THE STORY
Growing up in the city, I really did not have much opportunity to spend time around lakes that you could swim in. In fact, as a child, I could not swim. It wasn’t until I became a teen that I was able to move from being a non-swimmer to being a bad swimmer.
Not long thereafter, I had the opportunity to swim in a large lake. I wasn’t paying a lot of attention to where I was in the lake, until I suddenly noticed that I was nowhere near the shore and that the water was getting quite deep. I had no idea how I got out that far from shore, because I thought I was staying still in the same place near shore. I swam as hard as I could to get closer to shore. When I stopped, I realized that I was in the same place I was when I started that effort.
I could feel myself being pushed out further away from shore. My feet could no longer touch the bottom. If I didn’t do something soon, I figured I was a goner. So I tried again to swim with all of my might towards shore. I kept it up until I was completely exhausted and could do no more. Luckily, it got me just enough further in that my feet could touch bottom and I could walk the rest of the way to shore.
When I got to shore, I just collapsed out of complete exhaustion. I had no energy left. It was at that point when someone explained to me the concept of the undertow. Apparently, large bodies of water have undercurrents, called an undertow, which pull you out into the deep water. They are not so strong that you notice the push, but their steady pressure is enough to slowly push you out to sea. If you are not paying attention, they can cause you to drift far away from shore before you know it. Now they tell me. I wish someone had warned me of that before I had gone in the water.
THE ANALOGY
If companies are not careful in observing what is going on around them, they can find themselves drifting into dangerous waters, just like what happened to me at that lake. The drift can be very subtle, and not immediately noticeable, because the force pulling the company is not strong enough to catch one’s attention. Had it been noticeable, the company could have reacted to it. By not seeing the immediate effect, over time the undertows of business can pull a company off course, and before you know it, your company is nowhere near its strategic intent.
As a result, companies need to firmly anchor themselves at the point where their strategic position is optimally located. In addition, they must constantly monitor their position, to make sure that the undertow is not pulling them off course. Otherwise, the company will exhaust its resources just trying to gain back its position, rather than use those resources to enjoy the fruits of being in the right place the whole time.
THE PRINCIPLE
When it comes to finding a strategic position for your company, there are typically two types of choices. Either you can anchor yourself around a particular group of consumers or anchor yourself around a particular type of solution.
When you anchor yourself around a particular group of consumers, what you are doing is trying to build a strong bond between your brand and a distinctive group of people. As the needs and desires of this group evolve and change, the company evolves and changes in order to continue to meet their needs. For example, many companies have anchored themselves to the baby boomer generation. As that generation got older and its needs changed, these companies adapted in order to continue to serve the boomers. Companies that are strong into CRM (Customer Relationship Management) or Lifetime Value of Customer equations tend to be anchored around particular consumers.
The other alternative is to anchor yourself around a solution. The idea is to position yourself as the superior way to solve a particular problem. When people do not have that particular problem, you really don’t care about them. But on those occasions when the problem arises, you want them to choose you. An example would be a home improvement store like Home Depot. They are anchored on a particular solution—helping you complete a home project better than anyone else. If you are currently not doing any home improvement project, they really aren’t interested in you. If you are starting a project, then they are very interested in you, no matter what type of customer you are.
People drift in and out of various types of needs. Let’s look at grocery shopping. At the beginning of the month, just after being paid, one perhaps has the need of stocking up the house with basic groceries. Therefore, you look for the ideal stock-up store, one with a wide selection and low prices. Later on, when you need to replace the perishables, like milk and bread, you have a different need, requiring a different solution centered around convenience and freshness. If you are planning on having a fancy party at your house, you have yet another need, requiring a different solution which may have more to do with food quality and service. If, at the end of the month you start running out of money before you run out of meals to prepare, you might look for a store like Aldi, which may not have the greatest selection or quality, but will fill your tummy for least money.
The point is that a single individual can be many different types of customers, with distinctively different needs at different times—even for the same product, such as groceries. It would be extremely difficult for one store format to ideally meet all of these different problems for the same individual. If a grocery store tried to meet all of those needs, it would probably never be the best solution for any of those problems, and it would never be the ideal choice. So instead of targeting the entire individual, the store formats pick a solution. When the customer is in need of that solution, the format is the ideal best choice and will be chosen. When the customer is not in need of that solution, they will reject the format. But that’s okay, because it gets chosen enough for the set of problems it is solving.
