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The Gap


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THE GAP

In Mickey Drexler's idealized future, everybody would show up for work dressed as comfortably as he is now: soft leather shoes, rumpled khaki pants with pleats, and a wool sports coat.

It is only natural Drexler would go casual. After all, he's president of The Gap Inc., and these clothes are his business. There's nary a wing tip or high-heeled shoe in sight at The Gap's San Francisco headquarters. Employees pad across the blond-wood floors decked out in all manner of casual attire--cotton shirts, khaki pants, wool sweaters, and denim. Lots of denim. Hey, that guy down the hall, is he from the mailroom or is he the chief financial officer? There's no way to tell from the cut of his jeans.

But just because these workers aren't trapped in panty hose or gray flannel, don't think serious business doesn't get done here. Millard S. Drexler, 47, has turned The Gap into the most popular and profitable specialty clothing chain in American retailing today.

Recession? Retailing retrenchment? That's for the rest of the pack. Sales at The Gap and its sibling stores, GapKids and Banana Republic, blasted up 30% in the fiscal year ended Jan. 31, to $2.5 billion. Earnings are expected to rise 56%, to $225 million. And the glittering results are no fluke. Over the past three years, the company has posted average earnings growth of 43%. "The Gap is a huge success, while retailers around the world are struggling like crazy," says Melvin Jacobs, chairman of the New York-based Saks Fifth Avenue department-store chain.

The formula behind The Gap's rise is invoked by Drexler almost as a mantra: "Good style, good quality, good value." That's good enough as far as it goes, but The Gap is a lot more than nice-looking T-shirts and denim jackets. It's a network of sites shrewdly chosen by founder and Chairman Donald G. Fisher. It's a carefully tended vision of a Gap store as a clean, well-lighted place where harried consumers can shop easily and quickly. It's a culture that fusses over the most mundane details, from cleaning store floors to rounding counter corners at GapKids stores for safety's sake. And it's a high-tech distribution network that keeps 1,200 Gap stores constantly stocked with fresh merchandise.

LIKED LOOK. The result is a company that connects with consumers the way only a few other giant brands, such as Coca-Cola or McDonald's, manage to do. Buttressed by its acclaimed advertising (page 64), the Gap look is accepted equally by tots, teenagers, young adults, and graying baby boomers.

Barry Sacker, a 52-year-old human resources administrator in Brooklyn, N.Y., knows all about Gap appeal. His favorite shirt is a Gap purple corduroy button-down, but his 13-year-old daughter, Diane, and his 16-year-old son, David, borrow it all the time. Other chains may mimic The Gap's clothes, Diane says, "but The Gap has the only ones that look really good and feel really comfortable."

The Gap is intent on spreading its look further. Already firmly ensconced in 700 of the country's 1,500 biggest malls, it's taking advantage of recessionary blues by locking up sweet lease deals, moving into downtowns and urban neighborhoods, and opening on the main streets of midsize cities. This fall, The Gap will dip its toe into a new market, casual shoes, with several new Gap Shoes stores. Dean Witter Reynolds Inc. analyst Donald I. Trott figures The Gap empire could hit 2,000 stores and almost $5 billion in sales by 1995.

You'd think Gap executives would be jumping for joy, but they remain determinedly low-key. They stayed virtually invisible throughout 1991, even as the company churned out gangbuster numbers. Drexler firmly declined an offer to appear on Nightline during the Christmas shopping season to discuss The Gap's roaring success during one of retailing's worst recessions. Fisher told a friend he'd prefer to stay out of the public eye. "I don't want to be a Donald Trump," he said.

So is The Gap headed for a Trumpian tumble? Is its success an aberration of the recession? After all, people may well start buying flashier clothes again when times get better. And what happens when teenagers and young adults, gaga for The Gap right now, go on to the next fad? Isn't The Gap overexpanding and saturating markets? Won't rivals learn to mimic the Gap successfully?

Certainly, The Gap will be scrutinized for any hint of weakness this year. It will have to hold its own against retailers trying Gap-like concepts. And after three years of stupendous growth, The Gap's pace is bound to ease (chart). Although Wall Street forecasts 20% annual earnings growth through 1997, a healthy rate by any measure, the first unflattering comparisons with 1991 results are sure to shake individual investors and money managers who buy on earnings momentum. The Gap's stock has risen from around 4 in 1987 to 50 or so today, and its price-earnings ratio is a heady 35. So it's easy to figure that 1992 "is going to be a roller-coaster nightmare" for Gap shares, says analyst Jean M. O'Neill of Kidder, Peabody & Co.

