What to do when your domestic market is saturated and slow? Go overseas, of course. The question is when and how difficult a market to pick. For clothes retailer Gap, the answers seem to be: ‘now’ and ‘any’.
Gap is opening two stores in South Africa on Tuesday and Wednesday with wholesale partner Stuttafords in Johannesburg and Cape Town. And perhaps more adventurously, it plans to open in Lebanon, Georgia and Azerbaijan this year.
As reported previously by beyondbrics, Gap Inc isn’t afraid of the smaller or less-obvious markets. It is expanding rapidly in Panama and other Latin American countries, although Brazil is off the road map for now.
But overall, the company’s overseas expansion has been rapid. Six years ago it operated in just eight countries and sold products online only in the US. Now it sells online almost everywhere (90 plus countries) and has franchise outlets in 26 countries, which will rise to 30 with the new additions.
Stefan Laban, the head of Gap’s overseas business, said in a statement: “Extending our presence in Africa, the Middle East and CIS demonstrates the effectiveness of our international formula and the continued flexibility of our franchise model, which allows us to reach new customers quickly around the world.”
While Gap’s rapid expansion overseas to capitalise on EM growth certainly looks good on paper, in practice though, is the company at risk of overstretching itself?
After all, it was not too long ago that over expansion in North America was blamed for Gap’s sluggish growth. Just last November, the company detailed plans to close 189 locations, or about a fifth, of its namesake Gap stores in the US by the end of 2013 as part of a revamp of the business.
“From a long-term perspective, Gap’s doing the right thing, but its focus on smaller emerging markets raises the question of whether it’s spotted opportunities others haven’t, or whether it’s judging that competition is too tough in the bigger countries,” Barney Jopson, the FT’s retail correspondent, tells beyondbrics.
“The short-term, however, is what drives the market, and a long-awaited turnaround in its US business would do much more for its share price than these latest plans.”
So far, Gap’s success overseas has helped it make up for lost ground in the US. Sales outside of North America rose 11 per cent to $2.14bn last year and now account for 15 per cent of total group sales. By contrast, US sales fell 5 per cent during the same period and account for 68 per cent of group sales, down from 71 per cent the year before.
Asia is now Gap’s second biggest market by sales outside the US. The region generated $1.18bn in sales for the company last year, outstripping Canada ($918m) and Europe ($825m).
While the money spinning potential of Africa is well known (McKinsey Global Institute for example reckons the continent’s top 18 cities could have a combined spending power of $1.3tn by 2030), Georgia and Azerbaijan strike beyondbrics as more curious destinations for Gap to expand.
Or not says Richard Jaffe of Stifel Nicolaus.
“All of us have a myopic view of the world and where Gap should be,” he told beyondbrics. “But Gap’s entry into these smaller countries is low risk and high return because they are not going in there building bricks and mortar stores themselves. Rather they are doing it through a franchise agreement with a local partner. In return Gap can leverage its brand name and promote its e-commerce presence. It’s lucrative and costs Gap nothing.”
By Rob Minto and Pan Kwan Yuk, Financial Times
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