Adding some intensity to Old Navy‘s international expansion strategy, Gap Inc (NYSE:GPS) recently unveiled plans to open five franchise operated stores in the Philippines in 2014. Two of these stores were scheduled to open by the end of March and rest will be operational in the second half of the year.  These plans came soon after Gap Inc accelerated its Old Navy expansion in Japan and announced the brand’s first store in China. The retailer appears to be ramping up Old Navy’s expansion in Asia, encouraged by the strong customer response and huge market potential.
Gap Inc initiated Old Navy’s international expansion with Japan last year and ended 2013 with 20 stores in the region. The company plans to open 25 stores in Japan this year as it was thoroughly pleased by the brand’s performance. Considering Japanese buyers’ interest in affordable apparel brands and the gradual market recovery, speeding up expansion seems to be a wise move. In its last quarterly earnings call, Gap Inc stated that it will open its first Old Navy store in China later this year. Since the retailer’s namesake brand is already well known in the region, we believe it can build Old Navy into a stronger brand in the coming years. Moreover, the recent pullback in consumer spending in China can make Old Navy a viable shopping option given that it is one of the most popular affordable western brands. In the Philippines, booming BPO industry and rising remittances have created a conducive environment for apparel market’s growth. Gap Inc believes that the market is well suited to Old Navy‘s offering since Filipinos have shown great affinity for iconic American brands. 
Our price estimate for Gap Inc is at $50, implying a premium of more than 25% to the market price.
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The Philippines – Market Holds Enough To Keep Gap Inc Interested
Despite its small size, the Philippines apparel market offers good potential for value-focused retailers, due to its flourishing middle class, which is benefiting from rising disposable income on account of booming BPO (Business process outsourcing) industry and increasing remittances. The Philippines is one of the biggest BPO markets in the world, with over 640,000 (2011) employees working in various call centers.  In 2013, this industry generated $13.34 billion in revenues, which was an increase of almost 15% over the prior-year level. The country’s central bank expects the BPO industry to render $15.34 billion in 2014 with a sustained growth rate of 15%. By 2016, the industry is expected to touch $25 billion in revenues with close to 1.3 million employees, suggesting better lifestyle and higher demand for branded apparel in the future. 
Apart from the booming BPO industry, substantial rise in remittances (money received from friends and relatives working abroad) is also stimulating consumer spending in the Philippines. Remittances account for close to 10% of the country’s GDP and have been rising rapidly over the past couple of years. The Philippines received $21.3 billion in cash remittances in 2012, which was 6.3 % higher than what it received in 2011.  In 2013, the figure further rose by 6.4% to $22.76 billion. Growing revenues from BPO and remittances resulted in better-than-expected economic growth of 7.2% in 2013 and a strong forecast of 6.5%-7.5% for 2014.  Therefore, we expect consumer spending to continue to improve in the coming years, which bodes well for the region’s apparel industry. Euromonitor expects the apparel market’s growth to pick up in the future driven by improving lifestyle and healthy economic growth. 
Within the apparel market, consumers have shown a preference for high fashion low-priced brands, which has allowed them to shop more frequently. They have been increasingly switching to online shopping, which is at a nascent stage currently, but is expected to become a key distribution channel in the future.  These aspects are likely to favor Gap Inc’s growth given that Old Navy is a value focused brand and its e-commerce channel is quite strong. However, the company will face stiff competition from the market leader Suyen Corporation and its American partner American Eagle Outfitters (NYSE:AEO).
China – Tremendous Growth Potential Despite A Recent Slowdown
Gap Inc already has a well established footprint in China. During fiscal 2013, the retailer opened 30 new stores and entered 4 new cities, extending its presence to 21 cities in the region. Interestingly, its brand awareness in China touched 70% in 2013, which is significantly more than its peers. Considering this, the retailer might be able generate a lot of excitement for its upcoming Old Navy store.
Although the Chinese apparel market is struggling currently on account of consumer spending pullback, it is set to boom in the long term. With rising disposable income and growing urbanization, the market grew from $110 billion in 2009 to $140 billion in 2012, and is expected to touch $220 billion by 2016.  Moreover, eMarketer forecasts online retail sales in China to increase from $110 billion in 2012 to $440 billion in 2016. 
The substantial rise in the region’s labor costs due to labor shortages, an ageing population, and increased government regulation have all worked to drive growth in disposable income. The development of rural areas has encouraged the local population to look for work opportunities in their vicinity. This is preventing migration to urban areas, resulting in fewer workers and more expensive labor. Also, China’s population is aging and about 243 million Chinese are expected to be above the age of 60 by 2020.  The younger generation increasingly prefers college over factory work, which reflects increased awareness of education and the opportunities it affords. Apart from fueling labor costs, this trend is likely to enhance the youngsters’ living standards and increase the demand for specialty apparel.
Japan – The Big Market Is Recovering
Gap Inc introduced Old Navy in Japan last year and received prodigious customer response. It opened 20 stores during 2013 and plans to add another 25 stores this year. Japan is a huge market for apparel players with annual sales of more than $100 billion. Though persistent economic problems have weighed on the market’s growth for over a decade, it somewhat recovered in 2012 (+0.4%) due to increased consumer spending. The biggest gainers from this rebound were the top 100 specialty apparel chains (+5.2%) who hold more than half of the apparel market share in Japan. 
The region is an important market for affordable brands since Japanese buyers have been buying longer-lasting value focused products. This trend is likely to persist in the future as consumption tax is expected to go up this year.  This bodes well for Old Navy since it offers a wide range of casual products at affordable prices.Notes:
- Gap Inc. Opens First-Ever Franchise-Operated Old Navy Stores, Gap Inc, Mar 18 2014 [↩] [↩]
- BPO firms unfazed by Obama ‘job bill’, Business Mirror, Nov 8 2012 [↩]
- BPOs made $13.34B in 2013 export services, Business Mirror, Jan 3 2014 [↩]
- 2012 remittances hit record high, Philstar, Feb 15 2013 [↩]
- Remittances up 6.4% to $22.76 B in ’13, Philstar, Feb 18 2014 [↩]
- Apparel in the Philippines, Euromonitor, Jul 2013 [↩] [↩]
- China’s apparel retail market: $218 industry by 2016, Trans World News, Aug 3 2013 [↩]
- B2C Ecommerce Sales Climbs Worldwide, as Emerging Markets Drive Higher Sales, eMarketer, Jun 27 2013 [↩]
- China’s bid to provide care systems for elderly faces hurdles, warn experts, South China Morning Post, Sept 4 2013 [↩]
- Japan’s Apparel Market Is Growing Again, The Business Of Fashion, Dec 10 2013 [↩]
- Apparel in Japan, Euromonitor, Jun 2013 [↩]