report of case analysis digital transformation and artificial intelligence predicting consumer taste with big data at gap

Secondly, Gain insight into customer behavior and deliver a better customer experience by driving data- iven decision-making and drutilizing big data to analyze consumer tastes Gap Inc..

UNIVERSITY OF ECONOMICS AND LAW

REPORT OF CASE ANALYSIS Summer Semester: 2021-2022 DIGITAL TRANSFORMATION AND ARTIFICIAL INTELLIGENCE

PREDICTING CONSUMER TASTE WITH BIG

DATA AT GAP LECTURE: Master Nguyễn Thế Đại Nghĩa

Course ID 215MI5205 : MEMBERS IN TEAM

Ho Chi Minh City July 1 2022 , st

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CONTENTS

I OBJECTIVE ORIENTATION 4

II KEY ISSUES TO TACKLE 5

III EVALUATE OPTIONS 8

CATEGORY OF FIGURES

Figure 1: The decrease in sales in 2015 of Gap Inc in general and Gap brands 5

Figure 2: Sales growth at Gap Inc.’s main brands 6

Figure 3: Traditional Model and New Model of Gap Inc 12

Figure 4: Brand Consideration among Non-Millennial Consumers 18

Figure 5: Brand Consideration among Millennial Consumers 18

Figure 6: Business Model Canvas of Gap Inc 24

Figure 7: Revenue Prediction of Gap Inc 25

CATEGORY OF TABLES Table 1: The timeline of our recommendation 26

Table 2: Contingencies maybe happen with our recommendation 28

Table 3: Evaluation of team 30

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I OBJECTIVE ORIENTATION

Gap Inc is an American worldwide retailer of clothing and accessories, has faced a decline in sales since 2015, and is under pressure from market competition due to its use of analysis strategies of traditional and individual focus models Therefore, Gap Inc.'s new strategies are needed to turn the tide To get this, the proposals should achieve the following objectives:

Firstly, recover the declining sales of clothing products provided by Gap Inc and boost sales by promoting analysis of consumer tastes Secondly, Gain insight into customer behavior and deliver a better customer experience by driving data- iven decision-making and drutilizing big data to analyze consumer tastes Gap Inc aims to build a technology-modernized business model, especially focusing on developing Product 3.0

Finally, increasing competition with new competitors such as H&M and Zara as well as strengthening partnerships with businesses specializing in e-commerce and applying technology in business to create the foundation for the use of big data analytics consumer tastes Based on the above goals, in order to increase practicality, businesses need to set goals that are proven specifically through numbers:

According to revenue figures from 2015, Gap Inc continues to decline in revenue with an average of 2.35% per year Therefore, with the strategy, businesses must achieve growth of at least 10% per year and be offset by the annual decline rate from 2015

In effective business, customers always play an important role, so it is necessary to increase the customer retention rate by 10-35% with Gap and Banana Republic brands because currently, the dislike rate of these brands is higher than the number of customers like

Strengthen external relations, take advantage of cooperation with electronic markets (Amazon, Alibaba, ), and win 15% of online shoppers of Gap branded products through online platforms its

II KEY ISSUES TO TACKLE Declining sales following two years since 2015 - The main issues of GAP

Since 2015, GAP has faced a serious challenge of declining sales and profitability Net sales for fiscal 2015 decreased 4 percent to USD 15.8 billion compared with USD 16.4 billion for fiscal 2014 Gross profit for fiscal 2015 was USD 5.7 billion compared with USD 6.3 billion for fiscal 2014 If we look at Gap’s two most important segments - Gap Global and Banana Republic - we see that both have seen a decline in comparable sales of 4.0% and 12.0%, respectively Not only in 2015, but for the next two years, Gap still struggled with negative sales growth Meanwhile, Gap’s peers in apparel retailing, including TJX Companies, L Brands, and Ross Stores have reported positive comparable sales growth in their last fiscal years compared to a flat growth by Gap TJX Companies had 2.0% organic growth, while Ross Stores and L Brands had 3.0% and 4.0% growth, respectively These numbers pose a big challenge for Gap to find a solution to recover and regain market share before it is too late

In general, the main problem leading to Gap's sales decline during this period was an inability to keep up with trends Its clothing has failed to entice shoppers, swinging from uber-trendy to boring basics The company no longer seems to know what sets it apart from competitors

Figure 1: The decrease in sales in 2015 of Gap Inc in general and Gap brands

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Figure 2: Sales growth at Gap Inc.’s main brands

