By  on March 23, 1994

SAN FRANCISCO -- With its polished supermarket approach to bargain-hunting, The Gap's newest division is taking dead aim at the lucrative $202.2 billion mass market.

Refining its Gap Warehouse concept, the company opened its first three Old Navy Clothing Co. units this month in the Bay Area and one near Los Angeles as part of a rollout of up to 45 strip-mall stores in 1994.

"We're really going to school on this business,"said Millard Drexler, Gap president. "It's too early to make predictions, but we will be aggressive about expanding the business."

While the Gap would not comment on volume projections, industry sources estimate that the division could reach annualized sales of $240 million, based on a potential core of about 80 stores.

The Gap first entered the mass market with Gap Outlets in 1989. A year ago, 13 of them were converted into Gap Warehouses, along with about 40 poor-performance Gap stores.

The latest metamorphosis, according to Drexler, represents the final step in the company's three-tiered retailing strategy, with its Banana Republic chain at the high end of the market, Gap in the middle and Old Navy at the low end, poised to go after the fastest-growing segment of the industry.

Old Navy merchandise is generally priced about 30 percent lower than Gap clothing.

Merchandise in the outlets was made up of irregulars and Gap leftovers, whereas Gap Warehouses stocked merchandise specifically manufactured for those stores. Old Navy also has specially designed product. There is really no difference in the product made for Old Navy and what was made for the Warehouses, except the label. The difference is solely in marketing a casual, outdoor image for Old Navy.

In the U.S., there are 754 Gap stores, 178 Banana Republics, 283 GapKids and 45 Gap Warehouses. Internationally, there are 103 Gap and GapKids stores.

The three Old Navys in the Bay Area include one converted Gap Warehouse and two new properties. A Warehouse in City of Commerce, near Los Angeles, was converted to an Old Navy as well.

The fate of the other Warehouses is undecided, according to Gap officials.

The expansion of the lowest-price division comes on the heels of the firm's powerful fourth-quarter performance.As reported, in the quarter ended Jan. 29, earnings shot up 66 percent, to $109.3 million, or 75 cents a share, from $65.7 million, or 46 cents, a year earlier, boosted by improved margins at The Gap, GapKids and Banana Republic. Sales in the quarter climbed 14 percent, to $1.06 billion from $930.2 million, with same-store sales rising 4 percent.

The push into the mass market has been so rapid that Gap Warehouse labels still appear in all Old Navy merchandise. Relabeling will take place over the next couple of months, the company said.

The initial Bay Area locations include a 13,500-square-foot unit in Colma, a 15-minute drive south of downtown San Francisco and practically across the street from a Gap store; a 10,000-square-foot store in San Leandro, south of Oakland, and a 15,000-square-foot store in Pittsburg, Calif., 40 miles east of San Francisco. The largest units will be up to 20,000 square feet, but stores will average 15,000 square feet.

Other Southern California units are scheduled to open in Fontana in April and Tustin in May. East Coast openings are slated for Manchester, Conn., in April, and Islandia, N.Y., and Levittown, N.Y., in May.

While Old Navy exteriors are nondescript, interiors feature appetizing fashion basics in a friendly, industrialized environment.

The layout places men's wear on the left, women's on the right and children's in the rear. Baby clothes and large sizes will hit the floor in April.

An armada of zealous salespeople in black logo T-shirts paired with jeans or khaki pants greets shoppers by offering oversized black mesh Old Navy shopping bags or shopping carts, many with baby seats.

Wide, boldly labeled aisles and checkout counters surrounded by impulse items, like socks and baseball caps, also remind one of a visit to the supermarket.

For the grand opening, specials on Old Navy logo merchandise included a smaller version of the mesh shopping bag, $3; a coffee mug, $1, and a water bottle for $1. These were available while supplies lasted.

A boon to harried mothers is the kid's clubhouse, with fabric-padded tic-tac-toe blocks, a fun-house mirror, a scale and measuring tape. A bank of "kaleidoscope" monitors on the back wall attracts people by positioning large camera lenses at different heights, to encourage interactive participation.The Gap said early strong sellers include a button-front sleeveless denim dress at $29; easy women's separates, including a floral print rayon skirt at $26, and knit tops, including a white cotton long-sleeve pullover and similar vest, both at $24. Eighty percent of the products are priced from $7 to $22. Merchandise is updated weekly with new deliveries.

Old Navy has kept its low price structure primarily by using lighter-weight and less expensive fabrics, particularly evident when comparing the signature Gap one-pocket T-shirt. The richest version sells for $18.50 at Banana Republic, $10.50 at the Gap and a thrifty $7 for an Old Navy interpretation, which has an almost transparent quality to the cotton.

Old Navy jeans are $22, next to the Gap's gutsier $34 variety. Sourcing for all chains is worldwide.

Scaled down decor is another cost-cutting measure. Old Navy has serviceable concrete floors, while the Gap upgrades to hardwood, and lush extras are reserved for Banana Republic, with its inviting seating areas and abundant displays of fresh flowers.

Startup advertising for Old Navy is limited to full-page or double-page ads in regional newspapers, and billboards with retro images to convey timelessness. Other venues, like radio and TV, might be explored.

The word "Gap" is seen only once in the ads, and only on exterior store signs. Drexler said it is a short-term plan to use the corporate name in those spots.

"We wanted to help launch the business by trading on the equity of The Gap," he said.

A toll-free number is listed in the ads for further information. When called, a recording gives product news, details of the 30-day return policy, and directions to the nearest Old Navy.

The recording also asks the caller to leave a message on how she heard about the store. The Gap said this helps to track and adjust its advertising program.

The name Old Navy is more about mental imaging than fashion reality -- a denim work shirt is the closest thing to a nautical motif.

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