Friday, March 01, 2019

Will Divesting Old Navy Help The Gap?

Khadeeja Safdar reports in the Wall Street Journal today that Gap Inc. is splitting into two publicly traded companies. Old Navy, the company's low-priced apparel chain, will become an independent firm, while another company will operate the other brands including Gap, Banana Republic, and Athleta.  The article notes that Old Navy has been the highest-performing brand in the portfolio for some time, and that it has surpassed the company's namesake brand in total revenue.   Gap Inc.'s stock rose 25% when the news broke.  Safdar reports on the comments offered by CEO Art Peck when announcing the breakup:  

“The other brands overlap each other but overlap Old Navy less,” Mr. Peck said on a conference call with analysts Thursday. He said separating the two would allow both to make quicker decisions and focus their investments. Mr. Peck has long said the brands have advantages over their competitors because of the parent company’s combined size.

I have doubts about whether this move alone will help the core Gap brand address its long-running troubles.  Gap's struggles extend far beyond the issues experienced by many brick-and-mortar chains as consumers flock to e-commerce options.  Gap has been "stuck in the middle" strategically for years.   What do I mean by that?  Well, Old Navy has clearly occupied a low cost position in the casual apparel market.  Banana Republic has established a more differentiated, premium-priced position with higher quality and more professional clothing.  What's the Gap brand position in the market? For years, they have floating somewhere between a low cost and differentiated position, unclear about who they are or want to be.  I've been writing about this strategic problem and discussing it with students for at least ten years.  See this past blog post, for instance. Today's Wall Street Journal article describes one aspect of this problem:

Some analysts have said that Old Navy’s rise has expedited the Gap brand’s demise. “When your prices are lower and it’s essentially the same merchandise, you’re going to cannibalize the sales at the higher-end brands,” said Sucharita Kodali, a retail analyst at Forrester. “There’s no differentiation.”

Will splitting off the Old Navy brand fix this strategic issue at the Gap brand?  I don't see a clear reason why it will, unless other substantial changes are made.  Simply splitting the company in two does not address the "stuck in the middle" problem.  The Gap is not just stuck in the middle of Old Navy and Banana Republic; they are stuck in the middle of a host of other strong, well-positioned low cost and differentiated apparel brands.  

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