I'd much rather have a supply problem than a demand problem.
Gap CEO Sonia Syngal might want to bear in mind the maxim of 'Be careful what you wish for'. In what’s possibly the most dramatic manifestation of the global supply chain crisis on the retail sector, Gap saw its share price crash yesterday as the retailer reported heavy losses as a result of product shipment delays.
The company turned in revenues of $3.94 billion, down one percent year-on-year, and losses of $152 million against a profit of $95 million for the comparable quarter last year. By brand, Gap itself was down 10% compared to 2019 - the new benchmark for retailers - and Banana Republic was down by 18%. Once again Old Navy was a success story with sales up 8% from 2019, while Athleta was the biggest winner, up 48% compared to 2019.
But it was the impact of the supply chain crisis on the bottom line that really hit home. Earlier this week diginomica cited a Coupa study warning of the damage to come that made for uncomfortable reading for beleaguered retailers. Some 48 hours later, Gap provided the strongest indicator that the results of that study were far from alarmist
And it had all been going so well, according to Syngal :
Coming off record sales performance in Q2, we had accelerated momentum heading into the back half before facing disruption to our supply chain, driven by the 2.5 month closure of our top manufacturing country, Vietnam, as well as port congestion, both of which affected our ability to fully meet strong customer demand. While we had planned into the known supply chain constraints as we entered the quarter, including COVID-related closures in Vietnam, the shock to our business persisted longer than anticipated as weeks turned into months. We have been all hands on deck to address these headwinds and the resulting impact on our business, proactively navigating holiday and beyond, ensuring that the customer is at the center of every decision we make.
That’s meant joining the increasing ranks of retailers putting up money to charter their own freight carriers, spending $100 million on air costs in Q3 and a further $350 million for Q4 and the all-important Holidays season. Syngal said:
To secure our supply and meet the needs of our customers, we chose air freight over ocean vessels for a significant portion of our assortment, taking on extreme transitory costs. We're disappointed in the short-term impact on earnings. We made the choice to invest in our customer promise and build loyalty that will help sustain growth over the long term. Overall, we continue to believe the scale of our supply chain is a material advantage. We have deep relationships with our manufacturers across multiple countries of origin optimized for cost, speed and expertise. And we have strong transportation partners, offering speed advantage and industry-leading rates.
As Syngal noted, in some respects Gap has been particularly vulnerable to this sort of hit. Thirty percent of its manufacturing is outsourced to Vietnam, which had a 2.5 month COVID shutdown. Chasing cheaper production costs that have benefitted the firm before has now seen it badly bitten.
Still, never waste a good crisis. Syngal once again demonstrated that she’s a ‘glass half full, not glass half empty’ business leader, somehow managing to scrape a silver lining out of a disastrous quarter:
Learnings from this crisis will not go to waste. We're using them as an opportunity to accelerate digitization efforts that were already underway across our product-to-market process. There was a sizable increase in the enterprise clock speed on transformative initiatives as we combated the current crisis with an eye on a better future faster.
For example, we're adding supply chain capabilities that will allow us to better anticipate the unexpected. We've made significant progress digitizing core operating processes with a targeted focus on inventory management, loyalty and personalization. And we're transforming product creation by using digital tools to unlock speed and efficiency. All of these work will pay forward in 2022 and beyond. These near-term pressures have not distracted us from our core strategy.
That incudes becoming ever more of a digital first retailer, she explained:
We are becoming digitally-led. Online sales grew 48% in the quarter compared to 2019, representing 38% of total sales, and our migration to the cloud has unlocked innovation in our tech portfolio...Our leading omni platform provides customer convenience and engaging experiences, whether in store, on mobile or through curbside pickup. [As] our online sales grew 48% in the quarter compared to 2019, we maintained our rank as #2 in US apparel e-commerce sales.
The firm’s customer loyalty program has been leveraged to good effect, Syngal said:
Our sizable active customer file sits at 64 million, and those customers are spending more on average than they were 2 years ago. But the more important is that the health of our customer file is improving. Compared to 2019, newly acquired customers are spending more with us than our existing customers with increased average transactions, average unit retail and basket size. We're pleased with the launch of our innovative Rewards program and our ability to build customer lifetime value. Now with more than 45 million members, our loyalists are 2x more likely to shop across brands, and 3x more likely to shop across channels.
And investment in tech remains a priority:
We are investing capital to drive growth, reduce costs and increase speed and agility. To diversify and strengthen our business, we are also seeding new capabilities that will unlock additional value. For example, we acquired Draper, which we expect will power new e-commerce tools with 3DFit technology and we acquired CD4, our machine learning and AI acquisition with broad potential across sales, inventory and consumer insights. We have plans to scale these solutions in 2022 to build our core digital capability. This will help our brands lower return, boost in-stock levels, increase margins and deliver better customer experiences online and in stores across all 4 brands.
But as for that supply chain problem, that’s not going away. The firm expects it to impact on business into 2022 and it will result in some changes in operational behavior, concluded Syngal:
It starts with digitizing the information so that we know exactly where every unit is in our end-to-end supply chain. We had that information, but now we're going to a greater level of detail and more real-time visibility. And that all links to the technology investments we're making in digitizing our end-to-end supply chain.
Mind you, Gap wasn’t the only retailer to have supply problems. Nordstrom’s stock collapsed by 20% on the back of warnings of supply shortages for the Holidays, particularly at Nordstrom Rack. CEO Erik Nordstrom admitted:
We have not responded as quickly and as aggressively as we needed to, with Rack in particular... we've been significantly under inventory plans all year.
We said earlier in the week that the coming Holidays season would expose the operational fitness of many in the retail sector. This is only the start…all retailers need to mind the gap!