The problem occurs when one does not anchor the firm either on a particular solution or a particular customer. The undertows of life will cause to drift into no-man’s-land so you to not stand for either, and you will fail.
Sometimes the choice of where to set your anchor can be difficult. Take MTV, for example. For many years, they have focused on a solution—being the best entertainment option for teens. MTV would build strong loyalties to groups of teens who loved the brand. As the teens got older, MTV could be tempted to stick with these now twenty-somethings with whom they have built strong loyalties. However, MTV has stuck to their anchored solution and said good buy to these customers to go after the next batch of teens. This has worked well for MTV until very recently.
The newest batch of teens have decided that many of the web 2.0 companies such as My Space or You Tube are a superior entertainment option for teens over MTV. So when MTV abandoned its latest group of twenty-somethings, the next batch of teens did not line up at MTV to take their place. MTV failed to see that the undertow was pulling them away from where the current teen entertainment solutions were. Now MTV is in some difficulty.
Because of these kinds of risks, some companies are afraid to put their anchor down solidly in one location. There is the temptation to hedge one’s bets by trying to attract multiple consumer groups and or solutions. As risky as putting down an anchor in one place is, it is far more risky to drift around trying to be too many things to too many people.
Two struggling retailers help to point this out—the Gap and the Limited. When the baby boomers were young adults, they patronized these stores often and made both brands very successful. However, as the boomers got older, these retailers were faced with the MTV dilemma: do you stick with the boomers and follow them as their clothing tastes change or do you try to be the best solution for a youthful customer?
For the Gap and the Limited, it appears that they did not firmly plant an anchor in either location, but instead tried to drift between the two. They wanted to keep the older boomers yet still be relevant to younger generations. By not choosing a single location in which to anchor, both firms drifted out to sea, much as I did in that lake. Before they knew it, they had lost their footing with either camp and were swimming as hard as they could just to keep from losing even more ground. They have exhausted all of their efforts without getting much of any benefit.
Now the Gap is trying to find new management to get them back on course and there are rumors that Limited Brands is trying to sell the Limited stores division. Choosing where to anchor can be difficult. It is not easy turning your back on those who are not interested in where you plant your anchor. Yet, if you try to get too greedy and go after too much, you can end up with much less.
SUMMARY
Strategy is about making choices about what you will stand for. This is not always an easy task, because when you choose to stand for one thing, it means you no longer stand for something else. Choosing where to anchor your position is very important, because it helps you to make the proper decisions about which trade-offs to make in order to be superior at something. An unanchored company tries to do too much and does not make enough trade-offs. As a result it drifts away from any type of successful position.
Sometimes the drifting is slow enough that you do not notice it at first. By the time you notice it, you could find yourself so far away from where you thought you were, that you might not have enough energy or resources left to reclaim your position. Therefore, one needs to constantly monitor where you stand with your customers so that you continue to be relevant.
FINAL THOUGHTS
In many ways, a strategist is like a lifeguard. Lifeguards scan the environment to see if swimmers are drifting into dangerous waters and then quickly try to bring them back to safety. Strategists, scan the environment to make sure companies do not drift dangerously away from their desired location and then try to quickly bring the drifting companies back into a safe position.
Showing posts with label the GAP. Show all posts
Showing posts with label the GAP. Show all posts
Thursday, May 3, 2007
Sunday, March 4, 2007
An Assessment of the Gap
As promised last weekend, every weekend I will stray from my normal blog and provide an assessment of a particular retailer. This week we will look at the Gap.
The Gap clearly has problems. On March 1st they announced a 35% drop in fourth quarter earnings and a 7% decline in comp store sales. This is will be the third consecutive year of earnings declines. In fact, over the last 32 months, going back to June of 2004, the Gap has only posted three months with positive comp sales. So that is negatives on top of negatives on top of negatives.
In January, CEO Paul Pressler was forced to resign. In February, the Gap announced it was shutting down its experimental new concept Forth & Towne.
