SAN FRANCISCO, United States — In the mid 1990s, before Zara, H&M and Uniqlo arrived on American shores, Gap Inc. reigned supreme. The chain was the go-to place for quality fashion basics and the leading purveyor of style to the American masses through its core trio of brands: Gap, Old Navy and Banana Republic.
But the retail world was soon to change radically, creating major upheaval for Gap. The growth of the Internet helped to accelerate the rise and dissemination of global fashion trends, while providing fashion consumers with more information and options than ever before. And the fashion market quickly became crowded with global competitors from Europe and Asia, where Gap was significantly underpenetrated.
In the mid-2000s, Gap Inc. revenues plunged, as the company struggled to adapt its model to the new reality. Enter Glenn Murphy, who, beginning in 2007, managed to turn around the behemoth retailer, which generated more than $16 billion in revenues in the year ending February 2014, having regained the confidence of the financial markets and re-engaged its consumer base in America and abroad.
So when Mr Murphy announced last September that he was stepping down after seven years at the helm, Gap Inc. shares slid by 12 percent in one day, the biggest single day decline since May 2011. Industry observers wondered: who could take the brand forward and fill Murphy’s shoes?
Last month, Gap announced that Art Peck, who currently serves as president of the company’s growth, innovation and digital unit, will take up the job of Gap Inc. CEO, effective February 1st, 2015.
Mr Peck joined the Gap in 2005 from the Boston Consulting Group and has since held senior leadership positions across nearly every area of the company, overseeing the acquisitions of activewear brand Athleta and retailer Intermix, while driving Gap’s expansion in Greater China, where the company now operates more than 100 stores.
Still, Mr Peck has his work cut out for him. On Thursday, Gap Inc. cut its full-year earnings forecast as sales at the core Gap business fell by 5 percent in the third quarter versus a one percent increase in the same period last year. Gap shares were down more than four percent in extended trading following the earnings announcement — and all this, just ahead of the critical holiday retail season.
BoF spoke to Art Peck to learn how he aims to build on the success of his predecessor and take Gap forward in a retail landscape increasingly shaped by digital technology and global competition.
BoF: Glenn Murphy has done a formidable job at turning around this huge organisation. Why do you think you have been selected to fill his shoes?
AP: They’re big shoes to fill. Glenn’s done a tremendous job here. What Glenn has done so well, which was so new to this company, is leading us on this path to global growth on one hand, planting a flag in as many countries as we now do business in; the other side is really building discipline into our operating capabilities, which was critical.
If we’re a creative business then we have to always win through creativity, but in my experience, the best creative enterprises sit on a platform of very disciplined execution.
If I look at where we are, [Glenn’s] strategy has propelled us forward and will do so for several years by monetising our brands through new channels and geographies. But that also has a finite runway associated with it and we need to build a platform for ongoing growth. To put the next wave of strategy in place for the company, obviously the work needs to start now, even as we’re actualising the current strategy.
The two big pieces in my mind are the collision of digital and physical that is going on around us and is really going to redefine how [brands] can express themselves in their marketing, on their websites, in their stores and through people. The second piece is really beginning to evolve our product model, which is super critical. No business does business the same way successfully for decade after decade. We’ve evolved and we’ll continue to evolve that as well.
I’ve worked across so many places and organisations. I started in strategy and business development, started up a franchise business and led corporate operations for a while, ran the outlet business, ran the digital businesses and emerging brands, and now into this role. What that’s given me is the ability to know, as well as to develop, a culture and an incredibly strong talent group.
BoF: Let’s talk about this idea of the collision of physical and digital. Today, the customer journey is non-linear. And you need to engage with the customer across multiple channels. What do you think makes for a successful omni-channel strategy and how has that informed the work that you’ve done at Gap?
AP: I think omni-channel is an interesting piece of it, but to me, it’s bigger than that. If I just look at digital, what digital has been historically, not just for us, but for the industry and, frankly, for all of retail, is a really efficient transactional channel, for lack of a better term. If I look at digital going forward, it is, number one, going to be that because this industry will move from physical space to digital space. The digital expression of the brand will become one of the primary ways for customers to engage with the brand.
Taking that one step further, that digital expression of the brand needs to be holistic, aspirational, immersive, emotional. It’s going to need to express all of that on the real estate of a smartphone. That’s never something that we, or most of our competitors, have burdened our digital properties with. Yet if you look at where traffic is, if you count the footsteps in-store or the footsteps of unique visits to our websites, the trend is for traffic to be building and building and building digitally. It’s soon going to be the majority of our traffic.
