Change is in store for troubled Gap

Declining footfall in its flagship stores has Gap Inc. re-examining its business strategy and hoping that philanthropy, combined with a brand new look, will take it beyond khaki.

Declining footfall in its flagship stores has Gap Inc. re-examining its business strategy and hoping that philanthropy, combined with a brand new look, will take it beyond khaki.

Gap, the company that helped make beige a fashion statement, has seen its brand perception become a little too vanilla.

In the face of competitors that have emulated Gap's casual style of T-shirts and khakis, but at a cheaper price, the San Francisco-based retailer has watched shoppers look elsewhere for more fashion- forward designs. And the toll for Gap is uncomfortably clear.

A recent Wall Street Journal article points out that Gap Inc. has cut its earnings forecast twice over the past six months and expects per-share net income for 2005 to lag behind 2004's. Gap's stock has dropped almost 16% over the past year, and in January, "the company said that total sales for all of its brands fell 5% [over the past] month and are off 2% so far in the fiscal year ending January 28," reported WSJ writer Amy Merrick on January 6. "Overall sales at stores open at least a year fell 9% last month, [Gap's] 13th decline in same-store sales in 14 months."

As a result, the company has made a promise to itself and its stakeholders to focus beyond T-shirts and khakis and improve its sense of style. But the success of Gap's new business strategy hinges just as much on being seen as a strong corporate citizen and a good neighbor as it does on hitting the right note in its product lineup.

Philanthropy leads

Driving Gap's new corporate culture is CEO and president Paul Pressler, and philanthropy and community outreach are at its core. They're also nothing new for Gap. Its founders, Donald and Doris Fisher, established the company with philanthropic roots, but Pressler intends to better leverage that legacy of giving back to the community, says Jill Nash, VP of corporate communications.

Her department is playing a major role in making sure everyone, from employees to customers to vendors to shareholders, understands how that approach will bring the brand back into fashion.

"Any time you have aligned communications, you have greater clarity and confidence," says Nash. That has been critical in communicating the company's mission and activities, and executing on those. "Paul wanted to answer the question about what is the company's purpose, and how is that going to be reflected in our behavior. And even though the executive leadership team was the driving force behind this, we had to have all 150,000 employees in sync so that we all have a common framework in which to operate."

When Pressler joined the $16.2 billion company in 2002, he and EVP of human resources Eva Sage-Gavin looked at how the company conducted its business, says Kris Marubio, senior manager of corporate communications. During their review, they realized that the company had to come together across brands and functions and operate as a whole.

Consequently, Gap's "Purpose, Value, and Behaviors" was rolled out to executives in 2003 and to all employees in early 2004. Around the company, employees see posters and paper cubes emblazoned with reminders of Gap's behaviors, namely explore, create, and exceed, together; as well as its values - integrity, respect, open-mindedness, quality, and balance.

Gap encourages employees to live the new culture and has implemented the Founders Award, in the spirit of the Fishers, which recognizes an employee's volunteer efforts by providing a grant of up to $50,000 for a nonprofit that supports a cause the employee has been involved in.

"I see companies struggling with articulating the business strategy," says Nick Kalm, a partner at Chicago-based Reputation Partners, who does not work with Gap. "When a company goes through any kind of a culture change, it needs to explain why. And if it's something such as philanthropy, it doesn't want to be seen as pandering because people's ability to see through that kind of thing is stronger than it has ever been."

Kalm cautions that good intentions can't be at the expense of making sure employees and others understand the fundamental aspects of the business strategy. And companies must empower employees to be a part of that culture.

Lining up agencies

The "Purpose, Values, and Behavior" effort was executed entirely in-house, though Marubio says the new internal focus has not changed the way Gap works with its PR firms. Gap works with Zeno Group on corporate communications and PR for the Gap Foundation, with Burson-Marsteller handling crisis communications as needed. Right now, however, Gap is looking for an AOR to help take the stores beyond being a fashion brand to being a lifestyle brand. Weber Shandwick, Edelman, and Hill & Knowlton are on the shortlist; a result is expected in February.

While Gap won't discuss the role its new agency will play, it's likely it will be involved with endearing the stores' new design to customers. Gap is testing the new-store concept in such cities as Denver, San Diego, and Hartford, CT. In the prototype, gone is the white, open-loft feel, for a homier, comfier ambiance. (See sidebar.) The stores are also designed to feel less sprawling, instead creating a more intimate boutique feel.

Although the design is in its early days, Gap is noting its success, saying customers are spending more time at its remodeled Denver stores, are using the fitting rooms more often, and sales are strong.

This intertwined approach to boosting brand and sales through more intimate store design, as well as forging closer community ties, also found its way into the marketing and PR for Gap's newest brand, Forth & Towne. When the new brand, aimed at women older than 35, opened its first store in Chicago last year, it eschewed the typical media blitz for a more community-centric approach.

The company reached out to 40 influential women in Chicago, who were asked to take pictures of what style meant to them. The resulting photos were replicated into cards, with the slogan "Meet Me at Forth & Towne" on the back, which were left everywhere from gyms to cafes. For each card customers brought in, Forth & Towne donated $10 to the Children's Memorial Hospital.

"We wanted to come into Chicago as a neighbor and a friend," said Rinat Aruh, VP of marketing for the new brand, in September.

And this evolution of the corporate culture is inextricably linked to the company's business strategy and goals, says Nash.