What’s going on here? Well, some of the problems are caused by external factors and some of the problems are caused by internal management shortcomings. Of course, the fact that management did not adequately address the external factors would imply that all of the problems are ultimately the result of poor management.
Let’s look at some of the factors that got the Gap in trouble, and then we’ll talk about potential ways to get out of the mess.
External Problem #1: Apparel Woes
It’s tough to make money in apparel these days. Even the Limited has pretty much given up on trying to make a living selling apparel. Here are some of the issues:
1) Apparel is in a long-term disinflationary cycle. That means you have to sell a lot more units just to make the same amount of money (something the Gap has not been able to do).
2) Apparel used to be one of the primary purchases made by people to express their sense of “coolness”—their sense of style, hipness, belonging and individuality. For younger people, that function has now been replaced to a large extent by technology—cell phones, ipods, and the like. Money spent on these devices is often money no longer spent on clothing. For older people, that money is now being poured into their homes like never before. More and more, they are making their statement with where and how they live, rather than what they wear. In other words, if “coolness” and “status” are the attributes sold by the Gap, then their competition has increased to include stores like Best Buy and Bed, Bath & Beyond, who have found another way to tap into those same attributes.
3) The death of the big fashion trend also hurts apparel retailing. We have become such a fragmented society that no one fashion style can capture the market. Large, sweeping changes in fashion do not happen like they used to. Since there is no major fashion trend today, that means that there will not be a major fashion trend to cause it to become obsolete. Hence, the mass need to quickly replenish to stay in style has less power.
External Problem #2: Competitive Woes
1) Forgetting the fact above that the Gap has to compete against more non-apparel retailers for the “coolness” dollar, the Gap is seeing far more direct competition in the apparel retail space than back in it heydays of the last century. JC Penney and Kohls are growing stores like mad. Target has dramatically improved its “coolness” in apparel. Federated stores has revitalized the image of the department stores. An entirely new apparel retail format, called fast fashion (as executed by firms such as Zara, H&M, Forever 21 and Uniqlo) is taking the market by storm (we’ll talk more about this later).
2) Given all of the additional places selling clothing, and given the lack of growth in the sector, something has to give. One is pricing—nearly everything is on sale or bargain priced. The other is value. Clothing has been largely commoditized. When a product is commoditized, it is hard to convince someone to pay a premium for your clothing over someone else’s. Just look at what Steve & Barry have done to licensed apparel. Their prices are low enough to make even Wal-Mart look expensive.
External Problem #3: Shopping Mall Woes
Shopping malls are not the great shopping magnets they used to be. There is too much off-mall competition. Conventional wisdom is that there are only about 200 malls in the United States that still have great drawing power and create great profits for their tenants. The rest tend to be profit problems for their tenants. Unfortunately for the tenants, most of the malls are owned by only a couple of firms. Hence, if you want to be in the good malls, they force you to also be in the bad malls.
The economics of the mall no longer work. The mall rents are too high. You cannot make a profit selling commodity clothing and pay mall rents. The margins are too low. That’s why the Limited has shifted from selling clothing in the mall to selling bottles of goo—something where the ingredients cost a couple of pennies, but they can sell it for $20. That’s why JC Penney and Kohl’s have shifted to an off-mall growth strategy. Being the best in-line mall store is sort of like saying you are the best seller of air conditioners to Eskimos—not much to brag about. And the Gap is nowhere near the best in-line mall store.
Internal Problem #1: Unfocused on Customers
The Gap has been too unfocused in its targeted segment. It has tried to appeal to too many people. In the fashion world, trying to appeal too broadly is the kiss of death. In the past, they have defined their customer as being someone 18 to 35 in age, with no strong distinction of any particular lifestyle within those ages. By trying to be ageless and timeless in their approach, they have become “sales-less” at the cash register.
Internal Problem #2: Wrong Focus on Product/Marketing
1) No matter where you look in retail today, the death is in the middle. Profit is at the extremes. People either want the very best experience or the very cheapest experience. It’s better to be a Neiman Marcus or a Wal-Mart than it is to be a Sears. The Gap is firmly in the middle—the place of death. They charge too much to play on the cheap end and they do not offer enough to win on the high end. The products are firmly in the middle as well.
