lululemon athletica Inc. Jenna Beyer, Leon Faifman, Eric Ho, Miso Kezunovic, and Lance Olian Texas A&M University • Includes Case Flash Forward 1 & Case Flash Forward 2 Love Guests are so pleased with the clothes we offer that they can’t help but tell all their friends about it,” explains Laci Levisay, a lululemon associate from a store in Austin, Texas. Levisay continues, “For the other 20 percent who walk into lululemon stores with no previous knowledge, store employees look to find out as much as possible about the guests’ lifestyle and then educate them on what products would best suit their needs.” Choose a Positive Thought Based in Vancouver, Canada, lululemon athletica provides premium quality athletic apparel at a premium price. One of lululemon’s signature items is its yoga pants, typically sold by competitors for between $25 and $50. Yoga pants available in lululemon stores and online range between $78 and $128 with its most popular pair priced recently at $98 – two to three times rivals’ prices. However, lululemon’s products sell and they sell fast. Demand for lululemon clothing is so high that stores have trouble keeping new lines in stock. Sheree Waterson, Lulu’s chief product officer conveyed this example, saying, “A hot-pink color named ‘Paris Pink’ that launched in December (of 2011) was supposed to have a two-month lifecycle but sold out its first week.” The question then arises as to why customers, or “guests” as lululemon refers to them, are willing to pay high prices for high fashion items that are destined to be soaked in sweat! It seems the answer to this question resides in lululemon’s ability to connect with its guests on a deeper level than just the typical sales associate–customer relationship. After all, other companies such as Nike, Adidas, and Under Armour not only produce high-tech clothing with the same soft cotton feel, four-way stretch, and moisture-wicking technology that lululemon touts, but do so much less expensively for their end consumers. Ultimately, what competitors cannot duplicate is lululemon’s culture. It is lululemon’s deep understanding of its target market, close relationships with its communities, and an inimitable culture that transforms customers/ guests into diehard loyalists. This is not to say that lululemon does not uphold the highest quality standards in its products. Levisay states, “People will save up if they need to in order to afford our clothing because of the benefits they provide.” She goes on to explain, “It’s silly to spend that much on yoga pants if they’re not going to live up to their promise.” Jennifer Black, president of an investment research firm confirms this sentiment saying, “lululemon won’t put stuff in its store just to sell it. They don’t compromise on quality.” 1 Friends Are More Important than Money lululemon athletica’s in-depth knowledge of its target audience is an important, firmspecific asset. “Rooted in yoga but expanded into any sweaty pursuit you may have, lululemon creates technical fabrics that work with you instead of against you. Plus, they look cute!” explains Levisay. The stores’ “...guests comprise anyone living a physically active life that strives to achieve balance,” although the majority of shoppers are female, have disposable income, and are in the 15- to 65-year-old range. Fitness blogs confirm that lululemon “...recognizes this niche market and combines high performance material with attractive product design to create a committed brand following.” One of the strongest examples of lululemon’s focus on culture is the company manifesto, which appears on multiple lululemon products, from bags to water bottles. Explaining the company’s perpetuation of its manifesto, Whitney, a store employee and lululemon blogger writes, “We are sharing a piece of our culture and inspiration as a company. We have traditionally printed our [bags] with the lululemon manifesto, which is a series of statements that embodies our company’s vision, culture and beliefs... [as] a constant reminder of our vision to create components for people to live longer, healthier and more fun lives.” Observe a Plant Before and After Watering Each and every store employee at lululemon is considered a steward of the company’s culture. From the beginning of the hiring process, throughout training, and continuing throughout employment, each employee is expected to reflect the company’s mission and vision. lululemon athletica’s “...success is reflected in everything within the store experience. The people who work there believe strongly in the lifestyle and what it represents.” A focus on employee development is a crucial component of the company’s strategy. In general, a lot of money and effort is put into training store employees. Levisay comments, Employees don’t exist just to fold clothes or set up displays. They share their knowledge of the clothing and culture with every guest that walks through the door. They have the ability to explain functions of the clothing you would not necessarily recognize; items such as hidden pockets, body support, material that protects against harmful UV rays, and special woven silver that makes the material antibacterial. Another employee, Samantha Baldwin, clarifies the link between employee and guest. “If your employees are happy and