Central Agency for Mobilization and Statistics

Gap Pesti and SWOT Analysis

SCOPE

In this section, I am doing a PESTI and SWOT analysis of GAP Inc. The goal of a PESTI and SWOT analysis is to evaluate the performance of a firm by using their financial statements[footnoteRef:1]. In a PESTI and SWOT analysis you can determine the value of a firm by looking at its profitability and its growth. I will be using SWOT analysis and cash flow analysis to assess GAP’s performance. After analyzing GAP I will forecast the next ten years based on our findings. [1: AmCham, Real Economy-Egypt. (Source: MoFT, January 2003 and Central Egyptian BankCEB, February 2002).]

I can either look at SWOT for GAP over several years to determine the success of the firm or I can compare the SWOT of GAP to other firms in the same industry. These SWOTs allow us to relate the financial numbers to the business reality. Looking at SWOTs for our firm over several years is called time series comparison. This allows us to hold some factors constant and determine the firm’s strategy and how Ill they are implementing this strategy. If I compare the SWOT to other firms’ PESTI I are doing a cross sectional comparison. This allows us to see how GAP compares to other firms in the same industry[footnoteRef:2]. This lets us determine in what areas they are lacking and what areas they are excelling in compared to firms in the same industry. [2: Cunningham, Michael: “ICT Skills Gap Analysis-Phase I.” Partners for Competitive Egypt Project, December 2002.]

Finally after analyzing GAP’s financial statements, I can forecast the future for the firm. It is important to forecast so I can determine the future of the firm and if the firm is currently undervalued or overvalued. I can use a number of methods to determine our forecasting values. You can average past performances of the firm and assume this past performance will continue. Sometimes this can provide inaccurate numbers. So values are mean-reverting, which means that over time they go back to the industry average.

Our PESTI and SWOT analysis and forecast of GAP should provide a clearer picture of the performance of GAP then just scanning their financial statement. This will allow us to determine the success that GAP has had in implementing strategies and gaining profitability and growth.

BACKGROUND

The Gap, Inc. operates as a specialty retailing company. The company offers clothing, accessories, and personal care products for men, women, children, and babies under the Gap, Old Navy, banana republic, Piperlime, and Athleta brand names. The company also franchises agreements with unaffiliated franchisees to operate Gap and banana republic stores worldwide. Gap Inc.’s net profit in 2010 was $1,102 million, an increase of 14% over 2009.

PESTI ANALYSIS

Political Factors

Apparel retail sales are driven by demographic trends. Changing fashion trends among women and teens result in short product life cycles. Age distribution, ethnicity, gender, and priorities force retailers to establish a narrow target market, stressing the importance of brand recognition.

Social Changes

The apparel retail industry leaders have developed diversified products and offer a variety of options to consumers to respond to the changing and unpredictable fashion trends. The current trend toward value-line clothing is shifting to more expensive lines as the economy recovers from the previous recession. There is also a shift toward “greener” initiatives. Companies are finding ways to reduce waste and manage sustainable energy consumption, exemplifying corporate social responsibility to add value to products. Health and Illness are another demographic trend, which is a driver behind athletic apparel.

Technology

Internet shopping has changed the retail business by making it easy to navigate between many brands, categories, and products quickly. Consumers can also quickly determine whether a desired product is being sold by a competitor for a lower price. When a consumer is confident they are receiving a product for the lowest price, the decision to purchase will be easier. I expect that the trend of consumers shifting to purchasing online will continue and online retail sales will grow by 10% in 2011 and maintain this growth through 2014.

International Forces

The Chinese retail market offers a large opportunity for growth. China’s retail market grew at an annual rate of 17.3% during 2002-2009 and is expected to grow by 45% during 2010-2014. The industry is currently characterized by low globalization, allowing significant room to increase global market share. Additionally, as most of the raw materials for the apparel retail industry are imported, currency exchange rates also affect profit margins.

SWOT ANALYSIS

Strengths

Old Navy’s position as a value-priced family apparel retailer allows Gap to sustain profit margins during economic downturn, with Old Navy having growth of 3% in comparable same store sales during the recent recession. The Gap, Inc.’s focus on maximizing value with outlet stores has increased its customer base and brand image. A globalized franchise model enables the company to expand internationally. The Gap, Inc. has strong margins relative to competitors with an operating margin of 12.8% for FY2009, compared to the industry average of 7.5%. This margin allows the company to effectively combat price competition while enabling it to adjust for fluctuating cotton costs without increasing retail prices.

