By  on April 18, 2006

NEW YORK — Gap Inc. is entering the Middle East with about 25 Gap units and 10 Banana Republics by 2010 through a franchise agreement with the Al Tayer Group, a private, diversified company immersed in luxury retailing.

The Gap agreement brings both parties involved to new markets — Gap to the Middle East and Al Tayer to midtier retailing.

Meanwhile, Saks Fifth Avenue has signed a licensing deal in Shanghai, and will push for additional overseas locations, underscoring how retailers that have reached maturity in the U.S. are reaching overseas for growth.

Gap has always owned and operated all its stores, including the international units already up and running. There are Gaps and Banana Republics in the U.K., Canada, France and Japan.

However, a year ago, the $16 billion, 3,000-unit retailer determined it needed a new model for international expansion.

"Right now, we are pursuing the franchise strategy. We feel comfortable with it," Joshua Schulman, senior vice president of Gap Inc.'s international strategic alliances and Gap Japan Merchandising, said in an interview Monday.

Licensing and shops-in-shops were also considered, but franchising would be the best route. "Franchising is very appropriate because it provides for strong control of the brand on our part," Schulman said. "Gap Inc. will control all of the product — it's designed and produced by Gap Inc. — as well as the marketing, the creative and the store design. We will also work with strong local operators to understand their marketplace and who have strong relationships with the real estate community and strong relations with local talent to pull together the best local teams. The franchise model provides the right balance between protecting the core values of our brand and insuring strong local execution."

Schulman added that the international program "is not one size fits all. In other markets, we may decide on directly owned stores."

Al Tayer is the second franchisee signed on with Gap, which has been gearing up for overseas expansion. The Gap's international division, based here, early this year opened an 11,000-square-foot showroom at 620 Sixth Avenue, at 18th Street, which held its first market week for franchise customers in February. The first franchising agreement was announced last January with FJ Benjamin, which plans to open up to 30 Gap and Banana Republic stores by 2010 in Singapore and Malaysia.Around the same time, the first Gap stores in the Middle East will open. The first Banana Republic stores in the region are scheduled to open in 2007.

Asked if the Gap's subpar sales performance lately makes it more challenging to find franchisees, Schulman flatly replied, "No. In fact, there's a tremendous amount of interest in our brands from different parts of the world." In the Middle East, "we've done a lot of studies [showing] there is an appetite for this brand."

He would not disclose whether any more franchise deals would soon be announced, but he did say, "The program is accelerating.

"The Middle East, with its young and affluent population, is a particularly attractive market for the Gap and Banana Republic brands. Dubai, in particular, is a world-class shopping destination with some of the largest and most important shopping malls in the world," Schulman said in a statement, expected to be released today.

Under its agreement, Al Tayer Group and its local affiliates will hold exclusive rights to operate Gap and Banana Republic stores in Bahrain, Kuwait, Qatar and the United Arab Emirates, and exclusive rights for Gap in Oman.

The Al Tayer Group was established in 1979, and is based in Dubai. It has interests in retailing, fashion, jewelry, perfume and cosmetics, and is involved in publishing — including Gulf News, the UAE's largest English-language daily paper — and the automotive sector. Al Tayer has been immersed in luxury retailing, but now has a "strategic initiative" to be a midmarket player as well, said Khalid Al Tayer, group general manager of business development at Al Tayer Group.

While no locations were specified, the stores are all expected to be located in major malls, some of which are not yet open. Due to the extreme heat in the summer, opening on "high streets" is not practical, Al Tayer noted. He said his group also has rights to GapKids.

Under the agreement, Al Tayer owns and operates the stores, adhering to Gap store design, and buys the merchandise from Gap. Gap's global offerings — certain weaves or fits, for example — are sometimes different from what sells in the U.S. but there's a "global aesthetic" that makes Gap products recognizable the world over, Schulman explained.Asked if there were other fees paid to Gap, aside from the cost of the merchandise, Al Tayer said there were contractual obligations that he would not specify. He also said the company operates about 16 moderate-price perfume and cosmetic stores called Areej, which are around 10,000 square feet. "The bridge to the Gap is not that vast for us," he said.

Al Tayer did not seem worried about Gap's recent performance. "I don't see that as a concern," he said. "There is a high level of awareness of the brand. We also see an aggressively growing retail segment," he said, noting the region has been spurred on by growth in the GDP, the population, the workforce, including expatriate workers, and tourism.

The Saks store in China could open in two or three years, as previously reported by WWD. David Pilnick, Saks' vice president of international development, has been in China working on the deal. Saks sees other opportunities in other cities in China, too. Saks reportedly is eyeing a site in Delhi, India, in another licensing deal.

In 2003, Saks announced a strategy to build a network of licensing arrangements with overseas companies. So far, only two foreign units are operating, in Dubai and in Riyadh, Saudi Arabia. Saks said at the time that Japan was being considered, though the planning has since shifted to China. Under its licensing deals, Saks personnel consult on the design, marketing and merchandising of the overseas store, but the unit is operated and owned by the licensee. The arrangement limits the risks of overseas expansion, but there's also less profit potential.

As reported, Roosevelt China Investments Corp., an investment firm, is expected to strike a deal with Saks on the Shanghai site and line up a retailer to operate a Saks unit. In addition to China, the Middle East and South America also are considered possibilities for Saks licensed stores.

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