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Gap-Old Navy Split Could Create Pressure for Suppliers

The fallout for suppliers from the separation of Old Navy and Gap Inc. will likely depend on which side of the supply chain the company falls.

That’s mainly because Old Navy is on an expansion path and Gap stores are consolidating. Those companies that sell to both chains might find themselves in a more competitive environment, but the differentiation of price levels should minimize conflicts.

Gap Inc. announced in late February its plans to create two independent publicly traded companies: Old Navy, a category-leader in family apparel, and a yet-to-be-named company that will consist of the Gap brand, Athleta, Banana Republic, Intermix and Hill City.

The spin-off, Gap Inc. said, will enable each company to maximize focus and flexibility, align investments and incentives to meet its unique business needs and optimize its cost structure to deliver profitable growth.

Dr. Haresh Gurnani, Thomas H. Davis chair of business at Wake Forest University and professor of supply chain analytics, said there are real benefits for both companies in sourcing, which contributed to the reason they decided on the split.

“Any breakup in terms of sourcing is a dis-economy of scale,” Gurnani said. “They tend to lose some leverage due to the reduction of size, and when you look at contract manufacturers and suppliers, the bigger you are the better it is in terms of getting more capacity, better contracts and better prices.”

Gap knew the business had taken separate paths before its decision was made public.

“It’s clear that Old Navy’s business model and customers have increasingly diverged from our specialty brands over time, and each company now requires a different strategy to thrive moving forward,” Gap Inc. chairman Robert Fisher, said. “Recognizing that, we determined that pursuing a separation is the most compelling path forward for our brands–creating two separate companies with distinct financial profiles, tailored operating priorities and unique capital allocation strategies.”

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The move, however, may prove more challenging for suppliers.

“If you are maintaining common suppliers, you can be handicapped,” Gurnani said. “Old Navy can demand larger numbers and demand greater power, and Gap’s costs will probably increase a bit. But they will be able to manage their inventory assortment in a better manner.”

Suppliers can benefit from Old Navy’s independence and growth because they will have better order streams, “so it’s a win-win for Old Navy and its suppliers,” Gurnani added.

Mark Frohlich, an associate professor of operations management at Indiana University, said the situation presents an “under-explored” issue in supply chain management.

“I’d imagine that in their sourcing department there are certain buyers that have mostly procured for the Old Navy product lines and others that purchased for Gap’s,” Frolich said. “Likely, they will divide sourcing along those lines. If not, and they let the procurement professionals decide which company they want to go with, then it may be interesting in that one of the companies may not have enough buyers that decide to come on board, while the other one ends up with relatively too much staff given their now reduced volume.”

Even independently, Gurnani said Gap and Old Navy will still be large enough where both would remain among the top 10 apparel suppliers and distributors. “So they will still maintain a large enough size to maintain bargaining power with their suppliers,” he said.

However, the different directions being taken by the chains, with Gap closing stores and Old Navy expanding, could pose advantages and disadvantages.

Art Peck, president and CEO of Gap Inc., said the spin-off enables the two stand-alone companies to have “a sharpened strategic focus and tailored operating structure.”

On the other hand, Moody’s vice president Christina Boni said, “Although the proposed spinoff of Old Navy will enable a sharpened strategic focus on its business priorities, it reduces the diversification the brand provides to the overall entity.”

Old Navy is Gap Inc.’s leading brand comprising 47 percent of sales in 2018, with margins that lead its portfolio, Boni noted.

Gap Inc. said Old Navy, with approximately $8 billion in annual revenue, will be able to capitalize on its scale, broad customer awareness and positioning to extend its category leadership and deliver profitable growth. Old Navy will have the flexibility, focus and control needed to increase customer access by further applying its strategic real estate strategy, evolving its omnichannel model and expanding its product categories to continue to successfully resonate with value-focused customers.

At the same time it announced the split, Gap said it would restructure its signature store specialty fleet, including the closure of about 230 Gap specialty stores over the next two years. The company estimates an annualized sales loss of approximately $625 million as a result of the store closures.

“There will be a healthier channel mix after the restructuring, with nearly 40 percent of sales coming from online, and the remainder split fairly evenly between the specialty and value channels,” the company said.

At the end of the fiscal year, Gap had 2,406 stores in North America, Asia and Europe, while Old Navy had 1,131, mainly in North America.

“Old Navy continues to outpace Gap Brand and Banana Republic, and is one the fastest-growing major apparel brands with comparable stores of 3 percent in 2018 growing to over $7.8 billion in 2018,” Boni said.