GRADUATE SCHOOL OF BUSINESS STANFORD UNIVERSITY
CASE NUMBER: EC-9A FEBRUARY 2000
“This is about being clicks and mortar – letting customers access the Gap brands, whether in the store or online” – Ron Beegle, E-VP, Gap Inc.Direct One of the first bricks and mortar retailers to venture online, Gap Inc., headquartered in San Francisco, was widely considered an e-commerce pioneer in an industry renowned for its resistance to change. Long before other apparel companies were even considering a foray into cyberspace, Gap began developing its online strategy, re-examining its infrastructure, and shoring up key areas that would be needed to support its e-venture. While Gap recognized the opportunity the Web offered to leverage customers’ familiarity and loyalty to Gap brand, the value of the brand was Gap's biggest concern as the online strategy was developed. Gap's first web site was launched in December 1996. The site was informational, and did not offer commerce opportunities. In November 1997, however, the online store was opened at www.gap.com and in 1998, GapKids and babyGap went online, followed, in 1999 with BananaRepublic.com and oldnavy.com. Staying ahead of industry trends had long been a key to Gap’s success; the company had reinvented itself several times, introducing new brands, innovating merchandising and becoming synonymous with high-value, casual style. While the company had seen downturns, Gap had largely escaped the typical vagaries and cycles of the fashion apparel industry, and had consistently grown faster than the industry. In the first years of Gap’s on-line expansion, analysts estimated that Gap outpaced nearly all other apparel retailers in online sales: the company was believed to be the biggest generator of apparel sales on the Web. (Exhibits 1 and 2 provide overall Gap financials)
In 1969, Don Fisher, a 41-year-old real estate developer, and his wife Doris opened the first Gap store in San Francisco. The company took its name from the "generation gap" and targeted the
Research Associates Katherine McIntyre and Ezra Perlman prepared this case under the supervision of Professor Garth Saloner and Professor A. Michael Spence as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. The development of this case was managed by Margot Sutherland, Executive Director, Center for Electronic Business and Commerce, Stanford Graduate School of Business.
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Gap pursued a market segmentation strategy. Fisher sought to build his brand around a single product – Levi's jeans – which he offered in a broader array of styles and sizes than consumers could get elsewhere. some analysts believed. Under Drexler's leadership. The middle market was targeted with casual. and re-defining Gap's image. Thirty years after entering the retailing industry. August 3. after the margins on Levi's began to erode due to an FTC regulation that allowed retailers to discount Levi's products. there were six locations. rather than simply a retail chain. basic styles. the successful Old Navy format.’ In 1994. In April 2000. and the Fishers expanded their concept to new locations – by the end of 1970. Old Navy targeted families. and catered to a distinct demographic.2 (Exhibit 3) Although same-store sales growth slowed at Gap flagship stores in 1999. divisions and Gap Inc. Gap. and consistently achieved among the highest margins in the industry.Gap. would continue the company’s historical success. driving growth. the company went public. He was also lauded for his innovative merchandising strategies. In 1989. Gap introduced several private-label lines. Drexler decided that Gap stores would no longer sell Levi’s (Levi’s represented less than 2% of sales at the time) and moved Gap to private-label-only products. when there were 566 Gap stores. owning or overseeing the product development from concept to customer. Gap launched innovative advertising initiatives. 2
late-teen customer. Fortune. there were 3145 stores across all Gap Inc. of Old Navy's success.S. With the introduction of private-label clothing lines. Tradeline. Gap had an established. Drexler later worked to reposition Gap as a ubiquitous. and focused on the bargain-minded consumer. with 204 units. 1998. prominent position in the specialized retail apparel industry. In 1974. Inc. Banana Republic focused on an older and more affluent consumer. Gap took over control of the entire supply chain. an upscale women's mass retailer.1 With its multiple brands. This initiative was quickly followed by the first GapKids store. The Levi's strategy was an early hit. In 1983. and Drexler’s consistent ability to reinvent Gap. Although Gap’s sweet spot was the college-age customer (more female than male). where he had built a reputation for establishing large consumer brands. most analysts were confident that Gap’s aggressive plans for new stores. Drexler undertook improving the stores’ margins.
Nina Munk. GapKids launched the BabyGap line of infant and toddler clothing. June 25. beginning with its 1983 acquisition of Banana Republic. and offered more stylized products. offering fashionable.