In interviews with BUSINESS WEEK, The Gap's ordinarily press-shy executives say they aren't losing any sleep. "We don't worry," Fisher says. "We have a distinct advantage in our name, our merchandise, and the numbver and locations of our stores." Drexler doesn't deny that the Gap has benefited as consumers turned their backs on ostentatios display. "it's cool to say you shop at Wal-Mart," he says. But he insists that the shift toward value is a long-term trend, sure to continue through the 1990s. Drexler is a good example: He recently traded in an upper-crust Range Rover, which broke down a lot, for a Ford Explorer, which is holding up nicely.

And, says Drexler, don't count out The Gap's staying power. "We've been doing the same thing for seven or eight years," he says. "This company is no overnight success." For most of that time, Drexler has been honing The Gap's design skills. While he concentrates on the look of the clothes and stores, Drexler has a steady partner and boss in Fisher. Low-key and conservative, Fisher, 63, generally defers to Drexler on merchandising but still works out the gritty details of site selection, store construction, and manufacturing.

HEAD-SHOP DAYS. Fisher may be no merchandiser, but The Gap is very much his brainchild. The chain started off in the hippie-and-head-shop days of 1969, when Fisher, then a 41-year-old California real estate developer, couldn't exchange a pair of Levis that were an inch too short. Sensing a need for a place that sold jeans in a comprehensive array of sizes, he set up shop in San Francisco on Ocean Avenue. The first ads touted the store's "four tons" of Levi's. "You couldn't get into the store" because it was so crowded, Fisher says.

Before long, Gap stores were sprouting across the country. Since Levi Strauss & Co. would not allow discounts on its jeans, Fisher got a handsome 50% markup on his mainstay product. But in 1976, the year The Gap went public, the Federal Trade Commission ruled that manufacturers couldn't impose prices on retailers. Cut-rate Levi's flooded the market, and The Gap's margins suffered.

Fisher tried to sell higher-margin store-brand apparel under such labels as Foxtails and Chocolate Fatigues. TV and radio ads exhorted shoppers to "Fall into The Gap," but once they fell in, they found themselves in schlocksville. Jammed onto pipe racks were such items as terry cloth polo shirts and two-in-one T-shirts with zip-off layers that revealed different-colored sleeves. The stuff would move only when sold at discounted prices. The Gap became a me-too bargain basement.

In 1983, Fisher approached Drexler, who had just engineered a turnaround as president of Ann Taylor Stores Corp. (page 63). "The stores were in good taste, the merchandise was in good taste, it felt good to me," says Fisher. He asked Drexler to head a new retail chain he was considering as a way to diversify. Instead, Drexler offered to try to revamp The Gap. First step: liquidate existing merchandise through big promotions. That sent profits plummeting from $22 million in 1983 to $12 million in 1984. The stock went from almost 3 to a little more than 1 in the same period. "We were all scared, and I was more scared than anyone the first year and a half," says Drexler.

SIMPLE PALETTE. Swallowing his fear, Drexler started a one-man program to communicate his idea of what The Gap could be. In front of skeptical employees he waved pictures of Ralph Lauren in a jean jacket to prove that denim could look hip and elegant. He asked his designers why they didn't wear Gap clothes. "We said we don't like them, they're junk," remembers Patricia DeRosa, The Gap stores' executive vice-president for merchandising. But his message sank in: Design clothes you would wear, and the customer will follow.

Some employees were still confused, so Drexler handed out signs with a single word in white letters on gray background: Simplify. He meant not just the clothes, but the whole way The Gap does business. He got rid of executives who relied on complicated quantitative research. Instead, he hired people who understood his approach of quickly testing his fashion intuition in new products and pulling the nonstarters fast.

Drexler dumped the pipe racks and the junky shirts and played up The Gap's basic jeans and sweats. He brought in all-cotton merchandise in a deep assortment of colors, made space in the aisles, and laid out the goods folded on tables and shelves where they could be easily touched. "When someone walks in the store, I want them to feel as if it were all designed from one mind," Drexler says.

Drexler and Fisher also boosted quality. Thanks to its early foray into private-label apparel, The Gap had already established ties to manufacturers. Today, the company has 200 quality-control inspectors working inside factories in 40 countries to make sure specifications are met right from the start. Because The Gap designs its own clothes, chooses its own materials, and monitors manufacturing so closely, it can keep quality high and costs low. And a $75 million automated distribution center opened this winter outside Baltimore will enable The Gap to supply New York City stores daily instead of the current three times a week.

The tight control extends to the stores themselves. There's no more room for creative expression at a Gap store than there is at a McDonald's--maybe less. Gap merchandise goes through a major shift about every two months, and store managers receive a book of detailed instructions that tell them exactly what clothes go where. White walls are touched up once a week, wood floors polished every three or four days.

Sales staff receive no commissions, but James V. O'Donnell, The Gap's chief operating officer, pumps up workers with constant contests. Bring the most multiple purchases to the register, for instance, and win a Gap-logo watch. During the shopping rush over Thanksgiving weekend last year, O'Donnell had Pizza Hut and Domino's deliver 15,000 pizzas and 12,000 six-packs of Pepsi to store staffers. They had to chow down out of sight, though. Eating or drinking in front of customers will get you fired.

