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Gap Inc.: Going to France Strategy Research Paper

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Updated: Oct 8th, 2021

Introduction

Gap Inc. was founded in 1969 by Donald and Doris Fisher in San Francisco, California, with a single store and a handful of employees. Today, the Gap is one of the world’s largest specialty retailers with three of the most recognized brands in the apparel industry – Gap, Banana Republic and Old Navy. In 2004, the Gap boasted fiscal revenues of $16.3 billion. The Gap began creating its own private label clothing in 1982 and had stopped carrying other labels altogether by 1991. The name came from the growing differences between children and adults, called “the generation gap”, which reached its peak with the hippie movement.

This paper aims to understand the feasibility of the French market and make a strategy for Gap Inc. to enter France. To come to the strategy of Gap we first need to determine the market conditions of France. To do so we will conduct a SWOT (strength, weakness, opportunity, threat) analysis of the French economy. Then we will try and ascertain the best possible plan for Gap to enter the French retail market.

SWOT Analysis

Strengths

French Economy

France is world’s sixth largest economy with a GDP of $2 trillion. France’s population of 63 million people has a high disposable income of USD 33,855 per capita. France is a member of the G-8, the European Union, the World Trade Organization and the OECD, confirming its status as a leading economic player in the world. After Germany, France is the second-largest trading nation in Western Europe. France ran a record-setting $48 billion global trade deficit for the 12 months ending in November 2007. Total trade for 2006 amounted to slightly over $1 trillion, over 45% of GDP, 75.0% of which was with EU-24 countries.

Trade Environment

As a member of the European Union, France shares common external tariff, and, in many cases, non-tariff barriers with other members of the Union. Product safety and sanitary standards affecting imports into France are increasingly established at the EU level. The United States and EU have negotiated Mutual Recognition Agreements covering certain product standards that should ease entry into EU and French markets for U.S. firms.

Import Climate

There are no barriers for foreign-owned franchised companies in France. They are no quotas on imports of apparel manufactured in the United States. French importers pay VAT (Valued added Tax) at the rate of 20.6 percent on the CIF (Cost, Insurance, Freight) value on imported goods. They also pay customs duties of 14 percent when clearing goods through customs.

Weakness

Market Challenges

Government economic policy aims to promote investment and domestic growth in a stable fiscal and monetary environment. Creating jobs and reducing the high unemployment rate through recovery-supportive policies has been a top priority. Despite significant reform and privatization over the past 15 years, the government continues to control a large share of economic activity. Regulation of labor and product markets is pervasive. The government continues to own shares in corporations in a range of sectors, including banking, energy production and distribution, automobiles, transportation and telecommunications.

Opportunities

Market Opportunities

Textile and retail are one of the leading non-retail products considered “best prospects” in France. The French market for clothing retailers was worth Euro 21.5 billion (or US$19.8 billion) in 2001 having grown by 0.5% since 2000. The market has grown by 2.9% over the review period. A return to consumer confidence has been the key source of growth over the last two years.

Strong Franchise market

In 1998, the French apparel franchise market was composed of 2,915 franchises representing USD 1,929 million. In 1999, 317 new franchises are expected to open in France (women’s wear: 123; children’s wear: 72; men’s wear: 58; lingerie: 40; jeans wear: 13; sportswear: 11). Although the number of foreign franchises is low, they are growing at a steady rate (about 5 percent per year), and Italy is the leading country with the most important number of franchises in France followed by the United States, Spain, and Germany. French consumers are fashion conscious and like “American” styles and products. Therefore, there are good opportunities for U.S. apparel franchises to successfully penetrate the French market, especially in the sportswear sector. The franchise sector as a whole continues to expand, while the apparel franchise market remains relatively stable.

Weakness

Government Interventionalist Policy

France has a tradition of highly centralized administrative oversight of its essentially market-based economy.

EU levied Import Tariff

The EU tariff schedule is based on the Customs Cooperation Council Nomenclature (CCCN), which is also referred to as the Harmonized System. This system was introduced to provide a standard tariff classification regime for all products imported and exported throughout the world. The decreasing average for industrial manufacturing goods is expected to be around 3 per cent over the next few years.

Threat

Domestic Production

The French apparel franchise network is composed of 57 franchisors. The women’s wear franchise sector holds the most important share of the apparel sector, followed by the men’s wear and children’s wear franchise sectors. Over the past three years, the children’s wear sector has experienced considerable growth with a high level of new openings: 72 boutiques are expected to open in 1999. In general, French companies have installed their manufacturing facilities in countries with lower labor costs (Portugal, Morocco, Tunisia, Turkey, and recently in Eastern Europe).

Third-Country Imports

Italy is the leading country with the most important number of franchises in France (Max Mara, Marina Rinaldi, Cerruti, Francesco Smalto), followed by Spain (Mango) and Germany (Escada).

U.S. Market Position

So far, the only U.S. apparel franchises in France are Levi’s stores totaling 39 franchises in France, followed by Athlete’s Foot with a total number of 20 franchises.

Emerging Labor Laws

The working hour of labors is supposed to be decreasing from 35 working hours in a week to 30 hrs working. This is a major threat to the corporate trying to enter the French market.