2) As I mentioned in last week’s blog “Pride of Bag,” retailers are sellers of image as much or more so than they are sellers of product. The goal is to have such a great image that people want to be seen carrying your shopping bag, even if there is nothing in the bag that was purchased at that store. Abercrombie & Fitch is a clothing retailer that made catalogs showing people not wearing any clothing (a catalog not showing the products for sale, but the image being sold). I get the impression from the outside that the Gap still sees itself as a seller of products. They are not focused on creating a Pride of Bag. If all you are trying to do is sell clothing, then you have commoditized who you are, and nobody will pay enough to support mall rent for a commodity.
Assessment/Recommendation
In short, the Gap is selling the wrong product in the wrong place to the wrong people in the wrong way. So how do you fix that? Well there are four potential options:
Option #1: Get Narrow
The Gap can try to narrow its appeal, so that it becomes more meaningful to a smaller segment. After all, it is better to get 40% share of a sub-set of the population than it is to get 3% of a larger population. The problem the Gap has is that it has too many stores to cover a more narrow appeal. That means either shut down a lot of stores, or get narrow over many different segments, creating a portfolio of narrow brands.
Option #2: Go Off-Mall
The Gap can escape the negative economics of the mall by going off-mall. Unfortunately, outside of the Old Navy concept, the Gap really doesn’t have the right kind of a box to optimize off-mall economics. It is too small. Yet, it really would have trouble justifying getting larger. There was a time when the Gap had the opportunity to reinvent itself to become what Kohl’s became. It is probably too late for that now.
Option #3: Create a Mystique that Justifies Paying a Premium
This could work…if you can find the mystique. And it would probably require abandoning the Gap name.
Option #4: Change the Supply Chain
If it’s harder to make money at the retail end, then you need to find ways to fix the problem upstream. This is what the fast fashion people have done. They have reinvented the supply chain. They have shortened the pipeline time, which reduces capital investment and reduced the risk of making wrong guesses. They don’t worry about losing money in markdowns because the batch sizes are too small; they run out before the season ends. They don’t worry about people waiting for a sale, because the customers know that the items will be gone they have a chance to go on sale. Customers come more frequently, because the inventory changes more frequently. And best of all, the shorter pipeline takes out so many costs from the entire business model that one can afford to provide better value and still make a higher margin.
When the Gap is using antiquated supply chain methodologies against this new business model, it is like someone with bows and arrows trying to attack the military sophistication of the United States.
Recommendation
If I were running the Gap, here are the three things I would focus on:
a) I would find the best narrow focus for my company.
b) I would try to be the best destination for the entire lifestyle package for this narrow focus. In other words, I would not define myself as being in the apparel business, but rather in the business of selling a way of life. This would allow me to offer more high-margin goods along side my apparel. Also, it would get me out of the commodities business and into something more highly valued by consumers—self esteem.
c) I would revolutionize my supply chain. Most of the fast fashion retailers have their strength outside of the US. The Gap still has a chance to own the fast fashion space in the US. It lost the window on being the next Kohl’s. Now it has another chance, but the window is closing.
The Gap clearly has problems. On March 1st they announced a 35% drop in fourth quarter earnings and a 7% decline in comp store sales. This is will be the third consecutive year of earnings declines. In fact, over the last 32 months, going back to June of 2004, the Gap has only posted three months with positive comp sales. So that is negatives on top of negatives on top of negatives.
In January, CEO Paul Pressler was forced to resign. In February, the Gap announced it was shutting down its experimental new concept Forth & Towne.
What’s going on here? Well, some of the problems are caused by external factors and some of the problems are caused by internal management shortcomings. Of course, the fact that management did not adequately address the external factors would imply that all of the problems are ultimately the result of poor management.
Let’s look at some of the factors that got the Gap in trouble, and then we’ll talk about potential ways to get out of the mess.
External Problem #1: Apparel Woes
It’s tough to make money in apparel these days. Even the Limited has pretty much given up on trying to make a living selling apparel. Here are some of the issues:
1) Apparel is in a long-term disinflationary cycle. That means you have to sell a lot more units just to make the same amount of money (something the Gap has not been able to do).