Weakness

The Gap, Inc. has been experiencing low sales per gross square foot, which indicates low productivity. The company also faces cannibalization of sales between Old Navy and Gap as Ill as between banana republic and Gap. The Gap, Inc.’s comparable same store sales have been declined, on average, by 4% per year over the past 10 years. While the past 18 months have seen increases, the historical declining same store sales could indicate potential problems with the companies operating structures.

Opportunities

The internet allows The Gap, Inc.’s products to reach a higher percentage of customers. The lower prices, greater selection, and convenience provided by e-commerce all indicate an opportunity for growth[footnoteRef:3]. Gap’s e-commerce platform, Universality, is targeted to capture this trend. A winter 2010 survey shows that while 71% of parents are personally affected by the economic downturn, 90% say they are spending less on themselves so they can spend more on their children. This trend shows that despite the weakening of the retail markets, the children swear market offers a strong growth opportunity. The Gap, Inc. has been involved in the children’s apparel market since 1986 with Gap Kids and baby Gap stores. China’s GDP is increasing at a rate faster than U.S. GDP. The Gap, Inc.’s management plans to take advantage of China’s growth by opening their first stores in China during 2011. [3: AmCham, Real Economy-Egypt. (Source: MoFT, January 2003 and Central Egyptian BankCEB, February 2002). Cunningham, Michael: “ICT Skills Gap Analysis-Phase I.” Partners for Competitive Egypt Project, December 2002.]

Threats

The Gap, Inc. is undergoing the process of global expansion; however, it faces the threat of problems abroad. Labor costs in China are estimated to increase as Chinese provinces’ wages have been increasing by 10-20%, on average, which will decrease profitability margins. Economic problems in Europe such as increasing unemployment will hinder the European’s consumer spending and have a negative impact on apparel sales. China’s rapid economic growth raises concern about inflation in China. On April 17th, 2011, China’s central bank ordered the nations’ biggest banks to set aside large cash reserves, for the fourth time this year. Chinese inflation endangers China’s status as the low-cost workshop of the world. Chinese CPI rose to 5.4% in March, its sharpest increase in the past three years.

FIVE FORCES MODEL

The five forces model can help a company in a number of ways. It can determine the attractiveness of a particular market. It can also show the relationship between competitors, suppliers, and buyers within an industry. With this information, investors can develop a broad and sophisticated analysis of competitive position which can be used when creating strategy, plans, or investing decisions to use within the business world.

Rivalry among Existing Firms

Some aspects of rivalry among firms that make this model so important would be the number and size of firms, industry size and trends, product/service range, and differentiation and strategy. The clothing stores industry, which has done extremely Ill over the last 5-10 years, has a large number of competitors.

A few of the competing companies include American eagle, Abercrombie & Fitch, and TJ Maxx. This large number of competitors creates strong earnings potential compared to other industries. In the clothing store industry there is room to grow, but startup costs can be high. While Gap is definitely looking to gain a larger share of the market, switching costs for consumers is low. This is especially true with one of Gap’s top competitors TJ Maxx. TJ Maxx competes solely on price. In response, Gap is looking to reestablish a larger core of consumers who are brand loyalists. To compete with all these different competitors in the market, Gap Inc. created such higher end clothing lines as banana republic, Old Navy, and Forth & Towne. In an industry where the right mix of product differentiation and price play a key role, these three brands allow them to be competitive.

Threat of New Entrants

Some important factors surrounding the threat of new entrants section of the five forces model include: barriers to entry, brand equity, switching costs, access to distribution and government policies. Understanding these concepts will help a firm understand the industry at a higher level. The popularity of the internet has brought more sales opportunities for all companies within this industry, which in turn, has increased the development of online marketing. While Gap and its competitors compete in the clothing store industry, they also have a number of competitors in the fashion industry which includes brands such as Polo, Tommy Hilfiger, and Lacoste. These industries differ slightly because these fashion companies sell their clothing to department stores like Dillard’s, while Gap Inc. operates their own stores. They compete with these companies because switching costs are so low. However, within their own industry, startup costs can be high. Even though there is room to grow within the industry, the threat of new entrants is relatively low. This is largely due to large economies of scale in this industry in which new entrants will initially suffer from a cost disadvantage from existing firms such as GAP Inc. The risk of investing so much to start up deters most new entrants. In conclusion, there will always be the threat of new entrants, but it will be extremely hard and expensive to match Gap’s share in the market.

