Defeat, it turns out, smells a lot like cinnamon rolls. On a Saturday afternoon in January, the cheap-caloried aroma of Cinnabon permeates New Jersey’s two-story Livingston Mall, distracting visitors from an increasingly visible reality.

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The 43-year-old shopping center’s fleet of modest stores—so familiar and accessible to customers for more than a generation—are turning into a liability. Between a lackluster Sears on one end of the mall and a Macy’s on the other, four naked mannequins and an empty metal rolling hanger are all that remain in the fresh graveyard of Wet Seal, the teen retailer that recently announced it’s shuttering two-thirds of its stores. “One day they’re remodeling, the next day it’s closed,” mutters the teenager working the cell-phone repair cart outside the store. Across the way, at an Aeropostale kids’ shop, an everything must go! sign hangs in the window. “We’re closing Tuesday,” explains the girl at the register, sipping a smoothie while assembling a 200-piece puzzle. “They’re going online.” Next door is a large, empty storefront, freshly vacated by a Toys “R” Us, while at the other end of the corridor, teen retailer Delia’s, which recently announced liquidation, flaunts its own going out of business sign. “Once malls like the Livingston Mall lose competitive edge in a market, they can’t compete,” says D.J. Busch, mall analyst for Green Street Advisors, who predicts that 15% of lower- to mid-tier malls will disappear over the next decade. “Once you lose a good tenant, others will follow. Retail works that way—you follow the mob.” Advertisement Four miles away, at the Mall at Short Hills, tony brands like Bur­berry, Calypso St. Barth, and Chanel draw shoppers from all over the state. “Malls are the story of the haves and have-nots,” says Busch, who believes that destinations like Short Hills will continue to thrive. E-commerce has devoured lower-end malls, but “customers still want to try on, touch, and feel high-end apparel,” he adds. “As goes Middle America, so goes the middle-American mall,” says Wendy Liebmann, CEO of WSL Strategic Retail. The result is the latest wave of retail Darwinism: the classic American shopping emporiums that put downtown Main Streets out of business in the 1960s are now themselves on their way to extinction. All of this has been weighing on Art Peck, who has just become CEO of the company arguably most synonymous with malls: Gap Inc., which also owns Old Navy and Banana Republic. “Gap was founded in 1969, when malls were being built, real estate was coming available, and consumer shopping patterns were being trained,” says Peck, a slim 59-year-old, who was dressed in a hooded black leather Rag & Bone bomber jacket when I first met him in December, two months before he started his new job. “Gap essentially rode the wave of that initial change in retail, that mall building boom that took place for 30 or 40 years.” The brand enjoyed a 15-year reign over classically cool, affordable American style, but it has spent the past decade-plus struggling with an identity crisis while new retailers have colonized much of its domain. The iconic brand slept through the fast-fashion revolution fueled by the likes of European labels H&M and Zara; got lost amid competitors such as Uniqlo and Target, who offered basics and denim at higher and lower price points; overexpanded; and became too ubiquitous for today’s niche-minded fashion crowd. “We used to talk about the ‘Gapification of America,’ that notion of one size fits all,” says WSL’s Liebmann. “That’s just not a proposition relevant to America now.” Between 2006 and 2010, sales dropped every year at Gap’s North American stores; since 2013, store sales have continued to suffer. Gapquest 10 Things You Should Know About Gap’s New CEO

