Gap Rediscovers E-Commerce Playbook, A Little Late

By Thomas Lee
San Francisco Chronicle

WWR Article Summary (tl;dr) Retail consultant Alicia Hare says that for Gap to survive, it needs to figure out what its brand means — or should mean — to today’s shoppers. She says, saying it sells fashionable clothing at affordable prices is not enough to break through the clutter.

San Francisco Chronicle

People like to say later is better than never. For Gap Inc.’s sake, let’s hope that’s true.

The San Francisco apparel retailer, which also runs Banana Republic, Old Navy and Athleta, has struggled to increase sales over the past few years, forcing it to close stores and rethink its position in a fast-changing industry. I previously wrote that Gap was heading toward bankruptcy if it didn’t make some big changes to its business model and culture.

I’m happy to say that we’re starting to see some of those changes, at least on the cultural side.

Consider how a group of tech startups recently visited Gap headquarters to demonstrate innovations in merchandising, supply chain management and mobile apps.

The startup founders, who built their companies in the new XRC Labs incubator in New York, spoke to top executives and employees throughout the company.

This might not seem like a big deal, especially in the technology-obsessed Bay Area. But given Gap’s history of insular family ownership and management, inviting tech startups to its headquarters amounts to a sea change in how it sees the world.

Mainly, that the world is bigger than Gap.

“By nature, our bias is to do things by ourselves,” Sebastian DiGrande, Gap’s executive vice president of strategy and chief customer officer, recently told me. “It was very awkward or odd for us to think about collaboration on the customer-facing side.”

The XRC Labs event “is a very unsubtle attempt to start shifting culture,” DiGrande said. “For sure, my mission is to bring a different mind-set, a different sense of speed, a different sense of what it means to test and learn and to be willing to not necessarily fail but to learn from things that don’t work.”

The executive ranks of brick-and-mortar chains like Target, Macy’s and J.C. Penney have long been dominated by career employees who previously worked in merchandising and store operations. (One notable exception: Gap Direct President Toby Lenk, who founded e-commerce startups eToys and GameFly. He left in 2013.)

DiGrande is an outsider to retailing who joined Gap in May 2016. A graduate of the University of Pennsylvania’s Wharton School, he worked at GTE and then joined Boston Consulting Group, spending 20 years advising companies.

When he got to Gap, DiGrande discovered that the company could significantly improve its performance by doing relatively obvious things. For example, Gap recently redesigned its mobile app to add product reviews and ratings, which online retailers have long understood to boost sales.

DiGrande said he wants to move Gap from a transactional relationship with its customers, driven by weekly sales, to one based on long-term loyalty. A customer who shops both online and in stores will purchase 10 times more merchandise in a year than the casual buyer, he said.

The company is also testing a service that allows shoppers to pick up their online orders at a store. And Gap is experimenting with different ways to measure performance than watching sales go up or down. It’s trying out a net promoter score, which indicates how willing a customer is to recommend a store to someone else.

“The opportunity is to just get 1 percent of our customers” to be those loyal shoppers, DiGrande said. “So this isn’t about, you know, flipping a switch, right? This is about progression. This is about migration over time.”

Time is the operative word. DiGrande is definitely saying the right things, but Gap has made these promises before.

When Gap Inc. ousted Lenk, the e-commerce entrepreneur, in a reorganization five years ago, executives talked about how they might create loyal shoppers who bought the same brand online and in stores. For that matter, when Lenk was hired, Gap’s then-CEO, Paul Pressler, promised that its websites would provide a “seamless and integrated shopping experience with our stores.”

As for buying online and picking up in stores, Target, Macy’s and Best Buy began offering that service years ago.

And retailers across the country have been courting startups, and building incubators and research labs, long before Gap called in XRC Labs. Target hosts regular startup events at its San Francisco Open House. Net promoter scores? Intuit, the maker of TurboTax, pioneered those 14 years ago.

And then there are the numbers. Gap Inc. only recently resumed reporting online sales figures. After growing by an annual average of 17.1 percent from 2012 to 2014, Gap’s online sales have remained virtually flat for the past two years at $2.5 billion, according to eMarketer.

That there has been no meaningful digital sales growth over 24 months speaks to DiGrande’s challenge. U.S. e-commerce sales increased 15.4 percent in 2016 alone.

And Gap really needs to boost its digital business to offset the weakness of sales at its physical locations, which still account for 80 percent of total revenue. From 2012 to 2016, sales at stores declined 6.6 percent to $12.57 billion.

In other words, Gap faces a chasm at a time when technology, economics and shifting behavior are rapidly transforming the apparel industry.

Fashion is a young person’s game, and older brands like Gap and J. Crew can no longer dictate trends to shoppers who are more likely to draw inspiration from Snapchat than a sidewalk window display.

“Millennials are not buying clothes the way their parents did,” said Brian Kelly, a retail consultant and former executive at Sears.

Gap and other apparel chains are also facing a more fundamental problem of why they exist, said Alicia Hare, a former top strategy executive at Target who now runs West Coast operations for SYPartners consulting firm in San Francisco.

Older retailers jumped into the market because they saw an opportunity to fill a product or service niche, she said. Gap founders Donald and Doris Fisher started the company in 1969 in part to sell jeans that fit well.

In the 1990s, under CEO Mickey Drexler, Gap pioneered the casual work outfit, highlighted by khaki pants. But since then, workers have started dressing more casually, and Gap has searched for an identity, especially as it faces intense competition from global chains like H&M, Uniqlo and Zara, which serve up fast-changing, Instagrammable looks.

For Gap to survive, it needs to figure out what its brand means — or should mean — to today’s shoppers, Hare said. Saying it sells fashionable clothing at affordable prices is not enough to break through the clutter, she said.

Here’s the good news for Gap: The company is finally moving in the right direction. Last week, it announced that same-store sales rose 3 percent in the third quarter, its third consecutive quarterly sales increase. The company expects to record an increase in same-store sales for 2017; the last time that happened was four years ago.
Since July, Gap stock has jumped 39 percent to Friday’s close at $29.40 per share.

Gap’s future remains unclear. But by taking small, sensible steps — even steps it should have taken years or decades ago — the company may buy itself enough time to adapt to a world that has increasingly left it behind.
Thomas Lee is a San Francisco Chronicle columnist. He is author of “Rebuilding Empires” (St. Martin’s Press), on the future of big-box retail in the digital age.

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