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 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 the retailer Gap Inc., however, consumers’ affinity for its Athleta brand won’t move the needle. Athleta 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 together 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 those of Lululemon and L Brands, which owns Victoria’s Secret.
Worse yet for Gap Inc., each of its three core brands has failed persuade consumers to pay full price for its clothes. It’s a tricky situation, because the introduction of incessant discounts and promotions conditions consumers not to pay full price.
“Itstarts 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.”