'Modern American optimism' in action? Gap's retail digital transformation journey remains a deeply divided story

US retail institution Gap Inc has a plan to derive half of its total revenues from online within two years. It’s a bold ambition and based on its current performance, one that’s going to need considerable work to achieve. 

Overall, full year losses for the group were $665 million for 2020, down from a profit of $351 million in 2019, on a 15.8% year-on-year revenue decline. Online sales as a whole rose 54% and now account for 45% of total revenues, up from 25% a year ago. So that’s good, yes? Well, up to a point, but the Gap Inc story remains a lot more fragmented than that digital growth rate.

Digital transformation efforts at the group over the past few years have been a series of ups and downs and hits and misses, depending on which part of the brand portfolio you’re looking at at any given time. It’s not that there hasn’t been an understanding of the importance of developing omni-channel capabilities or a willingness to embrace tech - former CEO Art Peck at one point was declaring the firm to be in the same mold as the Silicon Valley businesses further down Highway 101 in terms of its technophilic DNA. 

But the end result has remained patchy and the various brands across the group are all in different places. Old Navy remains the most enduring success story, now the number two apparel brand in the US after Nike, while the star performer emerging from the pandemic has been Athleta, a clear beneficiary of the lockdown boom in ‘athleisure’ clothing seen elsewhere. But Gap itself continues to struggle and when it comes to Banana Republic, well….

As for the omni-acceleration seen in other parts of the retail sector, Gap’s major landmarks coming out of a COVID-hit industry appear to be shuttering another 228 Gap and Banana Republic physical stores and becoming a market leader in selling face masks, now accounting for three percent of total sales. 

Still, for her part, CEO Sonia Syngal, herself a former e-commerce champion at Old Navy, inevitably spins a glass half full: 

Our online business reached over $6 billion in sales and delivered 54% annual sales growth, leveraging our powerful omni-channel platform. Following the shutdown, we re-opened our fleet of more than 3,000 stores quickly, while permanently closing a group of over 200 unprofitable stores as part of our fleet rationalization strategy. We've met our customer's e-commerce shipping expectations at scale with on-time delivery of approximately 130 million products, well above the industry average…Powering our brands is the strength of our platform and capabilities at scale. Number two in the US [with] apparel e-commerce sales of $6 billion, we believe Gap Inc. is uniquely advantaged to win in digital.

Work in progress

OK, well maybe so, maybe no. As noted above, there’s still a lot of work to be done on that front. There are areas of the online business where for all Peck’s earlier boasts, tech-enabled capabilities have rolled out at a slower pace than they might usefully have done. 

Buy Online, Pick-up In Store (BOPIS) is a case point. This was launched at Old Navy - under Syngal - back in 2018, then extended out to Banana Republic and Athleta in 2019, before finally being offered across the entire group during 2020, cutting it fine for the boom in online shopping and customer collection that the pandemic fuelled. 

But there are wins to point to, insists Syngal, citing an expanded client database of 183 million names, up 14% year-on-year as customers provided more personal data to access and use online services. This additional resource has been used to beef up personalization capabilities and to build out loyalty program plans:

To meet the rising demand of online shopping and our target of increasing digital penetration to 50% by 2023, we're focused on personalization at scale and enhancing capabilities across mobile, all supported by a highly-automated fulfillment network. Mobile has become our customer's preferred way to shop with us online. And we know it can deliver further degrees personalization and inspiration as well as enable the entire omni-shopping journey. 

On mobile use, she adds: 

We now have over 50% of traffic and 75% of sales annually through mobile. With mobile as the primary engagement platform, we're working quickly to create frictionless mobile shopping and new digital experiences as devices, network, and customer preferences evolve.

As for loyalty, Syngal states a simple objective here: 

Our goal to turn every customer into a loyalist. We launched our Navyist, Gap Good, Banana Republic and Athleta rewards at the end of September, and in Q4 alone enrolled 6.4 million new loyalists across the company into the program. One of the biggest value drivers for us in 2021 will be the full implementation and integration of our loyalty program across all of our brands this summer. We know members of our loyalty program outspend non-loyalty customers by more than 88%. This integrated program will offer our loyalists benefits across our entire portfolio, while still providing unique and emotional brand connections. If we can get a customer from a single transaction to multiple transactions, to multiple channels, to multiple brands, we see value accretion at every step.

Consistency is very, very important for this business [as] is the expansion of our loyalty program, which allows for repeat visits [and] a deeper relationship [in] the personalization journey that our tech investments are fueling…We spend a lot of time on this. We have these four brands. We also know the power of our platform and portfolio. So we're solving for the 'and' not the 'or'. What we're doing with our loyalty design is to have really intimate emotional brand level engagement and offering. While at the same time, we know the customer values cross-brand shopping, we know the customer values the benefit of the portfolio, so we're doing both and we've been very thoughtful about what offerings we give our customers depending on their preferences.

Supply chain 

The 50% online goal is also going to be heavily dependent on having a robust back-end supply chain and inventory management infrastructure locked down. To that end, Gap Inc has been upgrading its six existing US distribution centers as well as beginning work next month on a seventh, an 850,000 square feet “state of the art” facility in Texas, costing $140 million to get up-and-running by Fall next year. This will be used to support Old Navy’s online distribution needs, says Syngal:

By delivering inventory faster and more efficiently to customers across the country, this new campus will allow us to meet the rising customer demand for online shopping. 

Expect more sophistication around fulfilment and supply chain as the loyalty program kicks in, she adds, so the more valuable a customer you are perceived to be, the faster you can expect to receive your purchases: 

One of the things, we are using loyalty for and we're designing it for, is to tier fulfillment based on if you're a bronze, silver, gold member, for example. That will also allow us to optimize the speed of delivery fulfillment based on our best customers and manage fulfillment costs effectively while pleasing our most valuable lifetime value customers.

My take

Through store closures, strategic reviews, and our focus on reducing fixed operating costs, we are building a virtuous cycle where productivity can fuel demand generation, pointedly [with] our investments in technology and marketing.

That’s the bottom line thinking in play here. As noted at the start, Gap is a frustrating transformation tale of highs and lows. When Syngal talks about the importance of consistency, it’s difficult not to raise a quizzical eyebrow as she currently presides over a hugely-divided retail empire. 

With two years to go, can Gap achieve its 50% online sales target? It’s hardly beyond the realms of the possibility, but fresh life needs to be pumped into the namesake brand - those face mask sales aren’t going to be there forever, we hope! - and Banana Republic’s ongoing plight shows no obvious sign of improving. 

Last word to Syngal, who back in the summer was talking up the “digital sunshine” as the firm turned in its worst quarterly numbers in half-a-century.  Flash forward nine months and the latest soundbite is: 

Gap stands for modern American optimism. 

It needs to, might be the cruel riposte.