feel supported in their goals, your genuine nature comes across and this allows consumers to buy the experience, buy the product.” This “caring-and-sharing” culture bolsters the high-quality products. Baldwin continues, “It wasn’t just about selling stretchy pants. It was about connecting with people on an authentic level and finding out their story.” This Is Not Your Practice Life lululemon athletica was founded in 1998 by Dennis “Chip” Wilson in response to increased female participation in sports and in accordance with his belief in yoga as the optimal way to maintain athletic excellence into an advanced age. Wilson, an avid surfer and snowboarder, had previously parlayed his passions for these sports into building a 2 successful company – Westbeach – that sold snowboarding and skateboarding apparel. After taking a yoga class, Chip fell in love with the practice. Once again melding his athletic passions with his acumen for producing high-end performance apparel, Chip saw the opportunity to produce higher-quality yoga attire. Wilson noticed that the cotton materials used in yoga apparel were inefficient for the demands placed upon them. He applied his knowledge of materials to design highly technical fabrics that would move and breathe better. Chip opened a design studio and retail store that doubled as a yoga studio at night to pay the rent. Yoga instructors at the studio became product testers, wearing Chip’s designs while teaching, and providing feedback about the product. The first official lululemon store was opened in 2000 in Kitsilano, a beach neighborhood in Vancouver. The first store served as a community hub for multiple aspects of healthy living including nutrition, running, biking, and of course yoga. Realizing the potential for female-centric, high-quality athletic apparel, lululemon began to grow; expanding across Canada for the next couple of years and entering the U.S. market in 2003. lululemon athletica continued to expand both in North America and overseas and announced its initial public offering in May 2007. In 2009, lululemon expanded its offerings by launching an e-commerce channel and ivivva, a subsidiary specializing in athletic gear for girls 4 to 14 years old. Dennis “Chip” Wilson The success of lululemon is attributable to the vision of Dennis “Chip” Wilson. After taking the company public in 2007 and serving as Chief Innovation and Branding Officer, Chip officially turned over the reins in January 2012. During his time with lululemon, he helped the company grow to 147 stores, transformed the brand into a cult following, and provided company focus by developing the lululemon manifesto. He remains chair- man of the board and continues to represent lululemon at investor meetings. His successor, Christine Day, has renewed the company’s goals and assembled an exemplary “management team with a complementary mix of retail, design, operations, product sourcing, marketing and information technology experience from leading apparel and retail companies such as Abercrombie & Fitch Co., The Gap, Inc., Nike, Inc., and Speedo International Limited.” Christine Day Christine Day joined lululemon as Executive VP of Retail Operations in January 2008 and was promoted to CEO in June 2008. Day was with Starbucks for 20 years, most recently serving as President of the Asia Pacific Group of Starbucks Coffee International. Starbucks and lululemon are very similar in that both are high-growth, international companies focused on cultivating their culture and brand loyalty. Day will focus on brand expansion and developing long-term corporate and business-level strategies. Don’t Trust that an Old Age Pension Will Be Sufficient In terms of financial strength, lululemon athletica (“LULU”) is positioned to weather declines in the economic environment. The company has a significant amount of cash, over 50 percent of assets and, although the company has a line of credit should it face an immediate liquidity need, lululemon holds no debt. Companies such as Adidas, Nike, 3 and Under Armor allS carry some debt and it is certainly noteworthy to see lululemon a egic Ma age e : C ce a d Ca e : C e i i e e a d G ba i a i , 11e operate with none. lululemon athletica has experienced tremendous growth in both PRINTED BY: nada l@ .ed . Prin ing i for per onal, pri a e e onl . No par of hi book ma be reprod ced or ran mi ed i ho p bli her' and profitability over the lastS couple years. prior permi ion.revenue Viola or ill be pro ec ed. 4/15/2016 a egic Maofage e : C Revenue ce a d Cagrew e : C by eai icompound e e a d G ba i a i , 11e annual growth rate of 41.47 percent from fiscal year (FY) 2009 to FY 2012. lululemon’s PRINTED BY: nada l@ .ed . Prin ing i for per onal, pri a e e onl . No par of hi book ma be reprod ced or ran mi net improved 12.87 priorprofit permimargin ion. Viola or ill befrom pro ec ed. percent in 2010 to 18.39 percent in 2012, driven mainly by improvements in the gross margin and control over the growth in sales, general, and administration expenses. As expected by the growth in sales and profitability, both return on equity and return on assets also increased (Exhibit 2). 