by Robin Lewis
I don’t care how much cash the Gap is sitting on or how much they generate on a daily basis. Just as Sears keeps pumping blood (cash), through its veins, Gap is, and has been for a long time, staying alive on “life support.” Essentially, the body (the retail business)is dying, but the nearest and dearest relatives (shareholders and the Board) obviously do not want to pull the proverbial “plug.” They all stand around the dying patient, hoping for some kind of miracle recovery, (metaphorically speaking, but bear with me).
Here’s what a long, slow death looks like. CEO Glenn Murphy was hired to resuscitate the business in 2007 following five years of revenue losses and a disoriented Gap brand that was flailing for relevancy during the reign of CEO Paul Pressler, who was hired in 2002. Pressler had also been charged with reversing the declining business, which had begun to suffer during the last two years of the twenty-year reign of the prince-of-all-merchant-princes, Millard “Mickey” Drexler.
Drexler was responsible for Gap Inc.’s meteoric and now storied sales growth from around $480 million, when he arrived in 1983 as President, to almost $14 billion in 2000, an amazing 2,400 percent increase. Unable to right the ship when it started to sink, Drexler retired in 2002.
So, Mr. Murphy, the former head of Canadian drug chain Shoppers Drug Market Corp., and a Canadian bookstore chain prior to that, is now (sticking with the metaphor) Dr. Murphy, the chief plastic surgeon operating on a patient dying of internal and external hemorrhaging. Since picking up his scalpel in 2007, he’s tried procedure after procedure, seeking one that will work, as the patient continues to hemorrhage, suffering through four years of declining sales.
The Gap brand is the heart of the dying patient, its 1,100 North American stores having lost almost a third of their sales –almost $2 billion – since 2004, more than the $1.6 billion drop in total Gap Inc. sales during the same period. And, as has been said by many retail experts over the past decade, if the Gap brand dies, the entire enterprise comes unglued.
Well, rather than slapping an oxygen mask on the walking dead, would we (the industry) be better off allowing Schumpeter’s theory of “creative destruction” to take hold, and simply help accelerate the demise of companies that arguably are diminishing in value more than creating it? After all, in an over-stored, over-stuffed world, huge dying businesses such as Sears and the Gap simply lower “all ships” by taking cash away from both the healthier, growing businesses and the emerging entrepreneurial businesses. By the way, during Paul Pressler’s disastrous tenure, Wall Street had in fact nicknamed him “dead man walking.” I have not heard that moniker transferred to Mr. Murphy. Not yet, anyway.
In other words, should we legalize some form of retail euthanasia? Or, is the Gap’s team of “physicians” working on a credible miracle cure? And, indeed, is it the right team?
I am obviously using the “euthanasia” reference as an exaggeration to make what I believe to be a very important point, that over-capacity continues, and it weakens pure free market competition, because the losers continue to get propped up in one way or another.
Well, one shareholder isn’t waiting around for those answers. Recently, Gap’s second largest institutional shareholder, Alliance Bernstein, pulled its “plug,” unloading about 23 million shares. Ironically, as speculation mounted about who bought the shares, Edward “Eddie” Lampert’s name came up, mainly because he’s developed a trademark act of shrinking his way to riches.
Makes sense, since Eddie (founder and CEO of Sears Holdings Inc. and his own ESL hedge fund) already owned 35 million shares or 5.8% of outstanding Gap Inc. shares as of February, 2011. Another fund in which Lampert is listed as a key executive, RBS Partners, increased its stake in Gap to 30-plus million shares, which makes it Gap’s largest institutional shareholder.
Oh boy — an epiphany! Eddie himself may be the euthanasia process I’m suggesting. Just copy the toxic combination of drugs he’s been injecting in Sears (see prior articles in The Robin Report), and bye-bye Gap, following the direction of one of its earliest ad campaigns: “fall in to the Gap,” only this gap will be an abyss it cannot get out of.
Or, maybe Eddie sees an “end game abracadabra” miracle cure for the Gap. More on this possibility later.
