Gap Group Split, Old Navy Will Become The "Core Engine" Of Profit?

Recently, the world famous fast fashion brand Gap group announced that it will be split into two independent companies: one with only the better OldNavy this year, and the other one has not yet been named, but its brand will include Gap, BananaRepublic, Athleta and other existing brands.

Gap's split strategy was bullish by Wall Street analysts. The news showed that Gap shares rose more than 25% in after hours trading.

For the brand split plan, Gap Group CEO ArtPeck said: "splitting will help Gap brands accelerate the pace of change, enhance executive power, and ultimately achieve the goal of thin line profit growth".

The Gap brand resolution plan is expected to be completed in 2020.

In addition, Gap group also said that in order to optimize the cost, 230 Gap stores will be closed in the next two years.

The construction of multi moat is the trend of fashion industry. What is the intention behind Gap's choice of splitting strategy?

Does Gap have a new power engine?

Since the opening of the first name brand Gap store in 1969, Gap group has continuously strengthened the layout of the North American market, enriched the brand matrix and actively promoted the expansion of globalization, gradually becoming the first and global leading garment brand in the United States.

The same name brand GAP has always been the contestant of the group.

However, after the rapid changes in fashion industry in recent years, the leading brand Gap has been replaced by the OldNavy of the lower level consumers of Gap group.

Over the past few years, Old Navy has been developing rapidly.

In 2018, the annual sales of Old Navy exceeded Gap and BananaRepublic two brands, accounting for half of the total group.

Fast fashion days are tough, and Gap is no exception.

In February of this year, Gap adjusted the structure of top management and appointed Alegra O'Hare as senior vice president and chief marketing officer.

In June last year, the group appointed Bilabong former CEO to become the new CEO and chief executive of Gap.

Insiders say that the main reason for frequent changes in the top level is the overall decline in group performance.

Gap group's 2018 earnings report showed that net sales in fiscal year 2018 increased 8% to 4 billion 100 million US dollars, up from analysts' expectations of $4 billion 10 million, compared with 2% growth in store sales.

Despite the overall growth trend of Gap group from the 2018 earnings data, according to the subdivision of brands in the financial reports, in the 2018 fiscal year, only OldNavy achieved a substantial increase in sales volume, a growth rate of 5%, and the Gap brand was a continuous loss. After 2017, its sales growth dropped by 1%, it fell by 5% again, which was a huge burden on the performance of the Gap group.

For the group itself, relying on a single brand to achieve growth itself is a huge risk of insecurity.

The GAP group spin off brand is actually announced to the outside world, formally replacing the group's profit "core engine".

The rising share price means that capital agrees with the Gap group's brand spin off, and it also means that the market has great expectations for the potential of the OldNavy market.

The rise of Old Navy is not related to the leadership of Stefan Larsson.

Larsson worked in H&M for 15 years. After joining Gap in 2012, Old Navy achieved profit growth for three consecutive years.

Larsson set up a clear brand strategy for OldNavy, positioning Old Navy as an inexpensive family brand, playing the main role in California, and customer groups spanning the millennial generation to the 60 year old.

After Old Navy is split into an independent company, its president, Stefan Larsson, will have more freedom of control. This will also encourage the top management to forge ahead and increase the brand building of OldNavy.

It is expected that the former president of H&M can help Old Navy replicate the glory of H&M's peak.

Obviously, after the spin off, the Gap group's structure and strategy will be clearer and clearer.

OldNavy will continue to adhere to its high cost performance advantage and advance to annual sales of $10 billion according to the plan. The Gap and BananaRepublic of the new company will focus on different development priorities and focus on different professional markets.

Banana Republic may continue to position high-end business winds, and Gap will focus on high-end children's wear.

If it goes smoothly, OldNavy will follow the group plan step by step towards the final goal of selling 10 billion US dollars.

