There Is No Gap Déjà Vu
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\"GAP\"More Like A Slow, Sears-Like Descent To The Bottom?

Glenn Murphy exits.  Art Peck takes over.  It matters not who the players are because there has been a revolving door full of them for the past 15 years, all declaring how they would return Gap to its once dominant position as the cool apparel brand for America’s youth.  All of them failed to do so, and there is no reason to believe Art Peck will have any better luck.  Actually, even luck would not be enough to reverse the ultimate fate of this storied brand.

I say this because the brand was driven into ubiquity (the anti-cool for young consumers, and therefore, the beginning of its end) in the late ‘90s and first two years of the Millennium under the watch of then CEO, Millard “Mickey” Drexler.  With a Gap on every corner, so to speak, cool turned to cold and its descent began. Ironically, Drexler would leave the helm of the brand that he guided through two decades of meteoric growth from $480 million in revenues upon his arrival in 1983 as president, to almost $14 billion in 2000, an amazing 2,400 percent increase when he left.  Indeed, his success earned him the moniker of the “prince of all merchant princes.” Unable to right the ship when it started to sink, Drexler retired in 2002. Comp store sales dropped 5 percent in 2000, their first decline since 1989, and then a whopping 13 percent in 2001, with the overall Gap brand down 12 percent.

And the point I want to make crystal clear is that once a hot, cool brand turns cold and boring in a world of an excessive over-abundance of equally compelling brands, it’s finished.  And nailing the Gap coffin were the up-and-coming millennials who were then, and still are, re-defining cool. Gap is not in their lexicon. No matter how much capital and time is invested in attempting to return the brand to its cool status and an energetic growth trajectory, at best it will simply limp along, lucky to eke out a living. I predict it will eventually die, not unlike this last dying decade for Sears. At worst, Gap as a brand could crash and burn.

Over the last decade since the Gap’s collapse and Drexler’s departure, it has been the occasional slog up and then slog along as a best-case scenario.  It would seem that the new CEO, Art Peck, might be at a tipping point, which finally marks the end of the line for the Gap. The Wall Street-correct voice of its new leader mouths the usual bromides of cost cutting, closing underperforming stores, eliminating jobs, hiring more capable merchants/designers, re-positioning the brand, developing a fast fashion process, blah, blah…and ho-hum. Such rhetoric might kick the can down the road and buy a few more quarters of slogging, but bringing the brand back to cool, it will not.

Let’s wander down memory lane a bit to review some logic that will support my point. And if some of the following reads like déjà vu, indeed it is.

The Anatomy of Gap’s Rise and Decline

Donald and Doris Fisher opened a little shop in San Francisco with $63,000 in 1969 with first-year sales of about $2 million, primarily in Levi’s jeans and LP records. Some 45 years hence, Gap Inc., including its namesake Gap brand, Banana Republic, Old Navy, Athleta, Intermix, and the now closed Piperlime, reached almost $16.5 billion in sales by 2014 with about 3,700 stores worldwide.

Stop here, and it sounds like a colossal success story. However, as we are all well aware, and as the numbers so vividly show, Gap Inc. rose like a rocket in its growth phase, but is now on the edge of a slippery slope down, further greased by the Great Recession and a lingering global economic mess.

What went wrong?

Competition, Ubiquity, Momentum Complexity and the Consumer

Like silent Pac-Men, competition grew up all around the Gap and began to chomp away at all three of its brands during the 1990s. Gap Inc. and the entire apparel specialty retail sector realized explosive growth during that period, primarily taking huge chunks of market share from department stores; the specialty brands were also competing fiercely among themselves. In fact, the rate of growth for dollars spent on teen apparel grew at an incredible 14 percent per year from the late 1990s through to the Great Recession. And many of them, like A&F, American Eagle Outfitters, Aeropostale, and Zumiez were hitting their stride right in Gap’s sweet spot.

Even so, following Old Navy’s repositioning in 1994, the Gap troika of brands was leading the specialty store pack through the latter half of the 1990s. In 1997, Old Navy hit a billion dollars in sales and Gap Inc. grew from $6.5 billion up to $9 billion in 1998. Plus they were opening stores at the rate of one per day.

The Gap had become the cool brand of all brands for consumers of all ages. And suddenly, it wasn’t.