Why When it Comes to Retail, The Pants Always Wear The Pants

The Denim Empire: See The History Of Gap In 4 Minutes Into this reality rides a former consultant turned digital believer with perhaps an impossible task: to make the once-iconic business relevant again. It is a task echoed throughout our economy—at brands like Yahoo and MTV, JCPenney, and Buick. Peck has spent the past nine years moving up through a variety of roles at the $16 billion apparel conglomerate, which includes newcomers Athleta and Intermix. He is convinced that the company’s future will depend not just on delivering better product but on radical experimentation. Gap thrived in the heyday of the mall—what Peck calls Retail 1.0—and floundered in the fast-fashion wave he calls Retail 2.0. Gap’s hope, he explains, is to leapfrog ahead to win in the Retail 3.0 era: a mobile-fueled future in which physical stores will have an entirely new role. “We’ve been doing business the same way for 40 years, and there are very few 40-year-old business models that are successful forever,” Peck says. “Periods of disruption are periods of disproportionate opportunity,” he continues, laying the stakes. “More money is made during disruptive times—but is also lost—than is made during times of stability.” So what will that store of tomorrow deliver? And how soon before Gap rolls it out near you? Peck props his foot on his knee, gripping his lower leg with both hands like an oar. Predicting what form that store will take is the puzzle he’s trying to solve. If there’s one item of clothing that both inspires and haunts Peck, it’s colored denim. He refers to the Colored Denim Period often in conversation, as if drifting back to memories of an old summer fling: bold punches of greens, yellows, fuchsias, and aquas in the form of skinny, cropped, and broken-in jeans and khakis. It represented a rare moment in the company’s recent history (February 2012, to be exact) when the Gap brand was ahead of a fashion trend yet true to its heritage—casual, American, optimistic. Peck was running the North American arm of the Gap at the time and he gambled big, letting stores run dry on other inventory in advance. “Then we flowed the product,” he recalls. “I kept looking at my head merchant, asking, ‘Where are the numbers?’ Day one, day two, day three, four, six, seven—then, boom, it hit, and the comps went through the roof.” It was the brand’s best-selling line in years.

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Distressed Denim? CEO Art Peck inherits a company with stagnating store sales—but bright digital prospects. Peck’s office, at Gap HQ in San Francisco, looks more like a designer’s den than an executive suite, evoking the confidence and whimsy of the Colored Denim Period. There’s no desk. A series of hacked Barbie dolls (a “family art project,” he explains, referring to his wife and four kids—two of whom work for Old Navy) line the windowsill; a decou­paged dress form topped by a soldier’s Vietnam War helmet (“worn by a guy who apparently, in the boredom of fighting a war, had a hot glue gun and glued pistol cartridges to it”) stands in the corner; and a tattered mustard-yellow rough road sign leans in the corner (“it’s irony”). The walls of the conference room next door are checkerboarded with another art project: 15 mini–David Hockney replicas, painted by Peck and his tech leadership team as a creative exercise. “There was a fair amount of wine flowing,” he admits. If there’s one item of clothing that both inspires and haunts Peck, it’s colored denim. Although there’s retail in Peck’s blood—a distant relative helped found Woolworth’s back in 1879, and his grandfather helped grow it globally—he didn’t find his way into the field until his late forties. After graduating from Harvard Business School, he spent 20 years at the Boston Consulting Group, advising executives at large industrial, technology, and entertainment companies and working for