MILANESE ME-TOO. Drexler once oversaw every major design decision, and he still keeps a close watch. He visits stores constantly and rarely comes to rest at headquarters. A typical day at The Gap's San Francisco office finds Drexler roaming the halls, popping in unexpectedly on staffers to praise or criticize dozens of projects in design, advertising, and merchandising. His self-appointed role is to keep "rock star" designers in harmony with the company's more down-to-earth managers. "You need both to make beautiful music," he says. Being a member of this band isn't for everyone. Insiders say newcomers either adapt easily to Drexler's vision--or they quickly walk.

Drexler's opinionated style comes through at a meeting in San Francisco. About 30 merchandisers are showing the proposed fall collection for GapKids to Drexler. The woman in charge of jackets holds up a hooded design cut to look very puffy. Everyone holds a collective breath while Drexler eyes the jacket: "I hate it," he says. A big cheer goes up: The New York designers were pushing the item, but the folks in headquarters found it ugly. The jacket is out.

More often these days, Drexler finds his staff's design sense meshes with his own. The Gap's New York designers, led by Lisa Schultz and John Fumiatti, create their new collections 6 to 12 months in advance, deciding first on a "concept" and a palette of colors, then designing individual items to fit the scheme. This spring, it's deep shades of mustard, burgundy, and blue that blend with khaki and linen. A brand-new collection hits the stores about every eight weeks, relegating last month's idea to the markdown section. The rapid turnover keeps design mistakes--such as an unpopular line of pastels in 1989--from languishing on shelves.

Many ideas are original, but others are unabashed knockoffs: Last winter's pullovers and jackets, for example, were based on designs introduced several years ago by Patagonia Inc., the pricey outdoor-clothing company. But The Gap's designers correctly figured the style was about to become widely popular. Another designer found a flowered pattern she liked on a purse in Milan and copied it for a shirt.

One design idea no one at The Gap would ever consider is plastering The Gap name on their wares. "It's not us," says designer Schultz. Drexler recently previewed a selection of footwear for the new Gap Shoes stores and spied a pair of boots with a Gap label sewn on the outside of the tongues. He insisted that those labels be placed inside.

For Fisher and Drexler, the current challenge is to keep The Gap growing. A plan now under way to expand stores to 8,000 square feet from an average of 4,000 is allowing for experiments in new adult lines, such as neckties and sport coats. Another effort to make more room for Gap goods is complete: Last December, Levi's jeans were phased out altogether. The Gap now sells only clothes under its own label. It surpassed the flagship label of Liz Claiborne Inc. in 1991 to become the No. 2 clothes brand in the U.S. after Levi Strauss.

Then there are whole new categories such as kids' clothes. Annoyed by the poor selection of children's wear he found while shopping for his 6-year-old son in 1985, Drexler convened a meeting of employees with kids at Gap headquarters. There was a lot of bellyaching about the poor quality and ugly styling prevalent in children's clothes. The result was GapKids, successful from Day One and now boasting 215 stores. From $2 million in sales in 1986, GapKids has gone to an estimated $260 million last year.

In 1990, Drexler added babyGap departments selling simple, unfrilly dresses, overalls, and other basics in the Gap's palette of colors but aimed at newborns to two-year-olds: It's been another hit. "It's very difficult to find good-looking, durable baby clothes that aren't baby blue or have those little doggies all over them," says babyGap convert Carolynn S. Gilbert, a 29-year-old executive at an architectural firm in Southfield, Mich.

SLIPPERY APPEAL. Not all of The Gap's growth moves have been unqualified successes, though. In 1983, Fisher bought Banana Republic, then two Bay Area stores and a highly popular catalog of safari-style clothes run by Melvyn and Patricia Ziegler. Banana Republic Stores performed wonderfully, going from an estimated $44 million in sales in 1985 to $191 million in 1987, thanks to the khaki craze spawned by movies such as the "Indiana Jones" series, Romancing the Stone, and Out of Africa. But by 1988, the safari madness ended, and Banana Republic's stores wound up losing an estimated $10 million over two years. Fisher finally forced out the Zieglers and put Drexler in charge.

Banana Republic has been slow in recovering from its slip. The division has gone through three top product designers in four years. But the company now says the 150-store chain is profitable at around $300 million in sales, and management is satisfied with its reincarnation as a sort of upscale Gap with more adventurous fashions. The safari theme has so far been excised from about 70% of the unit's stores.

Despite such missteps, Fisher's little blue jeans business has made him fabulously wealthy: His family's 38% stake currently is worth some $2.7 billion. His fortune has helped him indulge a passion for modern art: Gap headquarters houses a corporate art collection as well as a number of Fisher's Stellas, Calders, and Lichtensteins.

