Has Ecommerce Driven Scale Out of Fashion?

Having scale in retail used to mean that you could set the trends because with so many stores in so many locations, you could drive the market where you wanted it to go. Think of Gap t-shirts and khakis in the 80s and 90s.


But as the following article explains, the internet has put a premium on authenticity and differentiation, making the mass market less, well, fashionable and thereby hurting sales, margins and profits.

This internet thing is upsetting the basic laws of economics. Which is why it might be even more revolutionary than we realized. JL

Miriam Gottfried reports in the Wall Street Journal:

In the past, having scale meant a retailer could define what was cool. Now, thanks to e-commerce and the rise of fast fashion, ubiquity makes clothing less cool,
Sales are falling at Gap, and the weight of too much bricks and mortar isn’t helping.
The retailer said late Monday that comparable sales were down 7% in April versus a 12% decrease a year earlier. Comparable sales were down 4% at the Gap brand, 7% at Banana Republic and 10% at Old Navy. For the first quarter, comparable sales were down 5% overall, with sales at the three brands falling 3%, 11% and 6%, respectively.
Gap said it expects earnings per share for its fiscal first quarter, which it is scheduled to report on May 19, to be in the range of 31 cents to 32 cents. Analysts had been expecting earnings per share of 45 cents. The stock tumbled Tuesday.
And with good reason. Gap’s sales shortfall is hurting gross margins.
The company said last month that it entered April with more inventory than planned as a result of weaker-than-expected traffic in late March. That led Wall Street to lower its estimates. But the numbers Gap reported Monday were even worse than expected, and the inventory problem seems likely to persist.

 Meanwhile, Gap may also have too many stores. In the past, having scale meant a retailer could define what was cool. Now, thanks to e-commerce and the rise of fast fashion, ubiquity makes clothing less cool, according to Simeon Siegel, an analyst with Nomura.
Gap ended its fiscal fourth quarter with 3,275 company-operated stores. It said in February it expects square footage to be about flat in the current fiscal year versus the prior one. But with traffic down and sales moving online, physical scale has gone from being a competitive advantage to a burden.
Gap said it is “identifying opportunities to streamline its operating model to be more efficient and flexible.” It is taking a close look at Banana Republic and Old Navy locations outside of North America with the aim of focusing on geographies with the greatest potential. Still, closing a few stores abroad may simply not be enough.
To arrest the sales decline, Gap must become more conservative in its inventory purchases. Investors looking for healthier margins also need for Gap to shed more brick-and-mortar pounds.