Old Navy widens the gap between its omni-channel future and The GAP's legacy retail present

Profile picture for user slauchlan By Stuart Lauchlan March 3, 2019
Summary:
GAP and Old Navy are going their own way - good move or gambit to protect the latter from the former's failures?

 

gapoldnavy

Pragmatic growth strategy or a bid to save part of the business from the toxicity of the rest? Whichever thesis to which you subscribe, GAP’s decision late last week to put distance between its Old Navy operation and the rest of the company represents a significant long term roll of the dice - and one that might set precedent in a turbulent omni-channel retail market.

To recap, GAP has announced it will break into two companies. The first will be Old Navy; the second will contain the rest of the business, most notably GAP itself and Banana Republic, but also Athleta and Hill City.

The reason? Simple - Old Navy is a success story, while Gap is not. Or more accurately, is no longer. The former turned in $8 billion in sales last year, while the other four businesses combined can only boast around $9 billion. Old Navy’s sales rose 3% last year; Gap’s fell 5%.

The announcement took the retail sector by surprise, although a number of analysts have been calling for some kind of action to make Old Navy more of a flagship brand in its own right rather than the healthy part of an unhealthy whole. So why now? And has this been fully thought through?

The answer to the second question is that there are one or two signs that the answer is no. Put it this way - it’s been so fully-thought through that they haven’t managed to come up with a name for the non-Old Navy operation, which for the time being has a codename of NewCo.

As to why now, GAP CEO Art Peck says:

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.

That’s a long-winded way of saying Old Navy’s growth potential was being held back by the other parts of business and that its needs were not being met. For example, Peck points to Old Navy’s use of mobile Point of Sale tech as being “quite different” to Banana Republic.

Old Navy also has a great market opportunity at the moment as the turbulence in the omni-channel retail sector takes down the likes of Sears and causes others like JC Penney to struggle. As nature abhors a vacuum, the space created by those legacy retailers stumbling creates a demographic that Old Navy can address with room to breath and its own investment priorities. Peck notes:

We have a significant percentage of cash consumers at Old Navy that actually don't have access to the brand through the digital expression of the brand. What's really on our mind is here is that we have the number two apparel brand in the United States and a significant percentage of the population that doesn't have access to the brand. We think that's a real winning combination.

NewCo

As for NewCo, if we must call it that, there’s vague talk of being better positioned to “drive sustainable growth” and “levering a scale of operating platform” - nope, nor me - that suggests strongly that what happens next is most kindly described as a work in progress. Peck says:

In NewCo, we have the advantage of iconic brands. But we also have a business that needs to evolve and change. With our concurrent announcements on restructuring the Gap brand specialty fleet, we have a smaller, healthier base of stores that provide a critical component of the omni experience that our customers demand.

The NewCo challenge and the NewCo opportunity is to provide truly frictionless access across stores and digital, to continue to harness the power of data from cross brand shoppers and to become what I call radically more responsive to our customers.

All of which is good and aspirational, but the lack of detail at this stage is alarming. For example, all GAP brands, including Old Navy, currently reside on the one online website platform. Presumably if Old Navy is to be allowed to stand alone, surely the one decision that must have been made would be to give it its own platform to build its brand? Er, not exactly, says Peck:

On the website, it’s to be determined quite honestly how we shake that all around. We do have some overlap with GAP, overlap with Old Navy, the most Banana and Athleta, by far the least, Hill City and Intermix, certainly the least. But I'm not ruling anything out here, and obviously the world is filled with a number of people attempting to stand up third party marketplaces right now, third party digital marketplaces. I have one right here in this company…So that is a to-be-determined also, but I wouldn't jump to conclusions.

But Peck, who will be CEO of the NewCo business, is adamant that this is not a knee-jerk decision, the detail of which is going to be worked out on the run:

You can have confidence that we definitely boiled the ocean in looking at all the combinations and permutations here. We felt we wanted to be exhaustive and we felt we owed it to board and the employees and our shareholders to look at those. And so we really looked across the whole thing. We settled on this largely due to the business logic at the end of the day.

My take

While the markets responded well to the split announcement - with GAP’s share price rising 25% - 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.

For its part, GAP still has some serious problems that haven’t been addressed. Another 230 stores are going to be shuttered over the next 2 years in a bid to cut up to $300 million in costs. That’s damage containment, not a growth plan. NewCo doesn't seem to have any new ideas.

It’s also puzzling why Athleta and Hill City, both promising, young retail brands in their own rights have been shackled to GAP and Banana Republic. While the latter has shown some signs of life since its own store closure program, the former is a tainted brand with no obvious turnaround plan on show.

On wider note, the success of the split in 2020 will be watched with interest by other retailers. There are a number of companies that might benefit from having brands fly solo and be able to prioritise their own omni-channel investments. Abercrombie & Fitch’s Hollister brand springs to mind, for example.