By: David LaMore, Andrew Salamida, Galal Cancer AEM 4160 – Strategic Pricing April 23, 2015 Pricing Strategy

Company Profile ●Based in San Francisco, California ●Started in 1969 by Don & Doris Fisher ●Five brands, with almost 3,700 stores and more than 150,000 employees ●Core principles: o Creativity o Delivering results o Doing what’s right o Always thinking of our customer first

Gap Inc.’s Portfolio of Brands

Three Brands of Focus ●These three brands essentially sell the same product, yet are highly differentiated and sell at different price points

Don’t Forget About The Factory Stores!

Industry Structure

Background of the Family Store Industry ●Although Gap Inc. fits under multiple industries within apparel, we will focus in on the “Family Stores in the U.S.” industry defined by IBISWorld.

Revenue & Employment Growth

What’s the Industry looking like?

Major Companies ●The TJX Companies Inc. ●Gap Inc. ●Ross Stores Inc. ●All other family companies

Competition HHI=(.107^2+.139^2+.142^ ^2)*10,0 00= CR4= = 42.6

From Concept to Customer ●At a broad level, the typical organization of product life cycle in a typical apparel company: o Mills o Manufacturing o Distribution o Retail o Consumer

Typical Life Cycle of Many Goods ●As the average line in apparel begins its life cycle 18 months in advance, fast fashion companies have managed to shorten this life cycle into just a few months!

Cost Structure of Industry

The TJX Companies Inc.

Gap Inc.

Ross Stores Inc.

Industry Performance

Pricing Strategies

Versioning ●Essentially the same product ●Appeal to different consumers at different income levels ●Consumers’ tastes and preferences helps choose the brand which meets their needs best

Versioning at it’s finest... ●“Must haves” at low price point ●Clothing for everyone in the family ●American fashion essentials ●Casual attire at an affordable price ●Classic and modern clothing style for everyone ●Embraces freedom to express personal style ●Refined apparel with highest price point of brands ●Fresh twist on classic apparel for men and women ●“True Outfitters of Modern American Style”

Old Navy Shirt- $29.94 Jeans- $29.94 Shoes: $24.94 Shirt- $24.94 Jeans- $29.50 Shoes: $19.94 $86 $81

Gap Shirt- $49.95 Jeans- $59.95 Shoes: $59.95 Shirt- $49.95 Jeans- $69.95 Shoes: $39.95 $170 $160

Banana Republic Shirt: $69.50 Jean: $89.50 Shoes: $ Shirt: $79.50 Jean: $98.00 Shoes: $79.00 $277 $257

Retail vs. Factory Stores ●Gap and Banana Republic ●Differentiated brands in order to reach more price sensitive/low income consumers ●Factory brands are developed completely different ●Capture lower willingness to pay consumers ●Anchoring \ Gap Factory Pique Polo vs. Gap Pique Polo

Gap Factory Shirt: $ > $34.99 Jean: $ > $24.99 Shoes: $ > $14.99 Shirt: $ > $17.99 Jean: $ > $41.99 Shoes: $ > $20.99 $86 $81

Banana Republic Factory Shirt: $ > $19.99 Jean: $ > $53.99 Shoes: $ > $41.99 Shirt: $ > $37.99 Jean: $ > $41.99 Shoes: $ > $62.99 $116 $143

Men vs. Women Pricing Across Brands

Men’s Results 138%98% -32% 1.35%

Women’s Results 79%97% -11% 9%

Margins between Brands

Versioning $277 $85 $86 $170 $116 $257 $74 $81 $160 $143

Heavy Discounting ●Gap’s brands are known for heavy discounts due to a number of driving factors o Consumer’s addiction to sales o Getting rid of last season’s pieces o Items that do not sell well o Seasonal events that encourage shopping (ex. Back to School, Holidays)

Driving Factors for Sales In 2013 Annual Report: Trends Competition Current economic conditions Timing of merchandise releases Promotional events Change in merchandising mix Success of marketing/advertising Weather Currency fluctuation

Popularity of Gap Inc. Brands by Search

Discounting Summer Items at the end of June

Popularity of Gap Inc. Brands by Search Back to School promotions drive traffic more for Old Navy

Popularity of Gap Inc. Brands by Search Black Friday Promotional Event

Popularity of Gap Inc. Brands by Search Last minute holiday shopping

How does Gap discount so heavily? ●The cost of producing clothing per item is VERY low for Gap due to: o Economies of scale o Technology o Experience o Cost of labor ●As Gap marks up their items a certain percentage (industry average is 40%), they can afford to markdown their clothes extensively ●Apparel companies will sometimes even sell an item near or below its cost in order to get rid of prior seasons’ items and reduce storage costs

Recommendations

Risk Factors Must anticipate and respond to changing apparel trends and customer demands Customer traffic both in stores and online Competitively pricing products and achieving customer perception of value Must maintain favorable brand recognition and effectively marketing products to customers in diverse market segments as well as multiple geographic locations Developing innovative, high-quality products in sizes, colors, and styles that appeal to customers of varying age groups and tastes Will have to source merchandise efficiently

Key Strategic Initiatives Designed to optimize inventory levels and increase the efficiency and responsiveness of the supply chain 1) Seamless Inventory timely matching of product supply and demand across markets and channels to reduce stranded inventory 2) Responsive Supply Chain more vendor fabric platforming, product demand testing, and in-season rapid response to demand 3) Omnichannel Retailing Providing the customer with the same experience no matter which channel they are shopping from (social media, e-commerce, brick & mortar)

Total Return to Stockholders

Pricing Strategy: What should Gap do? Make best line of clothing more distinct→ creates higher value for consumer and differentiates that specific product line Establish lower prices and enhance the value of their products. (Everyday Low Pricing) Deep value retailers has shown that this can be successful Ex. H&M, Forever 21, Uniqlo, Zara

Questions? Thank you for listening to our presentation!

References m%2F025pbv&geo=US&date=1%2F2014%2012m&cmpt=q&tzhttps:// m%2F025pbv&geo=US&date=1%2F2014%2012m&cmpt=q&tz=