Gap becomes a fashion victim as profits are halved

The demise of the chino and checked shirt combination was confirmed yesterday when the American fashion retailer Gap announced a second consecutive set of disastrous financial results. Profits fell by 51 per cent for the last quarter to $90m (£62m) and the company forecasts worse to come as it triesto reinvent its khaki-and-cream casual wear which became one of the High Street sales successes of the 1990s.

The demise of the chino and checked shirt combination was confirmed yesterday when the American fashion retailer Gap announced a second consecutive set of disastrous financial results. Profits fell by 51 per cent for the last quarter to $90m (£62m) and the company forecasts worse to come as it triesto reinvent its khaki-and-cream casual wear which became one of the High Street sales successes of the 1990s.

Retail analysts said it showed that Gap had fallen from favour for failing to adapt to an emerging polarisation in shopping trends that, over the next decade, will favour either discount or upmarket fashion.

Discount chains such as Primark are forecast to take 10 per cent of clothes sales by 2005, while designer labels sold in stores such as Harvey Nichols and Selfridges take trade away from the middle market.

The analysts, Verdict Research, predict that the "middle-market" will shrink in the next decade as shoppers reject the current "price/quality" ratio displayed in stores such as Gap, and Marks & Spencer. One analyst, Sally Bain, said: "Gap is under pressure from above and below. There is so much choice on the high street that, if retailers get it wrong, people will go elsewhere."

In the past four years, discount retailers such as Primark, TK Maxx and Matalan have all more than doubled their share of the clothes market and further pressure on specialist clothes retailers is being applied by the supermarkets.

With its utilitarian range of "George" branded clothes, Asda increased its market share during four years to 2.6 per cent last year. Tesco has captured 1.2 per cent of the market by selling designer labels against the brand owners' wishes and launching a "Florence + Fred" range of adult clothes.

Analysts at Retail Intelligence have blamed the downturn at Gap on a globalisation strategy that opened 700 new stores last year.

They say that, with a chain of almost 3,900 stores worldwide, Gap was unable to react quickly enough in a fickle market and was being outpaced in Britain by "value-for-money" chains such as Next, H&M, Zara and Mango.

Gap has had to learn the same painful lessons of "bulk selling" as have the now-defunct C&A, as well as Marks & Spencer, which recently announced quarterly profits in women's clothes were down by nine per cent. Ms Bain said Gap's British operations had suffered from failing to follow up its success in creating the "casualisation of fashion".

Although high street spending remains strong in defiance of a widely forecast recession in Britain, the economic downturn in the US has provided no such comfort to Gap management. The chief executive of Gap, Heidi Kunz, predicted that profits would continue to fall for the rest of the year. The company's president, Millard Drexler, blamed "difficult and disappointing" trading conditions. He added: "Consumers are cautious – they are selectively buying new fashion but primarily shopping for value." In May, the company announced a fall in profits of 51 per cent and, within weeks, decided to cut its 10,000 workforce by 7 per cent.

Several hundred redundancies have been made in the UK and the company last week announced it was relocating its headquarters from London's Mayfair to Rugby.