4/15/2016 As seen in Exhibit 3, lululemon compares very favorably to some very well-known companies within the performance apparel clothing industry. Because lululemon operates primarily in a niche product market, it is able to compete against the likes of Adidas, Nike, and Under Armour and still generate above-average returns, principally by offering customers what it believes are higher- quality products. Historically, Adidas, Nike, and Under Armour did not offer separate apparel lines for yoga activities; however, all three have recently entered this particular market. Even so, lululemon is the only publicly traded company focused solely on the yoga apparel market. While lululemon does face competition from other companies with yoga apparel lines, none of these competitors can demand the premium that lululemon has on its products. The Pursuit of Happiness Is the Source of All Unhappiness At the beginning of FY 2013, lululemon was forecasting that its revenue and profit would continue to grow, albeit at a slower pace compared to the firm’s recent growth rates. 4 Management was forecasting that same-store sales would increase around 20 percent in FY 2013 and that earnings per share (EPS) would be between $1.50 and $1.57. The EPS expectation translates into a 16 to 22 percent growth range for net profit in 2013, which is substantial given the economic condition of the United States. Even so, these forecasts disappointed stock analysts that had expected the company would maintain its breakneck pace of growth at least throughout 2013. As the first – and sole – potential sign of trouble for the company, YE 2012 inventory increased nearly 85 per- cent from $57 million to $104 million. This growth in inventory combined with a lower sales growth forecast may reflect pressure from the economic environment, pressure that lululemon has historically weathered unscathed. Additionally, with the increased popularity of yoga and sustained above-average returns, new competitors are beginning to enter the market. For instance, in late 2011, Nike, Gap, and Nordstrom launched their own lines of yoga clothing to capture part of the growing market. The increased competition from these major apparel retailers will pressure lululemon and test its ability to continue generating desirable returns for shareholders as well as for other stakeholders such as employees. Life Is Full of Setbacks lululemon athletica has four primary competitors that operate in the same sphere of yoga apparel: Nike, Adidas, Under Armour, and VF Corp. Up to this point, lululemon has been able to successfully expand its business through focused and targeted marketing – but the firm’s competitive environment is rife with potential threats and challenges. Nike Nike began with a handshake between two visionary Oregonians: Bill Bowerman and Phil Knight. This pair grew the company from a U.S.-based footwear distributor to a global marketer of athletic footwear, apparel, and equipment that is unrivaled in the world. Headquartered near Beaverton, Oregon, a suburb of Portland, Nike now operates in more than 160 countries around the globe. Through its suppliers, shippers, retailers, and other service providers, Nike directly or indirectly employs nearly one million people. This includes more than 35,000 Nike employees across six continents, each of whom contributes to fulfilling Nike’s mission statement: “To bring inspiration and innovation to every athlete in the world.” The Nike brand is world-renowned and the company is characterized by strong operational and financial performance. For FY 2011, the company recorded $20.8 billion in revenues and $2.8 billion in income before taxes. Nike’s balance sheet is strong and the company has approximately $4.6 billion in cash and short-term investments, representing over 30 percent of assets. Nike holds under $0.5 billion in debt, a minimal amount compared to its liquidity. In terms of financial strength, Nike has a substantial capacity to invest in new markets and ventures. Nike recently launched its own line of yoga apparel to capture part of the growing market. Nike yoga products are typically part of Nike’s Dri-Fit line and are priced less than lululemon’s products. Nike tops are priced from $20 to $40 while its pants are priced from $40 to $70. The line was launched in late 2011 and it has yet to be seen whether its products will be attractive to lululemon’s customers. 5 Adidas Adolf (“Adi”) Dassler was inspired by a single idea when he made his first shoes in 1920 at just twenty years of age: to provide every athlete with the best footwear for their respective discipline. This principle guided him and his company until his death in 1978. His first shoe, made from the few materials available in the difficult post-war period, was constructed using canvas. From the very beginning, Dassler, a passionate athlete himself, was in close contact with sporting event participants, and personally attended many important sporting events.28 On January 31, 2006, Adidas acquired Reebok International Ltd., providing the new Adidas Group with a footprint of around €9.5 billion ($11.8 billion) in the global athletic footwear, apparel, and sports hard- ware markets. Today, the Adidas product range extends from footwear and apparel to accessories for all kinds of sports. Its key priority sports are running, soccer, basket- ball, and training.29 Similar to Nike, Adidas is a world-renowned brand and is