By  on June 24, 2010

Gap Inc., which has had an up-and-down, sometimes rocky experience overseas, considers its next move — China — “the cornerstone” of the firm’s global strategy.

On Wednesday, the $14.2 billion Gap, which generates $1.6 billion of its volume overseas, divulged details of the company’s China foray, saying four large flagships in Beijing and Shanghai and e-commerce will launch simultaneously in the fourth quarter. High-profile locations and executives with global brand experience outside the apparel sector are part of the program.

Whereas Gap stores around the world are often franchised, the China units — at least the first four — will be company owned and operated, and at 15,000 to 19,000 square feet each, will display the full range of Gap, GapKids, babyGap and 1969 Premium Jeans products. Gap expects to open its first Hong Kong stores next year, as well.

In Shanghai, a two-level unit will open on Nanjing West Road in the Venture Tech building. The other store will be on Mid Huaihai Road, one of the city’s high streets. In Beijing, a two-level store will be in the APM building on Wanfujing Street, and the other unit will be in Chaobei Joy City, a large regional shopping center.

At the new Gap China headquarters in Shanghai, an unorthodox dual leadership management has been established. Redmond Yeung, formerly president and chief operating officer of China and Asia-Pacific for Best Buy, has been named president, to oversee business development and real estate and navigate China’s bureaucracy. Lorenzo Moretti, formerly executive vice president and chief operating officer for Tesco in China, who also led Marks & Spencer’s expansion in Asia, has been named managing director to oversee store operations, product-to-market activities and infrastructure development. They report to John Ermatinger, president of Gap’s Asia-Pacific region. Earlier this week, Katherine Tsang, chairperson for China at the Standard Chartered plc bank, was appointed to Gap’s board.

The China entry reflects the aggressive international agenda Glenn Murphy has brought to the table since he became Gap Inc. chairman and chief executive officer three years ago. But officials say there’s a cautious, wait-and-see approach toward a larger China rollout in the future. “There is a long-term window for us in China,” Ermatinger said in an interview. “We want to go slow initially in order to go fast later on. The reason we went to a direct ownership model is because we want to do it the right way. Our aspirations are not necessarily to be the biggest, but to be the best. In these four locations and [on] our Web site, we will learn a tremendous amount from Chinese consumers in terms of their preferences. We are going to take a look at the rest of the Gap portfolio, which you know is a very unique attribute — Banana Republic, Old Navy, Piperlime, Athleta — to see how we would plot those.”

Ermatinger also said that after a few years, Gap will assess whether to open more company-owned stores or pursue partnerships. “We don’t want to be full of ourselves, thinking we know everything there is to know about operating in China. It’s a big test. While the world will be watching, our biggest critic will be the Chinese consumer,” he said.

The Chinese aren’t exactly clamoring to buy Gap, but the brand is not entirely unknown, either. “There is some level of recognition. Those that have the luxury of being able to travel outside the country know it,” Ermatinger said. “However, I would say the majority of the awareness of any brand is cultivated around the Internet. We are as excited about the launch of e-commerce simultaneously with brick and mortar for a lot of reasons. There are more than 380 million consumers in China who actually use the Internet regularly. That’s more than the U.S. and Japan combined. That’s projected to grow to 800 million in three years. The Internet will be as much a brand-building device as a commercial opportunity. But there is a learning curve.”

The Chinese, he added, want brands, particularly American ones. “There are a lot of brands in China, but in our space, there is not an American representation yet so Gap is looking forward to being that authentic purveyor of casual apparel.…There is a distinction we have,” Ermatinger said, citing Gap’s multigenerational appeal. The Gap stores, about twice the size of average units, represent “big expressions of the brand.…China is the third-largest apparel-consuming country in the world. The population is relatively young and the disposable income will only grow with time. There are tremendous opportunities, not only in China, but the Asia region.”

Asked how many seasons must pass before Gap has digested enough data to weigh the feasibility of a China rollout, Ermatinger said: “I wouldn’t be so confident to say it’s measured in seasons. I would be more confident to say it’s measured in years. The country is so vast it’s important to really get confirmation first, and that will only be in the cities we know: Shanghai, Beijing and Hong Kong.” Gap, though, is already exploring smaller cities to learn about real estate, consumer preferences and competition, Ermatinger said.

In China, Gap will be attempting to create a “unique service model,” though without the exceedingly high standards seen at Gap and Banana Republic in Japan, where one-on-one relationships, attention to details, displays and wardrobing are priorities, Ermatinger said. “In China, it’s not part of their DNA. We will not be hovering, but we will be there to support the Chinese consumer. They are going to have lots of questions” and will be discerning, he stressed. “They don’t necessarily call it out, but they know the brands that are flattering to their more straight-up-and-down body type.” In addition, “they are very acute around quality because they are paying a high percent of their disposable income” for clothes. “It’s not unlike them to pull the sleeves of a jacket inside out and look at the stitching, the workmanship and the fabrications. There is a real attention to detail relative to quality, which is something I have grown to expect in Japan, but I wasn’t sure I was going to find that in China. The small details, the trim, the buttons, the zippers, whether it’s functional with a hood — these are the kinds of things they look at.

“The other important thing is versatility. They don’t have very big closets so they look at the practical nature of what they purchase — to wear it to work and be able to twist it ever so little to wear after work to social events. Their apartments are very small. They just don’t have the capacity.”

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