Will Divesting Old Navy Help The Gap?

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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.  

Brief Clip from The Great Courses lecture series on Competitive Strategy

JetBlue: Stuck in the Middle?

My former student, Harris Roberts, asked an interesting question on Twitter yesterday:  Is JetBlue stuck in the middle?  In other words, are they stuck in a competitive position somewhere between an effective low cost strategy and a successful differentiation position?  The question arises because of the news that came out yesterday about the firm.  JetBlue announced that it would be charging baggage fees for the first time.  For certain types of low fare tickets, passengers will have to pay baggage fees.  In addition, the company will be reducing leg room and adding seats on certain jets that it will fly.  The announcements come after much investor pressure and a change in the CEO office.  Investors have clamored for JetBlue to improve its profitability, as it has lagged competitors in recent  years.  The moves, of course, represent a significant departure from JetBlue's past strategy.  If you have watched JetBlue's marketing in recent years, you know that more leg room and no baggage fees have been key elements of their message.  

Why do the moves suggest that JetBlue may be stuck in the middle strategically?  For years, JetBlue has tried to be the "Target" of the airline industry.  In other words, they have tried to differentiate themselves from the pure low cost players in the industry (Spirit, Southwest), while trying to operate more efficiently than the legacy carriers.  Target has tried to do the same for years, operating at a lower cost structure than traditional department stores or older discounters, while differentiating from Wal-Mart.  Such a strategy has been very successful for Target for decades, though the last few years have been challenging.  JetBlue's lagging profitability may suggest that it has not been able to achieve the efficiency of the low cost players.  At the same time, its efforts to differentiate (better service, TVs on the seats, more leg room) have not been sufficient to generate a price premium that offsets the higher costs associated with these amenities.  The moves to cut leg room and add baggage fees are not so much a sign that they are moving to become stuck in the middle... to me, they may indicate that JetBlue had already become stuck in the middle.   Now they are trying to find their way out of that challenging competitive position.   It's difficult, though, to make moves that contradict a longstanding marketing message.  It will be interesting to see how customers react. 

What Should Lafley Do Now?

Yesterday, we learned the shocking news that embattled P&G CEO Bob McDonald had resigned abruptly, and that former CEO A.G. Lafley had been hired to replace him.  P&G's performance had lagged investor expectations during much of McDonald's tenure.   Activist investor Bill Ackman had been pressuring the company to make significant changes.  

What should Lafley do as he resumes command of the company he led successfully for many years?

First, he has to streamline his other professional commitments, accumulated since he left P&G.  Why?  Ackman criticized McDonald heavily for holding many board seats at other organizations.  Ackman claimed that McDonald held more than 20 board positions at other institutions!  P&G claimed that Ackman was incorrect.  Yet, the company admitted that McDonald held 7 other board positions. Yikes! Even 7 board positions sounds very, very high to me, particularly for a CEO whose company is not performing as well as expected.   Lafley has to show his people and outside investors that he is giving P&G his undivided attention.  

Second, Lafley should consider streamlining the P&G portfolio.  During his tenure, he divested a number of brands that he considered non-core products or businesses.   More work needs to be done.  I believe two strong candidates for divestment are IAMS (pet food business) and Duracell (battery business).  Why?  P&G has divested nearly all of its food brands over the past decade or so.   IAMS is an anomaly.   In fact, if you go to the company website, IAMS falls under the category of "household brands" - along with the company's large stable of soaps, detergents, and household cleaners.  How does dog food fit in that category?   The US pet food industry is less consolidated than the European market.  It could consolidate further.  Lafley ought to seek a buyer for the business.    He also ought to consider divesting the Duracell business.   It also seems like an outlier amidst the company's other household care brands.  Duracell is a leading brand in its category and surely would fit better at a company selling other similar products.  Having divested these brands, Lafley can reinvest in innovation efforts to ignite more top line growth in P&G's core categories. 

Finally, Lafley has to make a decision about the competitive positioning of the company's portfolio of brands.  During his first tenure as CEO, Lafley divested many low cost brands and focused heavily on products with a differentiated, premium position in the market (think Gillette, Braun, and many high-end fragrances, for instance).   During the recession, the company found itself struggling in some categories, as customers opted for lower price alternatives.   Pressure built to offer lower-priced options.  Meanwhile, Ackman pressured the firm to cut costs.  There's danger in this situation.  Is P&G determined to be a differentiated player in many markets or a low cost player?  Or, is it stuck in the middle, muddling along with an unclear position between the high and low ends of many markets?  Lafley needs to make some tough decisions about the firm's competitive positioning.