Globalisation of GAP Essay

An investigation into how Gap inc. has expanded into global markets and to what extent has this been successful? Gap was founded in 1969 by Donald Fisher and Doris Fisher. The name came from the growing differences between children and adults, called â€Å"the generation gap. The Fishers had been frustrated with the lack of decent customer service and fashionable styles at other retailers. One of the original mottos of the company was â€Å"Levi’s for Guys and Gals.† Around 1982, Gap began focusing on its own private label clothing and by 1991-1992, the company had stopped carrying Levi’s. As of April 2, 2005, Gap Inc. had approximately 150,000 employees and operated 3,005 stores worldwide. Donald Fisher retired as Chairman of the Board in 2004 and was replaced by his son, Robert Fisher. The Fisher family collectively owns about 25% of the company. Since its founding in 1969, Gap has provided its customers with clothing and accessories that enhance their personal style. What began as one brand has grown to include Gap, examples of Gap brands are GapKids, babyGap, GapBody and GapMaternity. By providing great style, value and service, Gap has become one of the world’s most recognized brands with more than 1,450 stores in the United States, Canada, the United Kingdom, Japan and France. Today, Gap Inc. is one of the world’s largest specialty retailers, with more than 3,100 stores and 2006 revenues of $15.9 billion. Gap operate five of the most recognized clothing brands in the world including Gap, Banana Republic, Old Navy, Forth & Towne and Piperlime. The culture and ethics of Gap can be seen from the missions statement provided by Gap. Guided by a shared Purpose, we’re able to work together more effectively and contribute to Gap Inc.’s success in a more meaningful way. Inspired by the same Values, we reflect the character, spirit and beliefs of Gap in everything we do. Driven to exceed with the right Behaviors, we work purposefully as individuals, as teams, as a company, to be the best we can be and achieve our vision for growth. Our Purpose Every day, Gap Inc. honors the original reason for founding this company: We’re passionate that you be you. We make it easy for you to express your personal style throughout your life. Our Values To achieve our purpose, we create an environment that encourages our teams to act with integrity and live by the highest standard of ethics. We listen, we respect each other’s time, we value the contributions each of us makes. In a spirit of open-mindedness and trust, we are open to a diversity of ideas, approaches and points of view-across teams and across divisions. We believe in quality and delivering the best result possible, reflecting the realities of price, time and what customers truly value. We find ways to put into balance things that seem to be at odds-work and life, commerce and social responsibility, rapid response and a planful approach. One of the main aims for a business is to grow, once a business has achieved this in it’s own market expanding into foreign markets can be very expensive but profitable. Businesses which operate in more than one country are multi nationals examples of multi nationals are Coca Cola, Sony, Mcdonalds and Gap inc. these businesses have successfully expanded into foreign markets and are now a global brand which is enviable to any business. There are various reasons why companies want to expand into foreign markets. Firstly the world consists of over 6 billion people this is a huge customer base for companies to try to exploit. More potential customers could result in increased sales and revenue because of the larger target market. This could therefore increase profit and even further growth for the business. As a business grows economies of scale can be an essential tool for businesses to take advantage of. Economies of scale allow businesses to buy in bulk and so pay less for each unit, lowering costs for the business. On a global scale the economies of scale the business could benefit would be far greater than that if they just operate in their own domestic market. Also if a business operates in more than one domestic market the risk is spread over several markets. Therefore if one market is not doing well for the business other foreign markets could make up for this. Spreading the risk would be very beneficial as the business would not be reliant on one market. Finally, investing in emerging markets businesses would gain the opportunity to sell to people who’s income are growing strongest and fastest, creating a brand and customer loyalty which would benefit the company greatly when the country further develops. There are however drawbacks and disadvantages to entering into foreign markets. Firstly language can be a major problem in foreign markets. If the business is not familiar with the language of the new market it can cause problems in communicating with employee’s directors and employees. This could then lead to problems in making decisions and implementing any changes. Also setting up in a new market can have very high start up costs. This could include a variety of things ranging from buying land to building factories for production. These high capital costs could inhibit the company from expanding as they may be reluctant to borrow finance. Advertising in the new market can be very expensive, as the company tries to create a brand and gain a competitive advantage TV commercials or adverts in newspapers or the radio could cost the company millions as the advertising campaign may need to be a long term investment. In new markets research and development can also be very expensive as learning about the new market and customers is essential to do well in the market. The company must invest heavily in the research and development as it would be crucial to supply the market with what they need, not just relying on what has been provided in their own domestic market. The government in the new country can also pose a problem. Different laws tax and interest rates can cause a problem for the company. The business could have to pay higher amounts of tax or change some regulations in the company to comply with laws in the country. Decision making can be very difficult. If the head quarters of the business was in America and they had just expanded into China implementing decisions and making decisions would be made so much harder. Overall