The Gap’s president and chief executive officer has had his hands full in the past year. The $16 billion retailer suffered another tough quarter when it reported that Gap’s comp-store sales fell 4 percent, and Old Navy’s declined 5 percent in the second quarter. The business was hurt by slowing traffic and decreased demand at a critical time when the company is planning to spin off its Old Navy division.
Yet, Peck said difficult times can lead to introspection and bold ideas, specifically in the area of sustainability.
“The role and responsibility and obligation of a ceo today is to go some places where ceo’s haven’t traditionally had to go. If you’re observing the world around us, you can see that leadership on bigger issues, on social issues, political and environmental issues….I’d characterize our current leadership at best as inconsistent. That’s the nicest word that I can come up with,” Peck said, referring to President Trump.
“Ceo 101 class: When it comes to issues that are controversial, the general rule is to duck and hide,” Peck continued. “That’s not an option anymore.” He offered to explain how Gap “as a company, with 4,000 stores, 135,000 employees and a $6 billion supply chain — and, it’s our 50th anniversary — have made a change in a meaningful and substantial way.”
The retailer pivoted from philanthropy to sustainability because “philanthropy doesn’t stick,” Peck said. “We’re integrating sustainability into the core of our business. This is not a loss, this is an advantage and a philosophy that’s informed everything we’ve done from the top to the bottom of our supply chain.”
Peck confirmed that Gap Inc. is splitting the company up. “We’re letting Old Navy run on its own and really fulfill its destiny. We’re a portfolio of specialty brands. Gap and Banana Republic are great brands, but their business models need to evolve, then we have Athleta, Intermix, and Janie and Jack.”
By embracing sustainability, Gap discovered that doing good is also good business. “When we push real, substantial and authentic values to the forefront of our brands, it manifests itself in our profitability, by a couple of unit points at least,” Peck said. “Market share change is going to accelerate as brands push their values to the forefront. The customer will migrate relatively quickly, and the younger the customer, the more aligned they are with those values.”
Peck’s interest in sustainability and climate change has not only been fueled by a mix of altruism and the positive impact on Gap’s performance. “It’s personal,” he said. “I live in California. At the end of last week and over the weekend, I spent 72 hours without power, half of the time breathing smoke and surrounded by fire. We can deny this, but we’re stupid if we do.
“We know what this industry is good at, but being good to the planet and good to the environment hasn’t been a forte,” the ceo said, adding that 85 percent of apparel ends up in landfills.
Peck told the roomful of industry executives that if the Gap, “a big beast with seven brands, including Old Navy, can do it,” their companies can, too. “We know there’s a market share opportunity, and we know there’s a profit opportunity. I want to take you on a journey, informed by the basic apparel landscape, which is that the climate is affecting our businesses. On earnings calls, the weather card gets played more frequently, due to the volatile weather we face in our industry. Weatherproofing, in a meaningful way, frankly, is a fantasy. Climate is affecting our business and our business is affecting the climate. The customer is in the middle, and they give a damn.”
Gap’s core product is jeans; about 65 percent of its apparel is made from cotton. The retailer consumes 1 percent of the world’s cotton crop, so it behooves Gap to find solutions. He used a pair of jeans and their journey from seed to store as an example of the ways the company is embracing sustainability throughout the supply chain.
Peck said the company is addressing sustainability through new technology for commercial agriculture that slows carbon dioxide bursts into the atmosphere, and new water-saving technology for mills “that’s absolutely scalable across the industry.”
The technology Peck was referring to takes no water from, nor does it release water into, the municipal water supplies in India where the mills are located. This is critical because “a mill is very water intensive,” Peck said. “The mills exist in developing countries such as India, where there’s a water shortage and 100 million people today live in cities with no water aquifers. India has 4 percent of the global water supply and 16 percent of the demand by population.”
After the mill, the next step for a pair of Gap jeans is a processing plant in Vietnam, where “6,000 people are producing clothing for us and some of you in the room,” Peck said. “We’re working with our vendors and NGOs in countries where we do business and offering a program of life skills, work skills and reproductive health skills for the workforce that’s largely women.
