GAP (cont.)

Don displayed a deft touch for real estate, buying up old flophouses and converting them into low-end residences. It was the undervalued asset, the undiscovered angle, that got his blood pumping. As Gap's corporate mythology holds, in 1969, when Don couldn't find a pair of jeans to fit his lanky frame, he came up with the idea of opening a store with the best selection of Levi's anywhere. Since Levi Strauss, a San Francisco institution, zealously protected its prices to discourage discounters, he figured he could build a business with stable profits and little competition.

Gap grew quickly, and Fisher thrilled in seeking out potential sites and haggling over leases, leaving the merchandising to Doris and others. "Don could spot a corner with homeless people sleeping in the doorways that smelled bad, and he would know that it could be a fabulous retail location," says Jeanne Jackson, former CEO of Banana Republic and Gap Direct. Fisher was also a "decision-making machine," says another ex-Gap executive. "For him business was a game, and he liked to play to win." And once he had made up his mind, he usually wouldn't budge.

When the Federal Trade Commission accused Levi's of price fixing in 1976, and it became clear that discounted jeans would flood the market, stock of the newly public Gap plummeted. It didn't help that Gap posted its first loss after 26 profitable quarters. Fisher became the target of an SEC action, which he settled in 1977, and a class-action suit, which he vowed to fight but ultimately settled in 1979. "They tried to strike fear in us," he writes, "but we weren't buying." The stock didn't return to its IPO price until 1981.

Fisher needed a new concept. He began experimenting with lower-margin Gap-branded clothes, but like his father, he kept finding himself on the low end of the chain. "Discounting brought us lots of dollars but no joy," he writes. In hopes of going upscale, Fisher partnered with a young Ralph Lauren (Charts). But Fisher wasn't able to manufacture clothes that fit Lauren's specifications. "It was an amazing beginning, but the products didn't come in on time and the jeans didn't fit well," says Lauren. "Having a failure for me in an area where I had no control was upsetting."

In another attempt to boost margins, Fisher bought Pottery Barn. Confident that he could work the same growth magic he had at Gap, he kept expanding as the losses mounted. "I figured it would be only a matter of time until we caught on," he writes, "and so we continued to open new stores." It didn't work, and he sold it in 1986 at a $14 million loss, according to the book. Around the same time, he also bought a small chain of safari wear called Banana Republic.

In 1983, Fisher finally found the creative spark he lacked, in Mickey Drexler, the son of a Bronx button buyer, who had just completed a remarkable turnaround of Ann Taylor. (Charts) "[The Gap] had great real estate and a famous name," Drexler says in Fisher's autobiography. "I knew the business was going to hell with horrible goods--cheap goods. But I think we knew we each had what the other wanted."

To lure Drexler to San Francisco, Fisher once again turned to real estate, playing on the biggest fear of any Manhattanite--being priced out of an apartment. If things didn't work out, he agreed to pay the difference in the average price rise of three-bedroom apartments in New York City.

At the outset it looked as if Drexler might need his old place back. He wanted to slash all the low-quality inventory and start over, but Fisher resisted such a big hit. "I said, 'You can't do this! If you don't want me to take another markdown, I'm moving back to New York,'" Drexler says in the book.

Fisher agreed, and the breathtaking success that resulted has been well documented. Drexler junked everything not made from natural fibers and developed comfortable, long-lasting clothes that felt fresh and fun, such as colored fleece and buffalo plaid shirts (Gap stopped selling Levi's in 1992).

The company grew to 2,428 stores by 1999; the stock split eight times and returned over 46,000%. Whereas fashion had traditionally been something that originated in Europe and then was tweaked to fit local tastes, Gap offered an original, truly American style that was both appealing and affordable. Gap was a store, yes, but it was also a culture, a touch point for men and women, kids and babies, boomers and teens, foreigners and locals. "What Mickey did was revolutionize casual wear," says retail analyst Janet Kloppenburg of JJK Research.

Still, in many ways Gap continued to be run like a small-scale family business. The family owned more than a third of the stock, an effective majority, and the board was insular, packed with childhood or college friends of Don's and executives on whose boards Don also sat, such as Charles Schwab (Charts).

