Gap, Inc.

1 Harrison Street
San Francisco, CA 94105
(650) 427-2000
www.gapinc.com

Since the 1950s, many U.S. companies have made money targeting baby boomers, the generation born between 1946 and 1964. Tailoring products to the tastes of these seventy-six million Americans—and later, their children—helped Gap, Inc., become the largest clothing-store chain in the United States. What started as a single San Francisco shop has grown into a retailing giant with more than four thousand stores around the world. The Gap's casual, well-made clothes—especially khakis, jeans, and T-shirts—have become part of American fashion, worn by people of all ages and from all economic backgrounds.

Falling into the Gap

The first Gap store was established because founder Donald Fisher had trouble finding blue jeans in his size. Although he had no experience in retail, he and his wife Doris decided to open a clothing store in San Francisco, California, that would feature Levi's jeans in a wide range of sizes. The couple also sold records in their store, which they named the Gap, a reference to the so-called "generation gap" between young people and adults. The store was meant to attract college students and teenagers. The first Gap opened in August 1969 near San Francisco State College, and ads promised that customers would find "four tons" of Levi's jeans for sale. In 1992, Fisher told Business Week that the first Gap did so well, "you couldn't get into the store."

After his early success, Fisher stopped selling records and concentrated on jeans, while adding other casual clothes to his inventory. The Gap grew, opening more stores in California, and then in other states. In 1974, the company began producing its own clothes. Denim, however, remained the company's major product, and Levi's was the top brand. Radio and television ads encouraged shoppers to "Fall into the Gap" for affordable, fashionable clothes. By 1976, the Gap had two hundred stores across the United States.

But even as the Gap grew, the company faced some problems. For years, Levi's had not allowed retailers to offer sales on its jeans—stores had to charge what Levi Strauss & Company (see entry) told them to charge. In 1976, however, the Federal Trade Commission (FTC) ruled that manufacturers could not order stores to charge a minimum price. As other stores slashed prices on Levi's, the Gap saw profits fall. And in the early 1980s, the demand for denim clothes began to slow. Fisher needed to make changes to keep the Gap growing.

New Stores, New Leader

In 1982, Fisher began expanding the size of the typical Gap store, making it up to three times larger. With the extra space, the stores carried a wider range of clothes. The next year, the Gap bought the Banana Republic, a clothing retailer with two stores in San Francisco and a mail-order business. The stores had an African safari theme and featured clothes made from khaki, a light-brown cotton cloth often used for military uniforms. Fisher soon built more Banana Republic stores and sales grew almost 500 percent between 1985 and 1987.

Fisher's best move was bringing in a clothing retail expert to help him run the company. Millard "Mickey" Drexler had boosted sales at Ann Taylor, a chain of women's dress stores. Fisher named him president of the Gap stores and let him go to work. Drexler began by slashing prices to sell off old merchandise, so he could introduce new clothes. Both profits and the company's stock price plunged, and Drexler later told Business Week, "We were all scared, and I was more scared than anyone the first year and a half."

But as Drexler implemented his ideas, the Gap began to rebound. To Drexler, the store's old lines were "trendy but not tasteful," as he told the New York Times in 1991. Realizing that the long-time Gap customers—baby boomers—were getting older and wanted more style, Drexler switched to better fabrics and classic designs, offering items in many colors. He also got rid of all the brand-name clothes except Levi's. (The Gap stopped selling Levi's in 1991.) Everything else in the stores was designed by the company and bore the "Gap" label. Drexler made changes within the stores, too, displaying clothes on white shelves instead of hanging them from metal racks. Store walls were painted white, and the wood floors were polished twice a week to give the spaces a fresh, clean look. The new Gap attracted both adults and young people, and by 1986, sales had risen 40 percent from 1983.

Expanding the Market

In 1986, Drexler saw another need the Gap could fill: providing durable clothes for children. The company launched GapKids, separate stores targeted to children between ages three and twelve. Parents quickly responded, and the new division's annual sales reached $260 million in 1991. By then, the stores were also selling babyGap clothes, designed for infants and toddlers. Today, the Gap has separate stores for its line of kiddy apparel. In 1990, Drexler told Fortune magazine, "I didn't know if GapKids was going to work.… I do know you can't run a business without taking risks."

Helping the Gap grow was the company's advertising. In 1988, a series of black-and-white magazine ads featured celebrities wearing Gap clothing along with other items from their wardrobe. Called "Individuals of Style," the campaign's message was that Gap clothes were for everyone and they went with everything. Some of the ads featured Gap T-shirts, and sales of these simple tops soared. A later advertising campaign showed celebrities from the past, such as Marilyn Monroe (1926-1962), wearing khakis, sparking new popularity for the pants.

In 1994, Gap, Inc., added another new division, Old Navy. With larger stores than the typical Gap, Old Navy carried

clothes for the entire family, selling them at lower prices than the Gap. Trying to create a fun atmosphere, the company decorated the stores playfully, sometimes including old cars and gumball machines. In less than four years, Old Navy reached annual sales of $1 billion. By this time, the Gap had also expanded overseas, introducing stores in Canada and Europe. The first Japanese store opened in 1995. New products were also introduced, as the Gap began selling shoes and perfume.

Difficult Times

During the 1990s, the Gap and its other retail divisions grew dramatically. The company also began offering its products on-line, through several different Web sites. Although sales increased each year, the company started having some troubles in 2000. The boost in sales came from adding new stores, not from selling more clothes at existing stores. The Gap tried adding clothes meant to attract younger shoppers, but the new styles did not appeal to older customers. In 2001, Drexler admitted to Fortune, "We have disappointed some of our core customers."

To combat its slump, the Gap planned to slow its expansion and concentrate on winning back those old customers. While still concentrating on such basics as denim, Drexler added new fashions, hoping to find the right mix. Despite tough times, Drexler remained confident in the company's future. "At the end of the day" he told Fortune, "Gap is a very, very well-respected, popular, and recognized brand."