Sailing into the mass market: discount rivals stand at attention - Old Navy Clothing Co. offers competition - includes related article on comparison shopping - Apparel Merchandising

Discount Store News, March 4, 1996 by Shari Sanders

Discounters have been trying to knock off The Gap for years, but price-sensitive customers, limited selling space, costly sales help and several lean apparel seasons have all conspired to limit their success.

So how has Old Navy, Gap's newest prodigy, managed to enter into an ailing discount forum and set a new standard for low-price apparel retailing?

On the surface, it's Retailing 101--a wide selection of value-priced apparel coupled with effective visual merchandising and helpful sales associates. Discounters attempt to stay afloat by offering consumers this basic curriculum; however, few pass with flying colors. Old Navy appears to be an "A" student. It even goes for the extra credit by delivering an entertaining shopping experience.

"If anyone can outdo The Gap--and plenty of people have tried--it is The Gap. They've hit a home run with Old Navy," says Steven Kernkraut, a managing director with New York-based Bear Stearns & Co., who has followed the 133-unit Old Navy since its debut in 1993.

The unique Old Navy marketing concept offers Gap-esque men's, women's and children's apparel and accessories at discount-style prices. A typical Old Navy--most check in at about 15,000 sq. ft.--boasts warehouse-style interiors complete with pipe racks and high ceilings. But the minimalist decor is made up for in attitude. Shopping Old Navy is like going to Disneyland: Customers are compelled to look at and touch everything, and are tempted to stock up on logoed merchandise and the "item of the week." Retro cars and trucks and large decorative tins adorn the floors that show off a continually changing apparel mix.

Salespeople sporting headsets so they can instantaneously alert each other to customer needs are on hand, while signs tell shoppers standing on the register lines how long they can expect to wait. Associates at Old Navy are indoctrinated in the same fashion as those working for the Gap division. They are trained to always acknowledge the customer and attempt to service them before they perform housekeeping chores.

Old Navy is the final piece in The Gap Inc.'s strategy to be an important factor at all major points on the retail spectrum--with Banana Republic at the high end, Gap/GapKids smack in the middle and Old Navy at the opening level. The division, finally out of start-up mode, is expected to turn a profit for the first time this year, according to Peter Schaeffer, senior vice president at Dillion, Read & Co., Inc.

Because of similar prices and merchandise, Old Navy's presence in the market will have the greatest impact on discounters by setting a new standard in mass market apparel merchandising.

In the past discounters had the price edge; The Gap price points are as much as 40 percent higher than theirs. But with tire bulk of Old Navy items bearing a strong quality and styling resemblance to Gap basics, and about 80 percent of them retailing for $25 or less, Old Navy has more than evened the score.

"Most discount stores are boring. Old Navy is finding ways to draw people in, entertain them and most importantly, sell them," notes Kernkraut.

Old Navy is systematically moving in on discounters' turf. Last year, it took over a space in an Aurora, Ill., strip mall that was home to a 60,000-sq.-ft. Kmart. In St. Louis, Old Navy opened shop right next to Wal-Mart, as it did in a major mall near one of the chain's Tulsa locations. Caldor directly competes with Old Navy in half a dozen trading areas.

"Old Navy hasn't affected us yet," says a gmm at an East Coast regional chain. "We don't anticipate that it will. But we know they're growing, and we're working to negate any negative affects they can have on us by making our operation better."

The Gap Inc. plans to add between 50 and 100 Old Navy units each year for the next five years, so that by the turn of the century it will rival The Gap stores in volume.

Despite Old Navy's growth, it is unlikely to drown the discount apparel industry. but perhaps discounters can learn how to merchandise and market better from its example.

"Having them out there just makes discounters that much smarter. There's a lot of competition out there--not all of it good--but shopping our good competition makes us better," says the senior vice president of a regional discount chain.

Discounters and off-pricers currently generate between $40 and $50 billion in annual U.S. apparel sales. Old Navy is estimated to have done $400 million in sales in 1995. "Should discounters really worry?" asks Richard Baum, vice president equity research at Goldman Sachs & Co. "Not really. None of the major discounters are quivering." The 2,300-unit Wal-Mart, for example, generated about $16 billion in apparel sales last year.

While Wal-Mart may be sprinkled by Old Navy, smaller regional chains could very well get soaked. "Everyone should feel threatened by Old Navy," admits a gmm at a Big Three national discount chain. "Their concept is great, their goods are priced right and their visual merchandising is terrific. I have to give the Gap people a lot of credit."