Gap Inc. Outlines Ambitious China Growth Plans

The company believes it can more than triple its business in the country to more than $1 billion in the next three years — and India could be its next target.

Gap Inc. believes it can more than triple its business in China to more than $1 billion in the next three years — and India could be its next target.

This story first appeared in the April 17, 2014 issue of WWD.  Subscribe Today.

During Gap Inc.’s annual investor meeting in San Francisco Wednesday, Jeff Kirwan, the company’s president for Greater China, noted that store expansion, including efforts to penetrate the country’s fast-growing outlet channel, and the large and acquisitive population of Internet users will help the firm achieve its objectives in the world’s most populous nation.

In 2013, the Gap division opened 34 stores in Mainland China to finish the year with 81 units and about $300 million in sales, according to Kirwan. The number has since risen to 83, of which 15 are outlets, and an additional 30 stores are expected to open this year.

Since the beginning of fiscal 2014, the company has opened its first Old Navy unit in China, a 22,000-square-foot, three-level store in Shanghai’s Jing’an district. As it did when it entered China with Gap stores in 2010, the retailer backed up Old Navy’s physical presence with an online one through Alibaba’s Tmall.com platform, which sends shoppers directly to a Gap-owned site.

Old Navy expects to have five stores in China this year.

Running through a number of statistics about China’s projected growth in population and propensity for spending, Kirwan noted that the Chinese government expects 300 million citizens to enter the middle class by 2020.

“That’s taking the population of America and adding it to our target base,” he said, noting the country’s rapid transformation from an export-based economy to one centered on consumption. Nearly half the people in China — an estimated 600 million — are online, he said, and about 95 percent of them are engaged in social media.

Gap’s target in China is the so-called Golden Generation, said Kirwan. Because of government policy, many are only children who grow up “spoiled rotten” but then bear down as adults to help support their families. “They’re looking for brands they can trust,” he said.

Through its presence in Greater China and its marketing efforts, aided awareness of the Gap name has doubled to about 70 percent from half that level four years ago, and, due in part to its inclusion of children’s and baby apparel, recognition among mothers is above 80 percent, according to Kirwan.

With China’s middle class just beginning to take shape, Gap has been sensitive to pricing issues. Last week, it surveyed customers who walked out of the Old Navy store without making a purchase and found that only 4 percent of the “unconverted” departed because of the store’s price points. “We can push Old Navy deep into China,” Kirwan said.

While Gap has used franchise arrangements to penetrate some markets, such as with its introduction of Old Navy in the Philippines this year, Kirwan said that in the Chinese market all stores are wholly owned. “The current plan is that they will stay that way. Where [competitors] have gone franchise very, very quickly, they’ve lost control of their brand a little bit,” he said.

China is not the only large market in Gap’s sights, however. Steve Sunnucks, global president of Gap brand, discussed the world’s other billion-person-plus market, saying that his division is beginning to look at India. “That’s all I can tell you for now,” he said.

However, he did share a few details about plans to introduce Kate Spade New York and Jack Spade children’s collections at GapKids stores and online in November in markets including the U.S., Canada, the U.K., France, Hong Kong and Japan.

Outlets have continued to grow as a percentage of the Gap division’s business, and Sunnucks cited the opening of “urban factory stores,” such as those in Harlem in New York and Wembley in London, as allowing for greater frequency of shopping among value-conscious fashion customers. “They can shop locally between trips to outlet malls,” he said.

“Our online store is perhaps our most important flagship,” Sunnucks said, reiterating a theme raised by virtually every executive who spoke, including Glenn Murphy, Gap Inc. chairman and chief executive officer.

The ceo emphasized the critical role omnichannel retailing is playing in Gap’s business and how it’s up to companies like Gap “to create the marriage” consumers want and expect between physical and digital stores, whether the device be a computer, tablet or smartphone. “It’s really about digital in a physical environment,” Murphy said.

Sabrina Simmons, executive vice president and chief financial officer, said that online sales accounted for about $2.3 billion of the company’s $16.15 billion in sales last year and had doubled their share of Gap Inc.’s revenues from about 7 percent in 2008 to about 14 percent in 2013. At the same time, the firm’s square footage had dropped by about 2 million.

Art Peck, president of growth, innovation and digital, stressed that Gap’s growing efforts in digital were part of a crucial symbiotic relationship with its stores that was essential to preventing missed sales and margin improvement.

He reported that Gap and Banana Republic had logged “just under” 500,000 reservations as part of its “reserve in store” online program as it rolls out a “find in store” program on the Web and begins an “order in store” program on a trial basis in June.

Peck believes that “order in store” has enormous potential to improve conversion rates when, for instance, an in-store customer sees a product he or she likes but is unable to find in the right size. Locating the product the customer wants — whether in another store or a distribution center — helps to improve conversion and other financial metrics in a business in which “more than half your customers are walking out the door empty-handed,” he said.

While Murphy expressed disappointment about the difficult sales environment in the final months of last year and with the challenges confronting retailers since, his tone lightened noticeably when discussing Athleta, the firm’s athletic apparel division, which expanded to 65 stores at the end of last year. Noting that Gap’s franchise partners have asked about the company’s plans for the nameplate, he spoke of the retailer’s three firmly established American brands — Gap, Old Navy and Banana Republic — and then added matter-of-factly, “And soon to be four with Athleta.”