Gap’s Route of Expansion in China

Gap， an American clothing and accessories retailer， does not agree with the pattern of dividing the Chinese market into several tiers. In its blueprint， there is nothing called “second-tier market”.

Having been in China for three years， Gap has been expanding following one rule， which can be summarized as one sentence： considering other cities as important as Beijing and Shanghai– it indeed started its development in China from Beijing and Shanghai， but after that it is not considering other cities lesser than these two. It follows the same strategy of establishing stores in every Chinese city it goes， which ensures its success.

Gap entered China in November 2010. From that time to May 2011 before Jeff Kriwan took the CEO of Gap China， this American retailer only had four outlets in China. Nowadays， it has 70 outlets in China. As one of the top fast fashion brands in the world， Gap is the latest into China， but it is now catching up with its peers at amazing speed– Uniqlo， a brand under Fast Retailing， spent six years establishing that many outlets in China.

Then， Gap is still far behind its competitors. By now， ZARA under Inditex has already had 396 outlets in China. Uniqlo has 235 outlets while H&M， 134. Even if Gap could finalize the goal of establishing 80 outlets in China in its 2013 financial year， the gap is still big.

But the gap does not mean Gap is placed at a disadvantage. Its refusal to use of the common strategy of “placing Beijing and Shanghai in front of other cities” made it different from traditional retailers. Gap’s expansion is based on the concept of commercial district. The 19 Chinese cities it set foot in China include Chengdu and Shenyang which are considered to be the regional core cities and Hefei and Ningbo that might be neglected by traditional strategies.

Gap’s plan of establishing outlets is based on “market mapping”， a research activity that analyzes the matching degree of the business district of each market with Gap. Apart from collecting the demographic information， Gap will also define the markets’ existing and potential business districts and run tests over various factors of these areas， such as the visitors flow rate， consumer categories， recognition of Gap， convenience of traffic， performance of competitors and so on. Each factor is represented by a data point with corresponding weight coefficient. All data points are collected together to sort out the sequence of cities or business districts in terms of their values for expansion.

In Gap’s list， Hangzhou ranks before Shenzhen and Guangzhou and was the third city Gap set foot in after Beijing and Shanghai. Jeff Kriwan also equalized the commercial circumstance on the commercial street of Suzhou with the one in Shanghai. In his opinion， Gap will not treat Suzhou differently from Shanghai in terms of expansion just because this city is traditionally considered to be a second-tier city – the strategies can only be changed when differences of consumer behaviors are noticed.

Outside the list， Gap also made some tests to watch how much the brand of Gap can be accepted by the“said” less developed market. Hefei is a good example. Based on how active these new respond to the brand， Gap will change its expansion speed in these cities.

“Actually， when I talk with many property developers， I found that they have different definitions about the first-tier cities. Someone says that only Shanghai and Beijing are first-tier cities； someone includes Beijing， Shanghai， Guangzhou and Shenzhen； and someone extends the list to cover Chongqing and Chengdu，” says Jeff Kriwan. Now he is quite skilled in this topic， but when he initially took over， the classification of cities was a completely new idea for this executive who ran 1，200 outlets of Old Navy in North America.

Jeff Kriwan thinks that Gap and he are in the best time. In the past three years， the commercial property developed fast in the second- and third-tier cities of China. Local governments are paying more attention to the economic growth driven by consumption. The shopping malls and new business districts boost the rise of cities to become the new first-tier cities. The change of consumer behaviors in these cities brings more marketing opportunities to the retail brands.

“The business districts in China are changing too quickly as many older central business districts are replaced by the new ones. Even in the same business district， an old shopping mall might be replaced by a new one. There， the time Gap chose to get into China gave us a lot of choices，” he says.

With an open mind as a learner， Gap worked with consultancy companies before getting into China. They spent years investigating into this market and its rivals， concluding that their lessons and experiences. “Their stories of success and failure paved the road for the latecomers and lowered their risk when they came to China.” These experiences and lessons include how to build the corporate structure， whether to facilitate the development through one company or several companies， how to build an efficient logistics system and how to get engaged in digital marketing.

