The past two years have been extremely difficult for most fashion retailers. Wet Seal, BCBG Max Azria, Rue21, Gymboree, True Religion, Aeropostale, Pacific Sunwear and American Apparel have all filed for bankruptcy since 2016.[1] However, even against this particularly difficult backdrop, Industria de Diseno Textil SA (commonly referred to as Inditex, which owns Zara) reported in 2016 year-over-year increases of same store sales and net profit at 12% and 10%, respectively.[2]<\/p>\n
What was the secret to Inditex\u2019s remarkable performance? One key factor of success is a \u201chighly responsive supply chain that enables delivery of new fashions as soon as a trend emerges. Zara delivers new products twice each week to [each] store.\u201d[3] This is feasible because Zara is able to \u201cdesign and distribute a garment to market in just fifteen days.\u201d[4] This stands in stark comparison to the typical product development cycle where \u201capparel retailers were launching collections seasonally\u201d and which took \u201cseveral months to even a year\u201d to develop.[5]<\/p>\n
Immediate feedback from sales to production limits the impact of the bullwhip effect, where small oscillations in retail ordering are amplified further down the supply chain. This allows manufacturers, wholesalers and distributors to adjust rapidly, which reduces excess inventory and limits the need for Zara to discount stale inventory.[6]<\/p>\n
Tightly managing inventory also creates a \u201cvalue proposition [of] newness and scarcity\u201d because \u201conce product is gone, it is gone.\u201d[7] In turn, this drives additional traffic to the store. According to the NPD Group, \u201cthe average brand loyal visits a store 4.1 times per year whereas the average Zara shopper vists a Zara store 17 times per year \u2013 likely because she is afraid of missing something.\u201d[8] Higher customer throughput in store allows Zara\u2019s fixed costs to be amortized across more units, which in turns allows Zara to price products more competitively.<\/p>\n
Recognizing these trends in the industry, Gap Inc. (Gap) CEO, Art Peck launched Product 3.0 which was designed to \u201cmove forward very quickly in how we bring product to market and the speed that we bring it to market and the flexibility in our inventory.\u201d[9] This required significant changes in the way Gap operated, such as removing all creative directors, placing a small quantity of goods into stores and seeing how customers responded before placing larger buys, utilizing customer purchase data to predict demand, shifting some manufacturing plants from Asia to the Caribbean and reducing the product development cycle down to 8-10 weeks.[10]<\/p>\n
Successful implementation of Product 3.0 required digitalization of Gap\u2019s supply chain. Shawn Curran, Senior Vice President of Global Logistics at Gap, stated the need to \u201ccome up with new and innovative ways to drive value in our supply chain.\u201d[11] One way this was accomplished was to, \u201ccapture inventory visibility and track goods at the item level.\u201d[12] This additional level of detail allowed Gap to create an omnichannel experience by allowing \u201cshoppers to reserve an item on the website and have it ready to try on in a physical store of their choosing.\u201d[13] In all, Product 3.0 required $150 million in restructuring costs.<\/p>\n
Recent financial performance indicates that Product 3.0 may be having a positive impact on sales and earnings. In their most recently reported quarterly earnings, 2Q17, Gap reported that same store sales had increased 1% and that Gap\u2019s operating margin had increased from 7.2% the year before to 11.9%. Peck announced that in the short-term, Gap will be doubling-down on their Product 3.0 efforts by \u201ctaking advance of our operating scale to drive speed to market, responsiveness to customer demands and efficiency.\u201d[14]<\/p>\n
However, not all gains have been recognized evenly across Gap\u2019s portfolio. Old Navy (fashionable, but lower price and quality), experienced positive 5% growth in comparable sales year-over-year while Gap and Banana Republic experienced declines of 1% and 5%, respectively. The growth disparity is exasperated when taking a geographic lens. Overall net sales increased in North America by 2%, but declined in Europe and Asia by 14% and 23%, respectively.[15] This stands in stark contrast to expected growth rates in Asia which is forecasted to grow at 5% in 2018.[16]<\/p>\n
How should Gap respond? In the short-term, Gap should continue to invest in digitalization of their supply chain. While they have made significant improvements, it still takes Gap 8-10 weeks to go-to-market compared to Zara\u2019s two weeks. In the long-run, Gap should consider divesting brands \/ customers segments where fast fashion may not drive the same uplift in performance.<\/p>\n