To keep The Gap from making Fisher even richer, plenty of rivals are regrouping to compete. Department-store executives preach to employees about the need to "Gap-ize" the colors, fibers, and display of their wares. Says Michael A. Gould, chairman and chief executive at Bloomingdale's department stores: "If The Gap can do what it does in 3,000-square-foot stores, why can't I do it with a lot more space?"

That may be what Gould has in mind. Bloomingdale's, as well as Neiman-Marcus and Saks, are opening boutiques to sell designer Giorgio Armani's line of A/X apparel. Armani is looking to skim The Gap's biggest-spending customers with its new A/X Armani Exchanges, which offer stripped-down fashions with a European look at prices much lower than those at the top of Armani's line.

Other retailers are also trying to outwit The Gap. The Limited Inc. has Gap-like "relaxed fit" jeans, sold in some stores with a sales tag whose design is strikingly like The Gap's. The Limited also has a new line of children's wear. Dayton Hudson Corp.'s Target division of discount stores is experimenting with a chain called Everyday Hero that will have a distinctly Gap-like approach.The Gap's success has inspired outright hostility among some rivals. Tommy Z. Hoffman, president of Keds Apparel, a startup licensee of sneaker maker Stride Rite Corp., recently took out a four-page ad in Women's Wear Daily exclaiming that "the Gap is just not feminine enough" and exhorting retailers to buy Keds sportswear so they could "take on The Gap together."

Sniping from rivals isn't likely to wound The Gap--but cooling ardor for the Gap look might. And a few murmurs of ennui can sometimes be heard in this land of Gap-lovers. Julie Grossberg, 26, a film production worker in New York and Los Angeles, likes The Gap--but only up to a point. "Sometimes I find their clothes kind of generic and not so special," she says. "I like their basic staples, but I don't walk in there expecting to fall in love with something." Such talk doesn't faze Drexler, who figures he doesn't have to have all of a shopper's money. As he sees it, demand can only rise for the sort of basic, casual clothing that is The Gap's forte. If the material of choice is not denim or khaki, it will be something else that The Gap will master.

Still, plenty of retailers who once thought they had a permanent place in the nation's closet have instead been battered by the changing winds of fashion. At The Limited, for example, the flagship chain of Limited Stores once held the imagination and shopping dollars of millions of young women. But now they want something else, and Limited Stores has been struggling to find a new mix. "If there's one thing that's virtually a law in retailing, it's that you don't maintain a competitive advantage forever," says William Flatley, director of retail strategies at New York apparel-industry consultants Kurt Salmon Associates.

BIG GAPPLE. For his part, Drexler figures he still has new markets to conquer. There's the prospect of overseas expansion, although so far the Gap has cautiously moved only into Britain and Canada, with 35 stores in each country. But he also believes that The Gap hasn't saturated the domestic market.

Most analysts agree, although some suspect that The Gap might be getting too aggressive in New York City, where a Gap outlet seems to be popping up on every other block. That has prompted some to wonder whether The Gap will share the fate of Benetton, the once-hot sweater-and-sportswear maker that overexpanded. Not to worry, says Dean Witter's Trott. "Benetton was a loosely controlled, crappy franchise operation," he says. The Gap, in contrast, has always exercised tight financial discipline.

It may turn out that the stiffest challenge will come from within, where the hip, fast-moving culture Drexler inspires must survive in an ever-larger organization. Merchandiser Kay Vermeulen recently left the company after four years to work at Gymboree Corp., a children's clothes retailer. The Gap, she says, "has gotten so big you have to go through several people to get anything done. You have to sign off with this department and that department."

That's a criticism Drexler doesn't dismiss lightly. "I have the same worries," he says. But with this nimble, hands-on president at the helm, Gappers probably have little to fear from creeping bureaucracy--until the unlikely day that Mickey Drexler shows up for work in wing tips and pinstripes.HOW

THE GAP

GREW

1969

Donald Fisher, a real estate developer, opens first Gap store in San Francisco

to sell jeans and

records

1970-76

The Gap, helped by heavy advertising, spreads through the U.S., opening 200

stores

1983

Chairman Fisher

buys safari-happy retailer Banana Republic.

After a big spurt of growth, the fad fades in 1988

1983

Fisher lures Mickey Drexler from Ann Taylor to revamp The Gap. His

restructuring forces 1984 earnings

down 45%

1986

GapKids launched. A hit from Day One, it begat babyGap and now includes 215

stores

1988

Individuals of Style ads,

featuring hip celebrities and produced in-house, help

establish a new Gap image

1991

As earnings rise more than 50%, The Gap is the most

successful apparel retailer and the second-largest clothes brand, in the U.S.

DATA: COMPANY REPORTS

Russell Mitchell in San Francisco


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