the likes of Universal Music when digital file-sharing services such as Napster started to emerge. “I can remember executives arguing that a customer will never not want their music in physical form. There was a lot of denial,” Peck recalls. “I’ve seen this again and again—by the time change has happened around a company, they panic and reflexively react to it. It’s oftentimes too late. To be out there in the messy mosh pit of change with unclear direction and unclear implications, that’s much more important.” Peck jumped into the mosh pit in 2005, after Gap’s then–CEO Paul Pressler hired BCG to help identify growth opportunities—and ended up bringing Peck in-house to lead the company’s strategy and corporate development. “The most important things in my life have been unexpected, unplanned forks in the road,” says Peck (who met his wife on a blind date). He worked with Bob Fisher, son of Gap founder Don Fisher and then the non–executive chairman of the board, to cut costs—which included shutting down experiments such as Forth & Towne, a failed attempt to grab the over-35 set. Peck also suggested that the company accelerate international growth by franchising to local operators instead of relying on wholly owned stores. “We would surely not be as global as we are today were it not for Art,” says Eric Severson, Gap’s SVP of talent, who has worked closely with Peck for years. Peck has spent his time at Gap steadily hopping from one area to another, always with good results. He’s overseen operations and global logistics, led the acquisitions of activewear brand Athleta and upscale women’s fashion retailer Intermix, and ran Gap’s profitable outlet business (his first experience managing a P&L). In 2011, the company’s next CEO, Glenn Murphy, appointed Peck president of Gap North America, which had suffered years of falling sales. “What most leaders do is spend all this time analyzing, diagnosing, and then building a huge plan that you unveil,” says Severson. “Art is much more firmly rooted in get in, and start doing.” Peck had one priority: fix the product. Much of the problem, he concluded, stemmed from a fractured creative team—from design to merchandising to marketing. “The store felt one way, the service felt another way, the product felt another way, and the marketing was another way,” says Severson. “It was cognitive dissonance.” Peck fired Gap’s high-profile head of design, Patrick Robinson, and camped out in Gap’s New York Design Center. One weekend, he hotboxed all the top leaders in a room until they came to a consensus on a cohesive look. The gambit worked: The clothing created during Peck’s two years as head of the Gap brand led to eight straight positive quarters (including the Colored Denim Period), its best run in years—all without a head of design. Peck’s near-term priority as CEO is, once again, to fix the product. On a brisk January day, he stands at the mouth of Gap’s flagship store in Midtown Manhattan. “I’m glad to see yellow, because color has been lacking in the assortment. But it’s not the most democratic color,” he observes. He’s digesting the latest merchandise with Jeff Kirwan, who has spent the past four years building Gap Inc.’s China presence and whom Peck just put in charge of the Gap brand. Only one week into his new job, Kirwan can see the challenges ahead. “We’ve stuck with some old historical winners that have started to fall off the cliff. We’ve held on to them too long,” says Kirwan, pointing to a pile of skinny jeans that don’t have enough stretch in them. Adds Peck, “The trend in denim right now is the destructive and destroyed denim, and our washes are clean. We missed a little bit of the trend.” Then Peck wanders over to a table of cashmere sweaters and picks up a heather grey one. “It’s a really nice cashmere, but it’s a really tight crew neck. That’s not a feminine neckline at all,” he says, disappointed. “My guess is I could buy this in a large and wear it.”

