Living in San Francisco as I do, one runs into GAP employees all the time. I even had a roommate who worked at GAP long ago. In 2006, I got into an argument at a friend’s Christmas party with another guest who worked in the GAP’s global marketing department. It began innocently enough, he telling me he worked at GAP, me telling him that I was a former Wall Street retail anaylst. I tend to treat anyone I meet a source of information and so I did press him on more on GAP’s struggles. He was obiliging enough without giving away the store either but at one point and I don’t remember what exactly he said that led me to interject that GAP, Banana Republic and Old Navy are simply lost it if that’s the case. I went on a mini-tirade: you’re overstored, your same-store-sales are in rapid fire decline at Old Navy, tepid at best at GAP and probably slightly positive at Banana but you’ve got H&M taking women’s clothing away from you and if you don’t watch out Zara will take you both down. Your merchandising is just so frankly boring and bland that it’s blah. At that point it became a tit for tat. We’re doing this and this and I would counter H&M has done that already and Zara has opened a store a day this and their model works better because they are always testing. And then the kicker which caused him to just smile and walk away. I said your marketing obviously sucks (hey I was at a party not on the job and had been drinking) because Zara does 0 advertising and their same store sales are growing and yours are in negative territory. You guys have lost it.
Today I am happy to report that indeed Zara, a Spanish chain based out La Coruña in northwestern Spain, has overtaken San Francisco-based GAP as the world’s largest clothier. Zara works because they have a tight relationship with suppliers and they test their lines throughout the world. Logistics and communication throughout the chain are the keys to their success. If something is hot and it starts to sell, they then order up. GAP makes an executive decision based on marketing research on fashion trends and then orders massively from its suppliers. If it doesn’t sell, GAP is stuck with massive inventory write-downs. There was a time in the early 1990s when GAP could do no wrong but beginning in 1997-1998 the chain just lost its way.
Other parts of the Zara formula is that their stores are the centre of their advertising. Sharp crisp displays and mid-tier price points. Zara also only does larger downtown stores and no suburban strip malls, that came to be the undoing of the GAP. Zara’s lines are more limited. In truth, Zara is the Banana Republic-killer. That’s what Zara has killed. H&M, the Swedish clothier, in turn has eaten into Old Navy and the mainstream GAP sales.
From the UK Guardian:
Spanish fashion chain Zara has expanded so rapidly in recent months that it has overtaken its main US rival Gap to become the world’s largest clothing retailer.
Beloved by proponents of fast-fashion, Zara has spread its reach across the globe at a time when Gap has suffered from plummeting consumer spending in the US.
Inditex, Zara’s parent company, recorded a 9% increase in sales to €2.218bn (£1.7bn) in the first quarter of its financial year. It also benefited from the strength of the euro to edge slightly ahead of Gap which saw its revenues fall by 10% and recorded sales of €2.169bn in the same period.
The difference may be tiny, but Inditex claims it is significant: for the first time the Spanish group has inched past its American rival.
The group, whose high street store Zara has led the charge, hopes to consolidate its lead over rivals later in the year as it continues to expand overseas in spite of the economic downturn.
It is three years since Inditex overtook H&M, to become the biggest clothing retailer in Europe. But the rapid growth is nothing new to a company which first started in 1963 in the bedroom of chairman Amancio Ortega’s home in Galicia, northwest Spain, making bathrobes.
The first Zara store was opened in 1975, in La Coruña in Galicia. The 1980s saw rapid expansion across Spain, followed by the opening in 1988 of the first Zara store outside Spain, in Porto, Portugal.
Other shops followed swiftly in New York in 1989, Paris in 1990. Now the group has nearly 3,900 stores in 70 countries around the world.
Inditex has managed to get so far, so fast largely through the use of innovative management and logistics techniques, which have now become the subject of studies in business schools around the world.
In simple terms, it follows the same ‘oil stain’ pattern when moving into a new market. This involves opening one ‘insignia’ store aimed at building up its name in a new location, before setting up smaller shops of different brands to reach a certain density of outlets that allows it to create economies of scale and boost profit margins.
For a company which spends very little on advertising, its shops have always been its principal marketing tool, so many are purpose-built to look like fashion boutiques.
The key to Inditex’s brand diversification lies in the group’s vertical integration. Almost all the phases of developing and selling a new product are carried out in house — from design and production to logistics and sales.
Shop staff are encouraged — even expected — to keep Inditex designers in touch with any fashion trends as soon as they spot them, so the group can turn them round as soon as possible. A small team of in-house designers then works to keep up — if not ahead — of trends and get them on to the high street as soon as possible.
An Inditex spokesman said: “The success of the model lies in being able to adapt what you’re offering in the shortest time possible to what clients want.
“For Inditex, time is the principal factor to take into account, more so than the costs of production.”
Last year, Inditex saw profits rise by 25% to €1.25bn. Zara remains Inditex’s most important brand, with sales of €6.26bn in 2007, which represented two thirds of the group’s total revenues of €9.43bn.
Inditex has managed to branch out to a younger generation with its Bershka brand. This is where rivals have struggled to attract fickle, younger customers.
Gap in the market
In particular, Gap has found that as its core customer base has aged and looked elsewhere, the chain has struggled to attract a younger generation to its stores. The company’s Banana Republic chain in the US has fared better although a cheaper brand, Old Navy, has been a patchy performer.
For much of the past four years, Gap’s sales have been falling. The company brought in a new chief executive, Glenn Murphy, last year to turn around its performance but just as things were showing signs of improvement, the US economic slowdown caused a dip in consumer spending.
Gap has 3,100 stores globally and employs about 150,000 people. A Gap spokeswoman declined to comment on the loss of the top spot to Zara.
Inditex’s Bershka recorded sales of €925m last year with Massimo Dutti, Inditex’s more upmarket offshoot , bringing in €696m in sales in 2007, while Pull and Bear, which sells casual wear aimed at a younger people, recorded €614m sales. Stradivarius, meanwhile, offers cutting edge designs. Its sales last year were €521m. Other brands, such as Oysho, a women’s lingerie chain, and Zara Home, the furnishings chain, recorded sales of more than €200m each. The newest addition to the Inditex stable is the accessories chain Uterque.
Ortega, 72, remains the group’s reclusive chairman, who hardly ever appears in public and never grants interviews. He has already anointed his 24-year-old daughter Marta Ortega Pérez as heir. She is expected to take a role in the boardroom but has also been reportedly working on the shop floor learning the ropes.
I can’t recall the last time I was in a Banana Republic store much less a GAP one. I was in Zara just last week.