. each brand represented a unique image. In 1991. the Old Navy brand was introduced. 1999. and was able to hold pricing constant and base competition on product and brand image. opened in 1986. accounted for approximately 5% of all apparel dollars spent in the U. as a result. Among Drexler’s early initiatives was the decision to consolidate the multiple private label lines into a Gap brand.com EC-9A
p. teens and 25 to 35 year-olds were also targeted as customers. global brand. Millard (Mickey) Drexler joined the company as president of Gap Stores. value-oriented clothing at lower price points. Gap decided that the private-label strategy would pull the company out of price-based competition with larger retailers. Drexler came to Gap from Ann Taylor. “Gap Gets It”. Six years later. In 1987 Gap began its international expansion plans and opened its first London location. began to extend its reach beyond the flagship Gap brand. including the well-known and creative campaign ‘Who Wore Khakis.
Discounts.5% of online commerce sales in 2002 would represent incremental sales. “ ‘Clicks and Mortar’ at Gap.com. service and operations. 1999. and improve profits through cost savings. In addition to using the Internet as a vehicle for gaining market share. 8 Jupiter Communications. retailers believed the Internet created an opportunity for them to solidify their brands. individual companies saw opportunities for effective web initiatives to attract new customers and steal market share from competitors. rather than a brand division.9 In Web-wide surveys. it was a channel-based division. Banana Republic and Old Navy). In 1991.6 Longer-term projections were similarly varied.4 billion. “ ‘Clicks and Mortar’ at Gap. Sales potential for retailers trying to reach consumers through multiple channels were compelling — 50% of consumers who bought from the same company online and in stores spent more than when they shopped only at stores.” Knight Ridder Tribune Business News.0) Although the Internet might provide pure play retailers with a lower cost structure. October 18. “The Gap Promotes Web Commerce with Fashion News. 9 Louise Lee. and property and equipment. 1999. and was charged with maintaining complete control of its product through a highly vertically-integrated corporate structure. 1999. Adding to traditional retailers’ desire to develop a Web strategy were analyst predictions that most Web sales would not be incremental gains. While the division was treated as a profit center.com.” BusinessWeek.” Women’s Wear Daily. p. Sales estimates for 1998 online apparel sales ranged from $330 million3 to $460 million. (Table 1. While analysts' forecasts varied widely. 3
Gap’s internal structure was organized to support the company's goal of specific identities for each of the clothing-brand lines (Gap. 1999. “ ‘Clicks and Mortar’ at Gap. 1999. but rather simply channel shift as consumers moved their existing purchases to the Web. by the end of 1999. 1999.” BusinessWeek. p. online apparel sales had not grown as quickly as books or CDs. “A Warning to Stores: Get Online or Risk loss of share to net. 5 Mercedes Cardona. build closer customer relationships. October 18. 1. 4 Louise Lee. An assessment of the typical expenses of a brick-and-mortar department store revealed that the use of the Internet as a distribution channel could reduce costs in selling and support services.. Channel Shift Study. October 18. June 1999. Forrester predicted that online sales would be $20 billion by 20037 (7% of total apparel sales) and Jupiter expected 6% penetration by 2006. security was cited as a principle reason
Valerie Seckler. 6 Louise Lee. Each brand was established as a subsidiary/division of Gap Inc. Gap established an International unit. Opportunities for bricks and mortar companies to realize cost savings as they moved operations to the Web existed in a number of areas. March 29.8 While overall industry sales were expected to shift rather than expand due to e-commerce. the importance of the Web for apparel retailers was clear.com EC-9A
p. 7 John Sterlicchi. they were rising steadily. serve markets that were too small to profitably support a store. “Apparel Makers Add E-Commerce. As in other consumer markets.com.” Advertising Age.Gap. Reminders. 38.
ONLINE APPAREL SALES IN 1999
Although.4 and expectations for 1999 sales ranged from $642 million5 to $1.” BusinessWeek. Jupiter Communications estimated that only 6. August 4. July 14.
. bricks and mortar retailers with online stores appeared to have several advantages over pure-plays. traditional retailers were looking for ways to tap into this burgeoning market and protect their existing customer bases from onlineonly retailers.
1997 © 1999 JUPITER COMMUNICATIONS AS OF 6/9911
FOR EVERY GENERATION. 1999. offline retailers could satisfy this need. the Internet was a natural extension of Gap’s efforts to control an increasing share of the consumer’s apparel dollars. Introduction of the individual brands' web sites was staged over time: gap. The launch of the Old Navy web site exemplified Gap’s primary concern of protecting the core brand. and keeping value-drivers tightly controlled in house.0 Assessment of Typical Expenses of a Brick-and-Mortar Department Store
Source: NATIONAL RETAIL FEDERATION. 11 Jupiter Communications. Gap only launched a web property when all of the key business drivers were brought in-house.” Women’s Wear Daily. followed by the other brands over the course of the next two years. June 1999. in an industry where online sales were expected to be limited based on customers’ need to touch and try on the product. THERE’S A GAP
Given the compelling opportunities provided by online apparel sales. Channel Shift Study. due to the established trust relationships they had with consumers.
