Introduction
Gap, Inc. established in July 1969 in the state of California and reincorporated in 1988 under the regulations of the State of Delaware. The company is a leading international retail brand. It provides apparel, accessories, and personal care products for men, women and children. The products are sold under the brands like Gap, Banana Republic, Old Navy, Athleta, and Intermix (Gap, Inc., 2015). The report provides an overview of the internal and external environment of the company with the focus on identification of key issues and recommendations.
Political
In relation to politics, various factors impact the apparel industry and the company as well. Recently, the company faced investigation for not paying corporation taxes in Britain. The company faced allegation that it uses complex financial engineering that enables it to minimize the tax bills (Neville, 2016). In addition, various countries have reduced/eliminated the taxes for the U.S. apparel companies like Japan, Vietnam, Malaysia, and New Zealand. In turn, the governments supported the brands and apparel exports (International Trade Administration, 2016a).
Economy
Economy affected the company significantly because of recession. The wages of the middle-class Americans have been stagnant for 10 years due to which the consumers host some non-negotiable costs. However, two of the costs can be negotiated in relation to middle-class American spending like clothing and food. The brand like H&M and Primark covered the needs of low and high end consumers, but Gap is having issues because of middle position (Lutz, 2015). The economic issues like unemployment, fluctuations in the prices of commodities and, other economic costs contribute to decline in sales. For instance, Gap is experiencing decrease in sales while Old Navy has experienced increase in sales. The main reason is the economic factors, such as increasing energy prices and health insurance premiums and lackluster job market (Walker, 2015).
Social
Consumers’ shopping styles are changing constantly as internet shopping by consumers has increased. In turn, the competitors like H&M, Forever 21, Uniqlo, and American Apparel with the focus on internet and distinct offers at low prices attracted the consumers than Gap, Inc. (Walker, 2015). Moreover, the consumers are now more focused to value than trends (Lutz, 2015).
Technology
Technology put effects on the apparel industry as well as the company. It can be ascertained by the fact that the company localized the process of pricing inventory by using cloud-based optimization system (Crozier, 2016).
Legal
Rules and regulations are important for the apparel companies to follow to achieve success. The U.S. Customs and Border Protection (CBP) and Federal Trade Commission (FTC) put obligation on the apparel companies to follow labeling laws. It is important to label the information like fiber content, the country of origin, the identity of the dealer and instruction related to care (International Trade Administration, 2016b).
Environment
Environmental factors directly affect the apparel companies as it is important to keep into consideration the effects of the business operations on the environment. Accordingly, the company focuses on the climate change as the environmental and human rights issue. In addition, the company focuses on the reduction in GHG emissions and diversion of waste (Gap, Inc., 2016).
Industry Analysis
Porter’s Five Forces Model
Competitive Rivalry
The international apparel retail industry is highly competitive as the company faces competition from the local, national and international departmental stores, specialty and discount stores, independent retail stores and online stores (Gap, Inc., 2015).
Bargaining Power of Suppliers
The bargaining power of suppliers is low as the company buys not only private, but also non-private label merchandise from approximately 1000 vendors. The vendors have factories in approximately forty countries and the company has ability to negotiate the prices with the vendors (Gap, Inc., 2015).
Bargaining Power of Buyers
The bargaining power of the customers is high due to low switching cost. In addition, the demand of the company’s products has lowered due to low level of brand loyalty. The brands like H&M targeted the customers with value and low prices (Gap, Inc., 2015).
Threat of Substitutes
The threat to substitute is high because of low switching cost. The customers have different choices to make as various brands like H&M provide value products to customers at low prices.
Threat of New Entrants
The threat of new entrants is moderate due to high cost of entry into international apparel retail industry. In addition, brand image and risks associated with the e-commerce are the reasons that make entry difficult. However, e-commerce also increases the opportunities for the small retailers to expand their operations.
Internal Analysis
Strengths
The company has vast range of resources as one of the resources of the company is the merchandise vendors. The company has more than 1000 vendors with factories in about 40 countries.
The company owns key trademarks registered with the United States Patent and Trademark Office and other countries’ registries under common law.
The company has diverse workforce of 141, 000 employees, including full-time and part-time employees along with seasonal employees.
The company has strong brand portfolio as its distinct brands are the key assets.
The company also has wide geographic presence that enables it to avoid the risk of operating in one economy. It operates 3, 280 stores throughout North America, Europe and Asia.