The delicate balance between creativity and commercialization

Upsetting the delicate balance between creativity and commercialization, between designers and merchants, that existed at most fashion brands and that had supported Gap Inc.’s fashion cycles for decades Creative directors are aesthetic designers, highly trained in design, and use their unique eyes, attitudes, and personalities to shape tomorrow's fashion As arbiters of taste, they have provided legitimacy and credibility to new trends with their seal of approval Compared to creative directors, merchants or salespeople, the fashion industry is closer to the market, with a more commercial orientation They are responsible for selecting products to create a consistent product assortment for each store in order to reach a specific target consumer at

a particular price location The merchants are market-aware, while the creative directors are the market leaders The differences in the function between creative directors and merchants lead to conflicts in working styles and an imbalance in the division of responsibilities

Lack of ability to analyze and predict customer behavior

Since the early 2000s this company’s inability to take into account the dynamics of clients’ behaviors in the apparel market According to the case given, Gap failed to put in place an appropriate product assortment mechanism in line with customers’ changing needs and expectations in the fashion sector (Israeli and Avery 5) As a result, competitors such as Zara and H&M could easily gain a considerable share of the apparel market in the United States by offering fast fashion items at low prices compared to the case of Gap

The application of traditional methods of predicting customers’ future tastes and behaviors was ineffective for Gap As a result, clients shifted to rival companies that provided trendy apparel for both basic and fashion-forward items Gap’s use of conventional market research approaches was ill-informed Such methods could not allow this company to predict its clients’ future behaviors and deploy factors that could influence their tastes and fashion preferences

The rapid growth in e-commerce

When it comes to e-commerce, competition is always high The rapid growth in e-commerce poses a great challenge for apparel companies in meeting customer needs Many consumers were shifting their purchasing from brick-and-mortar stores to online channels As online sales grew, brands did not need the same number of physical stores At that time, GAP had over 3000 stores A large number of stores puts pressure on Gap to transform its business model The increase in online shopping also requires Gap to balance resources to operate online shopping channels and physical stores at the same time, otherwise, it is easy to lead to losses

Rise of Fast-Fashion model

8 The rise of the new clothing industry business model fast-fashion – –makes the products of traditional apparel companies like Gap lag behind the trend While Gap's product cycle is ten months, fast fashion brands need only four weeks to design and deliver their new products to customers The nature of Gap’s supply chain, which wasn’t designed for a fast-fashion world, makes it difficult for Gap to get its merchandise to market quickly Major competitors, such as Zara and H&M, became even stronger as they quickly adapted and converted to this new model

The transformation from asset to ability

Gap’s size and ubiquity were transforming from asset to ability Consumer tastes change with the increasing demand for personalization and uniqueness, making Gap’s classic and mass products no longer suitable

III EVALUATE OPTIONS

1 Criterion

To build the basis for the formation of options, we need to provide specific, selective, and close- -target evaluation criteria In this case of Gap Inc, the tonecessary criteria for the options evaluation process include:

Firstly, feasibility and effectiveness To ensure that the change process can take place successfully, the proposed options must be based on the available resources of the company At the same time, options must have a positive effect on the process of creating change Combining the two factors above, in order to come up with the most optimal solution, the company must know how to utilize and allocate resources effectively

Secondly, creativity, originality, and collaboration A prerequisite in the innovation process is to create uniqueness and excellence in products as well as work processes, thereby constructing a premise to build competitive advantages and regain market share Besides that, collaboration is a factor that helps accelerate the change process

Thirdly, the ability to diversify experiences and meet customer needs In order to solve the problems of customer tastes, the proposed solutions must achieve the goal of improving the customer experience, offering a variety of product segments and supply channels

Fourthly, the ability to accurately predict consumer behavior Accurate judgment of consumer behavior is the basis for deciding on actions to innovate and improve products and business models

Finally, maintaining a beneficial relationship between consumers and the company

2 List of options

In Peck's view, some options to help Gap Inc improve business performance include using Digital and Big Data, using Big Data and firing Creative Directors, using Predictive Analytics in marketing, predicting consumer preferences, Product 3.0, and Shifting the distribution model

Option 1 Using Digital and Big Data–Considering the changes in customers’ shopping behavior, Peck decided to invest heavily in digital capabilities to address the consumer shift to omnichannel shopping, centralizing on removing the wall between the physical channel and the digital channel

