The World According To Gap

It's out to take its place beside powerhouses like Coke and Nike

Nobody could ever accuse Gap Inc.'s boss of thinking small. "I always wanted for the Gap to be as famous as Coca-Cola," says Millard S. "Mickey" Drexler, president and chief executive of the San Francisco-based retail giant. That's a pretty grand wish for a company that for decades styled itself as an innovative seller of jeans and

T-shirts. But recently Drexler has been refashioning Gap's retail operations, rejiggering the merchandise mix, and most important, readjusting internal attitudes in a bid to transform the apparel chain into a portfolio of powerhouse brands.

Founded in 1969 by Donald G. and Doris F. Fisher, whose innovation was offering lots of sizes and styles of jeans in one place, Gap long struggled with the conundrum of how to keep growing without having to grow up. Wary of outsiders, the company kept largely to itself, shunning publicity and potential business partners. Even its distinctive ads were created in-house. And with the exception of Banana Republic, purchased in 1983, acquisitions have been few. "We were like little, immature kids: Leave us alone, and let us do our own thing," observes Robert J. Fisher, chief operating officer and one of two Fisher sons at the $5 billion multinational company.

LIMITED VISION. But that was before Gap's phenomenal growth began to sputter. Sales at stores open for more than a year--a crucial measure for retailers--had grown an average of 12% from 1986 to 1991 but slowed to a grim 1% in 1993 and 1994 and were flat in 1995. Gap executives and analysts began to wonder whether the glory days had come to an end. Fisher says the company's insular personality was limiting its vision for the future. "We were looking at ourselves as a store rather than a brand. When you do that, you draw thick, heavy lines around your freedom."

In an attempt to break out of that cage, Gap has spent the past three years reworking its brands to capture a broader customer base. In 1994, it launched Old Navy Clothing Co., a mass-market chain with a funky image that should reach the billion-dollar sales mark this year. It transformed struggling Banana Republic into an upscale retailer that racked up an estimated $750 million in sales in 1996. And it reinvigorated the core Gap chain through international growth, new ads, new products, and innovative partnerships. "They have a Neiman Marcus, a Macy's, and a J.C. Penney," says Todd D. Slater, an analyst at Lazard Frres.

That breadth has helped pump up sales. Gap Inc.'s comparable store sales rebounded 5% last year, while total sales rose 21%. And at a time when most retailing stocks are underperforming the market--the volatile industry group was up 18% in the past year, compared with 22% for the Standard & Poor's 500-stock index--Gap's long-lagging stock climbed 46%. "We think they can continue to grow earnings at a 15% annual rate," says Janet Bunch, a vice-president at Montag & Caldwell Inc., an Atlanta investment adviser and one of Gap's biggest shareholders.

How did Gap manage to broaden its reach? Industry experts say it began with the 52 year-old Drexler, a 14-year Gap veteran who became CEO in 1995. "Mickey has made the transition from merchant prince to executive," says NatWest Securities Corp. retail analyst Robert F. Buchanan, who credits him with a new emphasis on strategy and innovation. Ideas are emerging at such a frenzied pace that Gap maintains what insiders dub "the vapor list" to track those that can't be implemented immediately.

One of the most visible changes--aggressive store expansion--grew out of Drexler's study of highly branded companies, such as Gillette, McDonald's, and Nike. Drexler, who pored over Coca-Cola Co.'s annual report, says these brands showed him that ubiquity could be a powerful business formula. "The first thing that hits you is that you can buy them in a lot more places than you can buy Gap," says Drexler. "We knew...we'd have to have our products available at more locations."

The result: Gap shops have started popping up in such unconventional sites as strip malls and airports. "That's a change in thinking about where we should be selling our products," says Drexler. Old Navy already accounts for a quarter of the company's retail space and contributes an estimated 16% of total sales after just three years in business. Banana Republic has added stores, including some men's-only and women's-only outlets. BabyGap, once just a subset within GapKids, now has 17 of its own locations, with 40 more planned for this year. All told, the company now operates 1,651 stores in the U.S. and an additional 209 abroad. And next year, Gap will spend some $400 million to increase overall retail space by 18%. Still on the vapor list: a separate Old Navy for kids.

But ubiquity means more than just a lot of new storefronts. Gap has started to plaster its brand names on everything from nail polish to watches. "The essence of a megabrand is leveraging your brand into other product categories," says Adelle B. Kirk, manager of consumer marketing at Kurt Salmon Associates, a retail consulting firm.

OVERLAP. But before Banana Republic could leverage its name, it had to figure out what that name meant. A few years ago, it was a weak imitation of the Gap chain with an odd safari overlay. Company surveys showed an 80% overlap at one point between Gap and Banana Republic shoppers. "It's hard to out-Gap the Gap," says Drexler. So Banana Republic tossed out almost everything except the name and started over. Out went the fake palm trees. In came rich-looking fixtures and leather sofas along with new, upscale merchandise. It added bedsheets in November after research revealed that customers craved more Banana Republic-style merchandise. "People were saying: `I don't just want to shop at Banana Republic. I want to live there,"' says Div. President Jeanne Jackson, hired in 1995. That helped boost sales by an estimated 18% in each of the past two years. Jackson is now planning a Banana Republic catalog--a business abandoned in 1988.

Gap also is stretching itself with new advertising and marketing strategies-- something it needed after some lackluster campaigns. In December, it joined the Cyber Age with the launch of a Gap stores Web site, complete with an interactive dress-up doll. Old Navy has hosted splashy store openings featuring celebrities such as Cindy Crawford. And Banana Republic has begun sponsoring outside events--such as the Aspen Food & Wine Festival--to appeal to its affluent customer base. Gap also returned to TV advertising after a four-year hiatus. All this comes at a hefty price. Gap spent roughly $90 million on advertising in 1996, up from $64 million in 1995.

BALANCING ACT. Gap is no longer afraid to look beyond its own executive offices for new products and ideas. Drexler recently handed over authority for product development and marketing to each retail division, a move that led Banana Republic to hire an outside ad agency, New York-based Baron & Baron. Gap has also started hooking up with outside partners to produce such co-branded merchandise as Gap Barbie, which appeared on shelves over the holidays. A link with the National Basketball Assn. led to testing sports apparel with pro team logos for kids.

Not every new-product experiment has been a winner. The company is scrapping such poor sellers as paper goods and electronics. What's more, customers began to complain that Gap had moved too far from its roots. "We never want to hear the customer say `You have nice sunglasses, but I can't find jeans in my size,"' says Fisher. Concedes Drexler: "We took on a few too many initiatives."

Drexler insists that the new emphasis on brand extensions will not come at the expense of Gap's devotion to basic retailing. He still reads all customer letters addressed to him and visits stores weekly. He admits, however, that balancing Gap's past with its ambitious future will be tricky. After all, Gap may be opening a lot of new stores, but it isn't just a retailer anymore. Unless you think that Coca-Cola just makes soda pop.

Before it's here, it's on the Bloomberg Terminal.