How a Gap in the market has proved a big challenge for Oroton

Global retail has seen many life-or-death battles in recent months, and when it comes to the world of luggage, everyone is desperately trying to bag market share.

When the parent company of luxury handbag and accessories brand Oroton went into a trading halt last week in preparation for an announcement on some less-than-ideal sales numbers, retail experts spoke once again to the challenging climate for traditional bricks-and-mortar consumer goods brands.

OrotonGroup released that trading update last Wednesday, announcing it expects underlying earnings before interest, tax, depreciation and amortisation (EBIDTA) to be between $2 – $3 million this financial year, down from $12.9 million the year prior.

Among the bad news of those market conditions was the performance of clothing brand Gap, which the company said had “further deteriorated in an aggressive apparel market” and is expected to incur a $3.5 million loss by the end of the financial year.

By Thursday, a note from Citi Group analysts suggested the business should consider exiting its joint venture with Gap in Australia all together.

Back in 2013 OrotonGroup had said it was looking forward to “further strengthening the presence of the [Gap] brand” in the local market. So what went wrong?

The partnership

After losing the licence to distribute Polo Ralph Lauren products in the middle of 2013, new OrotonGroup chief executive Mark Newman inked a deal with Gap Inc. as part of a franchise agreement for the Gap and Banana Republic brands in Australia and New Zealand.

The licence deal was for an initial 10-year period, and at the time the two companies said they looked forward to consolidating the customer base for the brands.

“The Gap Inc. brands are recognised around the world and the Gap brand already has a loyal customer base here through the existing stores and online,” Newman said at the time.

However, retail strategist at RetailOasis Pippa Kulmar says even at the time of the deal, the Gap business had started to face the very challenging market conditions that local mid-market retailers are seeing today in Australia.

“I think in the US they were stuck in the middle with fast fashion — why would you buy a $20 top from Gap when you could buy a $5 top from H&M? That was in America at the time, but you’d have to say Gap has been dying and it’s been dying for a long time,” she says.

“I don’t think it was the right investment for Oroton to make.”

While the brand’s parent company, Gap Inc., acknowledged in its 2016 results that comparable sales were down 2% for the year, the group’s most recent first quarter results surprised last week when the company affirmed guidance.

However, like-for-like sales at Gap stores did slip, declining 4% last quarter, compared with a 3% drop this time last year.

The Australian challenge

By 2015, Oroton operated six Gap stores in Australia, although in a presentation to shareholders in 2015 the company said the first three Gap stores it had opened experienced a drop in like-for-like sales of 0.9%.

In a 2016 presentation to shareholders, the company said total Gap sales had increased 19%, however, by the time the business reported 2017 half year results at the start of the year, Oroton was reporting a “soft sales result”.

Kulmar says it’s not unreasonable to think Oroton would have “got a year’s boost when they first got started” with the business, but the same trends affecting the international Gap business would have also had an impact on Australian sales.

The company was also attempting to grow the Gap brand at a time when several other consumer goods brands and bag brands, similar to Oroton’s handbag imprint, were consolidating.

“I would classify Oroton as that bit that sits in the middle that competes against Kate Spade, Coach and Michael Korrs, and there’s a consolidation of the middle market in that space,” Kulmar says, pointing to the recent buyout of Kate Spade by US luggage imprint Coach for $2.3 billion.

The lack of an “icon”?

Reflecting on the broader market conditions, OrotonGroup anticipates challenging market conditions to continue into the company’s mid-season sales.

The business recently had a leadership change, with the exit of Mark Newman and appointment of Ross Lane, grandson of Oroton’s founder Boyd Lane, to the chief executive’s seat.

However, Kulmar suggests that regardless of what the group decides to do with GAP, the more important matter should be finding an iconic design or go-to handbag design for the other side of their business, to court international shoppers and generate excitement around the company overall.

“It’s about influencers but it’s also about creative direction, and finding something that’s truly Oroton,” Kulmar says.

“Think about it — what’s a bag that’s Oroton’s brand that everyone really wants? Think about the reinvigoration of Gucci — they picked a bag, they got it hot and that’s kind of how that market works.”

SmartCompany contacted OrotonGroup for comment on its plans for the Gap brand, but did not receive a response prior to publication.

Never miss a story: sign up to SmartCompany’s free daily newsletter and find our best stories on Twitter, Facebook, LinkedIn and Instagram.