Business Cluster Project

I worked in a team and we were asked to evaluate Gap, Inc. and give specific recommendations for future growth and prosperity. This is the report we created based on our research and findings.
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  • 1. Gap Inc.<br />Filling The Gap: <br />Building a Bridge <br />to Future Prosperity<br />PM Cluster 107<br />Professor Carter<br />Professor Coombs<br />Professor Matta<br />Professor Wright<br />May 1, 2009<br />Team 7G<br />Joseph Burns<br />Max Feldman<br />Patrick Fogt<br />Justine Holtkamp<br />Justin Schiff<br />
  • 2. Executive Summary<br />Recent Economic Downturn<br />The current economic downfall has caused consumers to drastically change their spending habits. This reduction in spending has severely impacted businesses from every industry, and the specialty retail industry is no exception. A majority of specialty retailers have seen a dramatic slowdown in growth and sales. The Gap must continue to grow by taking advantage of their market share. With so many resources available, The Gap has the unique ability to take risks in order to combat the limitations of their weaknesses.<br />Several efforts must be made to ensure the company’s ability to continue dominance in producing revenue and conveying value:<br />Update the Shopping Experience: Innovative Customer Relationships Management Systems give companies ample opportunities to better serve their customers through greater personalization. Application of Data Mining techniques will allow The Gap to analyze their market basket and increase customer acquisition, retention and loyalty.<br />Strengthen the Brand Image: A lack of brand identity has recently plagued The Gap’s ability to differentiate themselves amongst the growing threat of a highly competitive retail clothing market. Implementing and using an identifiable logo on apparel will increase brand recognition. As an industry leader, The Gap must use their resources to increase their recognition as an innovator amongst environmentally friendly stores.<br />Increase Global Presence: With such a volatile U.S. market, it is important to combat downturns through global diversification. With a redefined and focused brand image, The Gap will have the capabilities and resources to regain their status as the largest retailer in the world. Proper research into advantageous markets, as well as hiring employees that understand cultural differences, are the most important of many vital steps to achieving international prominence.<br />Financial Status<br />Successful and effective implementation of these strategies will greatly effect the financial status of The Gap versus its competition. The effect of these changes, as well as the current status of these financials in terms of liquidity, efficiency, profitability, leverage, and market value will be highlighted. While The Gap is an industry leader in some of these categories, there is also room for improvement. Steps of effective implementation of the provided strategies are designed to improve The Gap in these areas.<br />2<br />
  • 3. Table of Contents<br />3<br />
  • 4. Introduction<br />The United States based specialty retail clothing industry has suffered due to the recent economic recession. As the largest retailer in the United States, The Gap must continue to advance in order to maintain their market share. In a world of constantly changing technology and business strategies, many efforts must be made to stay ahead of the endless amount of relentless competitors. A powerhouse like The Gap must use their size and influence to emphasize their strengths and alleviate the pressures of their weaknesses. The structure of the typical shopping experience is changing and retailers are forced to comply to the ever increasing and specialized demands of their customers.<br />The purpose of this report is to: <br /><ul><li>Analyzethe performance of the industry
  • 5. Assessthe current condition of the company
  • 6. Benchmarkthe company against key competitors
  • 7. Provide strategic direction to tackle company and industry issues
  • 8. Discusshow to effectively implement these strategies
  • 9. Evaluate the impact of recommendations on the company’s financial position and performance</li></ul>4<br />
