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3. Vertical Integration
In the early 1980s, The Gap was a chain of pedestrian clothing stores stocked
with records, as well as Levi’s and other casual clothes, some mixed in with
The Gap’s own brand. Then, in 1983, the new CEO, Mickey Drexler, remade
the company. He softened the lights, bleached the wood, piped in music,
expanded the dressing rooms, and decorated the walls with large black-and-
white photographs by famous photographers. Each store gave the customer a
place to experience the brand Drexler envisioned. He wasn’t selling luxury
but creating a world around the brand and engaging the consumer face-to-
face. He was taking a page from luxury brands and creating a
simulacrum
of
that luxury. His strategy stoked revenue and profits, and The Gap began a
twenty-year run that was the envy of the retail sector.
25
Many point to Drexler as “The Merchant Prince.” However, his impact on
business was greater than that. Drexler recognized that while television could
broadcast a brand’s message, physical stores could go much further. They
gave customers a place to step
into
the brand, to smell it and touch it. The
store, Drexler decided, is where he would build brand equity. So, while Gap’s
key rival, Levi’s, continued to create the best TV commercials, Drexler built
the best stores.
The result? From 1997 to 2005 The Gap more than tripled in revenue, from
$6.5 billion to $16.0 billion, while Levi Strauss & Co. sank from $6.9 billion
to $4.1 billion.
26
,
27
,
28
,
29
Brand building moved from the airwaves to the
physical world, and Levi’s got caught flat-footed. I believe the world would
be a better place had LS&Co. registered Apple-like success, as the Haas
family (who own LS&Co.) is what you hope all business owners would be:
modest, committed to the community, and generous.
Steve Jobs brought Drexler onto Apple’s board of directors in 1999, soon
after his return to Apple—and two years later Apple launched its first brick-
and-mortar store in Tyson’s Corner, Virginia.
30
Apple’s stores were glitzier
than Gap stores. Most experts yawned. Brick and mortar, they said, was the
past. The internet was the future. As if Steve Jobs, of all people, didn’t
understand that.
It’s difficult to remember now, but when Apple made that move back then,
most people figured the company was wrong; that Apple was a company
lurching toward irrelevance; and that by opening fancy stores it was
positioning itself for luxury with the equivalent of a walker. How dumb was
that, they thought. Couldn’t Apple see that the tech market now revolved
around commodity boxes powered by Microsoft and Intel? That the boom
was in e-commerce?
Gap Inc., Form 10-K for the Period Ending January 31, 1998
(filed March 13, 1998), from Gap, Inc. website.
Gap Inc., Form 10-K for the Period Ending January 31, 1998 (filed March 28, 2006), from
Gap, Inc. website.
“Levi Strauss & Company Corporate Profile and Case Material.” Clean Clothes Campaign.
Levi Strauss & Co., Form 10-K for the Period Ending November 27, 2005 (filed February 14,
2006), p. 26, from Levi Strauss & Co. website.
The company’s former chief financial officer, Joseph Graziano, signaled
disaster, telling
Business Week
that Jobs was insisting on “serving caviar in a
world that seems content with cheese and crackers.”
31
The stores, of course, changed the tech industry—and advanced Apple as a
luxury company. The iPhone drove Apple’s share, but stores drove the brand
and margin. Walk up Fifth Avenue or the Champs Élysées, and you see
Vuitton, Cartier, Hermès, and Apple. These are captive channels. A $26,000
Cartier Ballon Bleu watch or a $5,000 suede Burberry trench coat would lose
their luster on shelves at Macy’s. But stores operated by the brands become
temples to the brand. Apple’s stores sell nearly $5,000 per square foot.
Number 2 is a convenience store, which lags by 50 percent.
32
It wasn’t the
iPhone, but the Apple Store, that defined Apple’s success.
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