Generally speaking， people will think a market to be full of competition once it has several brands of fast fashion. This is true， but Gap saw another side of this thing. The more competitors a market has， the more quickly consumers of this market can accept the consumer concept of fast fashion， which can save the cost of Gap to educate the market. If competitors face many problems in an area， Gap will handle this area cautiously. The information is gained from property developers that partner with Gap and its expansion in cities other than Beijing and Shanghai are benefiting from the display of outlets in these two cities.

Though establishing outlets sounds like a simple idea， it is complicated in both the process and the factors put into consideration. Gap’s development department has a special team consisting of nine people – coming from different places of China – that is responsible for looking for the partnership in property development. In addition， Gap also keeps the partnership with several third-party property agents.

Before finding a proper place for a new outlet， the team might have looked into hundreds of possible locations. In the first year of Gap in China， this U.S. company which has not enough fame and sales performance for reference in China， it desperately needs the thirdparty agencies to introduce property developers. In spite of that， the outlet designers might deny the project if they thought that the project was not fitting for a good outlet， even though the location and price were both very good.

Even if the location is chosen， it will be a wide range of time gap between signing the contract and the opening of the outlet. If the new outlet is to be built in an existing shopping mall， Gap has to wait for the original site occupier to leave due to the expired rent contract or whatever reasons. If it is a new project that Gap lays eyes on， it has to wait for the project to be finished or opened. Therefore， Gap sometimes only got 16 weeks to prepare for a new outlet and sometimes had to wait two years to take actions. In Guangzhou， Gap has been talking with several property developers but none of them has a defined plan.

“I hope we can find some property developers which want to synchronize their development plans with us for three to five years，” Jeff Kriwan says. The long-term partnership can not only guarantee Gap’s future plans of establishing outlets， but also allow them to begin the cooperation in the initial phase of the property project， so that Gap conclude the outlet’s location， area and design into the plan.

Gap’s cooperation with Yintai Property in Hangzhou is following an ideal pattern. In the past five years， this property company kept increasing its development pace in Hangzhou. In 2008， it established a department store by West Lake. After that the company established a project swarming with luxury brands， which was followed by the second phase that also included Gap. In addition， the company is planning to build a large business complex in the northern part of Hangzhou， where Gap is going to establish a new outlet.

Gap got into the market of Hangzhou in November 2011. On the first day， a lot of consumers came to its outlet. Both Gap and Yintai recognized the potential of this city and the two signed a cooperative contract that can be valid for several years.

From West Lake to the Lakeside Park of Hangzhou， you can see the huge Gap logos hung by several streets. This is the new campaign of propaganda Gap made for its new outlet in the most prosperous business district in Hangzhou. This one， which was marked as the second Gap outlet in Hangzhou， was opened on August 9 and covers 1，500 square meters. Gap considers it as a flagship store and it is the only fast fashion brand among all retailers stationed in the same business complex.

This outlet is staffed with 31 fulltime employees and 15 part-time workers. Dong Hui， general manager of this outlet， takes the seeking of new sales points of the display in accordance with the event so the outlet – Gap almost launches a new even every two weeks， providing discounts to different categories of products – her main task. The new sales points refer to changing the locations for displayed commodities within the rule of the Gap， such as how to bundle the clothes with discounted prices with the one with normal prices， which model should wear that clothes， which small artifacts can be picked up by the cash desk. All these tiny but important factors can affect consumers’sights and interest， which will finally be reflected in the sales performance.

For this outlet located in a scenic spot， the sales point of display is of great importance since 70% of the visitors are tourists. “Local consumers prefer shopping with goals and are attracted to discounts. Tourists， however， have no goals when getting in the shop. They need to be guided，” says Dong Hui. She joined in Gap two years ago. Before that， she was the regional manager of Starbucks in Hangzhou.