Threats from franchise market

As more and more retailers are aiming to establish wholly owned chains, the franchise market, however, is attempting to resist this trend by offering a large choice of products in order to target as many customers as possible.

Gap Inc.’s Strategy

Given the background of the French market and its foreign trade policy we may conclude that Gap should take the following measures foe entering the French market. This is the right time to enter the French market as the US-France trade relations are good and the entry barriers are non-existent. And the apparel retail market is still nascent. So the time is ripe for Gap to enter the market.

Cost

Gap should consider the emerging trend of hypermarkets in France and consider opening stores which will be big. The French retailers as it is take advantage of the allied low labor cost countries in the neighborhood where they set their manufacturing units. This will reduce Gap’s supply chain cost as well as give them a cost advantage.

In general, 50 percent of an outlet’s initial investment is provided on a mid-to-long term loan basis; 30 percent is provided by personal contribution, supplemented by a short-term loan for the remaining 20 percent. When taking over a retail location, companies are often subject to a substantial start-up fee, or “fond de commerce”, which is negotiable with the former occupant. This fee varies with the size and location of the establishment. The new leaseholder pays for the right to access the previous occupant’s clients. French banking and financial activities have undergone changes during the past decade. Former restrictions, such as credit ceilings or foreign exchange controls, have been abolished. These changes have resulted in increasing foreign investors’ interest in the French market, as well as that of financial institutions, which seek an operational presence. Rates of return will need to exceed cost of capital based on current interest rates and risk premiums.

Now we will consider other American retailers who entered France. Levi’s store was opened in 1988. The consolidated sales volume for France was estimated at USD 64 million. The stores in France generally cover a surface of 1,110 square feet with 4 salespeople. Each store generates a sales volume of approximately USD 1.7 million. The start-up fee required is generally USD 200,000. In the case of Levi’s store, the franchisee should also pay a participation in the advertisement representing 2 percent on purchasing prices (tax not included). Athlete’s Foot opened its first boutique was opened in 1996, and management reported a sales volume of USD 550,000 for 1998, while the consolidated sales volume for France was estimated at USD 12 million. The stores in France cover approximately 900 square feet and employ generally 3 persons. The start-up fee required is about USD 200,000. The success of these U.S. franchises can be attributed to the fact that French consumers are very receptive to U.S. fashion. Therefore, in light of the above, there appears to be numerous opportunities for U.S. apparel.

Product Mix

The different brand offerings of gap and their positioning are as follows:

  • Banana Republic – known for casual luxury, with high-quality apparel for men and women and sophisticated seasonal collections of accessories, shoes, personal care products, intimate apparel and gifts for the home.
  • Old Navy- famous for the best in denim, graphic tees, cargos, Performance Fleece, plus the Old Navy Item of the Week – each and every week, a special item at a special price.
  • Forth & Towne – a unique shopping experience and destination for women. Forth & Towne will offer fashionable apparel and accessories.
  • In addition, Gap brands include babyGap, GapKidsand Gap Maternity.

Since the French customers have been showing increasing affiliation for American style products, Gap should stick a strategy of standardization as far as design of their products are concerned. The positioning of the products should be same as in the US so that managing the brand becomes easier.

Target

As the French market has shown rising demand for sportswear in American styles (according to market research). Moreover there is increasing demand for kids wear as well as ladies wear market is booming. According to market specialists, sportswear franchises are expected to grow in the near future for the following reasons: Sportswear has diversified its original purpose and has become a large part of contemporary style. Today, in most cases, sportswear is being used as casual wear, such as windbreakers, sweat-shirts, T-shirts, shorts, or polo-shirts. In addition, capturing the spirit of today’s urban lifestyle, sportswear is highly popular among teenagers living in large, urban areas. As a result, sportswear, with American logos, is extremely popular among teenagers, who are influenced by their favorite American television series. As Gap should adopt a standardized product strategy so their target customers for a particular brand should not alter.

Pricing

Price is always an important factor for consumers. Thus, Gap should offer several lines/brands of products at different prices to attract all type of customers.

Advertising: One of the key factors in establishing a brand in France is to provide an adequate advertising budget. Gap should be able to effectively promote their image and reinforce their positions. New products should be aggressively marketed to appeal to French consumers and to influence their fashion preferences. For example, the media has a tremendous impact on French children. Music and television are influential at an early age.

Distribution/Business Practices

Given the previous trend of other American retailers and the market conditions in France, it is best advisable to open the new venture through a franchisee network. The Doublin law of December 31, 1989 and its application decree of April 4, 1991 protect the interests of commercial networks in general, as well as the interests of the franchisor, his/her network, and potential franchisees. A franchise contract is drafted for an average duration of 3 to 5 years; 50 percent of all the contracts are renewed automatically, with the balance renegotiated prior to renewal. Usually, the franchisee pays royalties fixed by the franchisors. Gap should understand that the price should not necessarily be based on the U.S. market. They should allow a margin of flexibility in their price, which would allow them to better adapt to specific French market conditions, i.e.: difference in real estate prices, and start-up costs in the retail business.

Reference

Hill W.L. Charles. Global Business Today ( 5th ed.). Boston: McGraw-Hill Irwin, 2008.

French Embassy in United Kingdom. 2002. French Embassy. Web.

BUYUSA.GOV. 2001-2008. US Commercial Service. Web.

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