  • 10. Industry Analysis<br />During a time of economic recession, it is necessary for consumers to find ways to cut corners and save money. One easy solution for those looking to reduce spending is to make it a priority to only purchase items they really need rather than what they desire. This philosophy has led to tremendous struggles for major players in the specialty retail clothing industry. In fact, According to the National Retail Foundation, specialty retail apparel sales in 2008 decreased by 17 percent (Great American Group, 2009). This reduction in sales has forced companies to find new and creative strategies that will not only help them survive, but also allow them to thrive in the future. However, before they can take this step, they must analyze how well or how poorly they are doing in comparison to the competition. <br />17%<br />Specialty Retail Sales, 2008<br />Source: Google Images, 2008<br />5<br />
  • 11. Company Analysis<br />Gap Fast Facts:<br />Net Sales<br />2007: $15.8 billion<br />2008: $14.5 billion<br />Over 3,100 stores:<br /><ul><li> United States
  • 12. United Kingdom
  • 13. France
  • 14. Ireland
  • 15. Japan</li></ul> Offerings: <br /><ul><li> Apparel
  • 16. Accessories
  • 17. Personal care items</li></ul>Source: 2009 Form 10-K<br />Target markets: <br /><ul><li> Men
  • 18. Women
  • 19. Teens
  • 20. Children</li></ul>Subsidiaries:<br /><ul><li>Old Navy
  • 21. Gap
  • 22. Banana Republic
  • 23. Piperlime
  • 24. Athleta</li></ul>Declining sales across the specialty retail industry has contributed to increased competition between retailers. According to the S&P Sub Industry Outlook (2009), <br />“Companies with stronger brands, differentiated products, superior customer service, and attractive price-value propositions are likely to outperform their peers.”<br />Source: Corporate Information, 2009<br />“Comparable store sales decreased 12 percent <br />compared with a decrease of 4 percent last year.”<br />Source: 2009 Form 10-K<br />6<br />
  • 25. SWOT Analysis<br />7<br />Source: Gap SWOT, 2008<br />
  • 26. Liquidity<br />Quick Ratio<br />1.5<br />The Gap 2008<br />Quick Ratio<br />5.0<br />Industry Average 2008<br />Quick Ratio = Current Assets - Inventories / Current Liabilities <br />The quick ratio is an indicator of a company’s short term liquidity. The ratio specifically excludes inventories to show how a business can pay its current liabilities without relying on the sale of inventory. Thus, the higher the ratio, the more liquid a company is.<br /><ul><li>The Gap, has a quick ratio greater than 1, a good sign for companies in their industry
  • 27. For the most part, have been approximately as liquid or more liquid than top competition in each of the past 3 years,
  • 28. However, in the last two years, the ratio has dropped significantly, meaning they have been less liquid
  • 29. The Gap must find more effective ways of converting their receivables into cash if they hope to stay ahead of their competition.</li></ul>The Gap is easily able to meet their short-term liabilities as a result of high liquidity.<br />Source: The Gap, AEO, J. Crew, A&F financials, 2006-2008<br />
  • 30. Efficiency<br />Inventory Turnover<br />5.0<br />Industry Average 2008<br />Inventory Turnover<br />9.6<br />The Gap 2008<br />Inventory Turnover = Sales / Inventory<br />Inventory turnover shows how many times a company&apos;s inventory is sold over a period of time. A higher inventory turnover ratio is considered a positive indicator of operating efficiency because it implies strong sales. <br /><ul><li>To develop a higher inventory turnover, The Gap must find ways to increase sales and decrease inventory
  • 31. Already doing much better than the industry average, with an inventory turnover of 9.6 in 2008, as opposed to the average of 5.
  • 32. Relatively similar to their competition
  • 33. Could take advantage of additional resources and large market share to create more progressive supply chain management systems.</li></ul>“You need to optimize your supply chain, <br />make your production processes lean, and <br />optimize your relationship to your customers.”<br />Source: Bierley, 2008<br />Source: The Gap, AEO, J. Crew, A&F financials, 2006-2008<br />9<br />
  • 34. Profitability<br />Return on Assets<br />3.6%<br />Industry Average 2008<br />Return on Assets<br />12.6%<br />The Gap 2008<br />Return On Assets = Net Income/ Total Assets<br />Return on Assets measures how profitable a company is related to its total assets. Basically, this ratio measures how much we are making on how much we have invested. A higher ROA is better because it concludes that a company is earning more money off of its investment. <br /><ul><li>The Gap’s ROA is slowly rising from year-to-year
  • 35. While in the past two years they were behind the competition, The Gap is currently generating more earnings from their assets than any of their top competitors.