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A Tight Spot Gap, founded in 1969, pioneered the idea of casual, affordable cool. Today, competitors encroach from every direction—and these are just the ones with actual, physical stores. Gap Challenge: Stuck in the middle, it’s been losing relevance as competition chips away from all sides.

Strategy: Boost design, materials, and production cycle to reestablish itself as an iconic brand. Old Navy Challenge: The “basics” brand has gone too basic, veering toward generic, cheap clothing.

Strategy: Make trends accessible at a low price point (already showing signs of progress). Banana Republic Challenge: Has developed a staid and serious “dressing for work” reputation.

Strategy: Give J.Crew vet Marissa Webb freedom to steer the brand into more fashion-forward territory; her first line debuted in March. Androgynous cuts, bland colors, and missing trends completely have been just a few of the issues plaguing Gap’s women’s collection since Peck stepped away from day-to-day management of the brand two years ago. After he left, the company hired a new creative director, Rebekka Bay, a Danish trend forecaster and design consultant who cut her reputation launching H&M’s more modern, upscale Cos brand. Bay tried to bring a fashion-forward basics sensibility back to the brand, but items like a T-shirt dress ended up too minimalist and boxy for the Gap customer. One of her more daring touches this past season was reviving Gap’s “Crazy Stripe” sweater from the mid-2000s, which boasts a rainbow’s worth of colors. While not referring specifically to that sweater, Peck commented to his staff: “It’s a sign of the times, unfortunately, that when there was an Ugly Christmas Sweater Party at the company, some of the sweaters there were from our current assortment. That’s not the way it should be.” By late January, Bay was out. The faster you are in conceiving product and putting it on the shelf, the less risk there is. At the Manhattan flagship store, Peck directs my gaze away from the bustling “Sale” section that appears to be a magnetic force for customers. “We’re not going to allow you to go over there,” he tells me, only half teasing. Training customers to expect chronic discounts has become a destructive cycle at Gap. He knows that he has to “pull out the promo needle,” as the industry puts it. To do so, Gap needs to ramp up its Retail 2.0 capability: Right now, he says, it takes the brand at least 10 months to get its new product ideas into stores. That’s about three times as long as competitors like H&M and Zara, which have built their success by hopping onto the fashion world’s hottest trends and riding them. “We’re an industry that guesses a lot,” says Peck, who is working with vendors across the entire supply chain to cut production time down to around 30 weeks. “The faster you are in conceiving product and putting it on the shelf, the less risk there is.” If Peck’s time as the head of the Gap brand gave him a road map for attacking the company’s product woes, it was his next job—the one he had just before he became CEO—that provided him with the skills for imagining Retail 3.0. For two years, Peck headed the awkwardly named “GID” division (for “growth, innovation, and digital”). This was the group in charge of the company’s smaller, high-growth brands, e-commerce, and so-called omnichannel offerings—industry jargon for bridging digital and physical retail. He introduced retail services such as “Reserve in Store,” “Find in Store,” and “Ship From Store,” and digitized its entire product inventory. Peck didn’t have technical engineering skills, but he pushed the group to infuse a sense of humanity into the company’s e-commerce products, and he was never afraid to question things. “If you looked at the way we presented ourselves on smartphones two years ago, it was highly utilitarian. Big buttons, gray, prominent text,” says Sol Goldfarb, the company’s executive VP of digital and customer experience. “Art kept saying, ‘It’s not good enough, it’s not good enough, you’re not there.’ Art taught us that choosing convenient and transactional versus emotional and engaging is a false dichotomy.” Art taught us that choosing convenient and transactional versus emotional and engaging is a false dichotomy. For years, Peck has focused on dissolving the wall between physical and digital. During the two years he ran the Gap brand, Peck shrank its U.S. footprint by shuttering more than 225 locations “in malls where real estate wasn’t productive,” he says. Now, as CEO, Peck hints that the number and size of the company’s 3,680 stores will inevitably shrink. He plans to make mobile the central point of all customer interactions—though he’s not exactly sure how. “I would like to be able to articulate a nice linear path as to what our stores are going to evolve to,” he says. “But I think it’s going to be a lot messier than that.” He’s testing showroom formats, mobile registers, RFID–tagged clothing, interactive digital walls, and even something that might resemble a vending machine. Peck has developers in Silicon Valley camped out at Gap, Banana Republic, and Old Navy stores, incorporating customer and salesperson feedback into code in real time. “I think that kind of rapid prototyping—typical in a lot of other industries, not so typical in ours—will be critical for figuring out this collision of physical and digital,” he says. Peck’s enthusiasm in this area is one of the key reasons he was tapped to be CEO. “As the board thought about the kinds of skills the new leader should have, digital operations skills were pretty far up the list,” says Bob Fisher. “Art was the unanimous choice.” Michael Silverstein, who ran BCG’s retail practice for 25 years, was one of the people Peck turned to in weighing the decision to accept. Silverstein advised him that it was a rare opportunity to reinvent retail at a moment filled with uncertainty—something Peck was wired for. Advertisement “Art’s running the company as if it’s a smaller company,” says Jyothi Rao, Intermix’s new president, whom Peck recruited from Gilt Groupe, where she ran its women’s and kids’ divisions. Rao recalls negotiating a critical new hire when the process hit a bump. “We could have gone through two or three layers in our HR organization,” says Rao. “But I just texted Art and said, ‘Are you cool with this?’ And he got back to me in less than one minute.” Nancy Green, a 21-year Gap Inc. vet who’s now running its fast-growing Athleta business, says that Peck understands how to cultivate entrepreneurs within a large organization: “What Art always says is, ‘What do you need from me?’ And I’ll say to him, ‘I need you to remove that wall for me, please.’ He’s like, ‘Okay, let’s figure it out.’ ”

