OrotonGroup looks set to take on Gap – but is it the right move in a tough retail market?

OrotonGroup is in talks about a franchise agreement with Gap Inc. and is looking set to take over operations of existing Gap stores in Australia, the company has announced.

The Sydney-based retail group is negotiating the terms of an exclusive franchise agreement with Gap Inc., parent company of the Gap brand, to roll out the brand in Australia, New Zealand and certain Pacific Islands.

It has also executed a non-binding agreement with the current Australian franchisee of the brand, Busby Holdings, to assume operational control of the three existing Gap stores in Australia.

The agreement, commencing November 2013, also covers purchasing certain inventory and fit-out.

Existing stores for the unisex apparel brand are located in Westfield Sydney, and Chadstone shopping centre and Melbourne Central in Melbourne.

Busby Holdings, a subsidiary of Brand Republic, has operated the licence of Gap in Australia since 2009, but has not rolled out the number of stores that it had forecast, according to reports.

OrotonGroup recently ended its 23-year agreement to operate Polo Ralph Lauren stores in Australia, and took on the franchise for American menswear chain Brooks Brothers.

OrotonGroup’s former chief executive Sally McDonald stepped away from the business in August, with new chief executive Mark Newman stepping in.

SmartCompany contacted Newman for more information on the proposed Gap deal, but no response was given prior to publication.

The group said in a statement it will “provide further details about the proposed franchise arrangement should the parties execute binding transaction documents”.

The company proved savvy with its operation of Polo Ralph Lauren, and has achieved strong success with its own Oroton accessories line in a tough retail market.

In addition to Brooks Brothers, Gap could be the ticket it needs to help plug a $20 million plus hole due to the ceasing its operation of Polo Ralph Lauren.

However, what potential does it have to make Gap a success in a similar way?

RetailOasis director Steve Kulmar says the brand was very successful in the 1970s and 1980s, but has not had the same market penetration in Australia that it has internationally.

Kulmar speculates that Busby has not taken the brand to the success that they wanted to achieve here, so they “want to exit”.

“I expect that they have convinced Gap Inc. to let them out of their agreement if they find another company to take over,” he says.

He says with Japanese retailer Uniqlo coming into Australia in 2014, and the recent improvements in Topshop, Country Road, Zara and Witchery operations here, he thinks it will be tough for OrotonGroup to make Gap successful.

“Now retail is about fashion, understanding trends, and having a great product at a low cost.

“The franchise model is not the best for the Australian market… Vertical businesses are the best way,” he says.

He highlights the cost of product to consumers via a franchise model can be too high, with too many margins involved.

“You have to be vertical or you can’t compete,” he says.

Kulmar says the group could make a success of the kidswear aspect of Gap, as this is a popular category for the brand.