The most important action of this option is promoting data-driven decision-making As the company moved into the digital realm, Peck pushed its managers to continually test and refine new features as the company listened to customers through its “voice of the customer” initiatives, which tracked customer feedback and usage This creates an opportunity to improve the product and enhance the customer experience For example, Gap collected data and discovered that customers wanted to buy online but still preferred to try on the clothes Gap worked with Google and Avametric to develop an augmented reality app that allowed shoppers to test out different looks to improve their online and mobile shopping experiences Besides that, Peck developed email programs to provide relevant, personalized messages to customers in order to personalize customers’ experiences Moreover,

10 using data-driven decision-making also helps Gap to manage the closing of underperforming stores The company used the collection of insights from consumers’ online browsing activity and engagement in social media platforms to help understand why consumers were not buying as much from Gap’s physical stores Based on a thorough analysis, Peck continued to develop Gap’s digital and mobile e-commerce platforms to drive customer engagement

Option 2 - Big Data In, Creative Directors Out

As we mentioned in the previous section, the creative director is the person responsible for creating the creativity and uniqueness of the product As arbiters of taste, they have provided legitimacy and credibility to new trends with their seal of approval Creative directors are always seen as an integral part of most companies, especially apparel companies However, Peck was always skeptical of Gap’s creative directors He advocated eliminating the position of creative directors and spreading the responsibility for designing the brand's seasonal lines to a collaborative team informed by hard data

Option 3 - Using Big Data and Predictive Analytics in marketing

Digital data streams allow companies to observe consumers' buying journeys and collect detailed data about their online behavior As digital data streams become more accessible and powerful, companies are exploring how to use data mining and machine learning to generate consumer preferences and predict future behavior in the marketplace The two main goals of using predictive data are to sell existing products and to develop products for the future

Option 4 - Predicting Consumer Preferences

Predicting the future fashion tastes of consumers is a difficult proposition Traditional market research methods, such as surveys, focus groups, and interviews, are often inadequate, as consumers are notoriously poor at predicting their future behaviors Modern market data collection also has some problems because consumer psychology research shows that consumer preferences are built, not revealed, and subject to marketers’ manipulation, unstable over time, and therefore

unpredictable So in order to ensure the most accurate customer taste prediction process possible, Gap must combine both traditional and modern market data collection methods

Option 5 - Product 3.0 at Gap: “A clear brand vision with a common

operating model” In a strategy Peck calls Product 3.0, he promises to combine “a clear brand vision with a shared operating model.” The new brand vision governs every design, sales, inventory, and manufacturing decision so Gap can identify trends, make them relevant to its customers, test them at stores and respond demand-buying more of what’s on sale and quickly get rid of what's not available with the goal of fewer fashion misses and markdowns In place of a creative director, each brand's vision statement acts as a filter so that trends can be consistently associated with the brand's image Besides that, to imitate its fast-fashion competitors, Peck wants Gap to enhance its ability to combine detected trends with real-time performance readings and act faster on them Moreover, in terms of characteristics, Product 3.0 is heavily based on the analysis of customer purchase data so it is necessary to find the correct data analysis tools Google Analytics data is also a source of inspiration

Option 6 - Shifting the Distribution Model

Another key decision being made is whether to partner with Amazon and allow it to sell Gap-branded products through its online platform

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3 Evaluation of the option

According to our group's analysis, in general, the proposed options are consistent with the established criteria Those options are all aimed at addressing the decline in sales and improving Gap's business All options focus on digital transformation, application of big data, and other technological achievements to improve products and enhance customer experience This is a perfectly suitable plan to catch up with the development of industry 4.0 In our perspective, the adoption of technology will foster the prediction of customers’ behavior and the expected fashion trends, thus allowing Peck and his managers to record improved product innovation to suit clients’ preferences Technology has also revolutionized the way businesses operate in the modern market, as denoted by the adoption of online platforms to boost sales and gauge consumers’ purchasing trends and market patterns Hence, by broadening its e-commerce engagements through online retail companies such as Amazon, Gap will not only increase sales but also mine data for its market analytics purposes Such an innovative approach is crucial to the success of Gap in the current clothing industry