Table 1.10 In addition. Gap began to consider the appropriate e-commerce initiative in 1996. In 1999. Off-line brands had an advantage as they went online. with the exception of the oldnavy. 4
that online users had not made a purchase on the Web.
. focusing on stylish value-driven product offerings. The company’s e-commerce efforts mirrored the strategy the company used to succeed in the offline channel – establishing new markets. all of the sites were launched with e-commerce functionality. April 14.com site where e-commerce functionality was not expected to be in operation until later the following year. “Buying in Cyberspace: Price may no longer be enough of a spur.com was introduced with e-commerce capabilities in 1997.Gap. whereas Internet-only competitors could not. Gap chose to hold off on launching a commerce-enabled site until after what many
Valerie Seckler.com EC-9A
Cash registers at Gap and Banana Republic promoted the online store. p.13 Each brand’s web site was designed to have the look and feel of the brand’s retail locations. as well as a partnership with CD Now.g. when they accessed the site. the length of their visit.com15 ads on the Web.com URL to drive further awareness. Analysts believed this was an example of how web initiatives took a back seat within traditional companies when the expected return on investment in bricks and mortar was higher. Gap used this contact information to send customized emails to registered users promoting new arrivals. 26.12 International was another case in point: a worldwide roll-out of Gap Online was not expected until the end of 2000. 13 John Sterlicchi. In addition to leveraging the formidable offline Gap marketing power. In 1999. While Gap representatives denied the rumors.
.” July 14. Gap web sites integrated technology to enhance the customer experience .including allowing users to easily compare sizing on different cuts and styles. February 26. Some products that were available only in select retail locations (e. after distribution facilities to support the online initiative were in place. and periodically ran promotions that allowed customers the opportunity to register by filling out a form at the store or through Web kiosks. Gap aggressively stepped up Web partnership efforts: in August. Discounts. where available. 1998. and drove a significant percentage of online sales. there had been talk on Wall Street that Gap could spin off its Direct. 1999 Knight Ridder Tribune Business News. 1999. October 29. frequency of purchases. were geared to drive customer registrations and to collect e-mail addresses and often offered discounts and contests as incentives. GapBody) were previewed on the web site. September 6. products selected and dollars spent – data the company had never effectively collected or stored through its bricks and mortar locations. “The Gap Promotes Web Commerce with Fashion News. specials. and many offline Gap promotions included the gap. The company benefited from the deployed technology through extensive customer data collection.com and etoys. and other promotional events. Gap spent approximately $3M on gap. Product prices were comparable to bricks and mortar stores (though without sales tax) and customers were allowed to return products to bricks and mortar retail locations.
PROMOTING GAP.Gap. multiple navigation schemes. The web sites offered Gap the opportunity to collect data on where customers lived. and the retention of customer preferences through wish lists and other tools. both online and off. 14 Women’s Wear Daily. The company wanted to ensure that the web site met Gap’s high standards. the 1999 holiday season. a three-year anchor placement deal was signed with AOL to promote the Gap brands.COM
Promotions for Gap web sites. Out of the company's 1998 advertising budget of $400M14 (4. 5
analysts considered a critical time of the year.com EC-9A
p. 1999. in November a joint marketing promotion was initiated between gap. 15 Women’s Wear Daily.4% of total sales). as well as offering a birthday and gift reminder service.. The email promotions proved successful. the company began pursuing distribution partnerships with major web brands.
Advertising Age. The online stores offered customers a broader range of sizes and a larger selection of products than were available in most retail locations. Reminders. Old Navy or Banana Republic units.
16 Pre-Shopping: Many customers valued the opportunity to do product research on the Web.com EC-9A
p. the Online unit was set up as a sub-unit of the Gap division. New York Times. and the recent introduction of Web lounges in New York. the company established distinct warehouses for the online unit.shop. In-store promotions: Gap leveraged the stores to drive website traffic with a variety of strategies. Analysts estimated that the costs for the first 24 months of a traditional bricks and mortar retailer’s Web initiative could easily exceed $30 million.
