One of the biggest apparel retailers in the U.S. Gap Inc (NYSE:GPS) is emphasizing global expansion to open up new revenue channels and reduce dependence on the sluggish U.S. economy. For the past couple of years, the retailer has been expanding at a healthy pace in lucrative markets such as China and Europe. Earlier this year, the company’s management stated that it will be launching its Old Navy brand in Japan. Gap Inc also came out with plans to enter new markets such as Taiwan, Hungary, Paraguay and Mexico.
Apart from its retail store expansion, the company has also been focused on increasing its franchise store presence in global markets. Last year, Gap Inc entered nine new countries with 85 franchise stores and plans to add 75 more in fiscal 2013. Last month, Gap Inc announced plans to open its first Old Navy franchise store in the Philippines, after it decided to start franchising the brand internationally.  This move makes sense for the retailer as the Philippines has emerged as an important apparel market in Asia with a booming BPO industry, rising remittances and growth in online retailing. However, the improving apparel industry has fueled the competition in the market, which has impacted value growth.  Nevertheless, the outlook for the apparel market is optimistic with an improving economy and purchasing power. 
Since the company is starting to franchise its Old Navy brand internationally, we believe that the brand will be launched in a number of markets in the coming future. This will assist the growth of Gap Inc’s Internet orders & franchise business, which accounts for about 30% of its value, according to our estimates. We currently forecast the segment’s revenues to increase to $4.8 billion by the end of our Trefis forecast period. However, if continued franchise expansion and rapid growth in e-commerce business push the figure to $6 billion instead, there can be 5%-10% upside to our price estimate.
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- Can Gap’s Price Optimization Strategy Improve Its Profitability?
Our price estimate for Gap Inc. at $50 implies a premium of about 35% to the market price.
Old Navy Enters The Philippines
Earlier this year, Gap Inc announced its plans to start franchising Old Navy brand internationally as it believes that the brand’s international expansion will play a key role in its quest to gain share in the global apparel market.  The brand’s products are relatively cheaper than the company’s other two brands – Gap and Banana Republic. Hence, we expect Old Navy to do well in emerging economies, where buyers are extremely value conscious. The vice president of Old Navy international stated that consumers have shown great interest in this iconic American brand, and it will reflect the same store environment in the Philippines as it does in the U.S. Gap Inc is entering a franchise partnership with Store Specialists Inc, which will start Old Navy’s expansion with two stores in Manila and add more stores by the year end. Store Specialists Inc already operates the company’s Gap and Banana Republic stores in the region.
The Brand Will Face Stiff Competition
Lately, a number of fast-fashion international brands and online retailers have entered the Philippines, which has intensified the competitive environment. These retailers have been aggressively following their discounting practices that has led to a decline in apparel market’s value growth.  Earlier this year, Gap Inc’s U.S. counterpart American Eagle Outfitters (NYSE:AEO) also entered the Philippines in partnership with the market leader, Suyen Corp. Suyen Corp offers a wide selection of merchandises at affordable prices, invests heavily in marketing, and leverages celebrity endorsements to attract customers.  Therefore, we believe that Gap Inc’s Old Navy brand will face stiff competition from local as well as foreign players.
Recent trend suggest that Filipinos have low brand loyalty as they prefer less expensive stylish apparel that are inline with the latest fashion trends.  Gap Inc will have to be extremely careful with the fashion content and prices of its products as it can easily lose its customers to other low-cost fast-fashion brands.
However, The Market Holds Good Potential
In recent years, the Philippines has become an important market for business process outsourcing (BPO).  In 2010, the region surpassed India to become the largest country for the BPO industry. In 2011, this industry reported $11 billion in revenues and employed over 640,000 people.  The growth in this industry has been one of the main factors driving higher disposable income, thus in parallel helping the apparel industry’s growth as well. Alongside, rising remittances have also had a positive impact on the Filipinos’ disposable income. Remittances refer to the money received from friends and relatives working abroad. This accounts for about 10% of the Philippines’ gross domestic product. Towards the end of 2012, the region witnessed a steep rise in cash remittances. The year-over-year growth for October and November 2012, stood at 8.5% and 7.6% respectively. Overall, the Philippines received more than $19 billion in cash remittances in 2012.  We expect the trend to continue and influence consumer spending growth in the country positively, which would bode well for the region’s apparel industry.
Currently, Filipino buyers prefer brick-and-mortar retailers when it comes to shopping for apparel. However, online retailing is set to boom in the long run, with growing Internet usage and an increase in number of online retailers.  According to Kleiner Perkins’ 2012 State of the Internet report, the Philippines is the fourth fastest growing Internet market in the world. In 2011, with greater wireless access in urban areas, the number of Internet users increased substantially by 44%, bringing the total Internet penetration to 35%.  This points towards a possible shift in consumers’ shopping channel preferences in the future. A number of online retailers are offering a wide variety of local and international brands on their websites, along with heavy discounts, attractive deals and low delivery charges. 
The apparel market growth is expected to pick up in the future on the account of improving economic environment and increasing purchasing power.  During the first quarter of 2013, the region’s GDP increased by a staggering 7.8% with increasing foreign investments and real estate boom. Notes:
- Gap Inc. Announces Plans to Open First Old Navy Franchise Store in the Philippines, Gap Inc, Sept 3 2013 [↩] [↩]
- Apparel in the Philippines, Euromonitor International, Jul 2013 [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩]
- How To Strengthen Outsourcing In Philippines, eastvantage [↩]
- BPO firms unfazed by Obama ‘job bill’, Business Mirror, Nov 8 2012 [↩]
- Philippine Remittances Rise Sharply, The Wall Street Journal, Jan 15 2013 [↩]
- Internet Trends [↩]
- Philippines’ 7.8% growth in Q1 outperforms peers, China, Philstar, May 30 2013 [↩]