However, the fact is that no matter how developed technology is, it cannot completely replace the role of people in economic activities In our viewpoint, Peck was not correct in firing his creative directors and replacing them with big data drives the creative process, because the creative directors most likely add uniqueness to the product, and they are considered trendsetters who are responsible to create fashion Many creative thinkers believe that big data will help the company in creating more powerful and accurate forecasts The creative directors are additionally accountable to serve as guardians of the company's image as well as for the ideas and inspiration regarding products Not only this, but the creative directors also tend to establish the design's direction for each product line, creating a small number of inspiration pieces and overseeing and accepting the product's designs, thus the personal vision of the creative directors reinforces and establishes the tone, feel, look as well as the spirit of the brand as a whole Furthermore, the creative directors are the artistic visionaries and they establish the feel, look & tone of the brand Particularly, the creative directors tend to create a few aspiration pieces and then the merchants and the lower-level designers figure out how to create multiple designs from these pieces, thus the creative directors give the vision of what the brand should be

IV RECOMMENDATIONS

1 Recommendations

On the basis of the analysis of Gap Inc.’s objectives and issues, we have summarized and presented these proposals to change the company’s operation method, returning its position, and helping it move forward on a respectable path

With the aim of making difference, Gap has to increase the application of technology, utilizing big data is one of the most important ways, it can help to predict consumer tastes and behaviors in real-time and warn about changes anytime they happen Therefore, senior managers of Gap Inc will have enough information to orientate new lines of products that are suitable for each customer segment and satisfy customer demand

Following the technological innovation, developing the Creative Director's role, and establishing a collaborative, decentralized, data-driven model are

14 also necessary Depending Creative Directors’ eyes couldn’t always make the right decisions, if they’re off the mark, approve a wrong line of products, sales collapse and so does Gap’s stock price Instead of that, the company should establish a collaborative, decentralized model with the management of the Creative Director so it can generate a better vision by mining big data using Analytics Tools (Google Analytics, Google Trends), social media, the company’s own sales, and customer databases

After that, Gap Inc should expand online distribution on e-commerce trading platforms, establish sustainable relationships between physical and digital channels; increase digital marketing & e-commerce such as cutting down inefficient physical stores, focusing on developing main stores, and improving the application and UX on the website (E-commerce) “Gap’s next CEO will

need to find a better way to connect with younger shoppers through product,

marketing, and digital.” Repositioning the brand of the company is always a top priority, Gap has to create different and quality product lines to meet the needs of customers Another important step in implementing the company's digital transformation is the application of AI Based on data from AI Vision, Gap could gain user experience and their purchasing ability by:

At physical stores: arranging products in the right places (using AI Vision to find out best-seller products and suitable places to put them on to gain purchase rate)

On E-commerce platforms: promoting UX on app and landing page, website of the company (using big data to analyze traffic on these platforms in order to specify the right decisions about arrangements, layouts, and UIs of them)

2 Our recommendation solves the issues

Through the analysis process, there are two main issues that Gap Inc is facing: Declining sales and the appearance of potential opponents These are clear ways that the following recommendations could solve them:

About declining sales, the issue’s main reason is the lack of information about customer tastes and preferences Additionally, the method of

depending on just only the Creative Director’s eyes is ineffective Because of that, Gap Inc can’t determine the accurate needs and tastes of consumers, which leads to unsuitable product lines being created To solve this problem, increasing the application of technology is one of the best ways, utilizing big data can help the company analyze consumer behaviors in real-time and then give warnings Based on that information, the management will re-establish product lines more suitable for each customer segment and create products that satisfy customer needs

The appearance of potential competitors is also a great threat to the company With the high changeability and low price of fast fashion, a series of these model brands sprang up, such as H&M and Zara These brands can easily gain a considerable share of the apparel market by offering fast-fashion items at low prices competing against Gap Inc Therefore, Gap should promote digital transformation With AI, the company could build stores and brands on E-commerce platforms quickly, making the user experience higher Not only that, AI Vision technology could help arrange the right products in the right places to increase the purchase rate of customers This method can also be used in physical stores with the same consequence After all, Gap’s brand name will be enhanced, and the user experience when making a transaction at Gap’s stores will be improved Since then, Gap Inc.'s position and competitiveness have also been restored and developed more and more sustainably

3 Market analysis

3.1 Five forces

The threat of New Entrants is moderate

The apparel industry is attractive for entrepreneurs because it has short product life cycles, tremendous product variety, volatile and unpredictable demand, and long and inflexible supply processes The global apparel manufacturing industry is expected to grow more than ever in times to come Therefore, this field has many rivals such as Gap, Macy’s, and Zara with long years of seniority, large scale, stabilized