“A Man of Words Remains Partial to One: Loyalty”. BCG. but rather as a key asset that they planned to increasingly leverage to provide the consumer with the most complete shopping experience. pack and ship operation of individual items. took on the responsibility of heading up the Direct unit in the spring of 2000. Alterations: Purchases made at the Banana Republic web site or catalog could be brought to any store location for free alterations (just as if it had been purchased at a store). Trusted Brand: Gap’s well-established brand and reputation made customers feel more comfortable making online purchases. consumers who bought through Gap’s online stores could return products to any store location.click’ posters. Gap initially set up the online distribution operations within existing distribution centers. but. as many Internet pure-plays liked to assert. but in third quarter 1998. Los Angeles and Aspen. Ron Beegle.
. E-VP Gap Inc.Gap. 6
CLICKS AND MORTAR
Gap executives echoed analyst expectations that apparel was a product uniquely positioned to benefit from a multi-channel strategy. shortly after the launch of the Gap web site.17 Since Gap’s existing distribution system was optimized to ship large quantities of merchandise to retail locations. Gap Inc. Gap saw their bricks and mortar stores not as an impediment. December 29. Additionally. the company made the decision to break out a new division. Direct division's responsibilities included the online properties for Gap. 1999. Observers pointed to several examples of how the consumer benefited from an established bricks and mortar retailer pursuing a multi-channel strategy: • Return Policy: Whereas Internet pure-plays required the customer to deal with the hassle of mailing back products that didn’t fit. customer retention rates for traditional merchants were 10 to 20 percentage points higher than online-only competitors. including Gap’s ‘surf. p C6. Direct.
SUPPORTING THE NEW CHANNEL
Initially. and then purchased at a bricks and mortar store. Gap Inc. Banana Republic and Old Navy and the new catalog business that began with the return of the Banana Republic catalog in Fall ’99 and was to be followed with catalogs for Old Navy and Gap. August 1999. ‘Winning on the Net: Can Bricks-and-Mortar Retailers Succeed on the Internet’. Direct. Chicago. San Francisco. supporting direct-to-customer shipments required the development of a pick.
com sales for the year ending September 1. Gap had dealt with customers exclusively in the retail channel. attracting the best IT workers was difficult at all organizational levels. $40-60m for JCrew. Estimated online sales for JCPenney. a favorable comparison with the already formidable 5 percent that Gap controlled for offline apparel sales.4 billion. Gap claimed that returns on the company’s online sales were approximately the same as for store purchases. Harris resigned as CIO at Nike and joined Gap. analysts estimated gap. 1999. Industry observers wondered whether Gap’s online strategy would be a source of sustainable competitive advantage.com. For example. Even more importantly.
Throughout the Internet industry.com. The new appointment prompted a non-compete lawsuit from Nike. Louise Lee.com over the same period were $60-80m.
While Gap did not break out online sales separately from overall brand sales. Inc.com. perhaps. and the build out of a full-scale call center manned by Gap.com.Gap. In mid-’99. The fierce competition for top IT workers was in evidence when Gap hired new CIO. For most of these workers.19 The 1999 sales figures represented a significant jump from analyst estimates of $20 million for Gap's 1998 sales.” Information Week. who constituted the vast majority of the Gap's 190. Gap seemed particularly well-positioned to pursue a “clicks and mortar” strategy. Gap owned its retail outlets and believed that the company was in a better position to manage conflict between the online and offline channels. bonuses were tied to sales objectives that were established by district and regional managers. store management often created incentives through in-store employee contests. For store managers. October 18. “ ‘Clicks and Mortar’ at Gap. as well as the fact that casual clothes such as Gap’s were typically more forgiving in size than higher-end brands.21 This low return rate was attributed to the fact that most people knew their size for Gap clothes.20 Based on overall industry sales estimates targeting online apparel sales for 1999 to be between $640 million and $1. Would this give Gap an advantage over manufacturers who did not have captive downstream channels?
Jennifer Mateyaschuk. Online sales had not yet been significant enough to cause concern from store managers about the online channel as a competitor — a competitor they were asked to promote daily in their store location. Ken Harris.18 As the corporate unit drove promotions into the bricks and mortar channels.com EC-9A
p.com captured between 7 and 15 percent of online apparel expenditures for 1999. while high product returns were a big concern for many apparel retailers as they considered their online strategies. August 16. personnel. 7
Customer support was another area that needed to be built out. $55-75m for Eddiebauer. 1999 fell between $80 and $100 million. 18. instead. “The New CIOs.” Business Week.000 employees. store personnel were asked to promote the web site to their customers. compensation was not tied to store sales. p. 1999. Prior to the Internet. The development of the online unit saw the accompanying launch of the company’s first 800-number. and $25-40m for Victoriasecret. 20 Ibid 21 Ibid
. Gap. In some ways. and customer problems were addressed within the store context.
