Is air freight worth the cost to Gap?

Discussion
Photo: Gap Inc.
Dec 01, 2021

Gap last week found itself defending its plan to air freight 35 percent of its holiday range and absorb $450 million in related costs to help offset supply chain challenges.

Gap’s shares saw a 24 percent one day plunge last Wednesday after the retailer slashed its full year earnings and sales guidance.

“We chose airfreight over ocean vessel for a significant portion of our assortment, taking on extreme transitory cost,” said Gap CEO Sonia Syngal last week on the retailer’s third-quarter analyst call. “We’re disappointed in the short-term impact on earnings, but we made the choice to invest in our customer promise and build loyalty that will help sustain growth over the long term.”

The parent of Gap, Old Navy, Banana Republic and Athleta also reduced its growth expectations for the full year to 20 percent from 30 percent. Management now expects supply chain disruptions to cause $550 million to $650 million in lost sales.

Gap blamed its downward revision on pandemic-related factory closures in Vietnam, which produces 30 percent of the company’s product. The shutdowns lasted two-and-a-half months, well beyond Gap’s expectations given other re-openings. Average on-hand inventory in Q3 was 11 percent below the third quarter of 2019.

Katrina O’Connell, CFO, told analysts that being a vertically-integrated retailer caused the shutdowns to impact Gap sooner than retailers relying on wholesalers for product. The backlog at U.S. ports also “deteriorated meaningfully” from the first half of the year, she said.

Gap rerouted a modest portion of inventory to East Coast ports to bypass West Coast port congestion. The company said it is taking some long-term steps to reduce excessive air freight, including digitizing product creation to speed turnarounds, leveraging more multinational vendors and using artificial intelligence to drive inventory management.

In the near term, however, Ms. Syngal said air freight investments are necessary to build on the momentum being seen across the company’s banners.

“We believe the right thing to do is compete in the holiday season to have the right stock across all four of our brands, and that’s what we’re doing,” Ms. Syngal told CNBC last week.

“I would much rather have a supply problem than a demand problem,” she added.

DISCUSSION QUESTIONS: Do you applaud Gap’s move to accelerate investments in air freight to support holiday demand? What are the key factors that go into decisions to invest in air freight and other steps to expedite delivery at the expense of margins?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"Hopefully the mix of merchandise their buyers are flying in hits the mark with shoppers."
"Although their heart may be in the right place, piling on air freight can only further shrink Gap’s profit margins."
"Gap, Inc. is demonstrating what it looks like to put customers first (over investors) with this decision."

Join the Discussion!

19 Comments on "Is air freight worth the cost to Gap?"


Sort by:   newest | oldest | most voted
Neil Saunders
BrainTrust

There are costs attached to air freighting inventory. And there are also costs attached with not doing so and losing sales and having a glut of product that is unsold and out of season. On balance I think Gap made the right choice. Some on Wall Street won’t like that because of the short term impact. However Gap has to take the long-term view and it is right to do so – especially to keep a popular brand like Old Navy in stock.

David Naumann
BrainTrust

Great perspectives Neil! It is promising to see a company taking a long-term view of customer satisfaction versus the typical short-term quarterly earnings maximization strategy.

Rick Watson
BrainTrust

Gap’s problem is not profitability, it’s that it doesn’t have a real plan for the brand.

AI is not going to solve any of their problems. The problem is flexibility. For decades brands prioritized unit costs to the exclusion of everything else. In an unstable world, flexibility is much more valuable, which means a diverse supplier base. It could take them years to adjust unless they prioritize it.

I wonder if they could coax Mickey Drexler back. 😉

Gene Detroyer
BrainTrust

A great lesson for a graduate class in business strategy in two short paragraphs.

Paula Rosenblum
BrainTrust

Why they didn’t make their stuff in this hemisphere is a bit beyond me but, beyond that, it’s a good brand decision.

David Naumann
BrainTrust

Good point Paula! If companies could find a way to manufacture products in the U.S., we could avoid this supply chain challenge. It would also create more local jobs.

Paula Rosenblum
BrainTrust

Or even the Caribbean.

Scott Norris
Guest

There used to be quite a robust clothing supply chain coming up from the Caribbean – in the 1980s, Wrangler had a dedicated cargo aircraft in its own paint hauling inventory every day up to the Mainland. So airlift is not something new in the industry.

