Provide a problem of marketing within the company and provide a page after of the justification and reccoemdnation of the problem.

Introduction From humble beginnings as a Levi jeans store, by 2000 Gap, Inc. had grown to become the world's leading specialist clothing retailer. Its CEO, Millard S. Drexler, the "merchant prince," was credited with transforming Gap into a global empire, leading the company through eighteen years of 21% p.a. growth to reach sales of $13.6 billion in 2000 (see Exhibit 1). Gap had expanded to 2,848 stores under its three brands: Gap, Banana Republic, and Old Navy, and controlled 6\% of U.S. apparel sales. 1 Drexel had also pushed Gap through a global expansion program, and international accounted for 12.5% of total sales in 2000. But as Gap entered the new millennium, dark clouds were building on the horizon. While sales in 2000 were up nearly 18% over the previous year, operating profits fell by 20%, only the second profit fall since 1984. Gap found itself plagued with concerns about fashion misses, logistics failures, the departure of senior managers, and increased foreign competition. New fast-fashion competition in the form of Inditex, H\&M, and Club Monaco threatened Gap's market share both domestically and abroad. 2 Drexler remained confident of recovery. Responding strongly to questions of Gap losing its competitive edge, he remarked, "That question has been raised at any time in our history that we've had a rough patch. But we continue to grow the profits."3 Drexler promised to fix infrastructure problems and recent fashion misses while expanding the high-growth GapBody and BabyGap concepts. Would these changes be enough to keep Gap competitive in a new retail era? Gap, Inc. History Gap, Inc. stemmed from a negative shopping experience: real estate developer Donald Fisher was unable to return a pair of Levi's jeans that were too short. Learning from first-hand experience that there was a "need for a place that sold jeans in a comprehensive array of sizes," in 1969,, Donald and his wife Doris founded the first Gap store (named after "the generation gap") in San Francisco, California. 4 The store originally carried Levi's jeans and discount music, offering both parents and culture-conscious children an appealing shopping experience. Because Levi Strauss did not allow its merchandise to be discounted, gross margins on jeans were high and cash flow was strong. In the first months after opening, Fisher cut Gap's low-margin music section but kept background music and an ambiance of 60's radicalism. 5 The Fishers established five more stores by the end of 1970 and the chain continued to grow rapidly. By 1976, when the Fishers decided to take the company public, Gap In 1976 the Federal Trade Commission ruled that manufacturers could no longer set prices, and retailers began discounting Levi's products. In response, the Fishers reduced their focus on Levi's and incorporated several lines of private-label active wear into the company's clothing mix. In order to keep prices slow, these lines were sourced from developing countries with lower labor costs. This expanded Gap's customer base but the clothing was considered "junky," and sold at reduced prices. 7 Despite the merchandise challenges, the chain continued to grow, reaching 522 outlets in 1981, but operating margins had almost halved from 1976 levels. 8 In 1983, seeking a solution to his problems, Donald Fisher hired Millard "Mickey" Drexler to be president of the Gap division. Drexler was working at Ann Taylor at the time, having joined them in 1980 at the age of 36 after experience at several department stores. In three years, he had turned an unprofitable chain of 25 stores into a profitable 55 store operation. 9 Fisher saw in Drexler the ideal person to help Gap recover from price deregulation and fully switch to private label clothing. He noted, "For years I was looking for someone to implement vertical integration... this is the end of the middleman as far as this company is concerned." 10 Although Drexler was initially hesitant to accept Fisher's offer, citing his interest in forming a retail start-up and his reluctance to relocate to California, he agreed to sign on for three years. 11 Drexler immediately set about revamping Gap, Inc. First, he sold off the low-quality private-label merchandise through promotions. He then hired new designers and began concentrating on selling basic, casual apparel under a single label, Gap. Before this, each Gap store carried as many as 15 different brands of clothing. 12 Levi's jeans were the last outside brand to be phased out, moving from 7 percent of Gap's merchandise in 1983 to a complete exit by 1991.13 Fisher remarked at the time, "That plan put us in a unique position for a retailer. We are the only American retailer of any size with its own brand name on such a dominating share of our business."14 Drexler's vision for the Gap brand was simple: "Everybody can wear [Gap] clothes... We want to provide the basic pieces for anyone's closet." 