  • 36. This is commonly a result of improved management techniques, which could be linked to hiring new CEO Glenn Murphy in 2007.</li></ul>The Gap is currently generating more earnings from their assets than any of their top competitors.<br />Source: The Gap, AEO, J. Crew, A&F financials, 2006-2008<br />
  • 37. Leverage<br />Debt Ratio<br />42%<br />The Gap 2008<br />Debt Ratio <br />39%<br />Competitor Average 2008<br />Debt Ratio = Total Debt / Total Assets<br />The debt ratio indicates the percentage of a company’s assets that are financed with debt. A firm that has more assets than debt will have a lower debt ratio. The lower the ratio, the better off a company will be in the long run. <br /><ul><li>The Gap is moderately leveraged because it uses a reasonable amount of debt to finance its assets
  • 38. While being highly leveraged can allow greater returns, having a larger portion of your assets financed by debt can also bring larger risk
  • 39. The Gap does an excellent job of controlling its debt compared to competitor J. Crew, which is extremely highly leveraged
  • 40. To maintain a low debt ratio, The Gap must set goals to pay off debt as quickly as possible. </li></ul>Source: The Gap, AEO, J. Crew, A&F financials, 2006-2008<br />
  • 41. Market Value<br />Market Capitalization = Price*Number of Shares Outstanding<br />Market Capitalization<br />$10.6B<br />The Gap 2008<br />Market Capitalization<br />$4.2B<br />Industry Average 2008<br />Market Capitalization is a measurement of the total dollar value of a companies outstanding shares. It is used to inform the public of the value of a companies equity. <br /><ul><li>The Gap is considered to be a ‘Large-Cap’ company, meaning its value is between $10 billion and $200 billion.
  • 42. Its competitors are considered to be ‘Mid-Cap’ companies, meaning their values are between $2 billion and $10 billion.
  • 43. The Gap has a much higher market capitalization than its main competitors.
  • 44. This indicates The Gap has more shares outstanding than any of its competitors, and occupies a larger market share.
  • 45. The Gap should use their enormous market capitalization to expand in areas where the competition can not. </li></ul>Source: The Gap, AEO, J. Crew, A&F financials, 2006-2008<br />12<br />
  • 46. Strategic Issues<br />Updating the Shopping Experience:<br /><ul><li>There is an inability to enhance the shopping experience for its customers.
  • 47. Retailers must make sure they are constantly adapting to a changing world that grants customers access to new technology and allows for a more personalized shopping experience.
  • 48. Customers must feel excited through a memorable and enjoyable shopping experience.
  • 49. The drab and plain appearance of stores must be improved to make things appear more animated and appealing.
  • 50. There is a lack of effective use of resources that stem from such a large market share.
  • 51. With such a progressive online shopping experience, why not incorporate these ideals within store walls?</li></ul>2. Enhancing Brand Image:<br /><ul><li>Suffer from a lack of brand image and recognition.
  • 52. There is no real logo to speak of that identifies where the customer purchased the product
  • 53. There is a lack of a marketing campaign that sparks the interests of loyal or potential shoppers.
  • 54. The Gap has struggled to find an identity and design apparel that is unique to their stores.
  • 55. How can this dominant firm expect to be successful going forward with such weak brand image?</li></ul>Increase Global Presence:<br /><ul><li>It is imperative that The Gap focuses less on U.S. overexpansion, and more on global expansion in growing markets.
  • 56. There are not great enough efforts to make a name as a ‘global specialty retailer’; offering stores in a variety of foreign countries have yet to produce a large percentage of their revenue.
  • 57. It is important that The Gap continues to move forward and market around the world to combat their international competitors.
