Finding a Gap in the market; the challenges facing an iconic clothing brand

Despite impressive expansion in China, the famous American clothing retailer is battling to overturn falling sales amid stiff competition

PUBLISHED : Monday, 23 January, 2017, 6:31am
UPDATED : Monday, 23 January, 2017, 6:31am

When Gap made its debut in China in 2010 with a spectacular 11,400-square-foot flagship store in Shanghai, it brought with it a unique ambition to provide Chinese consumers with “cool, modern and affordable American designs”.

At the time, the enormous billboard featuring a navy blue box logo at the centre of a gigantic polka dot took up almost the entire corner of the block and made quite a splash in Huaihai Middle Road, the city’s equivalent of New York’s Fifth Avenue.

The San Francisco-based apparel powerhouse, celebrated at home for its khaki combats, chinos and colourful T-shirts, broke the mould with an audacious expansion. Within four years, it had reached the milestone of 100 stores across 25 cities in China. The total number of outlets now stands at 160.

Gap is famous for its wardrobe basics, but in China there are many brands offering similar products at lower prices
Pascal Martin, OC and C Strategy Consultants

But recently it has been far from plain sailing for the 48-year-old brand as it becomes increasingly reliant on discounts to attract customers.

Gap’s 10,000 sq ft store in Guangzhou’s high-end Parc Central mall, also comprising its sister brand Old Navy, ceased business in December, just nine months after opening.

Just a few yards away from the vacant Gap outlet, Zara’s 23,000 sq ft store appears to be thriving. Last weekend, the shop was crammed with bargain hunters rummaging around for discounted clothes and long queues formed in front of the cashiers.

Further down the corridor, crowds of youngsters flocked to Abercrombie & Fitch’s surfer-themed Hollister.

Gap’s exit from one of Guangzhou’s most iconic malls is the latest of several departures the ailing American clothing giant has made from shopping complexes in major Chinese cities amid deteriorating sales growth across Europe, Asia and America.

“Normally a brand will shut a store if it is losing money from it and if it has lost confidence that the outlet will turn a profit anytime soon,” said Pascal Martin, a partner with OC&C Strategy Consultants.

Revenue from Gap’s namesake brand in Asia stayed virtually flat at US$856 million in the first nine months of 2016.

Globally, the company fared worse, having suffered seven consecutive quarters of sliding sales. In the nine months to October, sales dropped 2 per cent. That compares with a 16 per cent rise in net sales of Zara’s Spanish owner Inditex for the period.

Deteriorating sentiment among investors has pounded Gap’s shares, having wiped off almost half of their market value during the past three years.

As part of efforts to streamline the struggling business overseas, Gap shut all its 53 Old Navy outlets in Japan and withdrew the Banana Republic brand entirely from Britain.

In China, retailers are seen banking heavily on aggressive sales and markdowns to lure back customers.

“Overall, our store openings significantly outpace closures and China continues to be a key market for Gap’s global growth strategy,” senior vice-president Abinta Malik said in an email to the South China Morning Post. “We remain committed to building a sustainable and significant business in this region.”

There is little doubt that the world’s second-largest economy offers room for further growth. China is poised to surpass the US to become the world’s largest apparel market by 2019, according to market researcher Euromonitor.

At Gap’s biggest store in Guangzhou, giant posters that read “Buy three discounted items and get an extra 30 per cent off” are drawing bargain hunters such as Sunny Chen.

“I would only step in when they have sales promotions, which they often do, even for seasonable items such as down jackets and wool coats,” the 24-year-old said.

Similar marketing campaigns are in full force at Gap’s Tmall online marketplace, too. The latest winter and spring arrivals are selling at discounts of 20 to 70 per cent while various deals and cash coupons are available for those who spend more than 199 yuan.

“Gap is famous for its wardrobe basics, but in China there are many brands offering similar products at lower prices,” Martin said.

In a market where blue jeans at Metersbonwe, a ubiquitous Chinese casualwear retailer, cost only 98 yuan, youngsters are less inclined to splurge four times the amount on a similar item bearing a slightly “cooler” brand name on the label.

There is price pressure, too, from Japanese high-performance wear Uniqlo, which made a foray into China as far back as the 1990s, offering jeans, cashmere knitwear and other basics often for a fraction of the price its competitors are charging.

This has forced Gap to resort to discounts to retain its foot traffic, which, according to some industry insiders, has created a vicious circle. “Over time, the brand image gets affected and consumers will only be convinced to come when there are promotions,” Martin said.

While China is Gap’s only key market that saw a net rise in store count in the first three quarters of 2016, rivals also picked up their pace of expansion. Uniqlo’s Japanese parent Fast Retailing is looking to open about 100 stores in the coming financial year and Zara plans to add nine more to bring its total to 189.

A reliance on discounts is not just an issue for Gap’s China arm. In May, chief executive Art Peck told investors that Gap and Banana Republic would need to “tighten up” their discounts and other unnecessary promotions aimed at propping up sluggish sales.

What appears aesthetic to the Generation-X Americans decades ago may look cliched and dull to this generation of buyers, who are much, much more sophisticated
Zhu Danpeng, associate, China Branding Institute

But in a region where Gap does not enjoy as much brand recognition as at home, it is the lack of innovative designs that has distanced the original “normcore” retailer from the internet generation, making it lag the likes of Zara and H&M, which regularly churn out new lines.

“Millennials in China tend to detest overly basic styles. They are chasing trends while trying to be frugal,” said Zhu Danpeng, an associate with the China Branding Institute.

“So what appeared aesthetic to the Generation-X Americans decades ago may look cliched and dull to this generation of buyers, who are much, much more sophisticated.”

Back in Gap’s heyday in the 1990s, when the American chain was still the definition of “trendy”, the fleece hoodie with a kangaroo pouch was one of the most coveted items among Americans. But today’s Chinese millennials are reluctant to flaunt what they see as mediocre clothes logos on the streets.

“Gap faces the same challenges every retailer faces in this market: the rapid pace of technological and innovation developments and [the fact that] consumers’ needs change very quickly,” Malik admitted.

Ferry Yang, a 22-year-old university student, said: “If it were not that huge ‘Gap’ logo, I could have bought its classic hoodie or shirt. But I don’t want to appear like I’m showing to everybody which brand I’m wearing and how much it costs ... Gap has a special allure to Americans perhaps, but to us, it is only a US label. Not terribly cool or modern.”