Gap: Making Supply Chain Fashionable

Inspired by Zara, Gap Inc. has undergone a digital transformation in their supply chain to reduce product development and distribution lead times, thus enabling Gap to be more responsive to customer preferences. Early financial results seem promising, but are uneven throughout Gap's brand portfolio and geographic footprint.

The past two years have been extremely difficult for most fashion retailers. Wet Seal, BCBG Max Azria, Rue21, Gymboree, True Religion, Aeropostale, Pacific Sunwear and American Apparel have all filed for bankruptcy since 2016.[1] However, even against this particularly difficult backdrop, Industria de Diseno Textil SA (commonly referred to as Inditex, which owns Zara) reported in 2016 year-over-year increases of same store sales and net profit at 12% and 10%, respectively.[2]

What was the secret to Inditex’s remarkable performance? One key factor of success is a “highly responsive supply chain that enables delivery of new fashions as soon as a trend emerges. Zara delivers new products twice each week to [each] store.”[3] This is feasible because Zara is able to “design and distribute a garment to market in just fifteen days.”[4] This stands in stark comparison to the typical product development cycle where “apparel retailers were launching collections seasonally” and which took “several months to even a year” to develop.[5]

Immediate feedback from sales to production limits the impact of the bullwhip effect, where small oscillations in retail ordering are amplified further down the supply chain. This allows manufacturers, wholesalers and distributors to adjust rapidly, which reduces excess inventory and limits the need for Zara to discount stale inventory.[6]

Tightly managing inventory also creates a “value proposition [of] newness and scarcity” because “once product is gone, it is gone.”[7] In turn, this drives additional traffic to the store. According to the NPD Group, “the average brand loyal visits a store 4.1 times per year whereas the average Zara shopper vists a Zara store 17 times per year – likely because she is afraid of missing something.”[8] Higher customer throughput in store allows Zara’s fixed costs to be amortized across more units, which in turns allows Zara to price products more competitively.

Recognizing these trends in the industry, Gap Inc. (Gap) CEO, Art Peck launched Product 3.0 which was designed to “move forward very quickly in how we bring product to market and the speed that we bring it to market and the flexibility in our inventory.”[9] This required significant changes in the way Gap operated, such as removing all creative directors, placing a small quantity of goods into stores and seeing how customers responded before placing larger buys, utilizing customer purchase data to predict demand, shifting some manufacturing plants from Asia to the Caribbean and reducing the product development cycle down to 8-10 weeks.[10]

Successful implementation of Product 3.0 required digitalization of Gap’s supply chain. Shawn Curran, Senior Vice President of Global Logistics at Gap, stated the need to “come up with new and innovative ways to drive value in our supply chain.”[11] One way this was accomplished was to, “capture inventory visibility and track goods at the item level.”[12] This additional level of detail allowed Gap to create an omnichannel experience by allowing “shoppers to reserve an item on the website and have it ready to try on in a physical store of their choosing.”[13] In all, Product 3.0 required $150 million in restructuring costs.

Recent financial performance indicates that Product 3.0 may be having a positive impact on sales and earnings. In their most recently reported quarterly earnings, 2Q17, Gap reported that same store sales had increased 1% and that Gap’s operating margin had increased from 7.2% the year before to 11.9%. Peck announced that in the short-term, Gap will be doubling-down on their Product 3.0 efforts by “taking advance of our operating scale to drive speed to market, responsiveness to customer demands and efficiency.”[14]

However, not all gains have been recognized evenly across Gap’s portfolio. Old Navy (fashionable, but lower price and quality), experienced positive 5% growth in comparable sales year-over-year while Gap and Banana Republic experienced declines of 1% and 5%, respectively. The growth disparity is exasperated when taking a geographic lens. Overall net sales increased in North America by 2%, but declined in Europe and Asia by 14% and 23%, respectively.[15] This stands in stark contrast to expected growth rates in Asia which is forecasted to grow at 5% in 2018.[16]

How should Gap respond? In the short-term, Gap should continue to invest in digitalization of their supply chain. While they have made significant improvements, it still takes Gap 8-10 weeks to go-to-market compared to Zara’s two weeks. In the long-run, Gap should consider divesting brands / customers segments where fast fashion may not drive the same uplift in performance.

