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Breaking up is (too) hard to do for The GAP and Old Navy, so what's the next omni-channel 'big idea' going to be?

Stuart Lauchlan Profile picture for user slauchlan January 17, 2020
Spinning off Old Navy was supposed to be the 'big idea' that would assist The GAP's omni-channel turnaround - except it wasn't. Whatever happens next a new CEO needs to keep up the digital focus.


Topping off a week of retail success stories and best practice exemplars at the NRF show, along comes The GAP to remind us of the sorry, directionless state of that firm’s omni-channel transformation efforts. The firm has abandoned the grand plan that was supposed to help it turn around its (mis)fortunes and will no longer spin-off its Old Navy brand as a separate business.

That scheme was announced early last year by GAP’s then-CEO Art Peck who pitched the line:

Our customers' preferences and shopping habits continue to evolve, which is challenging the traditional retail model. We have responded to this with our balanced growth strategy, which has positioned us well with investments in our global supply chain, our digital capabilities and an enhanced and evolving omni-channel customer experience, while at the same time improving operational efficiencies across the company.

But over time, Old Navy's value creation levers, business model and customers have increasingly diverged from our specialty brands. That divergence to me is now clear. And we think the best way for each company to grow and meet the evolving needs of our customers is to allow them to pursue tailored strategies separately.

My own view was less enthusiastic:

There is an uneasy feeling that this is a case of ‘something must be done, this is something’ driving the “business logic” here. This looks to be more about protecting Old Navy’s future than being a thought-through strategy to re-invent GAP’s present.

Flash forward to today and Peck has departed and his ‘big idea’ has been trashed. Interim CEO Robert Fisher confirmed yesterday that the company has now decided that breaking up is too hard to do at the present time:

While the objectives of the separation remain relevant, our board of directors has concluded that the cost and complexity of splitting into two companies, combined with softer business performance, limited our ability to create appropriate value from separation. The work we’ve done to prepare for the spin shone a bright light on operational inefficiencies and areas for improvement.

Building on that brave stab at a ‘glass half full’ spin on this 180 degree reversal of a strategy that was aggressively pushed as the only course of action for the whole of last year, Fisher added:

We have learned a lot and intend to operate GAP Inc. in a more rigorous and transformational manner that empowers our growth brands, Old Navy and Athleta, and appropriately focuses on profitability for Banana Republic and GAP brand. Our board is focused on supporting this work and appointing new leadership with the appropriate experience necessary to lead a portfolio of retail brands and to support our transformation efforts.

What happened? 

To sum up, there were four main arguments for the spin-off that Peck articulated:

  • Separation creates two independent companies with sharpened strategic focus and operating structure.
  • Enables each company to capitalize on unique business models, growth plans and customer bases.
  • Compelling and distinct financial profiles, tailored operating priorities and unique capital allocation strategies.
  • Better positions the two new companies to create significant value for our customers and shareholders and opportunities for our employees

The intention had been that Peck would head up the non-Old Navy tranche of The GAP portfolio, the dreadfully-named NewCo. This was, apparently, going to service the “digitally-led omni-channel customer” and would build out a “data-driven, omni-channel operating platform” that would allow it to “leverage scale and digital capability to drive profitable growth”.

GAP slide
Source - GAP

Then along came another set of dismal quarterly numbers in November last year with sales down right across the portfolio - including at the Old Navy golden child - and Peck was out.  And now, so is his rescue plan.

My take

In our retail round-up of 2019, I said that the year had been a tipping point one for The GAP…one way or another. Halfway through January and here we are again. What happens now?  Well, the first thing that’s needed is a full-time replacement for Peck to come up with the next ‘big idea’.

It’s to be hoped that whoever picks up this poisoned chalice will closely examine the planned heavy investment in digital transformation and data analytics. Peck was right in the emphasis that he placed on tech infrastructure - even if he felt this wasn’t always appreciated. At a September 2019 analyst briefing, GAP execs were enthusing over the planned digital investments to come for both Old Navy and NewCo, including boosts for analytics, machine learning, improved customer targetting and personalization as well as an emphasis on being a mobile-first retailer.

As things stand, there has been progress made around online. For full year 2018, Old Navy turned in digital sales of $1.6 billion, 20% of total sales. Across the rest of the group, digital accounted for 24% of the total or $2.1 billion. It’s offline where the real problems are. CFO Teri List-Stoll explained in November:

Across the board, our online trends are better than our store trends…that’s really what we're focused on is how do we create seamless experiences for our customers, so that digital is embedded and seamless for them, so that we can capture them wherever they shop, and wherever they buy, which tend to be not necessarily the same place. And so we were pleased with the progress we're seeing in our online business, but also see that as a continued opportunity for growth as we move forward.

Nixing the Old Navy spin-off is embarrassing for the retailer, but probably for the best - and the share price bump that greeted the announcement suggests Wall Street is of similar mind. The new CEO - whoever he or she turns out to be - needs to take a long hard look at the state of the nation here and come up with a pragmatic omni-channel strategy for recovery. Of course, that’s going to be easier said than done. 


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