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Gap Enters South Africa: Will Shoppers Follow?

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As usual, Gap enters a new market with a premium pricing strategy.

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This week, Gap Inc. (GPS) established its official presence in Africa, opening its first two stores in Johannesburg and Cape Town, South Africa.

"South Africa is the natural next step for expanding our presence on the continent. The country has a thriving economy and a high Gap brand awareness, so we believe there is tremendous opportunity for us in the market," Gap head of franchising Stefan Laban told South African news site Independent Online.

The stores will of course sell Gap's by now distinctive-in-its-indistinctiveness brand of American casual apparel, but what's different will be the pricing strategy.

Here in the US, the retailer is seen as a mass-market, affordable chain, but it looks like Gap is aiming to reposition itself as a luxury brand in Africa, as it did when expanding into Asia.

To do so, the brand is jacking up prices at its new location. For example, a pair of jeans that retails here for $60 (461 rand) costs $130 in South Africa, while a $16 (123 rand) plain T-shirt sells for $40 (300 rand). As reported in the Global Post, "this is not the affordable Gap that American shoppers expect."

One reason for the higher prices is of course the combination of shipping costs and South Africa's steep import duties, but that alone cannot account for the almost threefold price increase.

What allows Gap to pull off their high-end pricing strategy is the cachet that comes with being an established American brand that is associated with high quality.

As John Ermatinger, former president of Gap Asia, explained to Marketplace in 2010, "When you go to a country like Israel or Australia or Athens or Turkey, these customers look at it as, 'This is an American icon that is finally finally coming to my country, and now they're going to teach me what casual apparel is all about.' And they're just euphoric over it."

Will Gap's "If we build it, they will come" strategy work? The company certainly hopes so, as it has struggled domestically, with North American sales falling 5% for the year ended in January. An 11% increase in sales elsewhere helped shore up the retailer's earnings figures.

The company's move into Africa has met with mostly positive responses from analysts. Chris Gilmour, an analyst for South African bank ABSA, told Global Post that South African customers will be willing to pay a premium for higher-quality clothing.

"Clothing in South Africa has been very poor quality and very expensive. In a South African context, because it is reasonably high quality, Gap is seen as being upper end," he said.

"If enough people believe that it's high quality, they are going to buy it and they are going to want more and more and more, even if they can't afford it," he added.

"All of us have a myopic view of the world and where Gap should be," Richard Jaffe of Stifel Nicolaus told the Financial Times. "But Gap's entry into these smaller countries is low risk and high return because they are not going in there building bricks and mortar stores themselves. Rather they are doing it through a franchise agreement with a local partner. In return Gap can leverage its brand name and promote its e-commerce presence. It's lucrative and costs Gap nothing."

Gap is not the first large foreign brand to enter the South African market. Zara, Louis Vuitton (LVMUY.PK), and Gucci (GUCG.PK) already have stores there, while the UK's Topshop and Abercrombie & Fitch (ANF) also have plans to enter the market. Wal-Mart (WMT), too, is keen to tap the fast-growing South African middle class, having acquired a majority stake last year of Massmart Holdings, a South African retailer.

If Gap proves to be a hit in South Africa, the company plans to further expand into Africa, including potential-filled markets like Kenya and Nigeria. As a McKinsey report noted, Africa's biggest 18 cities could wield a combined power of $1.3 trillion come 2030.

Twitter: @sterlingwong
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