What Gap Inc. Can Learn From Signet Jewelers CEO Gina Drosos

Source: CNBC

For years, Gap has struggled with a muddled corporate strategy.  Three of the company's four major brands (Old Navy, Gap, and Banana Republic) have blurred competitive positions.  Thus, they focus on overlapping target markets with product offerings that are not clearly distinguishable at times.  They cannibalize each other's sales far too often.  Moreover, while Old Navy has a clear low-cost positioning, and Banana Republic tries to be a differentiator, Gap has remained "stuck in the middle" for years... not clear about whether it's trying to compete on price or achieve higher willingness to pay, and not clear about whether it's a basics brand or a fashion retailer. 

I think Gap could learn a great deal from the turnaround led by CEO Gina Drosos at Signet Jewelers.  Her company owns several major jewelry chain brands (Zales, Kay, Jared).   Fortune recently profiled Drosos and her work improving performance at Signet.  Here's an excerpt from the article by Phil Wahba:

The Signet empire may not always be trendy, but it has considerably more momentum these days than it did when Drosos, the company’s first female CEO, took the helm. Not so long ago, it was not nearly as clear cut what purpose each of Signet’s three biggest chains were most suitable for. Indeed, as Signet fell into a rut during the 2010s, its biggest banners cannibalized each other and started to become almost indistinguishable. Drosos recalls a time when any sales event at Zales would mean a corresponding drop in business at Kay, a problem made all the worse given that the chains often operated rival stores within yards of each other at the same tired malls. “We had all of our banners pretty much on top of each other in the middle tier,” says Drosos.

Now each of the three major brands focuses on different occasions, customer needs, and price points.  The company still faces major challenges given its reliance on brick-and-mortar retailing with a heavy dependence on mall customers.   However, Signet has made some moves to enhance its online presence, including the acquisition of Blue Nile.  More work remains to be done if Signet will survive and thrive given the decline of malls in the United States. 

Of course, to make all this happen, Drosos had to change a toxic culture and address the fallout from a sexual harassment scandal involving a prior CEO.  Here's another excerpt: 

Drosos has also begun to change Signet’s culture—by making sure shell-shocked employees, primarily women, feel heard and included and are willing to buy into management’s vision, and dramatically overhauling the board... The toxic culture went beyond rampant misbehavior: It also took the form of a quasi-autocratic approach to business in which the bosses, disproportionately men, didn’t listen to what people in the field, the predominantly female frontline Signet workers, were seeing. Drosos, says that as a board member from 2012, she had always pushed for Signet to diversify its workforce and culture. When she became CEO, she says, the board told her to accelerate that effort.

The transformation of the culture, naturally, is key to this turnaround.  You cannot design and execute a new strategy without great ideas from people at all levels.  If you don't create an environment where people feel safe speaking up and sharing their ideas, you can't develop a winning strategy in a very challenging competitive landscape. 

Will Divesting Old Navy Help The Gap?

Source:Wikimedia

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.  

Whole Foods: Could it Get Stuck in the Middle?

Companies pursuing a differentiation strategy often face a serious challenge when low-cost competitors begin to infringe on their turf.   Some customers may opt for lower-priced options.  As growth slows for the differentiated player, it may try to boost profits by cutting costs.  If it goes too far though, the differentiated player may further erode willingness-to-pay on the part of some customers.  The company may get caught "stuck in the middle" at some point, no longer clearly as premium and differentiated as it once was, but clearly with higher costs and prices than the most efficient low-cost and low-priced rivals.   

Whole Foods faces this conundrum today, as reported this week by the Wall Street Journal.  The company faces slowing growth, in part because low-cost rivals such as Kroger have expanded their organic food offerings, while offering consumers much lower prices.  Whole Foods has responded by announcing a  plan to "save about $300 million a year by September 2017, partly by eliminating more than 2,000 jobs." That plan involves centralizing some key tasks and streamlining processes to generate more efficiency.   Whole Foods Co-CEO John Mackey understands the risks. He said, "We want to evolve the structure in such a way that we take out redundancy and waste, and at the same time though, we’re not diminishing the culture, the empowerment efforts that make Whole Foods Market special." 

 The Wall Street Journal article goes on to explain, "Transferring more authority to headquarters and automating more tasks risks harming Whole Foods’ customer-friendly reputation and turning off shoppers who place a high value on local products, such as blueberries and hometown pasta sauces, and niche items, said Jim Hertel, senior vice president at retail consulting firm Willard Bishop,a unit of Inmar Inc."   

Whole Foods clearly still has a solid position as one of the premium players in the supermarket industry.  However, the warning signs are there.  They must be careful about compromising their well-crafted and highly successful competitive positioning, as they cope with lower growth rates.  

JetBlue: Stuck in the Middle?

Let me start by acknowledging that, as a customer, I love JetBlue.  Their service stands out in an industry known for, quite frankly, a pretty awful customer experience.  Having said that, I've always worried that they run the risk of being "stuck in the middle" in terms of their strategic position.  They are not a low cost player in the industry, but on the other hand, they cannot command a premium price either as a truly differentiated player.   Now the Wall Street Journal reports that CEO Dave Barger is under fire, as financial performance has been subpar.  The paper notes, "Meanwhile, excluding fuel and profit-sharing, unit cost—the cost to fly a seat a mile—rose by 6.3%, and labor expenses were up about 15% on a unit-cost basis, the biggest jump ever year over year."  

What's the diagnosis in this article?  Wall Street Journal writer Susan Carey explains, "But many analysts and investors believe that JetBlue is marooned in an industry middle ground, between much larger, full-service carriers like Delta Air Lines Inc. that are improving their service and profitability, and successful ultra-discounters like Spirit Airlines Inc. that go after passengers who don't want perks—just rock-bottom fares. JetBlue has been profitable since 2009, but only marginally so and it often disappoints on quarterly profits."   That sure sounds like a company stuck in the middle, doesn't it?