"We believe that being a good corporate citizen is good for business," she explains. "This is nothing new. But customers increasingly shop by their values. And employees are selecting which companies to work for and stay with based on values."

Communications played a key role in making that a reality. Nash points to the company's two corporate social responsibility reports that have been published since Pressler's arrival and to his dedication to greater transparency.

Aligning goals

Pressler was one reason Bobbi Silten, a former advertising executive and president of Levi Strauss' Dockers division, joined as chief foundation officer last year. Silten explains that she and Pressler are aligned in their thinking that Gap's philanthropic values and business goals should interconnect.

"I've never separated the two [values and business]," says Silten. "I got into business because I wanted to change the way we marketed to women... doing good for the community should be a part of the way we do business."

Both Nash and Silten refer to a "virtuous cycle" to explain how business strategy and values intertwine. And for that to work, Gap must communicate with four key stakeholders: communities, employees, customers, and investors.

For the communities in which Gap does business, the company ensures its presence makes the community a more positive place by addressing social issues.

Employees are also members of the communities where Gap does business, and they increasingly talk of wanting to work for companies with a social conscience. Silten points to recent studies that show more and more MBA candidates will take lower pay to work at a socially responsible company. And with so many employees interacting with the customer, the more fulfilled they are, the better brand ambassadors they're likely to be.

Customers are just as important, as they want to buy from companies with good social values.

As for investors, Gap funds its foundation from shareholder profits. So corporate philanthropy and employee loyalty should create shareholder value, says Silten. "If this approach makes more money for the company and the shareholder, then we can put more money into the foundation."

The biggest challenge of implanting such a culture or business strategy is aligning the goals with the expectations of all stakeholders, says Steve Cody, managing partner at New York-based Peppercom, which doesn't work with Gap.

"You must make sure that the CEO's thoughts and actions are aligned with the individual employee or shareholder," says Cody. "You don't want any surprises. And this falls upon communications. Everyone should come to know about philanthropy because you've told them, not because they read about it in the paper."

To Cody's point, no aspect of Gap's evolving approach would be possible without the communications team, which takes great pains to make sure what it's doing isn't perceived as PR for the sake of moving khaki and denim.

When Hurricane Katrina pummeled the Gulf Coast, the company hosted shopping sprees at Old Navy stores for children displaced by the hurricane, with employees donating their time and energy to help 15,000 kids.

"We wanted to give them a chance to be kids again, even for just an afternoon," says Marubio.

Employee outreach

Internal communications also played a key role in reaching out to employees affected by Katrina, letting them know the company would help them get back on track. It was also instrumental in coordinating employee support for the Old Navy shopping sprees.

"It took a lot of employees coming together to pull this off," says Nash. The event was just as important for the employees affected by Katrina, allowing them to help the community and witness firsthand the ideals Pressler is promoting.

"This was a community-driven event," asserts Marubio. "We worked with local officials and schools to find the children who needed help and to make sure they understood we wanted to help. This was not about us."

But it ultimately is. Because as much as the virtuous cycle Nash and Silten refer to reflects those values and behaviors, if the company is not successful, it can't promote them. So Gap is placing a bet that those values, such a part of the its DNA, will benefit its business.

"It all gets back to what I said earlier," says Nash. "People are shopping more based on their values. People want to join companies they can believe in. It's a philosophical alignment that benefits everyone. Paul and the leadership team are keenly committed to an unrelenting focus on the customer and community. In a very competitive culture, this is how we're going to differentiate ourselves."

Gap goes boutique

As Gap finds new ways to connect with its customers, from philanthropy to marketing, it is giving its flagship store design an overhaul as well.

"We wanted to find a way to improve the store experience," explains Kris Marubio, senior manager of corporate communications, noting that the concept is only a prototype and is a work in progress.

So far, the prototypes have popped up in Denver; San Diego; Hartford, CT; and New York. The company did lot of research, looked to design elements at other venues around the world - from museums to other retailers - and watched how men and women like to shop.

Men are more inclined to go straight to what they want and then leave, and women tend to meander more. So the men's section now makes clothes easier to find, while the women's section - while not reducing square footage - feels smaller and more intimate, thanks to a layout that makes it feel more like a boutique.

The prototype also has an area with a couch, chairs, and coffee table with local newspapers and pop culture magazines. Instead of the same ads featuring the same clothes in every Gap store, employees will now fill out signs by hand in chalk. Walls will be repainted often to reflect changing fashions, and lighting has been redone to better highlight the clothes.

"People tend to shop with friends and family, and we wanted to create a space where everyone could hang out," says Marubio.

But not everyone is sold. The new design is a "cry for help," says Bruce Dybvad, president of Design Forum, a Dayton, OH-based retail consulting group.

He says the coffee table and chairs reflect Starbucks, the lighting and other architectural elements he's seen before at Kenneth Cole, and large photos emulate Abercrombie & Fitch.

"Emulation defies the heritage of Gap," says Dybvad. "It should be leading the retail edge."

He concedes that the warmer and more contemporary look is a welcome respite from the current "sterility" of Gap stores. But while it might send the messages of warmth and socialization, it doesn't tell shoppers who Gap is or what it stands for.

"I see lots of picking and choosing of elements," says Dybvad. "It's a good departure from where it is today. I just wish it had been a little more original. It needs to figure out who it is."

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