The Anatomy of Gap’s Rise and Decline
From a little shop in San Francisco opened with $63,000 in 1969 by Donald and Doris Fisher, and first year sales of about $2 million, primarily in Levi’s jeans and LP records, Gap Inc., including its namesake Gap brand, Banana Republic, Old Navy, Piperlime and Athleta, reached almost $15 billion in sales by 2011, with about 3,200 stores worldwide (about 2,800 in the US), and approximately 135,000 employees. It was only recently surpassed by Spain-based Inditex (owner of Zara) as the world’s largest apparel retailer.
Stop here, and it sounds like a colossal success story. However, as we are all well aware, and as the numbers so vividly show, Gap Inc., though it rose like a rocket in its growth phase, is now descending a slippery slope, further greased by a global economic mess.
The descent of this iconic brand phenomenon ironically began during the last two years’ tenure of Mickey Drexler, the architect of its meteoric growth. Comp store sales dropped 5% in 2000, their first decline since 1989, and then a whopping 13% in 2001, with the Gap brand down 12%.
What went wrong?
Competition, Ubiquity, Momentum Complexity and the Consumer
Like silent “Pac Men,” competition grew up all around Gap and began to chomp away at all three of its brands. So, even while Gap Inc., along with the entire apparel specialty retail sector, realized explosive growth during the 1990s, primarily taking huge chunks of market share from department stores, the specialty brands were also fiercely competing among themselves. In fact, the rate of growth for dollars spent on teen apparel grew at an incredible 14% per year from the late 1990s through to the Great Recession. And many of them, like A&F, American Eagle Outfitters, Zumiez and others, were hitting their stride right in Gap’s sweet spot.
Even so, following Old Navy’s repositioning in 1994, the Gap troika of brands was leading the specialty store pack through the latter half of the 1990s. In 1997, Old Navy hit a billion dollars in sales and Gap Inc. grew to $6.5 billion, followed by $9 billion in 1998. And, they were opening stores at the rate of one per day.
The Gap had become the brand of all brands for consumers of all ages. And then, suddenly, it wasn’t.
Somewhere in the blur of skyrocketing growth, opening 731 new stores in 2000 and hitting sales of $13.6 billion, Mickey Drexler and his brands lost their “cool.” And, they began to lose their customers – both in the over-30 and younger segments – in droves.
Indeed, Drexler would later admit in a Goldman Sachs retail conference that he had lost focus. Under the pressure of continuing to trump Gap’s rapid fire growth quarter on quarter, he got caught up in the momentum and the growing complexities of scale. He said that as a result, he was distracted from his typical role of keeping his finger on the consumer’s pulse. Too many layers of management and the growing bureaucracy took him too far away from those areas of the business that touched the customer, such as styling, presentation, communications, advertising, service, environment and image. In short, he lost control over the product, the experience, and thus the “soul” of the three brands and their ironclad connections with their consumers.
Additionally, as competitors began to ape and outdo the casual fashion that was its signature, Gap redirected its merchandising strategy toward trendier looks, edging away from its core competency. Trendy, alas, does not always equal cool.
So two major problems were beginning to emerge, both equally deleterious to the brand’s powerful connection with consumers. First, the rapid growth and store openings made the brand ubiquitous, and ubiquity is “antiquity,” the antithesis of cool to the Gap’s core consumers—the young. Second, Gap’s expanding merchandise lines for its various brand extensions, (GapKids, Gap Body, babyGap, etc.) were blurring what the original core brand stood for.
And while Drexler was caught in the Gap’s growth maelstrom, he was helpless to prevent the simultaneous declines of Banana Republic and Old Navy. Old Navy lost its consumer connection as “cheap chic” and Banana Republic went from work attire to expensive dressy, the wrong positioning for the brand.
As it all started to come apart at the dawning of the new Millennium, the Gap experienced its first two years of declining sales, and Drexler began to close stores and cut costs as he struggled to right the brand and reconnect with consumers. He departed in 2002, as the brands and the business began their descent.