Does fast fashion only improve performance of the fashionable, but lower price and quality customer segment (i.e., Old Navy) or can it succeed in the accessible luxury market (i.e. Banana Republic)? Given the high restructuring costs globally and relatively poor performance in Asia, should Gap continue to invest in international markets?

(Word count: 785)

[1] Lauren Thomas, “Here are the retailers that have filed for bankruptcy protection in 2017,” CNBC, September 23, 2017, https://www.cnbc.com/2017/09/23/here-are-the-retailers-that-filed-for-bankruptcy-protection-in-2017.html, accessed November 2017.

[2] Lauren Heller, “Why Zara Is The Most Exciting Retailer Today,” Forbes, March 15, 2017, https://www.forbes.com/sites/lauraheller/2017/03/15/why-zara-is-the-most-exciting-retailer-today/#3426830d5cd3, accessed November 2017.

[3] Greg Petro, “The Future of Fashion Retailing: The Zara Approach (Part 2 of 3),” Forbes, October 25, 2012, https://www.forbes.com/sites/gregpetro/2012/10/25/the-future-of-fashion-retailing-the-zara-approach-part-2-of-3/#2535351d7aa4, accessed November 2017.

[4] Kasra Ferdows, Michael A. Lewis and Jose A.D. Machuca, “Zara’s Secret for Fast Fashion,” HBS Working Knowledge, February 21, 2005, https://hbswk.hbs.edu/archive/zara-s-secret-for-fast-fashion, accessed November 2017.

[5] Trefis Team, “Gap Inc’s Premium Brands Aren’t Moving Fast Enough,” Forbes, September 16, 2015, https://www.forbes.com/sites/greatspeculations/2015/09/16/gap-incs-premium-brands-arent-moving-fast-enough/#6d6e721b222b, accessed November 2017.

[6] Kasra Ferdows, Michael A. Lewis and Jose A.D. Machuca, “Rapid-Rire Fulfillment,” Harvard Business Review, November 2004, https://hbr.org/2004/11/rapid-fire-fulfillment, accessed November 2017.

[7] Deborah Weinswig, “Retailers Should Think Like Zara: What We Learned At The August Magic Trade Show,” Forbes, August 28, 2017, https://www.forbes.com/sites/deborahweinswig/2017/08/28/retailers-should-think-like-zara- what-we-learned-at-the-august-magic-trade-show/#54a4e57f3e52, accessed November 2017.

[8] Deborah Weinswig, “Retailers Should Think Like Zara: What We Learned At The August Magic Trade Show,” Forbes, August 28, 2017, https://www.forbes.com/sites/deborahweinswig/2017/08/28/retailers-should-think-like-zara- what-we-learned-at-the-august-magic-trade-show/#54a4e57f3e52, accessed November 2017.

[9] Ayelet Israeli and Jill Avery, “Predicting Consumer Tastes with Big Data at Gap,” HBS No. N9-517-115 (Boston: Harvard Business School Publishing, 2017, p. 9.

[10] Ayelet Israeli and Jill Avery, “Predicting Consumer Tastes with Big Data at Gap,” HBS No. N9-517-115 (Boston: Harvard Business School Publishing, 2017, p. 10.

[11] Leela Rao, “Will Gap Be the Next Big Fast Fashion House?” GT Nexus, August 31, 2015, http://www.gtnexus.com/resources/blog-posts/gap-supply-chain-visibility-fast-fashion, accessed November 2017.

[12] Leela Rao, “Will Gap Be the Next Big Fast Fashion House?” GT Nexus, August 31, 2015, http://www.gtnexus.com/resources/blog-posts/gap-supply-chain-visibility-fast-fashion, accessed November 2017.

[13] Leela Rao, “Will Gap Be the Next Big Fast Fashion House?” GT Nexus, August 31, 2015, http://www.gtnexus.com/resources/blog-posts/gap-supply-chain-visibility-fast-fashion, accessed November 2017.

[14] “Gap Inc. Reports Second Quarter Results,” press release, August 17, 2017, on Gap website, http://www.gapinc.com/content/dam/gapincsite/documents/Press%20Releases/GPS_Q217_EPR_FINAL.pdf, accessed November 2017.