Gary Sankary
BrainTrust
Gap has found themselves between a rock and a hard place it seems. I strongly support their efforts to get creative with their supply chain in order to ensure that their stores are stocked for their most important selling season. That they had to do so and sacrifice margin, and subsequently got punished for that in the market, speaks to the shortsighted view of investors. Had they decided to make do and had a good selling season, their inventory issues would most likely have impacted their sales later in the season. They also would have disappointed customers and created a credibility issue for themselves. Gap, as an apparel company, also has to consider the seasonality of these products. The goods are made and Gap owns them. If they let them arrive after the holiday, the potential for margin impact from higher markdowns would also impact their bottom line. Given that apparel is a high margin business they have some room to maneuver here. I’m sure Gap carefully weighed the impact from missed sales (and 100… Read more »
Liza Amlani
BrainTrust

Every brand makes air/sea decisions EVERY season. It’s part of doing business overseas and serving a global customer.

The investment in air freight to support holiday demand was the right investment. Key factors that go into these decisions range from sourcing, costing, merchandising and planning as well as seasonal drops and visual merchandising directives. It’s not an easy decision but it is one that all retailers make.

David Spear
BrainTrust

These are tough choices and Gap is putting a stake in the ground with its air freight decisions. Hopefully the mix of merchandise their buyers are flying in hits the mark with shoppers. If not, they will unfortunately be faced with an even more problematic situation when they have to markdown a whole bunch of excess inventory.

DeAnn Campbell
BrainTrust

Although their heart may be in the right place, piling on air freight can only further shrink Gap’s profit margins. However having already divested themselves of physical stores they have left themselves without good options. Considering that online sales overall are far less profitable than brick-and-mortar sales given the high cost of shipping, staff packing, higher return rates, lower conversion rates and more, the added costs of air freight could very well push Gap’s revenue to the danger point long before they can implement any future solutions.

Jeff Sward
BrainTrust

I was in Athleta and Old Navy yesterday. Both were not just well stocked, they looked great. Especially Athleta. Impactful story telling with great color management. If it took air freight to pull that off, it was money well spent. The Gap division has problems that all the air freight in the world won’t solve.

Gene Detroyer
BrainTrust

With apparel retailers’ historic inability to forecast style, size and color, this decision could be a disaster.

Air freight is for products that are high value, low bulk and low weight. Apparel is the absolute opposite of that. Companies that find this to be their only alternative are, and have been, poorly managed. No matter what the external factors causing the in-store challenges, this is simply a poor decision.

Patricia Vekich Waldron
Staff

The real question is who will Gap disappoint – customers or investors? Hoping that the merchandise they are sending via air is what consumers want to buy!

Mohamed Amer, PhD
BrainTrust

The air freight decision was the right one for Gap. If your merchandise is en route instead of on the shelf going into the holidays, it will do great harm to the top and bottom lines and tie up working capital. Yes, Gap will absorb some margin but will be protecting the top line. Empty or poorly stocked apparel shelves signal the death of a brand in the eyes of consumers. All this presumes that Gap has the right assortments and ranges across their divisions.

Ken Morris
BrainTrust

I think a lot of retailers will be watching Gap’s air freight move to see how it plays out. There’s something to be said about just flying over the stalled container ships. The cost is high, but as Gap’s CEO Sonia Syngal said, it’s all about having stock in store and available for shoppers.

Until retailers take full advantage of the new capabilities of RFID technology, they will continue to lack visibility along the supply chain. Back to the air freight question, we might also watch to see if air freight companies start doing deals with retailers to take advantage of the parking lot in the sea situation.

Craig Sundstrom
Guest

This strikes me as (monetarily) the equivalent of deep discounting, only with the loss of margin coming from increased cost rather than decreased revenue. Functionally, of course, the point is to give a competitive advantage; and as such, it really only works if you’re the only one — or just one of a few — that does it.

Or maybe we can just view it like “free returns” — or “free whatever — something that quickly got out of hand and became a financial $inkhole for the entire industry. There’s a scary thought.

Brent Biddulph
BrainTrust

Gap, Inc. is demonstrating what it looks like to put customers first (over investors) with this decision. However, it still seems the Supply Chain teams across all brands could have done a better job to anticipate and pull the trigger sooner on air freight (at lower cost).

wpDiscuz
Braintrust
"Hopefully the mix of merchandise their buyers are flying in hits the mark with shoppers."
"Although their heart may be in the right place, piling on air freight can only further shrink Gap’s profit margins."
"Gap, Inc. is demonstrating what it looks like to put customers first (over investors) with this decision."

Take Our Instant Poll

Do you agree with Gap’s move to accelerate investments in air freight to support holiday demand?

View Results

Loading ... Loading ...