“We guarded this jealously as a corporate asset for a long period of time and just recently released it on an open source basis,” Peck said. “In terms of the whole curriculum, we’ve committed to putting 1 million women through it on our own over the next few years. I’m pleased that A&F, PVH and New Balance are taking advantage of it. It’s not really about sustainability and climate change, but generating meaningful change where we do business.”
During his time on the podium, Peck pulled no punches.
“Everybody in this industry knows that an occupational hazard is that you never have an apartment big enough for what you buy,” he said, adding, “Therefore, donating lightly used clothing to your cause of choice is something that we all do. Now, let’s go to the real dirty secret. I hate to say this, but you probably know already, deep in the back of your mind: Regardless of where you donate it, that clothing will ultimately be thrown out. There’s almost no recycling that goes on. It goes to a landfill or goes to an incinerator. It does not get reused.
“We’ve lived in a bit of a bubble,” he said. “The bubble really has been that being on-trend and having the right silhouette, the right rise, wash and novelty has always trumped values. It’s very hard for consumers to lead with their values. The bubble has been a bit of protection, where brands say, ‘We know about that sustainability stuff, but if you want to be fashionable, you have to go with us.'”
Peck addressed the other ceo’s in the room: “If you feel that incessant nibbling on your ankles, ankle-biting by small competitors is going to come up. They’re leading the way today, and if you’re a big company like us, if you’re not moving, then the customer is leaving you behind.”
Merchandise misses are costly to retailers when the garments end up being marked down. Peck said they’re also costly to the environment. When new styles go into stores, if Gap teams did well, they’ll sell off at full price on the feature table in the front of the store. “If we got it wrong, they end up sad and lonely in the back. What we really want to look at [during store visits] is the feature table in the front where all the new stuff is.” He now makes it a point to first go to the sale rack in the back of the store to see what merchandise didn’t sell at full price. “The mistakes represent a couple of things, including failure in our process to get our product right. They also represent the waste that we as an industry generate.”
Gap is working to decrease the amount of unwanted merchandise that must go on sale and represents significantly decreased margins. It winds up taking up space, until it reaches its final resting place — a landfill. It’s “the long tail of product that we bought and nobody wanted,” he said, adding of Gap’s new processes: “We’re using our product cycle time, and in the store, we’re using technology to test and respond, and crowd source testing to buy better, and buy less.”
Gap is also working to incorporate some of the discarded fabric and textiles into products, because even the most accurate buying isn’t enough. “Twenty-three pounds of textile waste — it’s a staggering number,” he said. “The only answer is ‘buy less and buy responsibly.’ But buying less and buying responsibly, I don’t think is going to solve the problem. We’re going to turn end of life garments back into being constructively used new garments. The technology is there and the scalability is there.”
Peck said Spandex cotton was chosen for jeans because the product has inherent comfort issues. But that makes it more difficult to separate the Spandex from the pure cotton and reuse the cotton fibers in a new pair of jeans. “How do you break through the impossible? Big companies are amazing at telling you what can’t be done. Three years ago, we stared at this issue, and the answer at the time was, impossible, it can’t be done.”
When cotton prices spiked several years ago, that had a material impact on Gap’s economics, and the need for a new solution became more urgent. “We looked at how to buffer market volatility,” Peck said. The obvious answer was to find an alternative source.” He proposed to his team that they look at recycled denim, but the “denim heads” insisted the idea was impossible. In their view, “the hand feel wouldn’t be the same, and it wouldn’t take the dye the same way, and it wouldn’t be real denim with the fibers, which wouldn’t have the same strength.”
Finally, Peck decided to put the jeans through “a blind taste test. I didn’t see the difference. [And neither did Gap’s most ardent denim heads.] So, right now, the pair of pants I’m wearing have 5 percent recycled cotton. Our partner is Cone Mills, and they’ve done an incredible job developing this. If we can get between 5 percent and 10 percent post consumer waste cotton, the economics are profound. If you want to talk about purpose and profits coming together.…How much does it cost? Nothing.”