A lot of that traffic is not buying. It’s pre-shopping, it’s about understanding what the brand stands for, it’s the emotion of the brand, the social responsibility component of the brand — all that richness is expressed digitally. Before, it was really chartered out into different places — through advertising, through a separate social responsibility site or publication — and now it’s all coming together in a digital property. That’s new ground we’re discovering but it’s really exciting.
And then there’s the collision of a digital and a physical environment. So to me, omni-channel is a little narrow. It implies I can shop anywhere and get inventory from anywhere and be fulfilled anywhere. If I look at the overall collision of physical and digital, there’s a much broader set of experiences. It really implies much bigger and more disruptive change.
BoF: Both of those incarnations of omni-channel are quite interesting. But executing is not always straightforward. What’s the hardest thing to get right?
AP: I’m going to give you an answer that you might find slightly orthogonal. To me, the risk as I see it is to presume you know where to go as a retailer. The reality is that the combination of digital and physical — these devices that are now untethered and travelling with you, responding to the context of your location and your activity — is creating capabilities, experiences, ways for customers to engage and empowerment that never existed before.
This is less about a linear roadmap about this capability or that capability than creating a set of experiences that the customer can choose to engage with or not. It's really about learning how customers create these experiences. You've got an amazing technology platform and it can perform all kinds of things, but lets put it in the hands of our customers and see where they take it or what they do with it. Then we will harden it up and start delivering a more structured experience.
BoF: Does that mean that you pilot and test it in an iterative fashion?
AP: That’s exactly where I was going, which is why we have test stores today where we will literally go out and put development teams, people who are writing code, into a store, at a table, and they will go through several reviews of code while sitting with the sales associates and the customers, as we're getting feedback on capabilities, and stuff like that. We're doing that on an ongoing basis so it allows us to work really, really fast and be right off the rock face of how the people who use this react themselves. We're doing that with simple things like in-store ordering, our mobile POS, ever-developing UI capabilities and all that kind of stuff.
So those are the test stores. We're creating a web-store that we'll be able to bring employees in and customers through, just to test different versions of how the technology sets up, what works and doesn't work, and we believe in very rapidly rolling and then revving. It's one of our assets that we have our own technology platform. It is very, significantly, within our control and it gives us the ability to be much more nimble and flexible, and develop at a very low cost off of that platform. It's a huge asset for us.
BoF: You also mentioned the product model. The Gap that I remember from when I was growing up in Canada was a store that offered me everything that I needed in terms of really good, high quality basics. The coolest jeans, the best t-shirts. But over the years, Gap seems to have veered from one strategy to another, while others have taken over that ‘basics’ space. How is the product model shaping up in your mind?
AP: It might seem like the profoundly obvious but it's useful to reiterate that all the rest that I'm talking about — omni-channel, digital and all those things — doesn't matter unless we are bringing on-trend, on-brand products that you emotionally connect to and make you feel good. Product is really what it's all about.
When I joined the company, we were just on the cusp of leaving the quota model, which really impacted how we source on a global basis. It's been very significant [in terms of] getting faster with continuing to build quality items at a lower cost. Those are the things that are going on right now in the global landscape.
The second thing that's changed is with the Internet and blogs, the dissemination of trends on a global basis, I would argue, is happening much faster than it was even 10 years ago, certainly 20 or 30 or 40 years ago. Therefore being on-trend faster is not so much about walking the styles off the runway and into your store in 3 weeks, but being on-trend now. I think this is table stakes right now.
The definition of what's a basic and what's fashion; I sort of scratch my head about it. I mean, obviously there are going to be basics. But I think the world, today, in terms of basics and fashion is a much muddier place.
There are core values that we stand for, which is quality. Obviously our brand has an aesthetic point of view, which is very important. They're American. You know, if I just look at Gap as a brand, aesthetically the words I always use are casual, optimistic and American, and I think those are very important words that define the brand on a global basis.
And now I think there's a very interesting dimension, which is yet to be realised, which I'm really excited about. It's just the whole vector of innovation. The fibre, the fabric, the yarn level, not to mention, wearables and how that's going to come and connect to clothing as well. This is something we'll talk about more on a going-forward basis. I want to put a stake in the ground here and hopefully you and I will talk again about how excited I am about product and how I think there is a modern version of product to bring to the market that is ours to go after.
BoF: We've focused a lot on Gap as the core business, but obviously you oversee a portfolio of different brands. Over the years the distinction, in the consumer's mind, between the Gap and Old Navy on the lower end, and the Gap and Banana Republic on the higher end, became a little bit blurred. What roles can Gap, Banana Republic and Old Navy play in the market?
