Founded in 1969 in San Francisco, GAP's history could be described as a start-up success story, but today the once shiny brand has faded, international success has slowed down and expansion has stopped - which can be clearly seen from the financial metrics.
A few key facts about GAP:
- GAP employs 117,000 people around the world.
- GAP reported $16.62 billion in revenue for 2021.
- The company’s digitally-led business made over $6 billion in annual online sales.
- In 2019, online sales accounted for 45% of total sales (compared to 25% in 2018).
- GAP, through its franchise partners, is present in 40 countries around the world.
- The company holds the following brands: Gap, Banana Republic, Old Navy, Intermix, Hill City, and Athleta.
How It All Started - GAP’s Story
Building up a chain of stores
Donald Fisher, a real estate agent aged 40 in 1969, found it difficult to find Levi's that fitted properly. Instead of continuing his search for the perfect fit, he decided to create his own store, which became GAP. On Ocean Avenue in San Francisco, Fisher and his wife, Doris, opened the first store of the chain. The Levi's and record store, named in honor of Ms. Fisher (and to acknowledge the generation gap between the founders), sold Levi's and records for three months. Vinyl was soon removed from the store, as it did not engage customers at all. It may come as a surprise now, but GAP did not have any products of its own, to begin with; instead, the founders based their strategy on Levi's - which was run by one of Donald's friends.
Levi's guaranteed that The Gap would always be stocked with Levi's apparel overnight from Levi's San Jose, California warehouse, and Fisher agreed to stock Levi's apparel in every style and size. Levi's Director of Advertising offered to pay up to half of The Gap's radio advertising upfront in exchange for a marketing package to any store that sold only Levi's products.
When the Fishers opened their store, the wares on offer were snapped up quickly, even though Levi’s was the hottest brand in the country at the time. Gap opened its second store in San Jose in 1970. Six thousand five hundred square feet of the facility were dedicated to stock storage, and GAP began selling Levi's for women. By the end of the year, the GAP had opened another half-dozen stores. The company's advertising tried to speak the language of young, rebellious people, quickly creating the company’s strong brand identity.
With its third anniversary approaching, GAP has grown from one to 25 stores. The founders launched a second retail venture selling discounted jeans, called Pants%ff!. The business had 36 locations in four years, generating $14.7 million of sales (more than $85 million today), and GAP began to set up its own brand and products.
The first GAP products and going public
In 1974, the first GAP-produced apparel was sold in the stores, which created the perfect momentum to go public. As part of the offering, 1.2 million shares of stock at $18 each were issued by The Gap Stores, Inc. The Gap Stores, Inc. launched two new stores in 1977: Brands, a value-priced chain to target more mature clients, and Logo, aimed at the fashion-conscious consumer.
The Banana Republic, GAP’s first acquisition
Mel and Patricia Ziegler founded Banana Republic Travel & Safari Clothing Company in 1978. Safari-themed items were originally the company's concept.
Because of their travel jobs, the couple was known to acquire interesting clothing items. With hand-drawn catalogs of items and safari-themed stores, they were known for their tales of fictional travelers/explorers. Gap purchased the company in 1983 and renamed it the Banana Republic while rebranding its stores to appear more upscale.
The 1980s were an exciting time for GAP, not only because of the first mergers and acquisitions but also because the company presented its own product on the big screen for the first time (the star of "Back to the Future," Michael J. Fox, wore the jeans in the movie) and introduced the blue GAP logo with white lettering in 1989, which was used until 2016.
Gap announced in 1991 that Levi's products would no longer be available in its stores. In the early 90s, the company experienced its height of success, as, in honor of Vogue Magazine's 100th-anniversary issue, Gap woven shirts and white denim jeans were on the cover, and Gap stock reached a record high of $59.
In 1994, a new brand joined the company group: Based on the prototype store of Gap Warehouse, Old Navy's first store opened in Colma, California. The brand's new name is a reference to a Parisian bar. The brand immediately became a hit, as only 4 years after its founding, it generated $1 billion in annual sales.
Under the direction of Millard Drexler, Gap took on an upscale identity and revamped its inventory in the 1990s. A 29-month sales slump, over-expansion, and tension with the Fisher family resulted in Drexler's dismissal from his position after 19 years in 2002. A non-compete agreement was refused by Drexler, and he subsequently became the CEO of “J. Crew”. The merchandise he ordered before he left was responsible for a large rebound in sales one month later. The new leadership’s focus was to close under-performing overseas locations, while also decreasing the company’s liabilities. By that time, GAP completely lost its market-leading position.