Does fast fashion only improve performance of the fashionable, but lower price and quality customer segment (i.e., Old Navy) or can it succeed in the accessible luxury market (i.e. Banana Republic)? Given the high restructuring costs globally and relatively poor performance in Asia, should Gap continue to invest in international markets? <\/strong><\/p>\n (Word count: 785)<\/p>\n [1] Lauren Thomas, \u201cHere are the retailers that have filed for bankruptcy protection in 2017,\u201d CNBC, September 23, 2017, https:\/\/www.cnbc.com\/2017\/09\/23\/here-are-the-retailers-that-filed-for-bankruptcy-protection-in-2017.html, accessed November 2017.<\/p>\n [2] Lauren Heller, \u201cWhy Zara Is The Most Exciting Retailer Today,\u201d Forbes, March 15, 2017, https:\/\/www.forbes.com\/sites\/lauraheller\/2017\/03\/15\/why-zara-is-the-most-exciting-retailer-today\/#3426830d5cd3, accessed November 2017.<\/p>\n [3] Greg Petro, \u201cThe Future of Fashion Retailing: The Zara Approach (Part 2 of 3),\u201d Forbes, October 25, 2012, https:\/\/www.forbes.com\/sites\/gregpetro\/2012\/10\/25\/the-future-of-fashion-retailing-the-zara-approach-part-2-of-3\/#2535351d7aa4, accessed November 2017.<\/p>\n [4] Kasra Ferdows, Michael A. Lewis and Jose A.D. Machuca, \u201cZara\u2019s Secret for Fast Fashion,\u201d HBS Working Knowledge, February 21, 2005, https:\/\/hbswk.hbs.edu\/archive\/zara-s-secret-for-fast-fashion, accessed November 2017.<\/p>\n [5] Trefis Team, \u201cGap Inc\u2019s Premium Brands Aren\u2019t Moving Fast Enough,\u201d Forbes, September 16, 2015, https:\/\/www.forbes.com\/sites\/greatspeculations\/2015\/09\/16\/gap-incs-premium-brands-arent-moving-fast-enough\/#6d6e721b222b, accessed November 2017.<\/p>\n [6] Kasra Ferdows, Michael A. Lewis and Jose A.D. Machuca, \u201cRapid-Rire Fulfillment,\u201d 性视界 Business Review, November 2004, https:\/\/hbr.org\/2004\/11\/rapid-fire-fulfillment, accessed November 2017.<\/p>\n [7] Deborah Weinswig, \u201cRetailers Should Think Like Zara: What We Learned At The August Magic Trade Show,\u201d Forbes, August 28, 2017, https:\/\/www.forbes.com\/sites\/deborahweinswig\/2017\/08\/28\/retailers-should-think-like-zara- what-we-learned-at-the-august-magic-trade-show\/#54a4e57f3e52, accessed November 2017.<\/p>\n [8] Deborah Weinswig, \u201cRetailers Should Think Like Zara: What We Learned At The August Magic Trade Show,\u201d Forbes, August 28, 2017, https:\/\/www.forbes.com\/sites\/deborahweinswig\/2017\/08\/28\/retailers-should-think-like-zara- what-we-learned-at-the-august-magic-trade-show\/#54a4e57f3e52, accessed November 2017.<\/p>\n [9] Ayelet Israeli and Jill Avery, \u201cPredicting Consumer Tastes with Big Data at Gap,\u201d HBS No. N9-517-115 (Boston: 性视界 Business School Publishing, 2017, p. 9.<\/p>\n [10] Ayelet Israeli and Jill Avery, \u201cPredicting Consumer Tastes with Big Data at Gap,\u201d HBS No. N9-517-115 (Boston: 性视界 Business School Publishing, 2017, p. 10.<\/p>\n [11] Leela Rao, \u201cWill Gap Be the Next Big Fast Fashion House?\u201d GT Nexus, August 31, 2015, http:\/\/www.gtnexus.com\/resources\/blog-posts\/gap-supply-chain-visibility-fast-fashion, accessed November 2017.<\/p>\n [12] Leela Rao, \u201cWill Gap Be the Next Big Fast Fashion House?\u201d GT Nexus, August 31, 2015, http:\/\/www.gtnexus.com\/resources\/blog-posts\/gap-supply-chain-visibility-fast-fashion, accessed November 2017.<\/p>\n [13] Leela Rao, \u201cWill Gap Be the Next Big Fast Fashion House?\u201d GT Nexus, August 31, 2015, http:\/\/www.gtnexus.com\/resources\/blog-posts\/gap-supply-chain-visibility-fast-fashion, accessed November 2017.<\/p>\n [14] \u201cGap Inc. Reports Second Quarter Results,\u201d press release, August 17, 2017, on Gap website, http:\/\/www.gapinc.com\/content\/dam\/gapincsite\/documents\/Press%20Releases\/GPS_Q217_EPR_FINAL.pdf, accessed November 2017.<\/p>\n [15] \u201cGap Inc. Reports Second Quarter Results,\u201d press release, August 17, 2017, on Gap website, http:\/\/www.gapinc.com\/content\/dam\/gapincsite\/documents\/Press%20Releases\/GPS_Q217_EPR_FINAL.pdf, accessed November 2017.<\/p>\n [16] \u201cRegional economic outlook. Asia and Pacific: preparing for choppy seas,\u201d International Monetary Fund, April 2017, Forecast for global retail sales growth from 2008 to 2018, https:\/\/www.imf.org\/~\/media\/Files\/Publications\/REO\/APD\/areo0517.ashx, accessed November 2017.<\/p>\n","protected":false},"excerpt":{"rendered":" Inspired by Zara, Gap Inc. has undergone a digital transformation in their supply chain to reduce product development and distribution lead times, thus enabling Gap to be more responsive to customer preferences. Early financial results seem promising, but are uneven throughout Gap's brand portfolio and geographic footprint. <\/p>\n","protected":false},"author":10379,"featured_media":0,"comment_status":"open","ping_status":"closed","template":"","categories":[],"class_list":["post-21228","hck-submission","type-hck-submission","status-publish","hentry"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-rctom\/assignment\/rc-tom-challenge-2017\/","yoast_head":"\n