In such a clubby atmosphere, it didn't seem strange that, for example, Fisher's brother Bob's company, Fisher Development, was the primary builder of Gap stores for most of its history. (In 1999 alone, Gap paid Fisher Development $485.3 million. By 2005, after criticism from governance experts, that amount had dropped to $21 million.) "It was Don's board," says a former director. "He was basically running a family company that had hit the big time with an entrepreneurial retail genius."

Fisher and Drexler presented a united front, but the merchandiser and his boss sparred over everything from whether or not to create Gap Kids (Drexler yes, Fisher no) to expanding abroad (Fisher yes, Drexler no). One epic battle occurred over what to name Drexler's concept for a cheaper brand of clothing: Drexler fought for Old Navy, the name on the sign of a café he'd seen in Paris, but Fisher thought it too military. He suggested Expectations or Excitement, then brought in a naming company that suggested things such as Forklift and Elevator.

Drexler won, and from Old Navy's launch in 1994, it became the fastest retailer ever to achieve $1 billion in annual sales, hitting that target by 1998. In 1995, Fisher ceded the title of CEO to Drexler, becoming Gap's chairman.

Yet tensions continued, in part because Drexler's success blocked the rise of Don's sons Bob and Bill, both of whom had joined the company in the 1980s. Although Fisher writes that he didn't want to put the same pressure on his kids that his dad had on him, he couldn't help himself. "I certainly remembered how much I disliked working for my father. At the same time, it bothered me to have so much invested in this business and not have a family member involved in it," he writes.

While Bill worked his way up to run the company's international division, Bob climbed the ranks at home to become, eventually, head of the Gap brand stores. There the low-key, firstborn son was respected for his focus on the company's culture and morale and for his refusal to put on airs, flying his family coach to Hawaii when he easily could have chartered a jet. "He was immensely involved in cultural issues and the squishy stuff and was good at it," says Jackson. "People responded to him and loved him."

Bob was a hard worker, yet his heart didn't seem to be in retail. Rather than walking the floor and touching the goods, he preferred to stay in his office. He was passionate about the environment and loved to focus on natural fabrics and Gap's recycling programs. Yet when it came to making tough management decisions, Bob struggled. He was infamous, for example, for interviewing job candidates as many as eight or ten times before deciding whether to hire them.

"Bob was a nice guy but not a decisive guy," says another ex-executive. "He would just agonize." It didn't help matters that Drexler showed little respect for the younger Fisher. "Their lack of compatibility made it difficult for those around them at times," says Jackson.

The pressure intensified in 1998 when the company came under fire from environmentalists because of an investment the family--not Gap--had made in a redwood-timber company. That concept was anathema to some anti-logging activists, who staged an embarrassing and costly public boycott of Gap. Don, as usual, held firm on the decision. But for Bob, the attacks--in addition to the family pressure he faced--must have been particularly painful. In 1999 he abruptly quit one day, agreeing to remain on the board.

"At that point it was just not where his heart lay," says one executive who worked closely with him. (Through a spokesman, Bob says the resignation was solely for personal reasons. "I owe a lot to [Drexler] and to what he taught me," he says.) Released from his khaki straitjacket, Bob spent time fly-fishing with his children and increasing his involvement with environmental groups such as the Natural Resources Defense Council and Conservation International.

Don took the departure hard, especially since son Bill had also left the company the year before. "The worst thing I ever did was make my sons too rich," Fisher later said, according to an acquaintance. "It was a real big deal," says a former board member. "You could just feel the resentment." That resentment found its way to Drexler--at almost exactly the same time the merchant's creative mojo began to falter. Basics were no longer trendy, so Drexler bet big on fashion, going for sexier styles that were supposed to appeal to teens--but didn't. At the same time, new COO John Wilson, with Don's support, was undertaking a dramatic store expansion, signing deals for over 1,000 new stores in a 2 1/2-year period in the late 1990s.

Taking advantage of the leverage he now had, Don squeezed landlords, capping common-area charges and sometimes forcing them to pay before construction had started on some new stores. "We did a lot of things we get the blame for," says Alan Barocas, a real estate consultant and former SVP of real estate, "but we were tough but fair."

Next page: GAP (cont.)

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