Don't Mind The Gap. Old Navy is the Gravy Train.

Theron Mohamed
August 28, 2018

In 'Crazy, Stupid, Love', dowdy dad Cal (Steve Carell) goes clothes shopping with ladies' man Jacob (Ryan Gosling) after separating from his wife. Anxious about changing his look, he pleads "Let's just go to The Gap"; Jacob grabs his face with both hands and commands, "Be better than The Gap". Gap's parent company, Gap Inc., has taken his advice to heart.

Gap has fallen out of fashion and fortune thanks to missteps such as its 'Dress Normal' campaign (customers didn't want to blend into the crowd), overstocking that forced aggressive discounts, and stocking too few tops compared with bottoms this summer. The brand's underlying sales were 5% lower last quarter than in the same period of 2017, and its weaker profitability led to Gap Inc.'s gross margin shrinking by one percentage point to 38.8%. Group CEO Art Peck called the performance "unacceptable", while finance boss Teri List-Stoll admitted there have been "too many instances" where the company has "failed to execute effectively". Moreover, a study of 13,000 consumers identified 'functional' concerns with the Gap brand such as perceived poor quality and inconsistent fit.

Sister brand Old Navy has stolen Gap's limelight. Its underlying sales rose 5% last quarter and 5% in the same period of 2017. It accounted for 49% of Gap Inc.'s global net sales, while Gap made up 30%, compared with 46% and 32% respectively a year ago. On a net basis, Old Navy opened 20 stores while Gap closed seven stores last period, meaning the former only had 166 fewer stores worlwide, excluding franchises. Peck ascribes the brand's success to its "product engine", likely referring to the speed and quality of its design, manufacturing and store delivery.

Still, it would be premature to write off Gap. Gap Inc.'s supply chain, stores, online business and customer data - its critical assets in Peck's view - give the brand a fighting chance. Peck views physical stores as "the deepest form of customer engagement" and has worked to integrate them with the company's websites. For example, since Old Navy rolled out Buy Online Pick up in Store (BOPS) across the US last quarter, a fifth of the service's users made additional purchases in stores, and a fifth shifted from only shopping offline or online to both. The additional revenue, plus the savings on shipping costs, have boosted profits. Combining online and offline retail also generates "immense and powerful" customer data, says Peck, which has allowed Gap Inc. to attract big spenders by precisely targeting consumers who are similar to its best customers, offer individualised deals and personalised experiences, and identify which product purchases lead to store visits and sales.

Gap's bosses have also invested in technology. Introducing the In-Stock On-Shelf App, which notifies store associates when stock needs replenishing, has resulted in items being available in the store but not on the floor only 1% of the time, down from 40%. Unsurprisingly, the app has increased customer satisfaction, driven sales and increased worker productivity. Gap has also upgraded its app to allow customers to scan the barcodes on items to read reviews, check if other sizes and colours are available, and order out-of-stock items to their homes. The new feature has more than doubled sales through the mobile app in the past six months compared to the same period of 2017.

As traditional stores close and shopping malls shutter, Gap's new boss Neil Fiske has his work cut out to rejuvenate the brand. However, Gap Inc.'s strategy of linking its stores and websites and harnessing customer data is compelling, and Old Navy should keep the company afloat until Gap's resurgence.