Enter Paul Pressler From the “Magic Kingdom”
So, just as founder Donald Fisher had tapped Mickey Drexler in 1983 to revive the company, he hired Paul Pressler as CEO in the fall of 2002. Pressler, a veteran of fifteen years at the Walt Disney Company as head of the Parks and Resorts Division, had earlier been president of the Disney Store chain.
Pressler’s strengths were supposedly in the areas of operations and supply chain, essentially a numbers guy who knew little of the nuances of fashion. Apparently Fisher and the board believed he was their man of the hour, to restore discipline and stability and to reverse the Gap’s downward trajectory. It’s likely Fisher and the board believed Drexler’s merchandising genius was exactly what was needed to take the business to its current level, but that a more operational and business oriented leader was necessary to take it to the next.
Or maybe they thought that some pixie dust had rubbed off on Pressler while at the Magic Kingdom, enough so to perform some magic on Gap’s travails. As it would turn out, Mary Poppins probably made more of an impression on him. You know, sort of tidying everything up in the operations, “…..with a spoonful of sugar…”, etc. I can’t get that song out of my head.
Anyway, off to the races Pressler went. Focusing first on what he supposedly knew best, Pressler made major organizational changes, bringing in key executives he had worked with at Disney, instituting an expansive customer research program (vs. Drexler’s sheer intuitive magic), introducing strategic planning and a new advertising campaign, and beginning to streamline operations and cut costs.
From a timing point of view, he also had the benefit of the final apparel line designed under Drexler’s watch, just before he left. And, as it hit the stores it ended up doing very well. So, sales as well as earnings of all three brands rose during Pressler’s first year.
This all certainly sounded good at the time, more “left brain” focus, and the introduction of some classic business disciplines. No more “flying by the seat of the pants.” But the rush to failure was not to be denied.
All of the strategizing, researching, operational improvements, and cost cutting in the world, alone, will not create style or an emotionally compelling brand. Just as Mickey Drexler’s “right brain” focus might have benefitted from a strong business and operational partner, Pressler’s left-brain orientation definitely needed a strong merchant. Furthermore, even in those areas of his supposed expertise, many of his initiatives showed his lack of understanding of the apparel business. For example, in an effort to cut costs and increase speed to market, he directed the merchants to use the same fabric source across all three brands. Each brand of course, has its own positioning, design, cost/price relationships, color needs, etc. It also meant that each brand’s designer would be constrained from quickly responding to a new trend.
This program failed.
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Another cost-cutting initiative was to move the production of prototype samples from New York’s garment district to their many suppliers in Asia. So, designers created patterns, sent them to Asia, got samples back, made changes and then sent them back to be remade. The increase in time and effort, and reduction in flexibility and responsiveness, more than offset any cost reductions.
There were many other examples of Pressler’s lack of experience and total disconnect from the creative, product and brand side of the business.
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But perhaps his most critically damaging move came in 2004 when he transferred the then head of the Gap brand to lead Forth & Towne, Pressler’s new brand initiative targeting over-35 women ( which after millions of dollars invested and 19 test stores opened, failed three years later). Pressler placed himself as interim head of the Gap brand until he found a replacement.
So now, as the Gap’s business was about to fall into a more accelerated decline, following a brief uptick in sales in 2003-04, the brand would be led into its descent by inexperience at best and what would turn out to be a total lack of merchandising skills at worst.
Compounding the choice of himself to head up the Gap brand, and leading to the nickname bestowed upon him by Wall Street as “dead man walking,” Pressler, under increasing pressure, appointed a former colleague from Disney whom he had hired to head up the Gap Outlet, to now lead the Gap. To make a long story short, the new appointee lacked any meaningful experience in either apparel or retailing to relate to the now $5 billion, very troubled Gap brand.
The brand’s relevance, positioning, image, consumer base and business were continuing to unravel at an accelerated pace. Between June 2004 and December 2006 (eight months before Pressler would be replaced), comparative store sales declined in every month but three. Paul Pressler and the Gap Inc. board mutually agreed on his stepping down from his position, which he did in January of 2007. And, does it surprise anyone that the Gap Inc.’s publicly stated qualifications for its next CEO at the time read: “…with deep retailing and merchandising experience, ideally in apparel, and who understands the creative process”?