AP: I don't spend a lot of time thinking about the brands competing against each other. We're in a business where a high market share is [one in the] low single digits. The one thing about a fragmented market is that there's lots of market share available outside of our portfolio. If this was a market where our brands command really big market shares then I'd be more concerned.
What I do worry about, and it's common among brands, always, is to make sure we have a clear brand aesthetic and even beyond the aesthetic, that the brand is consistent in what it stands for at all times. One of the things is that they're real brands. There are brands out there today that have synthetically created their legacy. Our brands have a [real] legacy. There's storytelling, there's history associated with them, the corporate responsibility story. It creates the opportunity for each of them to have a clear brand voice.
They're American, that's clear. Part of our global growth strategy is that American optimism and sensibility and quality sells on a global basis. But again it's less about them versus each other than making sure they have a clearly articulated point of view against the competition writ large.
BoF: From a product perspective, at one point I believe there was a team here in London that was tailoring product to a more European sensibility. Do you think the world has changed enough and the consumer is getting consistent information around the world that you're actually designing for a global customer without having to think about customisation or localisation for your brands?
AP: I think there are elements of this business that are inherently local, and our philosophy of designing and assortment is to design a global assortment that is a super set of what a different geography might actually need, in terms of fashion trends, sensibility, climate and those kinds of things.
What I don't believe is that the inherent aesthetic fingerprints of a brand [need to change]. If Gap stands for optimism, which comes in the form of some degree of colour and pattern and print, and Gap is casual; those inherent fingerprints of the brand need to be expressed consistently anywhere the brand shows up, both through the product as well as the marketing and the digital properties and everything else. Otherwise it's not a brand; it doesn't stand for anything as a brand. That to me is super critical.
If you go to localisation, we're a retailer as well, so stores are inherently local; the store experience, the service model, the way the associates will be dressed, all those kinds of things. And so, to me the answer is global where appropriate, which gives us leverage and brand consistency, and local where appropriate, which allows us to tailor those experiences and the assortment to local tastes and mores and styles.
BoF: What about some of the new brands that have recently been brought into the wider Gap Inc. portfolio. I'm particularly interested in Athleta, for one, and Intermix, for another, and I know you were quite actively involved with both those acquisitions. In a business where you have these big behemoth brands, small upstart brands can sometimes get short shrift. How do you see these growing brands fitting into your wider strategy?
AP: Well, the natural dynamics of a business portfolio at a company like Gap is you have your bigger, more mature businesses that are obviously significantly driving the financial fortunes of the company, and then small brands that are the seeds you plant for the future. I think good companies nurture brands that are in different stages of development. That's really where we are right now.
I'm not signalling the fact that maybe there's an aggressive acquisition strategy in front of us at all. We obviously always have our eyes open, but we're highly selective. I love the two businesses we've bought. They're very different.
Athleta was a business that we had our eyes on for several years before we bought it. We feel it is very well positioned in a place that is consistent with lifestyle trends and fashion trends, and those trends probably, relatively speaking, started in the United States but they're certainly going global at this point. It's been great for us so far. The growth rate is fantastic, so we are really bullish on the growing potential there.
Athleta is also inherently an omni-channel business because it's one of the rare businesses out there today that actually started without any physical stores. It was a catalogue and an online business and then we've obviously built out physical stores as well. It was, from its inception, really an omni-channel business and is giving us some really interesting learnings to see how a customer engages with a brand that didn't start with stores. But the whole trend of active, as it pivots into her casual ready-to-wear wardrobe, is just a super hot space right now, and one we feel is there to stay because it's so consistent with how she's living her life. It’s very consistent with Americans and casual, which is obviously a big part of what this company is about.
Intermix is a very different play. First and foremost, it's obviously at the high-end of the ready-to-wear scene, with designer and advanced contemporary products as its primary line. Secondly, it's obviously other peoples' brands.
I’m excited about it for a couple of reasons. Obviously, the premium and luxury space has always been a more stable component of the market, a faster growing component of the market. One of the less obvious reasons that I get excited about it is that it connects us much more deeply to the fashion ecosystem and the fashion world.
We're already using those connections — I won't go into the specifics — to come up with a couple of really interesting collaborations for our brands. It's a thing that I think Gap, as a company, needs to be, and should be: well-connected to the global fashion scene, well-connected to the ecosystem of fashion talent. Intermix is a very solid platform for having conversations and connections that we weren't having as a company a two or three years ago. It's an intangible asset, but I think it's a super important one.
BoF: I notice you didn't talk about the economics of Intermix, which is fundamentally a wholesale, physical retailer. I mean, that's a tough business segment right now!
AP: Um... it's a good business. That's all I'll say! [Laughs]
This interview has been edited and condensed.