000 824.000 494.44 May 1999 US$ (3-MOS) 2. $0.638.723.668 452.792.462.000 615.000 121.253 1.262.901 0 0 0 533.000 1.118.35 $1.308.450 0 0 748.617.199.000 238.000 0 7.000 0 0 0 398.365.000 2.37
Annual Figures: (GPS) Income Statement Summary Total Revenues Cost of Sales Other Expenses Loss Provision Interest Expense Income Pre Tax Income Tax Income Continuing Discontinued Extraordinary Changes Net Income EPS Primary EPS Diluted Jan 1999 US$ (YEAR 9.262.797 0 0 585.30 Feb 1997 US$ (YEAR) 5.054.723.365.403.000 0 0 0 824.319.366 1.731.242 320.199 231.216 $d.46
. $0.207 419. 8
Exhibit 1 Gap Inc.734.825 1.507.133.000 1.798 2.539.com EC-9A
p.073.138 -19.039 0 0 0 354.777.277.054.000 0 0 13.000 824.319.518.370.284.160 354.000 2.403.975 0 0 854.539.000 637.341 533.155.004.270.395.901 $1.000 0 0 0 202.635.776.859 $1.991 713.199.000 0 0 0 824.462.58 Feb 1996 US$ (YEAR) 4.000 398.58 $1.000 202.22 Jan 1999 US$ (YEAR) 9.000 1.381 1.000 1.422. $0.919.459 4.37 Jan 1998 US$ (YEAR) 6.088 0 18.149.017 -2.000 $d. 1999 Quarterly and Annual Financial Statements Source: 1998-99 Gap Annual Report
Quarterly Figures: (GPS) Income Statement Summary Total Revenues Cost of Sales Other Expenses Loss Provision Interest Expense Income Pre Tax Income Tax Income Continuing Discontinued Extraordinary Changes Net Income EPS Primary EPS Diluted Oct 1999 US$ (000) (9-MOS) 7.809.43 $1.000 $1.617.527 295.79 Jul 1999 US$ (6-MOS) 4.000 $1.539.Gap.46 $2.000 0 0 13.43 $1.000 494.396 -15.000 0 4.039 $2.859 0 0 0 452.539.000 2.370.446.700.000 323.000 $d.216 0 0 0 713.334.106.
16. 1 Yr.16 11.50 8.5 Yr.5 Yr.93 7. Published by OneSource Information Services. Ago Sales .5 Yr. Growth Rate
26.25 16.67 24.04 16.02
42.54 17.79 16.95 27. Avg.13 22. Avg.38 27.43 25.80 29.47 7.52 12.57 19.88 15.16 48.88 9.00 18.26 10.
24.37 13.89 11.21 43.
Sales (MRQ) vs Qtr.16 23.64 17. Avg.
41. Avg. Inc. 9
Exhibit 2 The Gap.60
EBITD Margin (TTM) EBITD .5 Yr. Ago EPS (TTM) vs TTM 1 Yr.40 19.95 18.58 21.59 19.13 7.39 2. Net Profit Margin (TTM) Net Profit Margin . Avg.90 28. Operating Margin (TTM) Operating Margin . Inc.5 Yr.22 7. Inc. Ago Sales (TTM) vs TTM 1 Yr.24 3. Growth Rate
33. Ratio Comparisons*
Source: Market Guide.93
20. 1999.50 12.Gap. Ago EPS .52
*Information was current as of 12/23/1999
23.02 11.99 38. 1 Yr.85
19. December.94 22.13
EPS (MRQ) vs Qtr.89 31.13 13.04 15.87 10.00
10.69 35.75 37. Pre-Tax Margin (TTM) Pre-Tax Margin .5 Yr.93 30.00
Profitability Ratios (%)
Gross Margin (TTM) Gross Margin .96 40..92 13.
Exhibit 3 Gap Inc.Gap.End Net increase in number of stores Comparable store sales growth 318 135 298 98 203 42 225 55 172 82 108 130 117 94 139 79 152 56
2428 2130 1854 1680 1508 1370 1307 1216 1092 14% 15% 10% 11% 10% 17% 16% 5% 0% 1% 5% 1% 7% 11% 14% 5% 13% 14%
GAP Gap Domestic Gap International BANANA REPUBLIC OLD NAVY TOTAL 279 107 59 126 571 1812 433 354 546 3145
1998 1997 1996 1995 1994 1993 1992 1991 1990 Number of Stores Opened Number of Stores Expanded Number of Stores Open at Year.com EC-9A
p. Store Growth
Source: Gap Inc. 2000(a)
Total Stores April 29. 1998 Annual Report and Q1 2000 Report
Net New Stores Year Ending April 29.