Gap Inc. in 2010: Is the Turnaround Strategy Working? Essay

Executive Summary Gap Inc. is facing the problem of decreasing sales in the family clothing store industry. Included in this paper is a detailed analysis of the family clothing store industry. This external analysis has showed that the industry is extremely competitive and difficult to make a profit due to low profit margins. The internal analysis of the company shows that although sales have decreased, Gap’s financial performance strengthens every year. Their profitability, leverage, and liquidity ratios have improved steadily every year which helps the company maintain a somewhat strong business situation. There are several possible alternatives for Gap Inc. to help increase sales and market share including maintain status quo, create new product lines and segment their target markets, and expand company operated stores in foreign markets which is the suggested course of action. Problem Statement The problem facing Gap Inc. is their decreasing sales and market share in the family clothing store industry due to the decreasing popularity of their clothing. Background and History Gap Inc. has several brands including The Gap, Old Navy, Banana Republic, Athleta, and Piperlime. Gap Inc. was founded in 1969 by Doris and Don Fisher. They started out selling clothing that targeted teenagers in San Francisco and expanded their clothing line to include active wear in 1970. The company went public in 1976. Gap Inc.’s clothing was popular in the 1990s and as their clothes were becoming popular and sales were increasing rapidly, so was their debt due to expansion. As their long-term debt increased, the quality of their clothing decreased. By 2000, their clothing style was not popular. The company had a few CEOs including Millar Drexler who was fired due to decreasing sales, Paul Pressler who resigned due to the company’s weak performance and he was replaced by Glen Murphy. Pressler’s turnaround strategy for Gap included reducing long-term debt. Murphy’s turnaround strategy was to expand business internationally and improve on the style and design of the clothing. PESTE Analysis Political Forces * Foreign governments; can cause delays or stall shipments by imposing new rules. * Better labour standards in foreign countries could cause an increase in textile prices. * The World Trade Organization. Another Multi-Fiber Arrangement could be imposed in the future. Economical Forces * Recession – consumers more cautious of prices * Interest rates will affect a store’s ability to afford loans for expansions * Exchange rates will affect costs to those companies that are importing textiles from foreign countries. Social Forces * Consumer’s tastes change frequently in the fashion industry. * Aging population – as the baby boomers age, their fashion needs will be different. * Obesity rates rising, demand for plus size clothing rising * Sweat shops/poor working conditions for employees of suppliers in foreign countries can cause bad publicity Technological Factors * The internet is becoming a popular way to sell merchandise. * New software and advancements in IT make it easier and more efficient for companies to track inventory and make the ordering process easier. Environmental Factors * People are more environmentally conscious and want to ensure companies are committed to green practices and are being socially responsible. * Clothing manufacturers can be creating a large amount of pollution due to their operations, especially if running a large plant. Porter’s Five Forces Threat of Rivalry Gap Inc.’s competition includes Abercrombie & Fitch, American Eagle Outfitters, Ross Stores, and several small local companies. The threat of rivalry is high due to: * Several competitors; thousands of small local and regional retailers. * No cost to buyers to switch brands. * Low profit margins; estimated to be only 3.4% in 2008. Threat of New Entrants The threat of new entrants is moderate to high due to: * Several possible new entrants, especially those operating specialty clothing stores. These include stores such as Reitmans who target women or H&M and Zara that target young adults. * Product differentiation and brand loyalty will make it more difficult to enter. Threat from Substitutes The threat from substitutes is high due to: * Several good substitutes are available such as: * Make your own clothes * Shop at specialty clothing stores * Buy second hand from flea markets, yard sales, or second hand stores * Department stores/big box retailers such as Sears or Wal-Mart. * No cost to buyers to switching to a substitute. * Prices are comparable or cheaper for substitutes and maintain quality Supplier Bargaining Power Supplier bargaining power is slightly higher than normal due to: * Limited supplies, potential for shortages * Products are differentiated in quality and style, however, could easily be duplicated by another supplier. * No cost to buyers to switch suppliers; however, may not be possible if there are shortages. Buyers Bargaining Power Buyers bargaining power are fairly high due to: * Low cost to switch suppliers * Products are differentiated in quality in style, however, could be easily duplicated. This increases buyers bargaining power. * Buyers are price sensitive – low profit margins and most of their purchases rely on third party suppliers from foreign countries. Overall, the family clothing store industry is not a very attractive industry. With all competitive forces being moderate to high, it would be very difficult for a new entrant to make a decent profit. Factors Driving Change * Entry of foreign companies * Regulatory influences and government policy changes. Regulations for importing textiles from foreign markets could cause an increase in prices for family clothing stores. * Changing social issues – increasing obesity rates * Changes in lifestyle – people becoming health conscious which affects their clothing needs. These factors driving change have the potential to decrease the demand for the family clothing store industry. As demand decreases, competition will become more intense. The combined impact of these factors could lead to lower industry profitability, especially if the companies cannot turnover inventory. Key Success Factors * Location * Brand loyalty * Keeping current with fashion trends These key success factors will determine how successful the companies in the family clothing industry are. Location is important because customers want to shop close to home. Companies must build brand loyalty to keep their customers coming back. Most importantly, if the company is not staying current with fashion trends, their customers will shop at a store that is offering the latest fashions.