2) Apparel used to be one of the primary purchases made by people to express their sense of “coolness”—their sense of style, hipness, belonging and individuality. For younger people, that function has now been replaced to a large extent by technology—cell phones, ipods, and the like. Money spent on these devices is often money no longer spent on clothing. For older people, that money is now being poured into their homes like never before. More and more, they are making their statement with where and how they live, rather than what they wear. In other words, if “coolness” and “status” are the attributes sold by the Gap, then their competition has increased to include stores like Best Buy and Bed, Bath & Beyond, who have found another way to tap into those same attributes.
3) The death of the big fashion trend also hurts apparel retailing. We have become such a fragmented society that no one fashion style can capture the market. Large, sweeping changes in fashion do not happen like they used to. Since there is no major fashion trend today, that means that there will not be a major fashion trend to cause it to become obsolete. Hence, the mass need to quickly replenish to stay in style has less power.
External Problem #2: Competitive Woes
1) Forgetting the fact above that the Gap has to compete against more non-apparel retailers for the “coolness” dollar, the Gap is seeing far more direct competition in the apparel retail space than back in it heydays of the last century. JC Penney and Kohls are growing stores like mad. Target has dramatically improved its “coolness” in apparel. Federated stores has revitalized the image of the department stores. An entirely new apparel retail format, called fast fashion (as executed by firms such as Zara, H&M, Forever 21 and Uniqlo) is taking the market by storm (we’ll talk more about this later).
2) Given all of the additional places selling clothing, and given the lack of growth in the sector, something has to give. One is pricing—nearly everything is on sale or bargain priced. The other is value. Clothing has been largely commoditized. When a product is commoditized, it is hard to convince someone to pay a premium for your clothing over someone else’s. Just look at what Steve & Barry have done to licensed apparel. Their prices are low enough to make even Wal-Mart look expensive.
External Problem #3: Shopping Mall Woes
Shopping malls are not the great shopping magnets they used to be. There is too much off-mall competition. Conventional wisdom is that there are only about 200 malls in the United States that still have great drawing power and create great profits for their tenants. The rest tend to be profit problems for their tenants. Unfortunately for the tenants, most of the malls are owned by only a couple of firms. Hence, if you want to be in the good malls, they force you to also be in the bad malls.
The economics of the mall no longer work. The mall rents are too high. You cannot make a profit selling commodity clothing and pay mall rents. The margins are too low. That’s why the Limited has shifted from selling clothing in the mall to selling bottles of goo—something where the ingredients cost a couple of pennies, but they can sell it for $20. That’s why JC Penney and Kohl’s have shifted to an off-mall growth strategy. Being the best in-line mall store is sort of like saying you are the best seller of air conditioners to Eskimos—not much to brag about. And the Gap is nowhere near the best in-line mall store.
Internal Problem #1: Unfocused on Customers
The Gap has been too unfocused in its targeted segment. It has tried to appeal to too many people. In the fashion world, trying to appeal too broadly is the kiss of death. In the past, they have defined their customer as being someone 18 to 35 in age, with no strong distinction of any particular lifestyle within those ages. By trying to be ageless and timeless in their approach, they have become “sales-less” at the cash register.
Internal Problem #2: Wrong Focus on Product/Marketing
1) No matter where you look in retail today, the death is in the middle. Profit is at the extremes. People either want the very best experience or the very cheapest experience. It’s better to be a Neiman Marcus or a Wal-Mart than it is to be a Sears. The Gap is firmly in the middle—the place of death. They charge too much to play on the cheap end and they do not offer enough to win on the high end. The products are firmly in the middle as well.
2) As I mentioned in last week’s blog “Pride of Bag,” retailers are sellers of image as much or more so than they are sellers of product. The goal is to have such a great image that people want to be seen carrying your shopping bag, even if there is nothing in the bag that was purchased at that store. Abercrombie & Fitch is a clothing retailer that made catalogs showing people not wearing any clothing (a catalog not showing the products for sale, but the image being sold). I get the impression from the outside that the Gap still sees itself as a seller of products. They are not focused on creating a Pride of Bag. If all you are trying to do is sell clothing, then you have commoditized who you are, and nobody will pay enough to support mall rent for a commodity.
