Mind the Gap

Sold its Chinese stores to Baozun

Back in September, rapper Kanye West, who now goes by the name Ye, announced that he had terminated his partnership with Gap, claiming that the retailer had breached its agreement by not opening dedicated stores and failing to release apparel collections as planned.

The partnership – revealed to much fanfare back in June 2020 – was expected to last a decade and generate more than $1 billion in annual sales for the mass retailer. Still, the breakup didn’t cause much of a surprise for many industry observers. Some say that Gap was so desperate to generate headlines and stimulate interest in its brand that it entered into the agreement with West too hastily, without working through the finer details. West was also recently dropped by another collaborator Adidas after he made antisemitic comments.

It was, however, another setback for the once iconic US apparel store as it struggles to turn its business around. Back in September, the Wall Street Journal reported that Gap planned to cut about 500 corporate jobs in the US and Asia to reduce expenses. In an effort to stem losses, Gap also announced last week that it has agreed to sell its money-losing Greater China businesses to Baozun, a company that runs e-commerce operations for a variety of brands in China.

The all-cash transaction is believed to be worth around $40 million. Baozun has been working with Gap Greater China since 2018. In the newly announced deal Gap has granted it exclusive rights to manufacture and sell its products in mainland China, Hong Kong and Taiwan. The arrangement could last as long as two decades, with an initial term of 10 years that can be renewed.

“As a 10 year contract as stated in the agreement, the price is not expensive,” Cheng Weixiong, an independent analyst in the footwear and apparel industry, reckoned.

The US retailer first opened shop in China in 2010 with four stores in Shanghai and Beijing, and expanded to 100 stores by 2014 across the mainland and Taiwan. But Jiemian reported that the company had closed outlets in 15 cities in China this year alone as consumers complained that prices were too high compared with other basic apparel retailers like Uniqlo. This has led Gap to rethink what it charges.

“When you walk into any Gap store in China, discount and promotion signs are everywhere. The scene is in stark contrast from when the company first entered China,” 36Kr observed.

Founded in Shanghai in 2007, Baozun went public on Nasdaq in 2015 and completed its secondary listing in Hong Kong five years later. The company is the market leader in working with fashion brands to help them sell online, with Nike and Zara amongst its clients, says iResearch. It also boasts strong ties with China’s largest e-commerce platform Alibaba, which owns a 10% stake in the company.

The relationship between the two was deepened in 2021, when Cainiao, the logistics arm of Alibaba, acquired a 30% stake in Baozun’s warehousing and distribution unit for $212 million.

However, not everyone is supportive of the deal. For a start, Gap Greater China, which includes the two entities Gap Shanghai and Gap Taiwan, is losing money. Based on Baozun’s stock exchange filing, Gap Shanghai reported net losses of approximately Rmb256 million ($35.83 million) in 2021, compared with Rmb456.3 million a year earlier. Gap Taiwan also reported net losses during the same period.

To turn the business around, Baozun will have to make significant investment. It also doesn’t bode well that similar foreign apparel labels like Topshop and Forever 21 have retreated from the China market one after another. Small wonder then, the day after the deal came to light, Baozun shares went down 5.4% in Hong Kong.

“As a pure e-commerce company, Baozun has zero experience in operating physical stores. Completing the acquisition is only the first step; how to operate and prevent Gap’s decline in Greater China after the deal is concluded is what’s hard. Baozun still has a long way to go,” media platform Cyzone grimly predicted.

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