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From the Magic Kingdom to Canadian Drug Stores
One has to wonder about the search firm assigned to this task.
Donald Fisher’s son Robert was appointed interim CEO upon Pressler’s departure in January, 2007, and in July, 2007, Gap announced that Glenn Murphy, previously CEO of Shoppers Drug Mart in Canada, was to be the new CEO of Gap Inc.
Hello? Am I missing something? Yes, drug stores are retailers and yes, they do carry merchandise, although not apparel, except maybe basic underwear and socks. And, I’m not sure of the types of “creative processes” there are in drug stores, maybe signage or advertising or who knows what? Furthermore, there is no industry that even comes close to being as intensely competitive, fast moving and deathly cyclical as apparel retailing in the United States, to say nothing of my favorite mantra – “share wars” in an over-stored world.
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I scratched my head then. Of course, four years hence, Gap Inc., primarily the Gap brand, still does not have a compass.
And the head scratching really started even before the Murphy announcement. In February, 2007, Bob Fisher appointed Marka Hansen, then a 20-year industry veteran who headed the Banana Republic brand, to become President of the Gap brand. Although this move did not confuse me, the real whopper was the announcement in May, 2007, that big name designer Patrick Robinson would become head designer for the Gap brand.
Since Murphy inherited that decision upon his arrival two months later, and because he was entering a different retail industry and a fashion and apparel sector he had virtually no experience in, and because he probably had little understanding of what a designer does or even who Patrick Robinson was, Murphy focused on what he understood best, operations, supply chain, cost efficiencies, and productivity.
After all, why should Murphy not assume that the organization changes made prior to his arrival, essentially replacing key staffers of Paul Pressler, would be to place high quality management in those areas of the business where he had less experience?
And, if that was, in fact, his assumption, it’s too bad it took him four years to learn otherwise. Murphy fired Hansen in February 2011, replacing her with Art Peck, prior president of Gap’s outlet Stores, and before that, 20 years at the Boston Consulting Group. Robinson was ousted in May, 2011, replaced by Pam Wallack, executive vice president of the new Gap Global Creative Center in New York, who would oversee the design and other functions.
As an aside, but a really, really big one, Art Peck, in a blog he wrote as Gap’s new president, said of himself that if one Googled him, “…you won’t find much.” And, among other things, said, “That’s right. I’m not a merchant.”
And, Pam Wallack was plucked out of her creative director job for Gap’s kids and adult clothing to be president of Gap Global Creative Center?
Again, am I missing something? Or, is this Glenn Murphy’s “Hail Mary” pass? The new president of the Gap is not a merchant, and what is it that they most in the world need? Go figure.
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Catch a Falling Star
The proverbial brand star was indeed falling when Murphy came on board and by 2010, sales of Gap Inc. at about $11.4 billion were back to their 1999 level, with the Gap brand having lost 30% of revenues, or $1.5 billion, since 2004.
Murphy has been given credit for achieving operational efficiencies, improving cash flow, closing and downsizing underperforming stores (particularly Old Navy and Gap), thereby increasing productivity, and for generally stabilizing the business.
He has also made good headway internationally, aggressively targeting China, Japan and Italy. And Old Navy, which ironically seems to fly under the radar due to the world’s focus on the Gap brand, is nearly twice the size of Gap. And, while Old Navy lost $1 billion in sales and had 60 months of negative comps between 2003 and 2008, it seems to be turning around. Sales were up in 2009 and 2010 and it looks as though they’ve repositioned the brand’s products and image to recapture the ownership of “fun for the family” they once had.
But the flagship is still the Gap, and as stated earlier, if it does not regain its strength and a relevant connection with consumers, and do it quickly, the whole enterprise will be at risk.