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New Intermix president Jyothi Rao Photo: Geordie Wood For all the criticism Gap has faced, its digital competence has never been questioned. “They’ve always been ahead of the curve,” says Sucharita Mulpuru, an e-commerce analyst at Forrester. The retailer builds almost all of its technology in-house, has been aggressive with services that straddle the physical and digital, and boasts one of the most elegant digital interfaces for its $2.26 billion e-commerce business, where most of the brand’s sales growth is coming from these days. “Gap is one of those brands that’s at an inflection point,” says Mulpuru. “It will either go the way of JCPenney, with its glory days behind it, or do what J.Crew has done: have a massive retrenching and turn the business around.” As Peck works to remedy lapses in the company’s Retail 2.0 proficiency and build a digital framework for Retail 3.0, he’s simultaneously creating a bridge that will allow the company to move smoothly from one to the other. That bridge, odd as it may seem, is fashion. Peck undoubtedly watched J.Crew elevate its brand prestige by debuting collections on the runway, and recently took a page from that playbook. In February, for the first time, Banana Republic revealed its latest line at New York’s Fashion Week, under new design chief Marissa Webb. Webb is arguably now Gap Inc.’s most fashionable employee. On the snowy winter day when I visited, she may have been the only woman in New York showing toe cleavage. Webb, J.Crew’s former head of women’s design, is walking Peck through a preview of her fall 2015 collection, bare skin exposed between her three-inch heels and cuffed navy wool trousers. An independent thinker, she represents a new type of dynamic Peck hopes to have with creatives. “Every time he comes to town he wants to meet at my [personal] studio,” says Webb. After leaving J.Crew in 2011, she launched an eponymous fashion line and had been running it for three years when Gap Inc. came calling last spring. Banana Republic was a staid brand trying to shake its work-wear reputation; then–CEO Murphy sent Peck in to meet with her. “I was the closer,” Peck says with a grin. Fashion has the potential to bring some necessary buzz to the company (remember when the First Family wore J.Crew to the inauguration?), but more important, it offers Gap Inc. two things it desperately needs in order for Peck’s overall vision to succeed: trend insights and credibility. Intermix, which sells high-priced wares from designers like Valentino and Derek Lam, will give Gap Inc. immediate access to fashion information and serve as a trend breeding ground for the company’s other brands. So will Peck’s relationship with Emily Current and Meritt Elliott, the L.A. duo behind Current/Elliott. After they designed the Boyfriend Jean—a trend that rocked women’s wear in 2008—Peck reached out to them for lunch, and they began a relationship that led to consulting work for the Gap brand. Last year, Peck became a personal investor in their newly hatched brand, the Great. (Peck says that his stake in the high-end brand isn’t considered competitive with Gap Inc.) “He allows any creative person to feel free,” says Current. The pair were recently named style ambassadors for Old Navy. Banana Republic creative director Marissa Webb. Both Rao and Webb are tasked with channeling trend intelligence to other Gap brands. Photo: Geordie Wood Then, of course, there’s Webb. In hiring her, Gap made an unprecedented financial investment in her namesake brand, knowing that it could provide valuable early intelligence—and perspective. “It’s the two extremes of the industry,” says Peck. “Ours is a big machine that sits in the corner every day and says, ‘Feed me.’ And [hers is] this relatively small business where the pure essence of it is product, nothing else—no politics, no process. I think it’s a healthy [way] to always remind us what job number one is.” Webb, who now juggles both Banana and her own line simultaneously, says she’s found a like-minded partner in Peck. “It’s an honest relationship,” she says. “He calls it as he sees it, and I respect that. He’ll send me a text and I’ll send him a text back. It’s very fast, very scrappy.” Now, once Gap develops its fast-fashion machinery, it will know precisely how to deploy it.

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None of this, of course, guarantees that Gap will succeed. As Peck takes the helm, Old Navy—now led by former executives from H&M and Nike—is on the upswing. Athleta, in the booming “athleisure” space, has the company’s fastest growth prospects, along with Gap Inc.’s Asian expansion. Peck killed e-commerce experiment Piperlime. He removed Bay and installed Limited Brands vet Wendi Goldman as Gap’s first executive vice president of product design and development. The pruning and buffing under way are always good practices, and Gap’s faster-fashion effort will be a smart investment no matter what—retail certainly isn’t slowing down. Plus, there could be more acquisitions ahead. (Some think the company should buy a retailer like Uniqlo, which still has yet to fully conquer North America, but Peck is more interested in smaller startup businesses that have a lot of growth ahead of them. “I tend to get much more excited about those,” he says.) Still, no one can answer that ultimate question of what a Retail 3.0 store will look like. No one knows. Advertisement For all the ground it lost with fast fashion, Gap might be in the best position to find out. It’s already ahead of competitors like H&M and Zara when it comes to a digital and mobile presence. If, by generating desirable, on-trend clothing and lots of good buzz, Gap can establish an emotional connection with consumers, perhaps it can then lead them anywhere, be it to a mall, an app, or a vending machine. In December, two months before officially becoming Gap’s CEO, Peck held his final meeting with his GID team. He riffed about “the wonderfully messy, ugly, disruptive time” that Gap’s business was entering, “the beginning of a shakeout” rippling across the apparel industry, and his hope that his legacy as CEO will be that “we grabbed it, wrestled it, and we are killing it.” The role of the store is evolving. There’s a Gap at New Jersey’s Livingston Mall, wedged between the surrendered Wet Seal and liquidating Aeropostale kids’ store. On an early January day, an end of season sale sign hangs in the window, next to mannequins dressed for the gym. Seven of the 10 shoppers inside rummage through the discounted merchandise. There’s another Gap one town over, at the Short Hills mall, where there’s also a Banana Republic. Webb’s fall 2015 collection will arrive in August. Many customers will see it first—and shop from it—on their phones. “The role of the store is evolving,” says Peck. “What it’s going to become is something that we and the customers will figure out, together, over time.” Luckily, when it comes to fashion, customers are always looking to try on something new. See the history of Gap in 4 minutes [Photo: Mark Mahaney]