Gap Walks Tightrope, Looks to Get Stronger as It Cuts Head Count

Gap Inc. is up on the high wire — balancing the need to cut costs with the hopes that having fewer people will help make its operations more efficient.

And retail’s watching, especially since many other companies are trying to pull off the same trick already or about to take their turn.

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The struggling Gap said Thursday that it would lay off about 1,800 of its headquarters and upper field workforce — a sizable cut for a company that counts about 8,500 employees in its corporate offices out of a total workforce of 95,000.

Bob Martin, executive chairman and interim chief executive officer, said in a statement: “We are taking the necessary actions to reshape Gap Inc. for the future — simplifying and optimizing our operating model, elevating creativity, and driving better delivery in every dimension of the customer experience.”

Gap telegraphed cuts were coming in March, when it reported that annual sales dropped 6 percent to $15.6 billion, leading to net losses of $202 million.

The problem is that sales fell quicker than selling, general and administrative expenses — which were down 4 percent to an adjusted $5.5 billion last year — while the cost of goods rose.

This year, Gap is looking to get SG&A down more, to about $5.2 billion.

Cost cuts can make Wall Street happy, with the mathematics of the financial statement making less equal more in the near term, but less is not necessarily more.

“A leaner, more efficient Gap is a positive move,” said executive search expert Elaine Hughes, managing director of the E.A. Hughes division of Solomon Page. “However, they need to do an audit on accountability. Companies have created layers and layers and thereby deflecting responsibility.

“I think the more important question is, ‘Is there a “need” for the Gap brand at the current size,’” Hughes said. “We are in an economy where luxury, value and purpose prevail — Gap has two out of three.”

So Martin, who’s been leading the San Francisco-based company since Sonia Syngal was ousted in July, has plenty on his plate as he tightens up operations for whomever gets the top job on a permanent basis.

“These changes include the consistent brand leadership structures we announced last month aimed at flattening the organizational structure to improve the quality and speed of decision-making, while in turn reducing overhead expense,” Martin said.

Trimming a corporate org chart can help companies do more with less.

Garrett Sheridan, cofounder and CEO of Lotis Blue Consulting, said: “Just having fewer people doesn’t improve the speed or quality of decision making. However, having fewer layers in an organization can.”

As a general rule, companies can do well with six or seven layers of management from the CEO to the front line, said Sheridan, adding that some companies have as many as 10 layers and need to cut back.

“When you have a lot of layers, what happens is some roles become pass-through roles,” he said. “They’re not people who actually work. Fewer layers is good.”

Evaluating this and making cuts or additions is something good companies do all the time.

“What you see when organizations make massive layoffs is sometimes it’s a bit of a knee-jerk reaction,” Sheridan said. “And there’s fair cover for doing this at the moment; so many companies are doing layoffs that you’re not the bad guy if you do it too.”

There is also just a boom-and-bust cycle in the fashion business.

“As soon as there’s any indication of good times ahead and growth, all organizations are building,” said consultant Sonia Lapinsky, a managing director and partner in the retail practice at AlixPartners.

And 2021 was a good year across fashion, pushing many companies to rush and grab whatever sales they could.

“Growing revenues tend to cover up a lot of mistakes,” Lapinsky said.

When the revenue growth goes away, there’s a lot of pressure to get costs in line, but Lapinsky said, “You can’t just cut your way to success.”

It’s a matter of how costs are cut.

“One of the problems as organizations grow is that they get very siloed,” she said. “Just cutting out layers isn’t going to eliminate the silo. You have to think about your overall operating model first, empowering people to make decisions the right way. Many times we see retailers react too late and focus on making very fast cuts. You’ve got to be analytical and disciplined.”

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