[15] “Gap Inc. Reports Second Quarter Results,” press release, August 17, 2017, on Gap website, http://www.gapinc.com/content/dam/gapincsite/documents/Press%20Releases/GPS_Q217_EPR_FINAL.pdf, accessed November 2017.

[16] “Regional economic outlook. Asia and Pacific: preparing for choppy seas,” International Monetary Fund, April 2017, Forecast for global retail sales growth from 2008 to 2018, https://www.imf.org/~/media/Files/Publications/REO/APD/areo0517.ashx, accessed November 2017.

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5 thoughts on “Gap: Making Supply Chain Fashionable

  1. Great essay! In response to your question about whether fast fashion is just for lower price segments, I believe it is not and that the digitization trend of supply chain is permeating all price points. Take for example, Moda Operandi, a website founded in 2014 which allows women to pre-order high end clothing and accessories (average price point of an order ~$2k) off of the runway so that they do not have to wait for department and specialty stores to purchase a collection before they receive their clothing. The company now has net revenues of almost $100mm. According to an article in Forbes, women receive their items a full 4-6 weeks before they would if they ordered the same items through a third party (department, specialty store). The Moda Operandi approach also helps the designers to digitize their supply chains by allowing them to collect data on demand long before they would receive information from their standard department store distribution channels. This, in turn, allows them to be more agile in planning the production of their lines and in turn helps them financially by producing more of the items that sell well and less of the items that do not.

  2. What a great read! To answer the question I think with right execution fast fashion will not only improve performance of the fashionable but lower price and quality customer segment, but also can succeed in the accessible luxury market. The year-over-year sales declines that Banana Republic and Gap experienced maybe due to poor market positioning. For accessible luxury market, customers would like to have large variety of products available and would need to have a faster fashion turnover. Thus, Gap has to be able to speed up design to market time to meet the customers’s needs. The consumer market in Asia is around 15 times larger than the US, despite the high restructuring costs, Gap should continue to invest in international markets. Refer back to my last point, design to market time is critical. Another factor to keep in mind is that the Asian consumers are more sensitive to pricing due to lower average household income. Therefore, merchandise selections may vary.

  3. Thanks for posting! In response to your question, I also believe that fast fashion can be successful across different price points. As supply chains gather consumer feedback and data more quickly, supply chains will more quickly adapt to fickle consumer preferences… at least over time. Relating back to your post, will that be enough time for Gap to achieve more broad-based growth across its portfolio? Given this ongoing uncertainty, my next question would be, “when should Gap consider divesting brands and customer segments?”

    On a slightly different note, I will be curious to see how – if at all – fast fashion companies like Zara evolve going forward. While they can continue to optimize their supply chains, I am interested to see how their price point evolves. If Zara’s brand becomes ubiquitous enough, will they have the ability to increase prices beyond their historical levels.

    Regardless, great post!

  4. Steve – Given the market dynamics and trends you described, I wonder if Gap Inc should even continue to operate Gap or Banana Republic brands. At the low end of price and quality, Old Navy can implement fast fashion and compete effectively with Zara using supply chain improvements through digitization. However, these supply chain improvements are predicated on the brand being responsive to its customers and then speedily impacting its supply – which may not be aligned with the brand goals of Gap or Banana Republic. Instead, perhaps the higher end brands, Gap and BR, should utilize a creative director and operate a different business model by not responding to customer demands, but rather creating “fashion” and allowing the customers to follow. I am not certain that Gap Inc should operate both distinct business models and may want to use its scale to continue to operate in fast fashion (as it has done with Old Navy) and sell the high-end portions of the business that may work better with an alternate model. Given the recent performance, Gap and BR certainly don’t seem to be working now.

  5. Thank you for the interesting essay! One challenge fast fashion will face as it moves to more upscale market segments is maintaining quality. A customer may be willing to forgive a certain level of defects from Zara but expect more from a pricier purchase from the Banana Republic. While achieving both speed and quality is not be impossible, it will undoubtedly be a substantial operational challenge.

    Additionally, speed may be more of a competitive advantage for Zara than it is for Gap. Zara’s brand image is closely tied to fashion – consumers come to Zara seeking the cheap but cutting edge. On the other hand, Gap’s brands are more closely associated with reusable basics rather than high fashion. Given these two very different brand images and strategies, I worry that speed is more beneficial for Zara than it is for Gap.

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