Gap to Expand in China, Shrink in U.S.

Gap plans to treble its China presence while closing a fifth of its stores in the U.S. after posting a 3% revenue drop in the 2nd quarter. Gap will expand the number of China outlets from the current 15 to 45 by the end of 2012.

Gap’s been shrinking to fit the market since 2007 when it began cutting its overall store square footage toward a 10% reduction by 2013. Now it’s accelerating the shrinkage by fingering 189 Gap-branded stores for immediate closure. It is also planing to cut more square footage from Old Navy stores without closing them.

Gap’s China expansion is part of its long-term goal of doubling overseas revenues to make up for its declining market share in the U.S. But even with the expanded 45 stores in China, Gap will hardly become a major presence there, nor will be be substantial part of its overall business when compared with the 700 stores that will remain in the U.S.

This year’s revenue declines are symptomatic of Gap’s fundamental weakness that goes beyond the recent recession triggered by the 2008 financial crisis. The Gap group comprising Old Navy, the upmarket Banana Republic as well as the namesake chain — has been seeing sales fall steadily over the past six years.

Part of the slide is due to increasing competition from brands with hipper images like H&M and Abercrombie & Fitch. The rest appears to be difficulty in coming up with coherent branding with a distinctive identity for its three separate chains. Instead the lower-priced Old Navy brand is seen as having cannibalized some of Gap’s clientele through aggressive pricing for largely similar clothing lines.

It remains to be seen whether consumers in China will perceive the Gap brand as offering a brand value sufficient to justify the premium pricing over generic domestic-brand casual wear.