Gap Strategy Is to Spread and Conquer

For strollers passing the storefront, they pop out like eye candy. They are Gap’s ribbed cotton sweaters in the latest summer shades, arranged in a flawless folded pile.

Retail giant Gap has revolutionized the way Americans shop and the way we dress. But with relaxed-fit khakis in sizes to carry us from the cradle to the grave, sold in locations becoming as ubiquitous as Starbucks, how many stores are too many? Will Gap ever hit the brick wall of market saturation when it is no longer profitable to expand? Or has it already?

There are 32 Gaps (including Gap, GapKids and BabyGap) in Los Angeles County. In Santa Monica alone, there are two locations in Santa Monica Place Mall, two on Wilshire Boulevard and one on Main Street. An additional Third Street Promenade flagship store will open early next year, just steps away from the Santa Monica Place stores.

Company spokeswoman Rebecca Weill defends this six-Gap pileup.

“Being available where and when our customers want us makes it easier for them, especially in a market the size of Los Angeles,” she says. “We evaluate these things very carefully, and we think there is a need for both the Third Street flagship and the Santa Monica Place stores.”

She explains: “Flagship stores carry a broader and deeper assortment of styles and sizes. They are a place to showcase the brand, and will often feature special elements.”

Some Gap stores have computers set up so shoppers can access the company’s Internet site. In downtown San Francisco, there is a Gap just five blocks from the flagship, and both stores do brisk sales, Weill says.

Even with more than 900 Gap locations nationwide (by comparison, there are 729 Express and 601 Limited stores in the U.S.) and 40 to 50 stores opening next year, Richard Baum, a retail analyst for Goldman, Sachs & Co., believes there is room for Gap to grow.

“One indication of market saturation would be that sales would be negative, and Gap hasn’t had a negative year in 15 years,” he says. “Another indication would be if new-store productivity started to decline and they were opening marginal stores, and that’s not happening right now either.”

One way Gap avoids market saturation is careful evaluation of real estate, Baum says. Gap has real estate offices throughout the U.S. with leasing representatives who scout out locations for new stores. The representatives look at a number of factors, including population, household income, foot and automobile traffic and visibility.

Another key to Gap’s thriving expansion is flexibility. The original vision of the Gap, founded in 1969 by Donald G. and Doris F. Fisher, was to offer many styles and sizes of Levi’s jeans in one place. Sales grew steadily in the 1980s but leveled off in the early 1990s. However, Gap was able to reinvent itself. Capitalizing on lifestyle trends of the 1990s, such as the casual workplace, Gap became more than just a store, creating its own brand of casual clothing.

Where Gap may be a success story, Benetton, another chain store that experienced rapid growth, didn’t fare so well.

When it first entered the American market in 1979, Benetton introduced a simple collection of colorful knits. The lamb’s wool cardigans and sweater vests were on target in the preppy, conservative ‘80s.

“There were elements in our favor--we were cool, we hit the right price point, and we were introducing a new way to shop: a small store selling sweaters,” says Carlo Tunioli, vice president and general manager of Benetton USA. Within five years of debuting in America, the Benetton label had expanded into more than 700 stores nationwide.

But then suddenly, Benetton wasn’t cool anymore. The number of stores plummeted to 200 in the late 1980s.

“There were many factors that led to our consolidation, as I like to call it,” Tunioli says. “Fashion changed, the customer changed, teenagers became professionals, and at the end of 1980s we were getting into a recession period.”

Another factor, he says, was Benetton’s licensing system. Because individual investors purchased their own stores, it was difficult for Benetton to control store operations, displays and sales.

“Our expansion was dramatic,” Tunioli says. “We wanted to increase access and visibility. It was a form of advertising. But you can reach a point where you have too much of a good thing.”

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Unlike with Benetton, Gap’s forte is brand management. Customers know what to expect when they walk into a Gap store, since all stores carry the same staples: khakis, T-shirts, woven shirts and jeans.

And where Benetton failed to adapt its line of basics to changing trends, the Gap brand succeeds each season in reflecting what is new. For example, when dark denim was on the runways for spring, Gap began carrying darker rinse jeans; when Gucci’s bamboo handled hobo bags were all the rage last fall, Gap’s higher-end Banana Republic stores offered their own affordable nylon versions. The ability to interpret trends at affordable prices may be what gives Gap real staying power.

Banana Republic and the lower-price Old Navy are part of the Gap family, although many customers do not realize it. GapKids and BabyGap, once just departments in grown-up Gap stores, also now have their own locations, which last year brought in $1 billion for Gap Inc.

Product-line extensions like GapKids, Banana Republic and Old Navy have been a major factor in Gap’s growth, Baum says.

“Gap has developed powerful concepts directed at different kinds of customers,” he says. “They don’t have to rely on just the Gap label to reach all segments of the population.”

With continued brand management, real estate and marketing savvy, it is likely there will be many more street corners Gap will fill. This summer, New York City stores debuted Gap-to-Go, a home delivery service. Who knows? In the future, Gap’s most convenient location could be as close as your doorstep.