15 Gap's clothes were made of sturdy cotton in a variety of vibrant colors; they aimed to be classic, casual pieces that could be worn season after season without bowing to the trends of the moment. Teri Agins, a fashion writer for the Wall Street Journal, famously called Gap an "anti-fashion" philosophy. 16 Agnis wrote, "Gap didn't need designer pedigree, it didn't need snob appeal, it didn't need high prices. And, ignoring fashion's revolving door, Gap still managed to make money, even though its clothes didn't go out of style each year. Shoppers came back for more Gap basics, attracted by the new colors and other flourishes Gap created to keep its styles fresh, underscored with Gap's marketing magic." 17 In addition to merchandise changes, Drexler overhauled the stores and exchanged crowded circular racks for white shelves and tables with neatly folded clothing. He also replaced "executives who relied on complicated quantitative research" with "people who understood his approach of quickly testing his fashion intuition in new products." 18 Drexler's intuition was a key part of Gap's initial change; he kept close tabs on design decisions as the company's brand grew. 19 The first year of Drexler's overhaul was challenging for the company - profits dropped 43% due to the merchandise liquidation - but thereafter, it thrived. While Drexler focused on the Gap chain, in 1983, Fisher moved to diversify by purchasing Banana Republic, a two-store chain that sold safari-inspired clothing. Fisher also purchased Pottery Barn in 1984 but sold it two years later because of poor profitability. Banana Republic did well initially but floundered after the safari craze ended in 1987. During the next few years, Gap, Inc. repositioned Banana Republic to include a broader range of higher-priced basic apparel and sales began to lift. In 1987, Fisher launched a new chain, Hemisphere, which sold "expensive 'European-inspired' clothes." 20 The merchandise didn't sell well, and the company closed the nine-store chain in 1989. Meanwhile, Drexler worked to diversify within the Gap brand. Frustrated that he couldn't find desirable clothing for his young son, Drexler launched GapKids in 1986; the division generated \$2 million in sales in its first year and grew to $260 million within five years. 21 Drexler was promoted to President of Gap, Inc. in 1987 while Donald Fisher retained the role of CEO. In 1990 babyGap was born and also grew rapidly. During the 1980's, Gap faced the threat of Benetton's rapid expansion into North America. Benetton, an Italian knitwear company known for classic lines, vibrant colors, and casual clothing, opened its first North American store in 1979. By 1985, Benetton's US revenues were expanding at 35% per year, the company's fastest growing market. Benetton's 1985 US store count had reached 800 small (400-600 square feet) mostly franchised stores. 22 At the time, Gap's 648 much larger stores (+4,000 square feet) appeared outnumbered and potentially overwhelmed. But Gap's revenue and store count continued to rise fast while Benetton's growth stalled as disenchanted franchisees tried to sue Benetton for overexpanding. Although the suit failed on a technicality, a the damage to Benetton's reputation had been done, and the number of outlets began to fall. The decline continued in the face of rising Italian labor costs, shifting tastes, disaffected store owners and Benetton's poor customer service. By the end of 1996, Benetton's US store count was down to 250; their expansion into the USA was described by the UK's Guardian newspaper as "little short of a disaster." 23 Meanwhile, over the same period, Gap's store count had nearly tripled to 1,854 , mostly driven by expansion in the US. The Gap division opened its first international unit in England in 1987; it entered Canada in 1989 and France in 1993. Although international expansion struggled at first due to a faulty pricing and sizing strategy, Gap quickly recalibrated and sales lifted. Gap's culture and store design soon became the envy of its foreign competitors. Robert Whitehead, an analyst at Goldman Sachs, noted, "A lot of things they do have been copied by UK retailers. This extends from shop layout and merchandise display to being able to exchange or refund clothes without quibbling." 24 By the end of the 1980's, Gap had "revolutioniz[ed] the casual-apparel market for men, women, and children, providing dressed-down clothes at affordable prices." 25 Stacy Ruchlamer, a retailer analyst at Lehman Brothers, wrote in a report, "The Gap has developed a superior concept of offering fashionable basics for many Americans. The Gap has the potential for substantial growth because it serves a huge market - young, middle-aged to more mature adults - with very little competition." 26 Popular advertising campaigns (e.g., "Individuals of Style" and "For Every Generation, There's a Gap") gave the company and its products a strong identity while Gap's aggressive expansion during the recession of the late 1980s allowed them to sign preferential lease deals in popular locations. 2728 By 1992 the Gap's stores were located in nearly half of the 1,500 largest malls in the U.S. 29 Gap's brand had evolved far from its initial private-label foray in the 70s. It produced quality clothes at low cost because it "design[ed] its own clothes, cho[se] its own materials, and monitor[ed] manufacturing so closely." 