They're not designed to be predators. But sometimes a sub-brand ultimately does a flagship more harm than good.

The theory is often sound: create a new brand to better compete with rivals, which often includes emerging businesses that are disrupting your offer. But the result can mean that your customers drift to that new entity, especially if it was developed as a cheap alternative, and subsequently abandon the original. That can induce not just financial and sales defeats, but also a brand conundrum.

The phenomenon is on display most vividly at Gap Inc. Mickey Drexler, who in the 1980s took Gap from a regional apparel brand to a global powerhouse, launched Old Navy to defend against Target and other retailers that had begun selling lower-priced denim. The sub-brand would have appealing basics similar to The Gap's (but not quite as fashionable or of quite the same quality) at much lower price points.

Soon Old Navy began to dominate the company's earnings reports, most quarters delivering sales and traffic bumps as The Gap sagged. It got to the point where Gap Inc. two years ago centered a turnaround on Old Navy's potential, only to decide this past February that it deserved to go it alone by splitting into two independent companies instead.

"Old Navy was a brilliant original brand created by GAP CEO Mickey Drexler as an off mall budget companion to mostly mall based GAP Stores," Columbia University Business School retail studies professor Mark Cohen told Retail Dive in an email earlier this year. "But then as Old Navy grew and was brought into the mall in many locations it became a competitor to the GAP. Management lost sight of the power of its creation."

There are many ways this happens.

Discount vs. full price

Gap Inc. isn't the only retailer to develop a lower-priced business in order to attract value customers. Nordstrom has seen its off-price Rack business mostly perform better than its full-line stores, and Macy's more recently made a similar move when it developed its own Backstage off-pricer.

Victoria's Secret's Pink, both cheaper and less sexualized, was launched to bring on younger shoppers. And Dayton's, a regional department store based in Minneapolis, decades ago ran a discount chain dubbed Target. Hollister serves the same role at Abercrombie & Fitch Co.

"In many cases, prices [play] a role in the growth. Old Navy is cheaper than Gap, Target was cheaper than Dayton's, and Rack is cheaper than Nordstrom," GlobalData Retail Managing Director Neil Saunders told Retail Dive in an email. "This is aligned with rising consumer expectations of value for money and a cheaper price point also necessitates higher volume which drives sales. But this isn't the sole reason for success."

Gap's Old Navy play was essentially a defensive one. But another idea behind the side brands at department stores, L Brands and other retailers was that young shoppers with less spending power would move up to the higher-priced flagships as their finances improved.

"This is what Ascena does, and The Limited tried it first [with Limited Express]," Lee Peterson, executive vice president of thought leadership and marketing at WD Partners, told Retail Dive in an interview. "They created or bought all these brands to try and capture the customer's entire life. You're supposed to graduate to each brand but you spend every dollar of your apparel life in their brand system. It doesn't happen right away, so it seems like a great idea, but eventually it cannibalizes."

Things don't necessarily turn out as planned. Nordstrom, for example, should face the fact that Rack will never turn over its budget shoppers to full-line stores, according to Cohen. That could be in part because, unfortunately for those retailers and their customers, finances for many aren't improving all that much, which experts say could be keeping middle-class consumers value-minded.

"The whole discussion about the disparity of wealth has a lot to do with this," Thomai Serdari, a professor of luxury marketing and branding at New York University's Stern School of Business, told Retail Dive in an interview. "Someone who is on a small budget prefers to splurge occasionally on brands like a Chanel, but also buys from Target. You learn to become more eclectic, in thinking, in taste, in how you view the world, with no organized hierarchies. Young people are happy when they find something that they like and they stop there — they're immune to the dictatorial direction from the brand."

As Saunders notes, however, price isn't the only differentiator propelling a sub-brand to leapfrog over its parent.

Innovation vs. neglect

Madewell, the newish denim brand that J. Crew is trying to grow in hopes that its superior performance will make a difference to the company's overall fortunes, (and like Old Navy, a Drexler brainchild), is not a discount brand. Yet it's out-performing its parent because it's achieving that crucial benchmark in retail — shoppers want to buy its merchandise.

"[I]n many cases ... the younger brand is more innovative and in-tune with what consumers want and is not encumbered with the out-of-date thinking that embodies the parent brand." Neil Saunders Managing Director, GlobalData Retail

Retailers sometimes make the mistake of depending on what they think is entrenched brand loyalty that actually isn't shared by younger customers, according to Peterson. That can lead to neglect in marketing and merchandising.

"Child brands or sub-brands can become more dominant than their parent brand in many cases because the younger brand is more innovative and in-tune with what consumers want and is not encumbered with the out-of-date thinking that embodies the parent brand," Saunders said. "All of those examples [Old Navy, Target, Nordstrom Rack] bring other things to market whether it be innovative designs, fresh takes on fashion, great omnichannel service or the excitement of a treasure hunt. In other words, they offer a fresh take that perhaps the parent business was not exploiting."

Indeed, Cohen suggested recently in another email to Retail Dive that developing a new brand can siphon away focus and talent. "The parent business no longer commands the attention it always had and certainly still requires from senior management," he said. "All eyes on the new toy while the old one is left unattended. Net [result] – Gap is nowhere, J. Crew is nowhere."

Getting somewhere

One way to handle the rise of a sub-brand is to give in to reality. Gap Inc. is doing that to some extent by spinning off Old Navy. But the savviest example is probably Dayton-Hudson, which sold off its flagship to The May Company (now Macy's) years ago and changed its name to Target.

Target is now one of the nation's most successful retailers, while Macy's is struggling with its model and has been forced to drastically reduce its footprint. In that case, the flagship was strategically scrapped.

"The drive to grow the Target side of the business was very much a considered one," Saunders said. "The Dayton brothers predicted shifts in consumer demand away from the traditional department store to a mass merchant model. Their vision proved to be correct and eventually the Target side of the business outpaced the department store division. Given today's context their view, held all the way back in the early 1960s, was extremely prescient."

But a side brand's success doesn't mean the inevitable demise of the flagship. American Eagle's Aerie lingerie brand, for example, along with stealing share from market leader Victoria's Secret, is proving to be a boon to its parent. Last month the teen retailer said that Aerie saw its 18th consecutive quarter of double-digit comps, rising 14%, and is boosting flagship women's sales in areas where Aerie sales are within or adjacent to American Eagle stores.

The idea is to bring on the talent and other resources to allow the new brand to thrive, without losing focus on the original. That not only prevents the new arrival from overtaking its parent, but can also bring new vitality to the retailer as a whole.

"Brands add character to a retailer and provide a uniqueness to the offer that is not available elsewhere. However, to succeed, retailers have to give brands some autonomy and breathing space to do their own thing," Saunders said. "That means that subsuming them into the overall corporate culture is not a sensible idea. Target would never have been able to develop as a business if it was run in the same way as Dayton's department stores."

Target is now applying that philosophy to the development of its own private labels, which are not only driving sales and traffic but also hold other potential, he said.

"Target's many own brands such as Goodfellow & Co have their own personality which fits with Target but is independent of it. That's the key to success," he said. "Could you see a stand-alone Goodfellow & Co store in the future? It sounds far-fetched now, but as Target fleshes out the range and moves it into personal care and other categories, you see the possibility of it – even if it is a stand-alone online store or site."