Three Foreign Markets Where Gap Has Tremendous Growth Potential

Due to increasing competition in the U.S. retail apparel market, Gap Inc. (NYSE:GPS) is looking to expand internationally to sustain its growth. With better economic growth prospects and lower competition among major western brands than the U.S., international markets provide an opportunity to gain market share and brand recognition.

The company is scaling up its expansion in China, Brazil and Japan. China is the second largest apparel market in the world, and luxury spending in the region is on a rise. In addition to this, Brazil’s growing middle class provides a large pool of fashion conscious buyers. Although Japan’s apparel market is feeling some pressure due to prolonged economic weakness, buyers have started to prefer value-for-money products, which is good news for Gap.

See our complete analysis for Gap Inc.

China’s Apparel Market To Cross $200 Billion By 2014

With a booming middle class and rising disposable income, China has become the second largest apparel market in the world with total apparel sales of about $110 billion (2009 figures). Consulting firm Mckinsey expects this figure to cross $200 billion by the end of 2014. ^[1] This explains why Gap opened 30 stores in China last year and plans to add 35 more in fiscal 2013.

The retailer also plans to open its affordable luxury brand store Banana Republic in the region. ^[2] Another McKinsey report suggests that while Chinese consumers represented only 1% of global luxury spending in 1995, they accounted for 27% of the spending in 2012. By 2015, China is estimated to have one-third share of the global luxury market. ^[3] Gap’s stores in Asia generate about 40% more revenue per square foot than its stores in North America due to better economic conditions and lower competition among major western brands. ^[4] We expect Gap to continue to expand its business in China in order to build a solid foundation for future growth.

Japan Is $110+ Billion Market, With Buyers Placing More Emphasis On Value

Although Japan’s apparel market stands large at about $110 billion, its growth has suffered due to a decline in consumer spending and prolonged economic weakness. ^[5] However, the situation is getting better with Japanese government’s Cool Biz campaign and the consumer shift to value-focused products. ^[6] The government has urged companies to limit air conditioning and set warmer room temperatures, which resulted in increased demand for casual clothing suited for such environment. ^[7]

Japanese buyers have started to prefer longer-lasting value-focused products. This is good news for Gap as it is expanding its Old-Navy brand (15-20 stores in 2013) in the region, which offers casual clothing at lower prices compared to Gap and Banana Republic. ^[8] Uniqlo, which is similar to Gap, is the largest apparel retailer in Japan. ^[9] We believe that Gap can establish a strong brand identity in the region.

Another encouraging sign for the company is the growth in Japan’s Internet retail market despite a lull in distribution patterns and mass merchandising in 2011. ^[6] To leverage this growth, the retailer launched its e-commerce site in Japan last year. ^[10]

Brazil Is $50+ Billion Market With Growing Middle Class

Brazil is the sixth most populous country in the world and the largest economy in Latin America. ^[11] Over the past four years, the apparel market in the region has grown strongly at an average annual rate of 7.4% with an estimated $50.7 billion in sales in 2012. ^[12] The growth is being driven by Brazil’s fashion conscious growing middle class, increased consumer credits and rising disposable income of people from lower income brackets. ^[13] Moreover, about 62% of the country’s population is under 29 years of age. ^[11] This favors the apparel market growth as most apparel sales come from the younger population. ^[13]

Brazil’s middle class, earning an income between $690-$2,970 per month, increased from 38% of the total population in 2003 to 55% in 2010. ^[14] The figure is expected to continue to increase for the next several years. A study by management consulting firm A.T. Kearney suggests that Brazilian shoppers spend significantly more on apparel products than Chinese shoppers. ^[15] They also tend to shop for apparel products on credit more frequently than other emerging nations. ^[14]

Last year, Gap announced that it plans to open its first store in Brazil in the second half of 2013. Brazil is not a new market for the retailer as it has been offering its products through duty-free channels in this region. As a result, we believe that Gap’s brand recognition will likely translate to strong sales for the retailer’s new stores.

Our price estimate for Gap Inc. at $40, implying a premium of about 10% to the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. From Mao to Wao: Winning in China’s Booming Apparel Industry, McKinsey, Jan 2011 [↩]
2. Banana Republic Set To Launch In China, South China Morning Post, Aug 15 2012 [↩]
3. Chinese shoppers ‘biggest spenders on luxury goods’, South China Morning Post, December 13, 2012 [↩]
4. Gap’s SEC filings [↩]
5. Overview of the retail apparel market, United Arrows [↩]
6. Apparel In Japan, Euro Monitor, June 2012 [↩] [↩]
7. Japan ‘Super Cool Biz’ Campaign Urges Businessmen To Shed Suits, Save Energy, Huffington Post, Jan 8 2011 [↩]
8. Gap’s Q4 fiscal 2012 earnings transcript, Feb 28 2012 [↩]
9. Japan Keizai Series – Japan’s Apparel Industry, Wally Baker [↩]
10. Gap Inc. Introduces E-Commerce In Japan, Gap Inc., Oct 10 2012 [↩]
11. Global Population, BBC [↩] [↩]
12. Apparel Retail In Brazil, Market Research, Feb 27 2013 [↩]
13. Apparel In Brazil, Euro Monitor, Jul 2012 [↩] [↩]
14. Brazil-The Next Emerging Destination For Retail, apparel resources [↩] [↩]
15. Brazil Is Most Attractive Emerging Market For Apparel Retailers Looking To Invest Abroad, ATKearney, June 2 2008 [↩]