  • 58. With The Gap having such a large market share, giving it more capabilities and resources than its competitors, why not continue to push its name in foreign countries?</li></ul>13<br />
  • 59. Update the Shopping Experience<br />In a world with so many advertisements, companies must advertise to those who want to purchase the products, not just the anonymous masses. High-end retail stores often use the tactic of providing a personal shopper for their most important customers. Why not provide these services to every single customer? In order to keep existing customers satisfied and spark interests from new customers, The Gap must use their immense resources and size to revamp the way people shop. Additionally, many companies in other industries have experienced great success through their creation of a personalized shopping experience.<br />14<br />
  • 60. Update the Shopping Experience<br />15<br />
  • 61. Update the Shopping Experience<br />Something as simple as a few touch screens connected to a software system can track the data of every customer in each store. This information can be used to:<br /><ul><li>Suggest products in terms of the customer’s style
  • 62. Track shopping habits through the year
  • 63. Send coupons for favorite items before a birthday
  • 64. Create a personalized catalog
  • 65. Design an interactive Facebook application
  • 66. Incorporate preference for new items or sales into promotions
  • 67. Encourage items that will fit customer’s body type
  • 68. Promote a new and innovative shopping experience
  • 69. Advertise other subsidiaries according to customer budget</li></ul> $<br />Cost per store:<br />$4000-6000<br />Source: Wright, 2009<br />16<br />
  • 70. Update the Shopping Experience<br />17<br />Source: Marshall, 2008<br />
  • 71. Update the Shopping Experience<br />While there are many potential benefits to an innovative shopping experience, there are also a few problems that may arise. <br /><ul><li>Many older customers are not experienced in basic computing functions. It is important to make the program very easy to follow for a less tech-savvy crowd. Allowing the opportunity to utilize advanced features that incorporate a younger crowd’s knowledge of technology is also important to keep those customers interested.
  • 72. It is important to note those customers that are resistant to suggestions about their own style that are simply based on previous purchases. However, those that do not wish to acknowledge suggestions will still have the ability to browse the store themselves.
  • 73. Costs of implementing a system are relatively small compared to the overall spending of The Gap each year. The shear size of the company will allow the company to cover such costs in the short term with the hope that the benefits from implementation will outweigh these costs in the long run. Clearly, the benefits of this concept will outweigh the costs with proper efforts to decrease resistance to such technology.</li></ul>18<br />
  • 74. Strengthen the Brand Image<br />In struggling economies, marketing budgets are often early casualties. A company positioned for success should not follow this trend. “Studies show that brands that maintain or increase marketing spending in a recession tend to do better than their rivals in the long run” (Cowlett, 2008). Recessions provide opportunities for improvement while others are tightening their wallets. The only way to combat the economic slowdown in specialty retail is to increase sales. This can be achieved through increased marketing efforts. It is essential to identify the needs and preferences of ever-changing consumers and direct efforts towards them effectively. This can mean marketing using previously unconventional means, like internet, text, and park bench advertisements. Opinion leaders may also be used to create product buzz. Weak brand image and brand loyalty are hurting the company. The Gap must strengthen and reposition their brand to give it a new, unique identity. They must revamp their offerings to create a brand that speaks to consumers through style and value. This value must emphasize of a strong history of trust, durability, and high quality. Use of a logo, development of a green line, and other promotional tools showing their products’ advantages should be utilized to create demand. Through utilization of these ideas, The Gap can increase their already dominant market share and strengthen the brand. By effectively using marketing efforts, The Gap can reconnect with their customers and develop strong customer relationships that will address their lack of brand loyalty.<br />“Brands that increase advertising during a downturn can improve market share and return on investment.”<br />Source: Quelch, 2008<br />19<br />
  • 75. Strengthen the Brand Image<br />Benefits of Using a Logo:<br />Proposed new Gap Logo to appear on apparel<br />“You need a brand makeover when the marketplace tells you so directly: Sales are slowing and market share is shrinking.”<br />The Gap’s sales are down and they are losing market share. Most successful specialty retailers use so
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