A dozen of visitors in this outlet think Gap to be cost effective， simple and full of leisure style. This brand with typical American style now rarely introduces formal apparel types. As reported by the Wall Street Journal， H&M， another fast fashion brand， has good performance in China because “it is highly welcomed by young Chinese consumers， who crave the same shopping experiences of foreigners at their ages and hope to buy fashionable apparels fitting offices and other places”. Gap is the same. And the biggest difference between it and H&M is that it has invested massively in the clothes for kids and infants.

The outlet in Hangzhou has its entire second floor taken by clothes for kids and infants. It is very common there that a family directly get to the second floor with the father manipulating the stroller while the mother choosing the clothes for the bay. “In Hangzhou， Gap has no equivalent rival in the market of clothes for kids and most of its consumers are returning consumers，”says Liao Jianghong， general manager of Gap in East China.

Hu Jing， a young mother in Hangzhou， proved the authenticity of Liao Jianghong’ words. She says that she got to know the brand from an online babysitting community last January when she was close to her labor. The mothers there all spoke well of Gap for its excellent materials and multiple types. Though Hu Jing never buys clothes for herself in Gap because she prefers the Korean style apparels， she often vistis Gap’s outlets and websites for her son.

GapKids and babyGap are two categories launched in 1986 and 1990. In most of the outlets of Gap in China， the area for clothes for kids and infants take 1/3 of the total area. The proportion might be higher in some business districts that gives priority to the atmosphere of family gathering or some lesser cities where it has no strong competitors.

From a certain perspective， Gap should not be considered to a real fast fashion brand because its product line is divided into long， middle and shortterms. The long-term products are those available for all seasons， such as jeans trousers. The middle-term products share the same features with other apparel brands that are launched on seasons and are added with new products coming out every month. The shortterm products are real fast fashion products as they take much less time from being produced to being put onto the shelf compared with the other two categories. However， it still needs four weeks – ZARA， the “fastest fashion”brand， only needs 14 days to complete all the links from designing to selling. Therefore， Gap prefers such a selfdescription： “when consumers cannot find a suitable pair of jeans trousers， we hope we can find them in Gap and they can buy them anytime they want.”

The real fast fashion is in a great demand in China. A global research made by Gap told Jeff Kriwan that Chinese consumers visited shops most frequently in the world. But different from people in North America and Europe， consumers who come to visit shops （at least Gap’s outlets） are not always for shopping. Instead， it is more like a social activity with friends and families. “That means Gap needs more new products and more fitting patterns to get them to buy the products，” Kriwan says. “Therefore， we are more often to introduce new products in China and change our display contents more frequently.”

North America is always the largest market for Gap as 70% of the company’s revenue comes from this continent. However， Gap and Old Navy， the two largest leisure clothes brands under Gap Group， are losing its consumers as many of them are getting old. They have not found ways to attract younger consumers. As a result， the revenue in North America keeps dropping from the year of 2004.

Meanwhile， the new fast fashion brands like Forever 21 and the foreign brands like H&M are eating away Gap’s market share. In 2007， Gap lost its title as the No. 1 clothes retailer to ZARA and H&M. Now， it has to compete with a strong competitor Uniqlo.

A sharp contrast is seen between Gap’s fall in the North American market and its rise and expansion in China. Nowadays， all outlets of Gap in China have met the goals of financial investment set by the headquarters， says Kriwan.

He is also waiting for the feedbacks from more property developers. For example， in Guangzhou， he has to wait for a while to get the locations he favors. He keeps repeating that this market is developing at an amazing and unbelievable speed， which also needs the reflective and radical offensive measures.

“If I can re-establish an outlook， I think I will do something different. These experiences and lessons are going to be integrated into the negotiations with property developers. We might pay twice as much as we did two years ago for a better location， or refuse to do so because it can not provide us with any betterment.”