30 It also had "200 quality-control inspectors working inside factories in 40 countries to make sure specifications [were] met right from the start." 11 New collections appeared in stores every six to eight weeks, and individual stores carried many sizes and colors (as opposed to styles) of items to cater to Gap, Inc.'s range of customers. However, by the mid-1990s, the company's growth leveled off and analysts declared it "mature." The casual apparel market had become increasingly competitive. Discounters, such as K-Mart and WalMart, began to copy Gap's casual chic style and lure customers away with lower prices and comparable quality. Furthermore, the media (e.g., Saturday Night Live) parodied Gap, Inc. on occasion and decried its use of "sweatshop" labor in factories throughout the world. Drexler disagreed strongly with the idea that the Gap brand was mature and argued that it would become as global and ubiquitous as Coca-Cola. To this end, Drexler launched a line of fashion items for Gap, attempting to steal back market share from discounters and to prove the value of the Gap brand. However, with items from faux-Western leather vests to leg warmers, the line stumbled and sales faltered. Unsold items were shipped to Gap Warehouses, large outlet stores which quickly sold the undesirable lines at steep discounts. As Gap suffered fashion misses through the early nineties, Gap Warehouse became an increasingly tempting way to fight discounters at their own price-point. One Gap manager noted, "It's like Dr. Jekyll and Mr. Hyde. The Gap is spinning its wheels, digging itself deeper in the sand. On the other hand, Gap Warehouse is unstoppable." 2 Critics wondered if discount retailing was the "logical conclusion of the anti-fashion movement." 33 In 1994, Gap opened three Gap Warehouse-style stores under the name "Old Navy Clothing Co." Old Navy sold every-day clothes at lower price points than Gap in large warehouse-style outlets of 20,000 square feet, nearly four times the size of Gap's traditional format. Old Navy was designed to compete with the likes of Sears, Target and Wal-Mart. Old Navy was an immediate success and sales reached $1 billion within 3 years. In 1995, Drexler was named CEO of Gap, Inc. Soon after being named CEO, Drexler announced that Gap would drop its foray into fashion and return to the "back to basics" anti-fashion aesthetic which had made it so popular in the 80s3435It received a heady promotion when actress Sharon Stone wore a Gap turtleneck along with a Valentino skirt to the 1996 Academy Awards - the turtleneck sold out the following week. 36 The firm also opened stores at a rapid pace and expanded into smaller cities. In 1997, Gap.com began selling apparel online. In the same year, Donald and Doris' son, Robert, became president of the Gap division. The company also benefited from the business-casual trend that exploded in the wake of the dotcom boom. In 1998, a popular advertising campaign promoting a new line of khakis led to a very successful year for the company. Gap, Inc. delivered operating profits of $1.3 billion on revenues of $9.05 billion, up from $6.5 billion in 1997. Comparable stores sales growth was 17%.37 In 1998 Gap also introduced GapBody stores, which sold intimate apparel. The successes of the '90s were challenged in the beginning of the new millennium. Gap, Inc. "misjudged fashion trends in 2000" and alienated many of its older, basics-oriented customers. 38In addition, by 2000, several top designers and executives had left the company "disillusioned with how bureaucratic the organization had become." 199 These included COO John Wilson, Banana Republic head Jeanne Jackson and Gap head Robert Fisher, son of founder Donald Fisher. Analysts Bob Buchanan from A. G. Edwards expressed impatience with Drexler's unilateral management style, stating, "It has become a much larger company now. It can no longer just be the Mickey show." 40 Finally, Gap's fast expansion had also begun to challenge its logistics and Old Navy experienced serious inventory problems during the summer season. 41 To restore confidence and sales, Drexler publically admitted Gap's struggles and reiterated his commitment to keeping the retailer on track. In September of 2000, he remarked, "The recent performance has been bad. We're unhappy about it. We're pissed off, but not making any excuses whatsoever. We're bringing urgency to the third quarter and major urgency to the fourth quarter." 42 Focusing on top line improvements, Drexler instituted a number of changes to improve profit margins and reduce administrative costs. Rather than displaying merchandise for four weeks and then discounting to increase turnover, Gap followed its competitors in keeping full priced stock on shelves longer. 43 Additionally, Gap began planning its Fall 2001 line earlier, speeding up product for later seasons to ensure timely deliver. 44 Drexler also began an aggressive remodeling program, with the goal of altering 100 stores by the end of 2000 . Although these changes wouldn't be visible to the customer, they would increase productivity and traffic flow through the stores. 