Furthermore, the company has high turnover ratio.
Weaknesses
The franchise business is not in the control of the company.
Weak presence at international level
Dependence on the older consumers
Inability to maintain brand identity
Inability to meet needs of today’s customers, who want stylish clothes at low prices. In other words, lack of product innovation.
Lack of effective advertising and inability to expand operations successfully
Key Strategic Issues
The external and internal analysis of the company provided an overview of the key strategic issues. Some of the strategic issues are as follows:
High Level Competition/Loss of Brand Identity
One of the strategic issues that the company is facing is the high level competition in the apparel retail market. Lack of focus by the company led other competitors like H&M and Zara to excel in UK and in international market. The company is not in a challenging position right now as it sells casualwear at high price, but there are lots of choices valuable for consumers now. The company needs to rebuild its brand identity as well as the price positioning. The other brands like Zara, H&M and Uniqlo made the brand statements with the help of flagship stores. On the other hand, the company has many stores but they are required to offer the products relevant to today’s market needs (Bearne, 2015). The company faces various competitive challenges, such as anticipation and quick response to altering apparel needs and demands of customers, more traffic in relation to offline and online stores, competitive pricing of products, gaining customers’ perception of value, building positive brand identity, and effective advertising of products in relation to different markets and geographies. In addition, challenges include development of innovative products to appeal customers (Gap, Inc., 2015). Accordingly, the company faced the issue of lack of sales at local and global level as its sales in Europe fell 5% and net sales declined from $ 199 million to 198 million (Bearne, 2015).
Failure to Internationalize the Business
Another critical strategic issue that company is facing is the efforts of the company to internationalize its operations. The company pursued the strategy of international expansion in different countries across the world. For example, new Old Navy stores have been opened outside the U.S., including in Maxico, Japan, and China. However, due to lack of experience with respect to operations in the earlier described countries and the issues like changing consumer needs and trends made it difficult for the company to achieve expected results (Gap Inc., 2015). It can be understood by the fact that the company recently closed its 53 Old Navy stores in Japan (CNBC, 2016). One of the reasons is the increase in internet shopping by the customers and changing trends. The company is needed to focus on the trends and product innovation along with successful e-commerce strategy to successfully expand its operations.
Lack of Product and Digital Innovation
Another strategic issue faced by the company is the lack of product innovation. In the past, the TV strategy of the company was legendary as it indicated the coolness due to association of the big celebrities. Nevertheless, in recent time the company’s advertising strategy failed to create an appeal. The main reason is the lack of innovation as the involvement of the big celebrities did not lead to increase in sales because of lack of innovation in relation to products offer to customers. There is a need to bring freshness and development of the products that can resonate with the customers’ needs. Moreover, there is lack of digital innovation by the company. It can be linked to the fact that inconsistency between brand’s in-store and digital experiences identify the disconnection with the customers (Milnes, 2015).
Recommendations
Focus on the Product Innovation
Gap, Inc. should work on the product’s innovation by focusing on the consumers’ needs and trends across different geographical locations. For instance, the customers in the U.S. need more value for the price that is provided by the brand like H&M. In addition, the consumers in Japan give preference to savings. For this they like to purchase from local brands, such as Uniqlo (Rupp, Yui, and Huang, 2016) (refers to figure 1).
Figure 1: Fashion Wars at Japan
Source: Rupp et al. (2016)
Hence, the company needs to focus on cost-effective fashion-styles to target the consumers in Japan and other countries. In other words, the company should focus on the fast fashion instead of old trends.
Focus on E-Commerce in China
The main reason of closing the stores is the growing trend of internet shopping, especially in China. In China, the company experienced 60% increase in web sales (Brohan, 2015). Hence, as part of geographical business expansion opportunities the company should increase the online stores in China. It will increase the sales and overall performance of the company at international level.
Innovation in Digital Experience
The company requires bringing innovation in its advertising by focusing on the digital tools with product innovation. It should target the customers with digital tools to connect with them to communicate the message and to develop brand identity. Social media tools are the most effective tools to increase the brand awareness and for the repositioning of brand as a fast fashion brand.
Repositioning of Prices
It is important for the company to adjust its prices relative to value provided. It is due to the fact that prices need to be competitive by increasing the value given to customers. The company should follow the strategy of H&M brand to target the customers.