operating in another market can cost the company millions in a variety of areas. When making the decision the company must take into consideration the opportunity costs of the expansion and not neglect the domestic market. Entering into new markets involves a great deal of risk there are many problems associated with selling in an unknown markets. Businesses attempt to overcome some of these problems in a number of ways, Firstly the company could decide to use joint ventures. This involves the business working together with another company in the country they wish to expand into. Both businesses will expect to gain from the venture. The partnership includes the original company who then teams up with a local company in the foreign market who has the knowledge of the market and already has established distribution links etc. An example of joint ventures could be Coca Cola who have entered joint ventures with bottling companies. They trade brand power for local knowledge of the distribution system. Joint ventures can be very good for companies, they can gain local knowledge without having to spend millions of pounds on research and development. Also initial capital costs would be reduced because you wouldn’t have to build factories or buy land because of your partner company. There is a greater chance of success in the foreign market and the risk is reduced for the company. From the research I have done I have not found any evidence of Gap entering into joint ventures, this could be due to the following negatives of the concept, firstly having to work with another business could be problematic. You may not be familiar with new company and so trust would have to be built between the two businesses in order for the partnership to be effective. The cultures of the two businesses could also be different causing difficulties in situations such as ethics. Decisions would also have to be made together; coming to a collective decision could be difficult. Finally any profits would have to be shared between the two companies, whereas if the original business had set up alone it would receive 100% of the profits. Obviously Gap would have taken into consideration the positives and the negatives about joint ventures but found that the disadvantages were outweighing the advantages. The second idea the business could use would be franchising. For many businesses this is the best way into international markets. Franchises are legal agreements by which local businesses are allowed to set up using the name, logo and trading method of a well known company. They gain all the benefits of a strongly branded product in return they pay a lump sum, percentage of the annual turnover and provide local knowledge. Examples of franchising would be Mcdonalds who have allowed some of their stores to be franchised. I have found evidence relating to various franchised Gap stores around the world. Gap has entered the franchise industry in order to develop its growth in Asia. Gap has signed a franchise agreement with Singaporean group FJ Benjamin Holdings which will see stores opened in Singapore and Malaysia under the Gap and Banana Republic brands. Under the agreements, F J Benjamin will hold exclusive rights to operate Gap and Banana Republic branded clothing and accessories stores in Singapore and will hold exclusive rights to distribute Gap and Banana Republic products in Malaysia. This franchise agreement between Gap and F J Benjamin demonstrates the company’s first step toward expanding the Gap and Banana Republic brands via international franchises. F J Benjamin plans to open about 30 stores in Singapore and Malaysia by 2010, opening the first Gap store in 2006 and the first Banana Republic store in 2007. â€Å"We are bringing Gap and Banana Republic to more customers throughout the world,† Quote from Andrew Rolfe president of Gap inc international. Gap Inc. will gain F J Benjamin’s retail expertise but will provide access to Gap and Banana Republic’s world-renowned clothing and accessories. F J Benjamin will purchase merchandise from Gap Inc. or suppliers designated by Gap Inc. and must keep to Gap Inc.’s quality standards to protect the reputation of the Gap and Banana Republic brands. This year Gap has also brought more franchise partners on board in United Arab Emirates, Kuwait, Qatar, Bahrain and Oman, and plans to have 90 Gap and Banana Republic stores in Southeast Asia and the Middle East by 2010. The second franchising deal that Gap inc have signed is with the Al Tayer group-a leading business in the Middle East. Al Tayer will introduce Gap and Banana Republic brands into five key markets in the Middle East. The Group plans to open about 25 Gap and about 10 Banana Republic stores by 2010. The first Gap stores will open in the later part of 2006 and the Banana Republic stores are scheduled to open in 2007. Under its agreement with Gap Inc, Al Tayer Group will hold exclusive rights to operate Gap and Banana Republic branded clothing and accessories stores in United Arab Emirates, Kuwait, Qatar, Bahrain, and exclusive rights for Gap in Oman. Gap Inc. will again provide access to Gap and Banana Republic’s world-renowned clothing and accessories in return Al Tayer Group’s expertise in building retail outlets in the Middle East. Gap have entered two franchising deals already, if these were to succeed I would not predict against them entering them in the future. The advantages to gap for using franchise deals are as follows; any risk for the business is taken away as someone else will be running the business. The company will be provided with a lump sum and a percentage share of the annual turnover. This lump sum can be invested into other areas of the business such as advertising or research and development. The percentage of the annual turnover could also be retained profit. The business grows quickly and easily a global brand can be created effectively as long as people are willing to buy franchises in your business. Although there are various advantages the company could benefit from there are also disadvantages which could harm the business, actions by the franchised stores could harm the reputation of the company, because they have no control in the market they give full responsibility to the franchisee that could let you down. Also only some of profits are given to the company they have to share with the franchisee. This annual turnover they do receive