45 By the end of 2000 , sales had reached record levels, hitting $13.6 billion, up 18% on the previous year. However, operating profit fell 20% to $1,445 million. (See Exhibit 1) Total comparable store sales fell -5\%, with Old Navy like-for-like sales falling the most (-11\%). Nevertheless, confidence remained high in Drexler's turnaround strategy, with Barney's Allen Questrom noting, "They've stopped a little bit, but I wouldn't be worried about him." 46 The Brands in 2000 Gap, Inc.'s portfolio consisted of Gap, Banana Republic, and Old Navy. The company had positioned Gap as the purveyor of "fresh, casual American style," Banana Republic as an "affordable luxury" retailer with an "elevated designer expression," and Old Navy as a "formidable player in the value sector" offering basic and fashionable items in a fun shopping environment. 47 (See Exhibit 3) Gap The Gap division "traditionally offered key items with a focus on casual weekend." 48 In addition to offering clothes for men and women, the division included sub-brands GapBody (intimate apparel), GapKids, and babyGap. Although teenagers and adults of various ages shopped at Gap, the brand targeted 18-30-year-olds. Gap operated a total of 2,079 stores domestically, 349 of which were opened Japan. 49 For fiscal 1998, 1999 and 2000, international revenues represented 10.1%,11.3%, and 12.2%, of total revenues. 50 Challenges for Gap in 2000 included a weak advertising presence and a poorly planned rebate campaign. 51 Drexler promised that Gap, "would be back on TV in a vicious way for the holiday." 52 Kenneth S. Pilot replaced Robert Fisher as Gap's President in April 2000. Pilot joined the company in 1989 and had been the Senior Vice President of Gap Outlet from 1993-1998 and President of Gap International from 19982000.53 Gap's top U.S. competitors included Abercrombie \& Fitch (A\&F) and American Eagle Outfitters (AE). A\&F sold clothes to men, women, and children through its three main brands; its flagship brand targeted college age individuals. The firm operated 354 stores and had $1.2 billion in sales in 2000.54 AE catered to 15 -25-year-olds and earned $832 million in revenue via its 663 U.S. stores in 2000.55 Banana Republic In 2000, Banana Republic operated 402 stores. It was seen as "a purveyor of chic basics - casual office wear in black or beige e56, an upscale version of Gap. Banana Republic aimed to be "the destination for the complete fashion wardrobe," offering shoes, accessories, and outerwear for sophisticated tastes. 57 Banana Republic was the slowest growing of Gap's divisions, aiming for a store expansion rate of between 40-60 in the upcoming fiscal year. (See Exhibit 3) The control of Banana Republic was split amongst several managers after Jeanne Jackson, the prior President, left to work for Wal-Mart in early 2000.58 For the future, Drexler planned to offer a wider price range of Banana Republic merchandise to draw in customers who might be intimidated by the "slightly elitist" store. 59 Additionally, Banana Republic was working to develop a "universal pants fit" to solve for figures outside of the typical model range that BR offered. Drexler joked, "If we figured out the number of women who couldn't buy pants at Banana Republic [and sold pants to them] we'd be bigger than WalMart." Banana's competitors included J. Crew, which operated 115 stores in the U.S. and Canada and had $714 million in sales and a net income of \$1.9 million in 2000, and Urban Outfitters, Inc., which had sales of $276 million, net income of $18.6 million, and 37 stores in the U.S., Canada, and the U.K. 61 Old Navy Old Navy strove to provide inexpensive basic and trendy clothing for entire families in a fun, warehouse-type shopping environment. In 2000, it operated 666 stores and also offered its products online. In additional to infrastructure problems in 2000, Old Navy also had trouble keeping its prices "compelling" to young customers. 62 Drexler promised to correct these issues in the coming year by refocusing on family lines, retooling marketing campaigns, and emphasizing low prices. 63 President Jenny Ming had run Old Navy since 1998, after working with the Old Navy brand since its founding in 1994. She had joined Gap in 1986. In the coming years, she planned to refocus Old Navy on families (from teenagers), rolling out underwear, maternity, and infant lines to raise margins. 