The company’s present
Between 2011 and 2013, Gap Inc. closed 189 US stores (21 percent of all US locations), however, it expanded in China. The company opened its first store in Brazil in the fall of 2013. Launched in October 2018, Hill City was Gap Inc.'s new brand of athletic apparel for men.
As a result of the COVID-19 pandemic, the company closed more than 225 locations during 2020. The company originally planned to close only 90 stores, but due to the financial effects of the pandemic, they expanded the number.
As a result of forecasting that its online business will double over the next two years, Gap Inc. announced a $140 million investment for a distribution center in Texas. Upon completion in 2022, one million packages will be processed daily at the center.
We can learn many lessons from the history of CAP. Countless business ideas have come from the founders' own solutions to problems, and GAP was no different. The Fisher family's apparel issues lead to a business idea, and almost immediately mobilized their network. As a result, not only did they quickly raise the funding to open their first store, but they also found supporters in the Levi's team, which provided the stock and helped with advertising.
The first store was an almost instant success and provided a great platform for expansion. GAP scaled up its network very quickly, at that time thinking exclusively in terms of company-owned stores. Later, a franchising system was introduced, which not only accelerated the expansion abroad but also other entrepreneurs the opportunity to grow the business.
However, the momentum of the 1970-90 period was interrupted by the emergence of new brands, and GAP lost its leading position on the market. As a result, the owners changed management several times - not only for the flagship but also for the other brands. The gradual phasing out of physical stores began, and the loss of sales was not truly reversed until the advent of the Internet.
However, the COVID pandemic hit the company particularly hard, causing huge losses for the holding company, which still relied heavily on physical sales in 2019-20. However, the quarantine caused the company to change course and shift its resources to online sales - and the result is reflected in its performance.
GAP Inc., a holding of brands
GAP, the core brand
Over the years, GAP has evolved into a brand that appeals to all target consumer groups. With its slogans and values, it positions itself as a culture-shaping, age-independent brand that appeals to strong personalities.
When the first stores opened, they sold only Levi's products, which were later replaced by private labels. Today, the portfolio includes hundreds of products ranging from face masks to jeans. Surprisingly, the best-known product of the brand is a t-shirt, instead of a denim product.
GAP opened different physical stores around the world focusing on a narrowed-down target audience, including:
- Pants%ff!: a shop for discount products, which was later discontinued.
- Logo: for an older, fashion-conscious clientele.
- Brands: replacing Pants%ff! with a broadened product portfolio.
- SuperGAP: This store format was two times larger than a standard GAP shop.
- GAP kids: This store type was focusing on children’s apparel.
- Gap Factory Outlet: This store again offered value-priced products in a different setting and model.
Surprisingly, Banana Republic is now a much more developed brand than GAP. From the beginning, BR was a brand for the adventurous traveler, with the founders repositioning clothing collected from their own travels and selling it to a domestic audience. The company sells tops, sweaters, jackets, pants, shoes, and accessories through its network of over 600 stores (500 of which are in the US).
The brand has modernized well, not only with a strong online presence but also with its own app (which offers discounted access to the company's entire line and points) and a clothing rental service that lets consumers swap out their entire wardrobe every three months.
To establish a separate image from its parent company Gap Inc., Gap Warehouse was renamed Old Navy Clothing Co. The new stores occupy about 15,000 square feet (1,400 m2), which is slightly more than the existing stores.
With flowing aisles, shopping carts, and little impulse items near the checkout counter, Old Navy stores were intentionally designed like grocery stores. With cement floors, metal shelves, and checkout counters made of polished pressed board and galvanized metal, the stores had the feel of industrial warehouses while the colorful arrangements and a large employee base made it stand out from other discount clothing stores. In the following year, 42 more Old Navy stores opened. The Gap Warehouse stores were mostly renamed Old Navy stores as well.
Over the next four years, Old Navy grew rapidly, becoming the first retailer in history to surpass $1 billion in sales and open 500 stores before the year 2000. With the opening of 12 stores in Ontario, Canada in 2001, Old Navy expanded into the international market.
The Old Navy brand also experimented with a dedicated children's store and a café in its flagship stores - but these ideas proved unsuccessful and were discontinued. In the 2000s, unlike GAP, Old Navy was keen to stay ahead of the competition. In response to changes in fashion, many stores were remodeled and the brand repositioned toward high-end fashion. However, the new direction was primarily aimed at women as opposed to the previous universal consumer group, which limited the brand's options. In addition, the rebranding of the stores was not a real success, and the top management was replaced.
