Can Gap Inc regain its lost ground?

Once comfortably ensconced as the world’s biggest clothing and footwear specialist retailer, for the past five years Gap Inc has watched its market share slide, but finally its strategy is showing a new cohesion.

In 2008, the unthinkable happened – Gap lost its global leadership position, overtaken by not one, but two, of its rivals. Now, however, new strategies are helping Gap to regain the spring in its step. In its most recent quarterly results, Gap Inc posted a 1% gain in total sales, continuing the positive trend begun in Q3 2009 which ended a seven-quarter run of negative growth.

Stripping out sales through the Gap banner’s North American stores, which account for 26% of group sales and was the only division to experience negative growth over the quarter, the rise is an even more encouraging 4%. Inditex and H&M may need to start looking over their shoulders again.

Gap North America the only cloud on Q2 horizon

Gap Inc’s Banana Republic and Old Navy banners – less visible from an international perspective – have sales of more than double those of Gap in North America, and they grew by 3% and 2%, respectively, over the quarter, bringing in revenues of US$1.8 billion. International sales rose by 3% and on-line revenues were up by 15%.

The underlying concern is that bricks-and-mortar locations in North America still account for nearly 80% of sales, despite the difficulties hinted at by the closure of 76 stores in the last year alone. Now on-line and overseas expansion are the key growth drivers going forward, a move that should widen Gap Inc’s revenue base.

Pincer movement of two-pronged overseas expansion strategy

The overseas expansion strategy is two-pronged, with different tacks for franchised and company- owned stores. Franchised stores, first introduced in 2006, have allowed the company to swiftly create a store presence in markets forecast to see strong growth, including the Gulf states, Russia and Turkey. Australia is the next market due to be added to the list.

Franchising has offered the company a lower cost way to expand its international presence, but when it comes to entering the higher-profile markets, Gap Inc is keeping operations in-house.

By the end of fiscal 2010, Gap Inc is planning to have entered the Chinese and Italian markets, raising the number of top 10 clothing and footwear retail specialist markets where Gap is present from five to seven.