Quick Response to Changing Needs
It is feasible for the company to respond to the changing needs of the customers efficiently across different regions. For this, the company should conduct surveys and evaluate the cultural and external environmental conditions of the countries. Surveys will provide an insight about the needs of the customers related to apparel. In addition, cultural and environmental characteristics will help the company to identify economic, political and social characteristics to design and pricing the products to target the customers. In turn, the company will be able to successfully expand its operations across different geographical locations.
Conclusion
It can be concluded from the above discussion that effective strategies with respect to internal and external environment of the companies help them to achieve ultimate success. Gap, Inc.’s internal and external analysis identified that the company failed to expand its operations internationally due to lack of product and digital innovation, loss of brand identity, and high level competition from local and international brands, etc. The company needs to develop its brand identity, according to today’s needs. It should be a fast-fashion brand, who gives importance to value for price. It is also effective for the company to focus on e-commerce as Chinese consumers are more involved in the internet shopping.
References
Bearne, S 2015, Analysis: How Gap failed to fill a gap in the fashion market, 30 January 2015, Available from: https://www.retail-week.com/sectors/fashion/analysis-how-gap-failed-to-fill-a-gap-in-the-fashion-market/5071599.fullarticle [Accessed August 10, 2016]
Brohan, M 2015, Gap ties its future to more digital, mobile and global expansion, 17 June 2015, Available from: https://www.internetretailer.com/2015/06/17/gap-ties-its-future-more-digital-mobile-and-global-expansion [Accessed August 10, 2016]
CNBC 2016, Gap reports earnings in line with Street expectations, announces 75 store closings, 19 May 2016, Available from: http://www.cnbc.com/2016/05/19/gap-inc-reports-earnings-in-line-with-street-expectations-announces-75-store-closings.html [Accessed August 10, 2016]
Crozier, R 2016, Gap Inc takes to cloud to optimise clothing price, 8 June 2016, Available from: http://www.itnews.com.au/news/gap-inc-takes-to-cloud-to-optimise-clothing-price-420558 [Accessed August 10, 2016]
Gap, Inc. 2015, Annual Report. Available from: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MzMxMzk4fENoaWxkSUQ9LTF8VHlwZT0z&t=1&cb=635954753332651759 [Accessed August 10, 2016]
Gap, Inc. 2016, Doing Our Part on Climate, Available from: http://www.gapincsustainability.com/environment/doing-our-part-climate [Accessed August 10, 2016]
Huang, G, Yui, M and Rupp, L 2016, Gap’s Old Navy Exits Japan as Chain Copes with Sales Decline, 20 May 2016, Bloomberg. Available from: http://www.bloomberg.com/news/articles/2016-05-19/gap-s-old-navy-will-exit-japan-as-chain-copes-with-sales-decline [Accessed August 10, 2016]
International Trade Administration 2016a, OPPORTUNITIES FOR THE U.S. TEXTILES AND APPAREL SECTOR Trans-Pacific Partnership, Available from: http://trade.gov/fta/tpp/industries/textile.asp [Accessed August 10, 2016]
International Trade Investment 2016b, U.S. Labeling Requirements for Textile, Apparel, Footwear and Travel Goods, Available from: http://web.ita.doc.gov/tacgi/eamain.nsf/6e1600e39721316c852570ab0056f719/290cdb039f3f3518852576b300675a9e [Accessed August 10, 2016]
Lutz, A 2015, Gap's tale of 2 brands shows how broke Americans really are, 11 April 2015, Available from: http://www.businessinsider.com/gaps-sales-decline-and-old-navy-success-2015-4 [Accessed August 10, 2016]
Milnes, H 2015, The lesson of Gap and J.Crew's struggles: the middle is nowhere to be stuck, 17 June 2015, Available from: http://digiday.com/brands/lesson-gap-j-crews-struggles-middle-nowhere-stuck/ [Accessed August 10, 2016]
Neville, S 2016, Gap pays almost no tax in UK since 2011 despite sales of £1bn, 11 February 2016, Available from: http://www.independent.co.uk/news/business/news/gap-pays-almost-no-tax-in-uk-since-2011-despite-sales-of-1bn-a6866526.html [Accessed August 10, 2016]
Walker, T 2015, Gap struggles to remain relevant as economy and internet take customers elsewhere, 21 June 2015, Available from: http://www.independent.co.uk/news/world/americas/gap-struggles-to-remain-relevant-as-economy-and-internet-take-customers-elsewhere-10334393.html [Accessed August 10, 2016]
