Gap and Abercrombie & Fitch are trapped in a vicious cycle.
The brands can’t stop resorting to one of retail’s worst trends: rampant discounts.
A new report from Credit Suisse highlights this problem.
“The Gap and Abercrombie had the highest levels of discounting in our pricing check, as it appears both companies continue to rely on heavy promotional activity to drive consumer demand,” the analysts write.
“Gap’s out-the-door price was 31% lower than the full price, and Abercrombie’s out-the door price was 25% lower than full price. Both company’s discounting levels were higher than the group [of retailers surveyed] average discount of 13%,” they add. The analysts were looking to assess discounting during the back-to-school season.
In fact, over the past 18 months, the companies discounted an average of 50% a month, the report writes.
It’s no secret that Gap has had trouble weaning people off of discounts; Gap Inc. CEO Art Peck spoke about this on an earnings call in May. He spoke specifically about the troubled Banana Republic, likening it to a “game of chicken.”
Credit Suisse writes that this structure, which it calls a “high-low pricing model,” could potentially cause both brands to lose more of their shares of the apparel market.
It already made Gap Inc. feel the burn in its most recent quarter. The parent company of Gap, Old Navy, and Banana Republic saw sales slip 2% for the second quarter of fiscal 2016. Banana Republic saw sales plunge: -9%, Gap fell -3% and Old Navy was flat. Abercrombie & Fitch reports earnings this coming Tuesday.
One reason for this problem is fast fashion — Credit Suisse points to Zara, H&M, and the extremely cheap Primark, which have led the way in selling apparel that’s affordable. Zara also has a famously swift supply chain — along with an internal data center — that gives it the ability to respond quickly to what customers want and don’t want. Credit Suisse also notes that Zara recently lowered its prices, making it even more competitive.
As shoppers get used to the fast fashion’s tune of getting more and paying less, it’s harder to convince them to pay a premium. And once consumers get used to buying things on sale, they need a truly compelling reason to pay full price.
“It starts to train the customer to expect 30% off or 40% off going forward, and the only way to untrain her is to have a big fashion hit that they happen to buy very little of, and train her to start [shopping] more like [the store was] a fast fashion retailer,” Mizuho Securities Managing Director Betty Chen told Business Insider earlier this year.
And Gap’s CEO knows that there’s only one thing that can really get shoppers to pay a pretty penny for apparel: good products.
On the company’s most recent earnings call last Thursday, he highlighted how brands can charge more for products… but only if they’re worth it.
“So, when Gap gets it right and has quality on-trend, on-brand merchandise, we have the authority to price and deliver value in a way that I’m confident the brand has, but we haven’t seen the brand be able to do for a while,” he said last Thursday on a conference call with analysts.