In the years that followed, sales continued to decline, halted by Old Navy poaching leading designers from competitors such as Nike and H&M. Greater consumer appeal also boosted demand, and Old Navy generated $6 billion in sales - more than its sister brands combined.
GAP Inc. began restructuring the brand into a stand-alone company shortly before the coronavirus outbreak, which it said was necessary to consolidate underperforming businesses. However, the pandemic caused a general decline in demand, which was a very serious blow to the group. As a result, the process was postponed.
Forth & Towne
The Forth & Towne brand is GAP's boutique brand focused on women over the age of 35 who were previously GAP customers but have since moved on to other manufacturers. Founded in 2005, the brand also operated 35 stores for a number of years, but these were closed and converted entirely to online sales. Today, only Forth & Towne accounts for a small part of the group's sales.
The main reason for F&T's failure is the diversity of its target audience. While GAP's other brands appealed to everyone from children to adults, women and men, there were few women over 35 who retained the rebellious spirit that GAP continued to offer them. Despite this, the brand was not discontinued by the holding company, but online sales are now minimal.
Athleta was founded in 1998 to meet the unique needs of athletic women. Acquired by Gap, Inc. in 2008, it opened the first store in Mill Valley, California in 2011. 2016 saw the launch of the community-driven Power of She campaign and the debut of Athleta Girl. By 2020, Athleta already had 200 stores around the world and double-digit year-to-year growth.
The brand pursues a very deliberate growth strategy: it does not want to compete primarily with Puma or Nike, but always offers the most in-demand products, based on continuous market research. Currently, in addition to masks, the company also produces clothing aimed at young girls in sports.
The reason for Athleta's strong presence lies in its resources, which are focused on the online space. Not only is the company strong on social media, but it can also stay in touch with customers through its own app and email marketing tools.
- Approximately $130 million was paid in cash to acquire Intermix in 2012.
- In April 2020, GAP sold Janie and Jack, a high-end children’s clothing brand it acquired from Gymboree, to Go Global Retail.
- In May 2021, GAP announced the plan to sell Intermix to a private equity firm.
Over the years, the GAP group has built up several brands in addition to its core brand. These have included acquisitions, but also a clothing line that grew out of a particular type of GAP business.
Overall, GAP has had mixed success in building brands. While Old Navy has been a resounding success, going from just selling cheap products to generating billions in sales, Forth & Towne remains an unfulfilled promise and fails to attract women over 35 back to the company.
However, the company owes a lot to the sub-brands under its umbrella, as it has been able to try all the experiments that would have been too risky on GAP. What is certain is that the incredible expansion of physical stores today is a matter of prestige at best, because it is not necessary to open new stores to increase sales. The successes of Old Navy, Banana Republic, and Athleta show that online sales still have enormous potential (the company expects to double its sales in the next few years).
The Fall of GAP And The Strategy To Regain Market
GAP enjoyed tremendous success throughout the 1970s and 1980s. After the invention of shuttleless looms in the late 1970s, the quality and price of denim increased, and the overseas denim trade became much more expensive. Demand for denim began to decline and prices began to skyrocket. GAP eventually ceased selling Levi's and began producing its own denim under a new label, "Gap Fashion Pioneers".
From this point onwards, the Group's results improved steadily until the mid-2010s as more stores were opened abroad and in the US, and the franchise system also drove expansion. GAP's in-store revenue fell by 4% in 2015, while its online revenue grew by just 1%. GAP acquired Athleta and Intermix as part of its survival strategy - the latter of which offered a more luxurious experience. However, foot traffic in GAP stores was continuously decreasing, as the generational gap, which the name was a nod towards, became a reality.
The COVID-19 challenge
Throughout the US, the overall apparel category dramatically declined, with sales down over 50%.
As a result of the pandemic crisis, brick-and-mortar retailers were experiencing a never-before-seen decrease in demand. Although it was already in the making, the slow attrition has been boosted by COVID-19 and the related quarantines. There were around 9,000 closures of traditional retail stores in 2019, and some well-known brands have filed for bankruptcy.
Over the years, the GAP group has built up a substantial cash reserve, typical of this type of situation, but more than half of it had to be spent in 2020 - mainly on rent, staff retention, overheads, and franchise partner support. This was reflected in the company's stock market value.
At an investor conference in October 2020, GAP Group outlined its plans, which it calls Power Plan 2023, to recover and regain its market position. The holding company relies heavily on its four key brands, GAP, Banana Republic, Athleta, and most notably Old Navy.