Somewhere in the blur of skyrocketing growth, opening 731 new stores in 2000 and hitting sales of $13.6 billion, Mickey Drexler and his Gap brands lost their cool. The rapid growth and store openings made the brand ubiquitous, and, as I mentioned, ubiquity is antiquity, the anti-cool to the Gap’s core consumers—the young.  As a result, Gap began to lose their customers in droves.

And while Drexler was caught in the Gap’s growth maelstrom, he was helpless to prevent the simultaneous declines of Banana Republic and Old Navy. Old Navy lost its consumer connection as cheap chic, and Banana Republic went from work attire to expensive dressy, the wrong positioning for the brand.

It all started to fall apart at the dawning of the new Millennium. The Gap experienced its first two years of declining sales, and Drexler began to close stores and cut costs as he struggled to right the brand and reconnect with consumers. He departed in 2002 as the brands and the business began their steep descent.

Enter Paul Pressler From the “Magic Kingdom”

Paul Pressler came in as the new turnaround CEO in the fall of 2002. An alumni of the Disney store chain, his strengths were supposedly in the areas of operations and supply chain. Pressler was essentially a numbers guy who knew little of the nuances of fashion. Were his operational skills what Gap needed? It took Gap’s board and owners five long years to answer that question, precious years that could have been used working towards a turnaround.

Pressler’s “left brain” focus would prove that all of the strategizing, researching, operational improvements, and cost cutting in the world would not create a stylish collection or an emotionally compelling brand. Just as Mickey Drexler’s “right brain” focus might have benefitted from a strong business and operational partner, Pressler’s left-brain orientation definitely needed a strong merchant. It never happened.

So by 2005, the brand was led into its descent by inexperience at best, and what would turn out to be a total lack of merchandising skills at worst. As Gap’s business fell into a more accelerated decline, and the brand’s relevance, positioning, image, consumer base and business continued to unravel, Wall Street bestowed Pressler the nickname of “dead man walking.”

Between June 2004 and December 2006 (eight months before Pressler would be replaced), comparative store sales declined in every month but three. Pressler stepped down in 2007. Does it surprise anyone that Gap Inc.’s publicly stated qualifications for its next CEO at the time read: “…with deep retailing and merchandising experience, ideally in apparel, and who understands the creative process”?

The search firm that served up the next CEO apparently did not read those qualifications, or Gap’s board and owners decided to override them with their own qualifications.

Read on.

From the Magic Kingdom to Canadian Drug Stores

In July 2007, Gap announced that Glenn Murphy, previously CEO of Shoppers Drug Mart in Canada, was to be the new CEO of Gap Inc.

Hello? Am I missing something? Yes, drug stores are retailers and yes, they do carry merchandise, although not trendy apparel. And I’m not convinced of what type of creative process thinking there is in drug stores — maybe the signage or advertising? Furthermore, there is no industry that even comes close to being as intensely competitive, fast moving and deathly cyclical as apparel retailing in the United States. To say nothing of my favorite mantra – “share wars” in an over-stored world.

I scratched my head then. And of course, seven years hence, the Gap brand, still does not have a compass.

But the head scratching really started even before the Murphy appointment. The Gap announced in May 2007 that big name designer Patrick Robinson would become head designer for the Gap brand.

Since Murphy inherited that decision upon his arrival two months later, and because he was entering a different retail industry and a fashion and apparel sector he had virtually no experience in, and because he probably had little understanding of what a designer does or even who Patrick Robinson was in the first place, Murphy had to assume Bob Fisher (majority owner and interim CEO between Pressler and Murphy) and Marka Hanson, President of the Gap brand, had good strategic reasoning for hiring Robinson.  So he accepted the move and focused on what he understood best: operations, supply chain, cost efficiencies, and productivity.

After all, why should Murphy not assume that the organizational changes made prior to his arrival — essentially replacing the key staffers of Paul Pressler — would be to place high-quality management in those areas of the business where he had less experience?

If that was, in fact, his assumption, it’s too bad it took him four years to learn otherwise. Murphy fired Marka Hanson who was responsible for hiring Robinson in 2011 and inserted Art Peck, as her replacement. Peck had been president of Gap’s outlet Stores, and before that, spent 20 years at the Boston Consulting Group.

As an aside, but a really, really big one, Art Peck wrote a blog as Gap’s new president, saying that if anyone Googled him, “…you won’t find much.” Among other things, he also said, “That’s right. I’m not a merchant.” Okay, so now we have a self-effacing CEO with drug store experience and a president of the Gap with consulting experience.