Threat of Substitute Products

Some key concepts that go along with the threat of substitute products are buyer propensity to substitute, relative price performance of substitutes, buyer switching cost, and perceived level of product differentiation. Understanding this section will allow a firm to know how to handle any substitute products that is thrown at them by competitors. The threat of substitute products for Gap is very real. This is the main reason they are trying to reestablish a larger group of brand loyalists with their “back to basics” simplistic 11 style that consumers had known and loved. Another way Gap Inc. can overcome this problem is with their other brands, especially Old Navy. Brand loyalists will generally buy a particular brand regardless of the price. However, consumers who are not brand loyal tend to seek out substitute products largely because of high prices. This is where Old Navy is able to tap into the industry. Old Navy offers trendier styles with a lower cost, which lessens the threat of substitute products. In an industry as diverse as the clothing industry, every move you make determines when and how many substitute products could possibly enter your market. This is why having more than one line of clothing, an online shop, and sales in more than just the United States is so important.

Bargaining Power of Buyers/Customers

Understanding the bargaining power of your customers will help a firm decide on the price it wants to sell its products for. Since our industry is on average and not a price competitive industry, this section is not as important as others in the five forces model. Simply due to the low switching costs of the industry, buyers do have some power[footnoteRef:4]. Price sensitivity plays a small role but the majority of buyers are willing to pay for Gap’s moderately priced clothing. Sales at retail locations tend to attract customers with less spending power, but customers generally know what to expect with regard to prices in the industry. On the average, Gap Inc.’s prices are lower than both Abercrombie & Fitch, and Buckle. The Gap brand or Banana Republic may lose a few customers due to prices, but Old Navy was created to appease the price shoppers. In this market, it is important to compete on quality and brand name, as Ill as price. This is why, for example, Abercrombie & Fitch launched Abercrombie Kids, Hollister Co., and RUEHL 925 campaigns. In conclusion, the customers do not have much bargaining power within this industry. An example of an industry that would have high bargaining power of customers would be lower quality outlets such as Kmart, Payless, and Wal-Mart. [4: Central Agency for Mobilization and Statistics (CAPMAS): “Import-Export Products Data in $U.S. For 1996-2000.” ]

Bargaining Power of Suppliers

Bargaining power of suppliers is an extremely important aspect of our firm, and the industry in general. If not properly calculated, excess cost and high inventory can occur. There are numerous suppliers of fabrics and other materials like cotton to choose from. Most firms actually shop for manufacturers of clothes and hand their designs over to them. Since the firms in our industry have a high quality brand image, most have real power over their suppliers, due to manufacturer’s vying for their business.

In conclusion, there is an extremely high degree of competition within this clothing retail industry. Since these brands rely on the latest fashions, quarterly changes in seasonal products must happen as much as possible. Technology, including online shopping, must be up-to-date. Branching out to places other than the United States is important. Overall, these firms are relying on brand image and differentiation to gain as much market share as possible.

HOW GAP’S CEOS PERFORM THEIR ROLES TO ENSURE A SUSTAINED AND VIABLE MARKET POSITION

Vision

Every manager in a firm has the discretion to disclose information. Accounting rules require a certain amount of disclosure, but beyond that it is up to the manager how much information the firm will disclose. Quality of disclosure is very important to an investor. A manager can make it easy for an analyst to gain an insight into the firm by disclosing a lot of information. On the other hand they can make it quite difficult to assess the business reality by only disclosing the minimum amount required. As an investor you want as much disclosure as possible without threatening the firm’s competitive advantage. If you disclose too much information the competitors will be able to look through the glass and see your strengths and weaknesses, of which they can then turn around and use against you or copy your strengths and gain a profit like yours.

Mission

GAP does a good job of disclosing its’ business strategy. In the Letter to Shareholders they do not try to sugar coat their performance. They are quite liberal in disclosing bad news. Paul Pressler, CEO of GAP, makes no attempt to explain the drop in Net Sales for 2005. Instead of excuses he clearly lays out a plan to return to growing sales and to regain Gap Inc.’s competitive position. One criticism of disclosure is that there is no real explanation of Gap Inc.’s performance from 2005. Gap Inc. did not try to explain this decrease to any reason. They basically just said they can do better and have a plan in place to return to its’ increased earnings. Another good quality of Gap Inc.’s disclosure is that they break up their finances by different companies. Gap Inc. owns banana republic, Old Navy, and Forth and Towne. In their annual report they separate these businesses out so all their performances aren’t lumped together. This can show the investor or analyst which companies are doing Ill and which aren’t.

