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Get Four
|  | APRIL 18, 2006
By Louise Lee Gap Goes GlobalThe retailer hopes a Middle East franchise deal will be a first step toward revving up its lackluster international businessGap Inc., which has suffered persistent problems in its core domestic business, is planning to launch a major expansion of its store base in far-flung international markets. The San Francisco clothing chain is expected to announce a franchise agreement with Dubai-based retailer Al Tayer Group to open Gap (GPS ) and Banana Republic stores in five markets in the Middle East. Financial terms weren't disclosed. The first Gap-brand stores under the pact will open later this year. The move underscores Gap's renewed strategy to infuse new life into its ho-hum international business. Gap has operated stores in Britain since 1987 and in France since 1993. But those outlets, which are company-owned, have posted spotty performance as those markets have matured. In 2004, Gap exited the German market altogether after struggling there for years. GLOBAL BRAND. By pushing into non-Western countries, Gap is hoping to sell masses of young, sophisticated Asian and Middle East shoppers on its trademark jeans, casual pants, and t-shirts. Besides planning on the Middle East outlets, Gap and Singaporean franchisee F.J. Benjamin expect to open stores in coming months in Singapore and Malaysia. Analysts believe that Gap has the potential to attract consumers in these areas. "Gap is recognized as a global brand," says Andrew Jassin, managing director of retail consultant Jassin-O'Rourke Group. "The fashion is translatable to many other markets and appeal to the largest segment of the market." Gap's current overseas push comes as the company is trying to reverse a trend of declining sales. The retailer has experienced high executive turnover in the last year, and its merchandise selection, which currently features lightweight hooded sweatshirts and twill shorts, has failed to click with consumers for more than a year. Gap will have to sell plenty of clothes in its newest markets if the effort is to have much financial impact on the company as a whole. Overall, Gap's total revenue in the year ended in January, 2006, was $16.02 billion, down 1.5%. Last year, Gap's sales in the Britain and France combined fell 6.1%, to $825 million. Sales in Japan inched up 2%, to $603 million. Together, those three countries account for about 9% of Gap's total revenue. CHASING STARBUCKS. Joshua Schulman, Gap's senior vice-president of international alliances, says the company's U.S. stores already brings foreign customers in the door. "We know from our stores here that we attract many (overseas) customers when they're traveling here. In Asia, in particular, Gap has tremendous brand recognition." Schulman adds that Gap is following the precedent set by other American brands that have successfully expanded in Asia and the Middle East, such as Starbucks (SBUX ). But selling a new audience on a fashion brand is more complicated that luring them day after day for coffee. "People look to Starbucks as a model, but fashion is different from Starbucks," says Emanuel Weintraub, an independent retail consultant in Fort Lee, N.J. "You go there because you want the same cup of coffee you got last time. But with clothes, you don't want to see the same product as you saw last time." What's more, the company is bound to encounter tough rivalry not only from established local brands but from other American casual-clothing labels, including Esprit, Levi Strauss, Tommy Hilfiger (TOM ), and Ralph Lauren (RL ). "Gap may run into more competition than they think," says Michael Appel, a managing director of retail consultant Quest Turnaround Advisors. AMERICAN IMAGE. Under the agreement, Al Tayer, which already runs stores in the Middle East selling luxury brands including Gucci and Yves Saint Laurent, will operate Gap and Banana Republic stores in the United Arab Emirates, Kuwait, Quatar, Bahrain, and Oman. Al Tayer is expected to open up to 35 stores in all by 2010. As franchisee, Al Tayer will operate the stores, hiring employees and seeking out real estate, while Gap controls marketing, advertising images, and product design. Schulman says that Gap expects to keep its marketing consistent worldwide, promoting the Gap brand's message of "fresh casual American style" and Banana Republic's image of "affordable luxury." Gap's current international expansion strategy of working with local franchisees reduces Gap's financial risks. Using franchisees, Gap is able to sell its brand and its clothing without the headaches of navigating local real estate markets and hiring armies of store-level employees onto its own payroll. All of Gap's existing overseas stores in Britain, France, and Japan are owned and operated by the company, a setup that has at times proven expensive and unwieldy, analysts say. Analysts say that as it moves into Asia, Gap may be gearing up to enter the market with the highest potential: China. Schulman wouldn't comment on Gap's China plans. But even with stores scattered throughout Southeast Asia and elsewhere, if Gap doesn't have stores in China, it will still have a gap in its international strategy.  Lee is a correspondent in BusinessWeek's Silicon Valley bureau
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