64 Inside the Organization Various units at Gap, Inc. were working to carry out Drexler's strategy for 2000 and beyond. Marketing For 1998, 1999 and 2000, Gap, Inc.'s advertising expenses were $399 million, \$504 million and $487 million respectively 65 Each of the firm's brands had its own in-house marketing team which created in-store posters, billboards, and television ads. The Gap division advertised through print, outdoor, and television advertising. The Gap's most successful campaigns of the 90 s relied on images of celebrities wearing classic Gap apparel. However, these campaigns had grown tired and parodies of Gap's signature khaki campaign by Saturday Night Live ("Kurt Cobain wore khakis") spoke to the need for a more compelling framing of Gap's iconic brand 66 Old Navy had established a tongue-in-cheek image through its campy advertising, some of which spoofed old television shows and featured eccentric spokespeople. Susan Wayne, executive vice president of marketing at Old Navy, explained, "The smile and wink in our brand is critical to who we are."67 Banana Republic relied on print and outdoor advertising to target professionals in their 20s and 30s. In conjunction with efforts to position itself as a retailer of fashionable apparel, it had been conducting an "aspirational" yet "approachable" ad campaign. 68 Supply Chain Gap, Inc. designed, merchandised, marketed, and retailed its own apparel, and each brand had its own team for these functions. All design teams were located in New York to be closer to the trending fashion scene while the merchandising and marketing teams resided in San Francisco, in the head office. Gap's creative team consisted of 80 designers, up from ten in 199069 The team mined a wide variety of sources for inspiration, from fashion magazines to museums and European street wear. 70 The team designed eight major collections every year with a few smaller shipments to keep stores refreshed with new merchandise every six weeks. Gap's lines were approved four times a year by Drexler and a team of merchandising executives who flew to New York from San Francisco to meet the designers. Drexler inspected prototypes of all men's, women's, and children's apparel and items that gained his approval would show up in Gap stores approximately eight months later. 71 Although each brand had its own team of designers, buying and logistics were handled centrally. The firm outsourced the manufacture of its apparel to over one thousand vendors in 50 countries around the world. 72 China was one of Gap's major suppliers, though figures on the exact composition of Gap's manufacturing contractors were not released. Fifteen Gap, Inc. centers in the U.S., Canada, the U.K., and Japan distributed the company's merchandise to its 2,848 stores worldwide. Because Gap outsourced internationally, collections would hit retail stores many months after their initial design. Lisa Schultz, Gap's former executive vice-president of product development and design before her departure in early 2000, remarked in 1997, "We work a year in advance. Because our volumes are so large, we need to commit to a color a long way in advance. We need to make specific yarn commitments against a production schedule." 73 However, Schultz remained confident that her team stayed ahead of trends, "Very often, trends on the runway are the very same things we already have in the pipeline." 74 Store Base All of Gap's stores adhered to a strict, centrally dictated design code. For example, all Gap stores had to be between 6,000 and 7,000 feet and decorated with white walls, pale wood, and aluminum. 75 Every store played the same music and carried the same merchandise arranged in the same way, all dictated by the central San Francisco office. Every detail, from the order of colored shirts on a counter to the exact amount of GapScent floating through the air, was planned by the head office. Although Banana Republic and Old Navy had their own aesthetic messages, they too were held to strict internal consistency through guidelines from the head office. John Winter, a retail consultant, stated "The stores have a coherent message...They don't sell a vast range of merchandise. The displays are tightly edited. The Gap presents a relentlessly clear fashion statement, where nothing is out of place." 76 Human Resources The company used its own experienced sales associates to assess "candidates' aptitude for retail work and suitability for the GAP environment." 77 The approach improved retention and productivity among associates, according to one source. Gap, Inc. also administered several assessments (shop-floor, communication, self-motivation) to place prospective sales employees in positions. 78 Gap, Inc. also invested extensively in employee training. Sales associates went through at least sixteen hours of sales training to provide customers with the best advice on "fabric, fit and fashion." 79 The company rewarded employees who met performance or company goals with bonuses. Conclusion As Gap moved forwards into the new millennium, Drexler appeared poised to take on internal and external challenges. After growing the company from sales of $481 million to a world-wide retailing empire of $13.6 billion, he was confident that Gap's current struggles could be fixed easily. In an early 2000 speech, Drexler pointed to companies such as Nike and Coke and remarked that the goal of Gap was to become a market share leader in the same way; aiming for 30% of the U.S. apparel market. 80 What would it take to fulfill this dream? - Provide a total of four findings of fact; 1 from the following four functional areas of business: - Marketing - Provide a full justification and recommendation for each finding of fact (minimum of 1 page each, not including the Finding of Fact)