It was clear from the presentation that the Group still generates significant sales from its stores in shopping centers, but that e-commerce is growing strongly and will be a focus in the future. GAP is also taking advantage of the fact that while it reaches customers with several different brands (producing more than 1 billion items per year), it can achieve significant cost savings in its underlying processes through centralization. Two key areas for this are logistics and production/supply chain automation.
The development of a strong corporate culture has been part of GAP's plans in the past, but Power Plan 2023 places a strong emphasis on communicating the company's values. The main reason for this is that market research shows that 50% of customers explicitly look at whether they embrace the values a company stands for when making a decision.
GAP operates according to the following company values:
- Equality: The first Equality and Belonging Group (EBG) was formed in the early 2000s to foster a sense of belonging among employees. As part of the commitment to Create for All, with All, the EBGs play a crucial role. By investing in these organizations, the company continues to grow its community of allies, create a meaningful workplace experience, and increase diversity in business practices and decision-making processes. The Equality and Belonging Groups include Parents @ GAP, Pride @ GAP, Women @ GAP.
- Amplify Black Voices: GAP intentionally tries to find ways to amplify diverse voices, especially in creative and marketing departments. The GAP brands are open to everyone, and they will continue to find ways to serve customers and communities more authentically. The company provides anti-racism training to its employees and customers.
- Environmental awareness: GAP places a strong emphasis on the environmental sustainability of its production and supply chain processes. As a result, in 2019 alone, more than 11.2B liters of water were saved in manufacturing.
- PACE (Personal Advancement & Career Enhancement): It was initially created to support women in the global apparel industry in 2007, but since then the company has expanded it to empower adolescent girls and women in community settings around the world. Workplace, Community, and Academia are the three pillars of P.A.C.E. today. In partnership with local NGOs, governments, brands, and schools, GAP delivers P.A.C.E. community programs around the world. Through supply chain vendor and community partnerships, 1 million women and girls are projected to be reached by 2022.
- Sustainability: The GAP Group not only strives for environmental sustainability in its manufacturing technologies, but sustainability also plays an important role in the design of its products. Not only are the best raw materials held to the same high standards as GAP and its partner brands, but they are also sourced from sustainable sources, which is paramount throughout the supply chain.
Although GAP's history is similar to that of most apparel brands, the company differs significantly from its successful competitors in one respect: The lack of adaptation has been a major factor in the company's performance in recent years.
For a long time, the group placed too much emphasis on GAP as its core brand, even though Old Navy outperformed it for years. The main reason is that GAP failed to maintain its trendiness of the 1970s and early 2000s and has now lost its former recognition. No wonder the corporation wanted to separate Old Navy from the other brands, as it probably would have had more success as a standalone company. However, this plan was thwarted for the time being by the COVID -19 pandemic.
As a result, the company's financial results were significantly impacted as the Group, which still relies on physical sales for nearly 70% of its business, was severely affected by store closures and customer quarantines.
The company has adopted a two-pronged strategy for recovery, shifting its focus to online sales and closing underperforming physical stores. It is strengthening the online presence of each brand. The company is also placing more emphasis on communicating its values, which is important for both new employees and customers.
Steps of the product cycle
Most of GAP's products are manufactured in Asian countries, mainly in China, Vietnam, and India. Most garment companies follow a similar strategy, driven by cheap labor. The production and life cycle of the products are as follows.
- Design: During the concept phase of a product, most of a product's environmental impacts can be determined. This fact means that GAP's creative vision can have a significant impact on people and the environment. Production and sourcing teams have an important role when they place orders through independent suppliers to bring this vision to life.
- Raw Materials and Processing: Fabric products include natural fibers, such as cotton and linen, synthetic fibers, such as polyester and spandex, as well as manufactured fibers, such as rayon and modal. Each fiber has a unique impact on society and the environment. Given cotton's importance for many products and its water-intensive production process, there is a special focus on this raw material.
- Textile Manufacturing: In addition to consuming large amounts of water, fabrics are often dyed and finished with chemicals that may pose a risk to local waterways if not handled properly. The company’s environmental standards are specified in the GAP Mill Sustainability Program.
- Vendor management: Using facility monitoring and capacity-building programs, Gap strives to continuously improve supplier conditions by combining a comprehensive approach to improving conditions in the supply chain. The environmental impact of the vendors is also measured and addressed by the supplier monitoring team.
- Logistics + Distribution
- From supplier facilities, the Group ships products via land, sea, air, and truck, then forwarding them to stores and customers directly. As part of its commitment to energy conservation and reducing waste at distribution centers, the company uses the best mix of shipping options based on speed, cost, and sustainability.
