By: David LaMore, Andrew Salamida, Galal Cancer

AEM 4160 – Strategic PricingApril 23, 2015

Pricing Strategy

Company Profile● Based in San Francisco,

California● Started in 1969 by Don & Doris

Fisher● Five brands, with almost 3,700

stores and more than 150,000 employees

● Core principles:o Creativityo Delivering resultso Doing what’s righto Always thinking of our

customer first

Gap Inc.’s Portfolio of Brands

Three Brands of Focus

● These three brands essentially sell the same product, yet are highly differentiated and sell at different price points

Don’t Forget About The Factory Stores!

Industry Structure

Background of the Family Store Industry

● Although Gap Inc. fits under multiple industries within apparel, we will focus in on the “Family Stores in the U.S.” industry defined by IBISWorld.

Revenue & Employment Growth

What’s the Industry looking like?

Major Companies

● The TJX Companies Inc.

● Gap Inc.● Ross Stores Inc.● All other family

companies

Competition

• HHI=(.107^2+.139^2+.142^2+0.038

^2)*10,000=523.78• CR4=10.7+13.9+14.2+3.8=42.6

From Concept to Customer

● At a broad level, the typical organization of product life cycle in a typical apparel company:o Millso Manufacturingo Distributiono Retailo Consumer

Typical Life Cycle of Many Goods

● As the average line in apparel begins its life cycle 18 months in advance, fast fashion companies have managed to shorten this life cycle into just a few months!

Cost Structure of Industry

The TJX Companies Inc.

Gap Inc.

Ross Stores Inc.

Industry Performance

Pricing Strategies

Versioning

● Essentially the same product

● Appeal to different consumers at different income levels

● Consumers’ tastes and preferences helps choose the brand which meets their needs best

Versioning at it’s finest...

● “Must haves” at low price point

● Clothing for everyone in the family

● American fashion essentials

● Casual attire at an affordable price

● Classic and modern clothing style for everyone

● Embraces freedom to express personal style

● Refined apparel with highest price point of brands

● Fresh twist on classic apparel for men and women

● “True Outfitters of Modern American Style”

Old Navy

Shirt- $29.94Jeans- $29.94Shoes: $24.94

Shirt- $24.94Jeans- $29.50Shoes: $19.94

$86 $81

Gap

Shirt- $49.95Jeans- $59.95Shoes: $59.95

Shirt- $49.95Jeans- $69.95Shoes: $39.95

$170 $160

Banana Republic

Shirt: $69.50Jean: $89.50Shoes: $118.00

Shirt: $79.50Jean: $98.00Shoes: $79.00

 

$277 $257

Retail vs. Factory Stores

● Gap and Banana Republic ● Differentiated brands in order to reach

more price sensitive/low income consumers

● Factory brands are developed completely different

● Capture lower willingness to pay consumers

● Anchoring\

Gap Factory Pique Polo vs. Gap Pique Polo

Gap Factory

Shirt: $49.99 -> $34.99Jean: $49.99 -> $24.99Shoes: $36.99 -> $14.99

Shirt: $44.99 -> $17.99Jean: $59.99 -> $41.99Shoes: $34.99 -> $20.99

 

$86 $81

Banana Republic Factory

Shirt: $54.99 -> $19.99Jean: $89.99 -> $53.99Shoes: $69.99 -> $41.99

Shirt: $54.99 -> $37.99Jean: $69.99 -> $41.99Shoes: $74.99 -> $62.99

 

$116 $143

Men vs. Women Pricing Across Brands

Men’s Results138%

98%-32%

1.35%

Women’s Results79%

97%-11%

9%

Margins between Brands

Versioning$277

$85

$86

$170

$116

$257

$74

$81

$160

$143

Heavy Discounting● Gap’s brands are known

for heavy discounts due to a number of driving factorso Consumer’s addiction

to saleso Getting rid of last

season’s pieceso Items that do not sell

well o Seasonal events that

encourage shopping (ex. Back to School, Holidays)

Driving Factors for Sales

In 2013 Annual Report:• Trends• Competition• Current economic conditions• Timing of merchandise releases• Promotional events• Change in merchandising mix• Success of

marketing/advertising• Weather• Currency fluctuation

Popularity of Gap Inc. Brands by Search

Popularity of Gap Inc. Brands by Search

Discounting Summer Items at the end of June

Popularity of Gap Inc. Brands by Search

Back to School promotions drive traffic more for Old Navy

Popularity of Gap Inc. Brands by Search

Black Friday Promotional Event

Popularity of Gap Inc. Brands by Search

Last minute holiday shopping

How does Gap discount so heavily?

● The cost of producing clothing per item is VERY low for Gap due to:o Economies of scaleo Technologyo Experienceo Cost of labor

● As Gap marks up their items a certain percentage (industry average is 40%), they can afford to markdown their clothes extensively

● Apparel companies will sometimes even sell an item near or below its cost in order to get rid of prior seasons’ items and reduce storage costs

Recommendations

Risk Factors• Must anticipate and respond to changing

apparel trends and customer demands• Customer traffic both in stores and online• Competitively pricing products and

achieving customer perception of value• Must maintain favorable brand

recognition and effectively marketing products to customers in diverse market segments as well as multiple geographic locations

• Developing innovative, high-quality products in sizes, colors, and styles that appeal to customers of varying age groups and tastes

• Will have to source merchandise efficiently

Key Strategic Initiatives• Designed to optimize inventory levels

and increase the efficiency and responsiveness of the supply chain

1) Seamless Inventory• timely matching of product supply and

demand across markets and channels to reduce stranded inventory

2) Responsive Supply Chain• more vendor fabric platforming, product

demand testing, and in-season rapid response to demand

3) Omnichannel Retailing• Providing the customer with the same

experience no matter which channel they are shopping from (social media, e-commerce, brick & mortar)

Total Return to Stockholders

Pricing Strategy: What should Gap do?

• Make best line of clothing more distinct→ creates higher value for consumer and differentiates that specific product line

• Establish lower prices and enhance the value of their products. (Everyday Low Pricing)

• Deep value retailers has shown that this can be successful

• Ex. H&M, Forever 21, Uniqlo, Zara

Questions?

• Thank you for listening to our presentation!

Referenceshttp://www.gap.com/browse/home.do?ssiteID=BRhttp://clients1.ibisworld.com.proxy.library.cornell.edu/reports/us/industry/default.aspx?entid=1069http://www.marketwatch.com/story/gap-abercrombie-need-a-pricing-strategy-shift-2015-02-13https://www.google.com/trends/explore#q=%2Fm%2F0263lp%2C%20%2Fm%2F01yfp7%2C%20%2Fm%2F025pbv&geo=US&date=1%2F2014%2012m&cmpt=q&tz=