would probably be significantly lower than the stores gross profit annually. The final growth strategy which could be used by Gap would be licensing, A license allows a business to make, produce and market a product or use the production method, which is protected by copyright or patent. This means that an innovative company can expand into international markets without actually having to invest in locally based production facilities. An example of licensing would be Heineken lager which is brewed under license by Whitbread’s in the United Kingdom. From research I have found that as well as franchising Gap have also entered licensing agreements. In 2006 Gap announced a licensing agreement between themselves and Safilo group. Safilo group are the leader in high-end and luxury eyewear. The agreement includes Banana Republic-branded prescription frames and sunglasses. The agreement includes the design, development, production and distribution of a collection to be launched by the end of 2007 in the United States and Canada. Terms of the agreement include a five-year commitment. The agreement represents the first time Banana Republic will sell its products outside its own distribution channels. â€Å"Their ability to transform eyewear concepts into luxury products is a great complement to our own expertise in extending the Banana Republic brand.† Quote from Marka Hansen president of banana republic, highlighting that both the companies entering into the licensing agreement will benefit from the others expertise in that relevant field. Banana Republic are not familiar with the design or production of sunglasses and so have taken the opportunity to find a leader in the sunglasses market to do this for them. Safilo will benefit from the well know brand identity of Gap inc and therefore the agreement should benefit both companies dramatically. These are not the only benefits that both companies could gain; capital costs of setting up in a foreign market are reduced because the licensee will have to produce the product. Also no local knowledge will be needed because the business will not have to sell in the area. This can save millions in research and development for the company. Finally the risk of setting up in a foreign market is reduced and the business grows quickly and easily, a global brand is created. Having these benefits would be great for both the companies involved in the licensing agreement, but as with all the strategies there are downsides to entering these agreements, somebody else will be running your business you have to trust others will the reputation and brand of your company. If the licensee does something to harm your reputation it could reduce sales. Finally the profits from the new market go directly to the licensee. The business only receives a lump sum for selling the license. This could prove disastrous if the market does very well and profits are alot higher than expected. Assessing which strategy will be best in order to be profitable and best for the business can be very difficult. Making the correct decision on which strategy to use when entering a foreign market could be the difference between success and profits in that market or complete failure. Gap inc. is a global brand, and owns stores around the world, as the table shows below. The company has entered into these markets using different strategies, and so therefore some have been successful and others have not. I will know analyze the strategies used by the company in order to create a global brand and then evaluate whether this has been successful. Country Total number of stores United Kingdom 240 Canada 236 France 54 Japan 153 Germany 20 Source, http://biz.yahoo.com/e/070402 Gap has entered various markets using company owned stores and deciding not to use any of the strategies above. This strategy was used in several European market such as Germany the UK and France. These markets however have not proved as profitable as had hoped, this lead to Gap exiting the German market. Gap has operated in the UK since 1987 and in France since 1993. Overall, Gap’s total revenue in the year ended in January, 2006, was $16.02 billion, down 1.5%. Last year, Gap’s sales in Britain and France combined fell 6.1%, to $825 million. Together, those two countries account for about 7% of Gap’s total revenue. Source- Gap inc Annual report 2006 Source – http://finance.google.com/finance?q=GPS The above diagram shows the share price for Gap inc. since 1987. The graph shows that the share price was relatively low until 1997 when there was a dramatic increase ranging until 1999. We can see that in 1987 when the Gap invested in stores in the UK the share price was $2.87. Even after entering such a mass market and increased possible customers which should inevitably lead to increased sales and therefore profit, in the following years the share price did not reflect this. After four years in the UK market the share price had only increased minimally to $3.37. A larger increase in the share price would have been expected if the sales had gone as predicted. The same can be said about the share price when the company expanded into the French market in 1993, the share price was $4.38 after three years in the market the share price had only increased minimally again to only $6.37. These figures show that there has been an increase in the share price of Gap after the introduction into new markets, but not the kind of increase that was expected. Because Gap was introduced into the new markets by company owned outlets, the start up costs would have been very high and so therefore the company would have expected to have high sales to try and regain some of these costs. The inevitable ending to the Gap stores in these markets would be similar to that of Gap stores in Germany were after years of poor sales the company withdrew from that market Gap was forced into selling shops in Germany to one of their main competitors, Swedish company H&M. The lack of profits and growth in the European markets is highlighted in the quote below. â€Å"Gap International store sales were negatively impacted by weak product acceptance in Europe. Our total store sales increase was due to the 130 new store openings, a majority of which occurred during the second half of the year.