Consumers will only pay more for one kind of product -- and it's killing Gap

Athleta model athleisure running AthletaAthleta can get people to pay full price.

Consumers are increasingly unwilling to pay a premium for apparel.

But there’s a notable exception: athletic apparel.

“Consumers also appear willing to pay a premium for a product that performs better,” Morningstar analyst Bridget Weishaar wrote in a recent note. “This fits with our belief that consumers now value experience over material goods, as performance-based apparel is used in activities.”

It’s true that millennial consumers love to spend on fitness and experiences, and this is why athletic apparel has been such a strong sector, from Athleta to Lululemon — which famously rarely discounts its apparel — to Under Armour to Nike. These companies are reporting positive sales, even when the apparel industry has been struggling at large.

Unfortunately for Gap, though, consumers’ affinity for Athleta isn’t going to move the needle: it accounts for less than 5% of the business, as Weishaar points out, and she writes that she thinks it’s “unlikely to have a noticeable impact on the overall company margin over the next five years.” (Gap’s namesake brand does sell athletic apparel, but Gap reported that comparable sales were down -3% in the most recent quarter.)

Gap and Old Navy, however, make up nearly 80% of Gap Inc.’s business. Further, when Gap reports its quarterly earnings, it generally highlights its three core brands: Gap, Banana Republic, and Old Navy, all of which reported negative comparable sales in the most recent quarter.

This means that even though consumers may love Athleta, Gap is still in a losing battle with other competitors in the highly saturated athleisure market — Weishaar notes that Gap Inc.’s margins are much lower than Lululemon’s and L Brands’, which owns Victoria’s Secret.

LululemonFacebook/LululemonLululemon has convinced consumers to pay full price, for the most part.

Worse yet for Gap Inc., all three brands have failed convince consumers to pay full price for their clothes. It’s a tricky situation, because they have resorted to incessant discounts and promotions, which makes it very difficult for consumers to want to pay full price, since they know they can get it on sale later.

“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 last month.

And even though Gap is known as an iconic American brand, that doesn’t mean anything to consumers, Weishaar writes, adding that “consumer preference has shifted to value over brand in general apparel retail, and competition has flooded the space, namely through fast-fashion retailers H&M, Zara, and Uniqlo.”

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