Okay, it's probably a massive overstatement to argue that Gap Inc. (NYSE: GPS) is going down in flames. However, there is little doubt that the once-ubiquitous brand is experiencing some serious problems. Between brand confusion, the decline of narrow-focus retailers, and increasing competition from other companies, Gap will either have to massively tighten up, or 2009 is going to be a rocky year.

The first problem lies with brand identity. Gap, Inc. owns three major retail chains: Gap, Old Navy, and Banana Republic. Although the Gap was, historically, a relatively inexpensive brand, it has forged out a mid-level space for itself. At this point, its customers expect well-constructed, durable, relatively classic styles. By comparison, Banana Republic focuses on more upscale clothing, and Old Navy sells cheap, relatively disposable clothes. To put it another way, Old Navy markets itself toward high school and college students, Gap markets towards college and young professional, and Banana Republic skews more toward young professional.

Obviously, these aren't hard and fast delineations, and there is considerable overlap among Gap's target demographics; however, this is basically the way that Gap splits up its customer demographic. The trouble is that the high prices that one may expect of Banana Republic have found their way down to the Gap, while the questionable construction that is perfectly acceptable at Old Navy somehow has migrated into many of Gap's garments. This brand confusion has resulted in overpriced clothing items that quickly fall apart. Not surprisingly, it has also led to some major irritation on the part of Gap's loyal customers.

This post is part of my series featuring established companies and the smaller, more aggressive or innovative rivals that may eventually succeed them.

San Francisco-based Gap Inc. (NYSE: GPS) has seen its fair share of hits or misses. The original Gap Stores was an overwhelming success in the 1980s and 1990s, but ran into the proverbial wall as the century was ending. The Gap missed the fashion changes and has re-tooled and re-engineered itself more than Joan Rivers! The concept has never been quite the same or attained its cache in the minds of discerning consumers. Other concepts within the Gap system have fared better, such as the Banana Republic, and Old Navy still remains popular in the deep discount segment.

Zara offers a fresh approach to fashion with a range of price points appealing to all levels of consumers. Zara is based in Spain and is part of the huge distribution company Inditex, which trades on the Spanish exchange. Zara is just beginning to make some serious inroads into the United States. With only 154 stores in the U.S., Zara has the room to five-fold its base within the next decade. The Zara concept has over 1,400 stores spread out over 50 countries, with plans to double that base. The U.S. is fertile ground for Zara as the international cache appeals to American consumers.

Zara is a vertically integrated concept. From designing men's, women's and children's fashions to manufacturing to distribution, Zara controls the entire process. The stores are all company-owned, to complete the vertical integration. Zara has captured the cache that the Gap Stores once had. Zara's appeal ranges from casual wear to business attire, while maintaining reasonable price points.