Objectives

In Gap Inc.’s report they use numbers and strategies with forward looking statements that basically anticipate future effects on cash flows, dividend payouts, cash balances vs. cash flows, and new store openings. They explain how they came to these numbers, which makes it easier for the analyst to determine if these numbers are accurate.

In conclusion, Gap Inc. does a great job of disclosing information for an analyst or investor. This level of disclosure makes it very easy to determine the reality of Gap Inc.’s position in the industry and to forecast future financial results.

Business Model

Gap Inc. is also very good with disclosing numbers that they think are important. Free cash flow is a subject they spend a lot of time on in their financial report. They believe that free cash flow is important because it represents how much cash a company has after the deduction of capital expenditures. Gap Inc. goes above and beyond disclosure for their cash flows to show the analyst how important they feel these cash flows are. They also explain in their footnotes all the forward looking statements that they include in their annual report.

CEO’s Leadership

(a) Chairman and CEO Selection. The board selects the CEO and Chairman in the manner that it determines to be in the best interests of the company. In the event the director who serves as Chairman is not an Independent director, the board will designate an Independent director to serve as Lead Independent Director.

(b) Duties of the Lead Independent Director. The Lead Independent Director presides at all meetings of the board at which the Chairman is not present, including each Independent session of the board. The Lead Independent Director has the authority to call meetings of the independent directors. The Lead Independent Director also serves as a liaison between the Chairman and the independent directors, approves certain information sent to the board, and approves meeting schedules and agendas. The Lead Independent Director is appointed by the Independent directors annually.

(c) Job Duties of Chairman, CEO, and other Officers. The company has approved formal position descriptions for the Chairman, CEO, and brand/function heads. The performance of the CEO and brand/function heads is reviewed annually with respect to their stated duties and with respect to pre-determined company and divisional objectives.

(d) Succession Planning. The board is responsible for the succession planning of the CEO (including a separate emergency succession plan), and periodically reviews the succession plan and identifies potential successors for the company’s CEO. The Compensation and Management Development Committee also periodically reports to the board on succession planning matters. In addition, the CEO reports periodically to the board on succession plan for certain key officers and makes recommendations to the board regarding his/her succession.

References

1. AmCham, Real Economy-Egypt. (Source: MoFT, January 2003 and Central Egyptian BankCEB, February 2002).

2. Al-Ahram Weekly Online: “Inadequate Remedies,” April 5-11, 2001, issue 528, Mona ElFiqi.

3. Al-Ahram Weekly Online: “Stalling in Troubled Waters,” November 15-21, 2001, issue

650, Mona El-Fiqi.

4. A-Arafa Group: “Egyptian Textile and Clothing Industry,” July 03, 2003.

Business Monthly: “Currency Float Ineffective without Customs Reform,” March 2003.

5. Canadian Trade Commissioner Service, Department of Foreign Affairs and International

Trade: Market Brief, “Overview of Opportunities for Canadians in IFI-financed Health

Sector Projects,” Julie Wallace, December 2002.

6. Central Agency for Mobilization and Statistics (CAPMAS): “Egyptian Exports of Most

Important Commodities, 1996-2000.”

7. Central Agency for Mobilization and Statistics (CAPMAS): “Total Exports Between Egypt and World by Country, January-September 2000.”

8. Central Agency for Mobilization and Statistics (CAPMAS): “Total Exports Between Egypt and World by Groups, January-September 2000.”

9. Central Agency for Mobilization and Statistics (CAPMAS): “Import-Export Products Data in $U.S. For 1996-2000.”

10. Central Bank of Egypt: Annual Report. Economic and Trade Data for Egypt 1999-2000,

Online.

11. Central Bank of Egypt: Labor Activity Report, April 13, 2003 (source: CAPMAS). CIA Fact Book for Egypt, January 2002.

12. Cunningham, Michael: “ICT Skills Gap Analysis-Phase I.” Partners for Competitive Egypt Project, December 2002.

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