† Source – Quote from Gap’s annual report of 2006 This quote highlights the problems faced in the European markets. Gap may have used their experiences and lack of success in the European market to improve their chances in other emerging markets such as Asia. This may have played a part in swaying the decision to choose licensing and franchising as a source of international growth rather than try to go it alone as they did in Europe. Gap’s problems in this market could be down to a number of reasons, for example poor research and development not understanding what the consumer needs or poor pricing strategies. The two franchising agreements between Gap and F J Benjamin Holdings and Al Tayer group are relatively new. The franchises are not trading and so the extent to which this has been successful can not be evaluated. A leading competitor and one of Gaps main rivals in the clothing industry is Spanish company Zara a well branded company known all around the world, has successfully franchised it’s company and is now reaping the rewards. For example a franchised Zara in Helsinki was opened in April 2002 and sales got off to a flying start and were better than predicted. Spanish group Inditex owners of Zara have reported a rise in profits of 14.6 percent, thanks to â€Å"outstanding† sales at its Zara chain. Sales for the three months ended 31 July rose net income at à ¯Ã‚ ¿Ã‚ ½144.7 million, up from à ¯Ã‚ ¿Ã‚ ½123.6 million last year. These figures from Zara show the type of sales and net income Gap must achieve for there franchise to be a success. Gap can look at Zara’s success at franchising and take on board how they have achieved there success. Sources, http://www.stockmann.fi/portal/english/news_releases/?year=2002&id=880709 http://www.fashionunited.co.uk/news/inditex.htm Again as with the franchising agreements the licensing agreements Gap have entered are relatively new and in the start up phase with the Safilo group. The products are set to be launched towards the end of 2007 and so figures on how successful they have been obviously cannot be researched. Evaluation. Gap inc. have or are soon going to be using various growth strategies in order to try and increase sales and profits around the world. From my research I have found that the first main strategy used by Gap was to open company owned stores in Europe. I found that this was a partly bad decision. I found that Gap found entering into the European market very difficult finding it hard to please the customer and increase sales. As I said earlier Gap’s intention’s when opening stores in both France and the UK were positive however the share price does not suggest this. Both these markets can be potentially lucrative however in the following years the share price did not reflect this-it only increased minimally. Gap found both of these markets hard to enter, but there hardest task was the German market. Here poor product acceptance and poor sales lead to Gap closing operations in Germany and selling their stores to clothing rival H&M. This highlighted the problem for Gap in the European market and if sales continue the way they are at the moment drastic changes need to be put in place or operations in the UK and French market may also have to be closed down. Entering into foreign markets using company owned shops as Gap did, has positives and negatives, setting up can costs millions of pounds in start up costs buying land or having to buy retail shops in city centers can be very expensive. Research and development is also a major factor, because the company can not rely on treating every market as there own domestic market every country will have different tastes and fashions and will have a different view on how much they are willing to pay. Finding this out is crucial for the business to succeed. Even though there are negatives there are some positives all profits made in the new market go directly to the company it doesn’t have to be shared, and also the company’s risk is more spread out so that the company does not have to rely on only one market others can make up for one market doing poorly. From my research I can evaluate that the decision to go into the European market using company owned shops was a bad idea. All of the markets entered are struggling and Gap has already had to exit one of them. Using company owned shops has its advantages but I think that Gap has not benefited from these; this could be for a number of reasons. Even though two of the markets entered are still operating I would predict that if sales do not increase then Gap would be forced into exiting these also. I believe that the franchising agreements set up with both groups in the Middle East is a positive move for Gap. I think the area knowledge that the groups will bring will help Gap succeed in this market were it failed in the European market. Using the Zara case study I found that there previous franchises have been extremely successful and increased profits massively for the parent company Inditex. Gap needs to seriously consider how and why Zara’s franchise agreements have worked and why they have been successful and then implement this into there own agreements. Gap and the franchisee groups could benefit from the agreements massively for a number of reasons, any risk for the business is taken away as someone else will be running the business. A lump sum is received for the franchise and more importantly high capital costs will not be needed because someone else would have to invest the money. This makes this a positive because there are less opportunity costs as less money would have to invested into selling abroad. This money could be used to strengthen the foothold in the company’s domestic market as they cannot afford to neglect this whilst trying to expand. However there are also negatives of this strategy which Gap would have to consider mainly that Gap would not have any control over the franchised stores, the owner could tarnish the reputation of the company on a global scale through one action which would drastically affect the company. Gap would have to ensure the franchisee was the right person for the culture and ethics in the company and a partnership built on trust must be formed. Overall I think that franchising would be an excellent way of growing for Gap. I believe looking at the success of Zara using this strategy that Gap will succeed in the Middle East with the franchised agreements. Gap must be careful however that the Al Tayer Group and F J Benjamin are the right groups to push the Gap brand globally.