Again, am I missing something? The new president of the Gap is not a merchant? Go figure.

Catch a Falling Star

The proverbial Gap brand star was indeed falling when Murphy came on board. By 2010, sales at Gap Inc. were about $14.6 billion, merely a smidgeon more than their 2000 level. The Gap brand had lost 30 percent of revenues, or $1.5 billion, since 2004.

Murphy did get some credit for achieving operational efficiencies, improving cash flow, closing and downsizing underperforming stores (particularly Old Navy and Gap), thereby increasing productivity. However, sales actually dropped in 2011 to about $14.5 billion. So urgency was the name of the game echoed by a comment made by Murphy in a 2011 analyst and investor webcast: “We’ve been questioning our merchandise model for the last six to nine months.” Another comment: “We need to get better right away in our women’s product. Gap is a redo. We’re trying to transition the Gap brand aesthetic. It got a little too modern for our customers.”

He also made some headway internationally, aggressively targeting China, Japan and Italy. And Old Navy, which ironically seemed to fly under the radar due to the world’s focus on the Gap brand, grew to nearly twice the size of Gap. And while Old Navy lost $1 billion in sales and had 60 months of negative comps between 2003 and 2008, it seemed to be turning around. Sales were up in 2009 and 2010, and it looked as though they had repositioned the brand’s products and image to recapture the ownership of “fun for the family” and great value it once had. Of course, the recession helped, driving consumers to value oriented brands. Today, Old Navy is now the dominant brand.

But the flagship is still the Gap, and as stated earlier, if it does not regain its strength and a relevant connection with consumers, and do it quickly, the whole enterprise will be at risk.

Designer Déjà Vu

Amazingly, even after a decade of -1 percent (yes, that’s a minus), topline growth and less than 10 percent bottom line growth, Mr. Murphy (and his predecessors) never figured out that the Gap brand’s real problem was not just product.  It was the brand name itself and all that it stood for, both real and perceived by its consumers.  And those consumers that left the brand at the turn of the century did, in fact, leave the brand altogether, and product alone will not bring them back.

The Patrick Robinson failure should have confirmed this point.  But Mr. Murphy apparently thought another high-profile designer would save the brand and hired Rebekka Bay in 2012 to be creative director.  Ms. Bay was the highly respected designer of H&M’s minimalist brand, Cos. At least Murphy selected someone with experience in the fast fashion business, which had been stealing many of Gap’s targeted millennial consumers.

But again, it’s a branding problem, which design and product positioning alone will not fix. The young customers who left the brand were followed by their younger brothers and sisters, many of whom simply bypassed Gap for H&M, Zara, Forever 21, and Uniqlo. These young customers have an uber mental picture of the Gap, including its stores, products, advertising and imaging, plus its ubiquity, and its un-coolness. They hear or see the word Gap and the indelible visual that comes to mind is yesterday, not today, not cool.

My point and opinion is that it doesn’t matter if Gap miraculously figures out how to do fast fashion, (which would require an enormous structural and strategic overhaul), or even if they somehow discover the hot fashion trend of the moment, if it’s inside a Gap store, online or carries the Gap label, it’s still the Gap.

So, I’m sorry to say that Ms. Bay’s efforts were doomed to fail from the get-go. Her initial line flopped.  Bye, bye Rebekka and good luck.

It’s All Up to Art Peck Now

Gap Inc. went on to gain some minimal growth from $14.5 billion in 2011 to $15.6 in 2012. But it was largely driven by Old Navy, as was the meager growth in 2013, (roughly 3 percent to about $16.1 billion). In 2014, Gap Global had minus 5 percent comp store sales; Old Navy Global had a 5 percent increase, while Banana Republic’s Global same store sales were flat.  And in the first quarter of 2015, same store sales crashed by 10 percent, compared to a 5 percent drop in the same quarter from the preceding year.

As stated earlier, all of this now leads to another déjà vu crisis moment. CEO Art Peck’s bromides about cost cutting, closing stores and the fact that his team is all over the issues and challenges indicate yet, once again, that there is hope for a turnaround.

Hope and reality sometimes serendipitously merge. But before this happens at the Gap, Mr. Peck is going to have to address a laundry list of realities that inform and shape his business:

The brand is cold and is descending, particularly among millennials who are the next primary consumer segment for apparel. Everything the brand used to stand for among America’s youth has been co-opted by fast fashion brands like H&M, Forever 21, Zara, Uniqlo and others. These young consumers want more new, more often, whenever they want it. Fast fashion compels greater visitation rates due to more frequent and faster new line cycles, and most importantly, these brands also offer greater value.