So, urgency is the name of the game, echoed by a comment made by Murphy in a second quarter analyst and investor webcast: “We’ve been questioning our merchandise model for the last six to nine months.” Another comment: “We need to get better right away in our women’s product. Gap is a redo. We’re trying to transition the Gap brand aesthetic. It got a little too modern for our customers.” And, tactically, they stated the need to focus on women’s tops, a category critical to success in the women’s business.
The relative success of Athleta and Piperlime aside, I could say, wake up Glenn, what have you been doing for the last four years? Operations and all the good stuff you did to stabilize the business does not make your brands “cool” again. It is precisely about brand positioning, about strategy and not tactics, and I’m sorry, but this is not the drug store business.
As one very close observer said of Murphy: “…to my knowledge, the major internal meetings held by him were all about the operations, the numbers, seldom about brand strategy.”
At the end of the day, in my opinion, the most critical reason for Mr. Murphy’s inability to turn the business around is that he simply did not fit the literal qualifications that Gap Inc. put forth when searching for a successor to Pressler, looking for someone: “with deep retailing and merchandising experience, ideally in apparel and who understands the creative process.”
Had he really understood this business and its success factors, he might have immediately searched for another Mickey Drexler to balance his “left brain” skills. The question now: is it simply too late?
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So What’s Next
Are we looking at another iconic brand in its death throes, the question I opened this article with? Well, if we want an easy way out, we can accept the bell curve of life phases: birth; growth; maturity; old age; and, death. This would put the Gap brand and probably Old Navy and Banana Republic on the dying end of the curve.
One leading industry consultant I spoke to pointed out the similarities between Sears and the Gap, “both as genuine American icons, though from different eras, both changing the face of retail for their respective generations. Now the challenge (for the Gap), with the ever fickle Millennials is not unlike that of Sears and its baby boomer loyalists in their heyday, (since the Sears’ generation is, like it or not, either dead or dying).”
Speaking of which, I must come back to my Sears reference at the beginning of this article, and one scenario that might play out for Gap Inc.
First, a question: are Eddie Lampert, (founder and CEO of Sears Holdings Inc. and his own ESL hedge fund) and RBS Partners (another fund in which he is listed as a key executive) accumulating stock to acquire Gap Inc., or to have a seat on the Board? If so, does he see an “end game” miracle cure for the Gap that makes the sum of its parts bigger than the whole, just as he seems to be revaluing his assets at Sears? Early speculation was that his fallback exit strategy, if he was unable to turn Sear’s business around, was always the ability to sell off its valuable real estate holdings, as well as the proprietary brands. Accordingly, in Spring of 2008, he took the “whole” of the retail model and “unbundled” it into five autonomous units: operating businesses; support, brands, online and real estate.
And, early indications are that Sears is aggressively pursuing an e-commerce strategy that looks a lot like that of Amazon. Sears has securitized many of its brands and is wholesaling them to select retailers (even competitors). They are even proactively leasing space in many current Sears and Kmart locations to the likes of Whole Foods, Forever 21, athletic clubs, golf and gift shops, and others.
As we know, Eddie, viewed himself as a brilliant retailer, maybe even a “merchant prince” when he first aggregated Sears and Kmart, vowing to return them to their iconic positions as quintessential retail brands. Of course, we learned later on that he is simply a brilliant financier, knowing how to create value where there essentially is none: the “abracadabra” strategy. So, maybe Eddie is looking to perform his magic on Gap Inc. Who knows?
Another scenario could be the unbundling of the five brands to sell to strategic or financial investors.
But, I don’t think Glenn Murphy or the Board, including the Fishers, are even remotely interested in either of these scenarios. They want to revitalize the business and get it headed north on all cylinders.
So, Dr. Murphy, make sure you’ve got the right team of physicians, particularly ones who can balance your “left brain” skills. Step up your international and online growth, which you have committed to. Downsize and close enough stores not just for cutting costs, but also to reduce ubiquity which is counter to “cool.” And, get your “right brain” staff to nail a winning design, merchandising, presentation, communication and image strategy for every one of your brands. And, then you will reverse the trajectory of your falling stars.
Good luck, as you struggle against time and economic circumstances.