Assessment/Recommendation
In short, the Gap is selling the wrong product in the wrong place to the wrong people in the wrong way. So how do you fix that? Well there are four potential options:
Option #1: Get Narrow
The Gap can try to narrow its appeal, so that it becomes more meaningful to a smaller segment. After all, it is better to get 40% share of a sub-set of the population than it is to get 3% of a larger population. The problem the Gap has is that it has too many stores to cover a more narrow appeal. That means either shut down a lot of stores, or get narrow over many different segments, creating a portfolio of narrow brands.
Option #2: Go Off-Mall
The Gap can escape the negative economics of the mall by going off-mall. Unfortunately, outside of the Old Navy concept, the Gap really doesn’t have the right kind of a box to optimize off-mall economics. It is too small. Yet, it really would have trouble justifying getting larger. There was a time when the Gap had the opportunity to reinvent itself to become what Kohl’s became. It is probably too late for that now.
Option #3: Create a Mystique that Justifies Paying a Premium
This could work…if you can find the mystique. And it would probably require abandoning the Gap name.
Option #4: Change the Supply Chain
If it’s harder to make money at the retail end, then you need to find ways to fix the problem upstream. This is what the fast fashion people have done. They have reinvented the supply chain. They have shortened the pipeline time, which reduces capital investment and reduced the risk of making wrong guesses. They don’t worry about losing money in markdowns because the batch sizes are too small; they run out before the season ends. They don’t worry about people waiting for a sale, because the customers know that the items will be gone they have a chance to go on sale. Customers come more frequently, because the inventory changes more frequently. And best of all, the shorter pipeline takes out so many costs from the entire business model that one can afford to provide better value and still make a higher margin.
When the Gap is using antiquated supply chain methodologies against this new business model, it is like someone with bows and arrows trying to attack the military sophistication of the United States.
Recommendation
If I were running the Gap, here are the three things I would focus on:
a) I would find the best narrow focus for my company.
b) I would try to be the best destination for the entire lifestyle package for this narrow focus. In other words, I would not define myself as being in the apparel business, but rather in the business of selling a way of life. This would allow me to offer more high-margin goods along side my apparel. Also, it would get me out of the commodities business and into something more highly valued by consumers—self esteem.
c) I would revolutionize my supply chain. Most of the fast fashion retailers have their strength outside of the US. The Gap still has a chance to own the fast fashion space in the US. It lost the window on being the next Kohl’s. Now it has another chance, but the window is closing.
Saturday, February 24, 2007
Introducing the NANDEX
In order to get more dialogue amongst all of my readers, I am now introducing the Planninga from Nanninga Retail Index, or the Nandex for short.
Every weekend, I will place a two-part questionnaire on the blog about a particular retailer. You will be asked to vote on whether you think that particular retailer is the “toast of the town” (a winner of a retailer) or whether that retailer is just “toast” (a loser who is on the way to extinction).
The way this works is as follows:
On the right is an opportunity to vote on how you feel about a particular retailer. You get to vote based on two criteria:
1) Is their strategy a winner?
2) Is their management a winner?
I will leave the voting for an entire week. Then, each Friday, I will comment on the results and set up another Nandex.
This is your chance to tell off a retailer if you think they have missed the mark (or congratulate them if you think they are on the right track.).
This week's survey is aout the GAP. Are they the toast of the town or are they just toast?
Every weekend, I will place a two-part questionnaire on the blog about a particular retailer. You will be asked to vote on whether you think that particular retailer is the “toast of the town” (a winner of a retailer) or whether that retailer is just “toast” (a loser who is on the way to extinction).
The way this works is as follows:
On the right is an opportunity to vote on how you feel about a particular retailer. You get to vote based on two criteria:
1) Is their strategy a winner?
2) Is their management a winner?
I will leave the voting for an entire week. Then, each Friday, I will comment on the results and set up another Nandex.
This is your chance to tell off a retailer if you think they have missed the mark (or congratulate them if you think they are on the right track.).
This week's survey is aout the GAP. Are they the toast of the town or are they just toast?
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