At present, Gap's action to split the brand is a strategically strategic move. It separates the unique OldNavy from the mire of Gap's decline, and hopes that the development of Gap group can be driven by Old Navy through a focused development strategy.

But how long can the dividend from the brand break be maintained? Can Old Navy alone save the Gap and support the Gap group's billion?

The split strategy is a fast fashion straw?

In recent years, due to the rising of ultra fast fashion and the impact of e-commerce, fast fashion in the fashion industry has become dangerously stable.

Fast fashion giant Inditex, H&M and so on are facing many difficulties.

Inditex2018's performance in the financial year is not satisfactory.

Inditex group's sales increased from 2.64% to 2 in 2017 from 2018 to October, the worst year since 2008. Inditex's share price fell more than 4% due to slower growth.

In order to cope with the decline, H&M launched two new brands Arkeet and Nyden at the end of 2018, hoping to save the performance of the entity store. But in the second months ending 2019, the H&M group's revenue growth was only 1.2%, far below the same level in the previous year.

According to incomplete statistics, last year, the number of new stores in the ten fast fashion brands decreased by 17% compared with the previous year. The expansion of Newlook, MJstyle, H&M and Forever21 was in a "stagnation" state.

In fact, all the fast fashion brands have been trying to save the decline.

On the one hand, fast fashion group, including H&M, Inditex and Gap group, has been seeking cooperation with e-commerce or social media platform, using big data, AR and other means to carry out innovation and optimization of full channel sales, covering more different consumers and enhancing consumers' shopping experience.

On the other hand, in order to increase the product's sense of design and texture, fast fashion has joined with famous artists or big names.

For example, H&M and Moschino jointly, and UNIQLO and Kaws jointly launched a panic buying rush.

However, choosing the resolution strategy, Gap is the first person to eat crabs in fast fashion.

The choice of split mode is seen as a group stripping off the declining brand, helping to promote the brand strategy in the rising period.

VFCorp has split its Vans, The North Face and Timberland.

The secret of Vitoria was also asked by investors to split their nursing brands Bath and BodyWorks and Wei Ming, in order to avoid the decline of the brand and influence the development of other brands.

In addition to stripping the aftermarket brand, Gap intends to move closer to Spain's fast fashion giant Inditex.

Inditex group includes many brands including Zara, Bershka, Pull&Bear, MassimoDutti and so on, including low-end parity line to high-end business line, which is similar to Gap group.

As the leading brand of Inditex, Zara accounted for almost 2/3 of the Inditex group's annual sales in 2018.

Gap split its profit brand OldNavy, can it make Old Navy the next Zara? The answer may not be that simple.

Inditex group is a heavy asset company in many fast fashion groups.

Inditex group has invested in, shares or acquired many factories in Europe, and the vast majority of its production is also realized in its own factories in Europe.

At the same time, Inditex group is also the only enterprise in the clothing industry that reserves the logistics and pportation company.

The operation mode of heavy assets can help enterprises to reduce the cost of each link and improve communication efficiency and reaction speed.

Zara has built a strong supply chain system through continuous investment, which is also an important reason why other fashion brands can hardly replicate their models.

But not to mention that the success of duplication of ZARA is a big problem for OldNavy or Gap group. It is worth noting that even the powerful ZARA has been affected by the fast fashion recession, and the sales growth of Inditex group has shown a weak trend, resulting in a slowdown in sales growth of Inditex group.

As the first brand to eat crab in fast fashion industry, it is still unknown whether the Gap group's resolution of Old Navy can revive the old style of the group.

For the fast fashion industry with the luxury head brand, the tide brand and the net red product, the timely break of the Gap group and its inferior brands is a lesson and positive case for other brands who are in the mire.

However, splitting is just the first step in strategic restructuring and initiative.

Even if branding can bring higher valuation and financing opportunities to itself, it may not be a life-long resource for fast fashion group.

Gap group how to save the decline and go further, this is all fast fashion brands have to think about the problem.