- Retail Stores: The Group's sales still account for a significant portion of its more than 3,100 stores and leave a substantial environmental footprint. The company is constantly working to reduce this - not only by closing superfluous stores but also by increasing efficiency. In its stores, the company also runs a program to help young adults with barriers to employment secure their first job.
- Consumer Use and Circularity: GAP places special emphasis on educating the consumer, the end-user, to become more consciously involved in the product cycle. Recycling, donating old clothes, and selling second-hand clothes are part of this process. In addition to clothing labels, the Group also uses social media platforms to communicate with its customers.
In the decades since its founding, GAP has always placed great emphasis on marketing and creating a unique customer experience, using TV commercials featuring supermodels, appearances in movies and TV series, and countless newspaper ads as important tools for positioning its brands. Young Cindy Crawford was one of the most iconic supermodels participating in GAP’s advertisements and catalogs.
Today, however, trends have changed, and while it is still necessary to advertise on these platforms, GAP has adopted a different strategy in the online space. The focus is on data-driven marketing, as experts in the company believe that the only way to regain old glory is to offer customers the most personalized experience possible.
GAP Inc built a sophisticated digital marketing technology stack to power its data-driven approach to personalization. The basis of these efforts is their proprietary customer data platform, which helps them develop an integrated view of the customer that they can use for marketing. Within its CDP, Gap Inc targets customers across multiple digital channels, blending first-party and third-party data. Ads are tailored to each audience segment based on data about the viewer at the time of ad serving, using a technology called dynamic content optimization.
According to Noam Paransky, Senior Vice President of Digital, GAP maintains tens of millions of records in its CDP, which would make manual segmentation difficult. The marketing team utilizes AI to assist with customer resolution, clustering, and segmentation. Additionally, they utilize AI and automation to manage advertising bids and optimize content.
The company's strategies are reflected throughout the supply chain. Importantly, the focus is not only on continuous cost reduction but also on the customer experience. Market research conducted by the company also confirms that environmental awareness plays a major role among customers, so rather than being hidden in processes, it is brought to the forefront of communications. Sustainability as a guiding principle is also present in all areas, from design and production to logistics and product distribution.
In marketing, GAP has always been strong, and with the opening to online, this corporate function has also made great strides. Today, data about customers' habits is collected in countless places to map the buyer persona as accurately as possible. These profiles make it possible to target potential customers very precisely and also allow personalized advertising and discounts.
Final thoughts and key takeaways of GAP’s story
Growth by numbers
In its more than half-century of existence, GAP has experienced two crises: a gradual one that had little impact on its figures, and the pandemic COVID -19. The latter not only forced the company to rethink its operating model but also had a serious impact on its share price and revenue.
GAP's current annual revenue of over $16 billion is made up of production from its four main brands: Old Navy, which evolved from a discount store, is first, followed by GAP, and only then the Banana Republic and Athleta.
Since the 2000s, the group has managed to keep costs down by closing hundreds of stores and reversing its previously aggressive expansion strategy, but the pandemic has eaten up more than half the company's cash during at least 6 months of stopped business.
Number of employees
Number of retail units
Key takeaways from GAP's story:
- Collecting brands that resonate with different audiences: GAP has expanded its product line from the beginning, constantly testing what its target audience needs. In recent decades, most of its experience has been in launching new brands in the shortest possible time, with the Banana Republic and Old Navy having unprecedented careers under the leadership of GAP.
- Centralizing: Apparel brands targeting different customer groups are very similar in terms of production and supply chain. Recognizing this, GAP has gradually centralized its internal processes and designed the entire value chain so that it is not only efficient but also serves the company's respective values and culture.
- Not adapting soon enough: The Group has made several serious mistakes over the decades, one of which continues to resonate today because of its slow adaptation. GAP did not realize quickly enough that customers were turning to e-commerce rather than physical stores, and was forced to follow its competitors into the online space after losing its market leadership.
- Finally acting for a future: After a considerable delay, the website GAP finally responded and made some important changes - for accuracy, it should be added that the actual switch to e-commerce was mainly forced by the pandemic COVID -19. However, with digital marketing tools (AI segmentation, data mining, and customer profiling), the group is already able to sell more effectively.
The future of the GAP group is still completely open. At the moment, no one can say how many more years the founder will outlive his group. There are signs that a serious turnaround program is underway, so there is a chance that GAP can overcome the downward trend of the 2000s and the revenue gap created by the pandemic. The company's values are in place, and the group has all the tools it needs to become a market leader again, but is it sufficiently prepared for another crisis?