Today, consumers have instantaneous and unlimited access to whatever their hearts desire, a key tap away or in a store across the street, thus upping the ante for even strong brands in a fierce over-stored market. Turnaround brands like the Gap face almost impossible odds.

Millennials can scan through more stores and brands in ten minutes than spending a whole day shopping, and forget about hanging out all day in the malls.  The mall sits comfortably in their pockets wherever they are.

Millennials are less interested in buying brand identities than in creating their own unique style.  They’re into exclusivity and individual expression. Cool is most often something nobody else has (again, ubiquity is the anti-cool).

Physical retail estate will shrink for both stores and malls as e-commerce accelerates, challenging Gap’s mall locations.

Physical stores must create great experiences to compel young consumers to take the time to come to and shop through the stores; the Gap in-store experience is lackluster at best.

Smartphones are providing a wide range of more entertaining and enjoyable experiences for millennials to spend time and dollars on than shopping for apparel.

Will Mr. Peck and his team address these realities in ways to successfully merge his hope with these real world issues? Can they bring the Gap brand back to a level cool enough to be embedded into the zeitgeist of today’s youth?  Or are we looking at another iconic brand in its death throes? Spoiler alert: that’s the opinion I opened this article with.

An Alternate Path?

In my opinion, the Gap brand will continue to unravel until, mercifully and quietly, it can be euthanized without having caused the type of catastrophic collateral damage that comes with a crash-and-burn scenario.

If Mr. Peck even subconsciously agrees with my opinion of a dying brand (because he would never utter that belief out loud, even to himself), then he would be well advised to watch and learn from the poster child of euthanasia who is managing a huge business slowly into oblivion.  That would be my favorite piñata, Mr. Eddie Lampert, CEO of Sears Holdings. He continues into his 12th consecutive year of financially engineering the demise of Sears and Kmart, while pocketing millions through what he calls “unlocking value.” (I call it “squeezing the turnip” for Eddie.)

I’m not suggesting that Mr. Peck should manage the Gap’s descent for his own gain. What I am saying is that, in my opinion, if he understands the inevitable, as Eddie did and still does for Sears, he can perhaps learn how to bring the Gap in for a soft landing, as opposed to a crash.

Think about the similarities between Sears and the Gap: Both are genuine American icons, though from different eras, and both are changing the face of retail for their respective generations. Now the challenge for the Gap, with the ever-fickle millennials is not unlike that of Sears and its baby boomer loyalists. Sadly the Sears’ generation is, like it or not, either dead or dying. The Gap, on the other hand, has a millennial generation that can provide a new runway, if Gap can connect with them.

Peck Cannot and Will Not Do It

Need I state the obvious? Art Peck, the Gap board and the Fisher family are not even remotely interested in either of the Sears euthanasia scenarios. They will cling to hope and they will address the realities as best they can to revitalize the Gap brand — as futile as I believe it to be.

At best, Mr. Peck and team will slog through this third déjà vu period, having accomplished nothing more than his predecessors, Paul Pressler and Glenn Murphy, by just keeping the brand alive. The question then would be: Will the Gap Inc. board, its owners and Wall Street allow yet a fourth attempt at a turnaround?

As I close on that question I need to repeat Gap Inc.’s publicly stated qualifications for its next CEO, following the departure of Paul Pressler in 2007. At the time it read: “…with deep retailing and merchandising experience, ideally in apparel, and who understands the creative process.”

I also need to repeat that line from Art Peck’s blog, which he wrote as Gap’s new president. He said of himself that if one Googled him, “…you won’t find much.” And, among other things, said, “That’s right. I’m not a merchant.”

The brand collapsed and lost its cool in the early 2000s. Over the course of the next 15 years, it was steered under the leadership of two CEOs, neither of whom fit the publicly stated qualifications required by Gap Inc. in 2007. And now the brand has as its CEO, Art Peck, a consultant for most of his career who publicly admits to not being a merchant.

I rest my case. Like the once iconic and enormous Sears brand, Gap will continue its descent with a whimper and sink slowly like Sears. Or in a worse case, it may finalize the collapse that started at the turn of the century with a quick and loud bang.

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