characterized by solid operational and financial performance. For FY 2011, the company recorded €3.3 billion in revenues and €0.9 billion in income before taxes. Adidas’ balance sheet is moderately strong; the company has approximately €1.3 billion in cash and short-term investments, representing over 12 percent of assets. Adidas holds under €1.3 billion in debt, a moderate amount compared to its liquidity. Based on these metrics, Adidas has the capacity to invest in new markets and ventures. Though Adidas does have yoga apparel, its line is very limited. The firm’s styling is significantly different from lululemon’s, suggesting that Adidas is targeting a different market compared to lululemon. Under Armour Founded in 1996 by former University of Maryland foot- ball player Kevin Plank, Under Armour started with the simple plan to make a superior tee shirt; one that provided compression, wicked perspiration off your skin rather than absorbing it, and worked with your body to regulate temperature and enhance performance. Under Armour’s mission is to “Make all athletes better through passion, design, and the relentless pursuit of innovation.”31 For FY 2011, the company recorded $1.47 billion in revenues and $0.16 billion in income before taxes. Under Armour’s balance sheet is strong and the company has approximately $175 million in cash and short-term investments, representing over 19 percent of assets. The company holds approximately $78 million in debt, a relatively minimal amount compared to its liquidity. Under Armour has the capacity required to invest in new markets and ventures, but not to the degree that Nike and Adidas possess. The company has grown rapidly over the years, but remains significantly smaller than Nike and Adidas. The Under Armour brand is strong in the United States; however, it lacks the worldwide awareness that Nike and Adidas possess. Nevertheless, the company has strong operations and financial performance and has marketed its products very aggressively in the United States. Under Armour recently launched its own line of yoga apparel to capture part of this expanding, growing market. Under Armour’s yoga products are priced from $40 to $100 and its pants are priced from $70 to $100. The Under Armour yoga line has styling similar to lululemon yet has a limited selection as, to date, the company has focused on other apparel lines. 6 VF Corporation VF Corporation, organized in 1899, is a worldwide leader in branded lifestyle apparel, footwear, and related products. VF is a highly diversified apparel company with multiple brands, product categories, channels of distribution, and geographies. Included in the VF Corp. portfolio are brands such as The North Face, Vans, Timberland, Jansport, Wrangler, 7 For All Mankind, and Nautica. It markets its products to consumers shopping in specialty stores, upscale and traditional department stores, national chains, and mass merchants located in different parts of the world. Among its brands, VF Corp. is the owner of lucy, a women’s active wear brand that most closely compares to lululemon’s dedicated yoga apparel brand. lucy is a relatively young company, founded only a year after lululemon. “The styles are designed and developed by women who do the activities we design for: yoga, run- ning, training, exploring the outdoors, and traveling to your favorite destination.” For FY 2011, VF Corp. recorded $9.4 billion in revenues and $1.2 billion in income before taxes. Of the lululemon competitors, VF Corp.’s balance sheet is the weakest. The company has approximately $341 million in cash and short-term investments, representing just over 3 percent of assets. VF Corp. holds over $2.1 billion in debt, a relatively large amount compared to its liquidity. Based on these metrics, VF Corp. has a very limited capacity to invest in new markets and ventures. VF’s lucy is not well known within the United States and represents only a small portion of the VF Corp. brand portfolio. lucy yoga products are typically priced less than lululemon’s products with a similar styling. lucy tops tend to be priced from $35 to $80 while its pants are priced from $35 to $90. lucy is the closest brand to lululemon in terms of product and customer focus, but the brand is one of the smallest in a large portfolio of the parent firm’s brands. That Which Matters the Most Should Never Give Way to that Which Matters the Least The general environment is particularly interesting for lululemon due to the niche nature of its product offerings (yoga, and more recently, running gear). Although lululemon offers products for males and even for children as young as four years old, its target is females between the ages of 15 and 65. Given this broad, targeted band of the female population, the potential market for lululemon’s products is over 105 million women in the U.S. alone,35 representing over two-thirds of the U.S. female population. Not even considering men, children, and international customers, it is evident that the potential customer base for lululemon is substantial. Of course, other factors, such as the medium to high price of its products and the fact that not all potential customers need or want yoga apparel, cull from this potential customer base. The geographic footprint of lululemon is growing every day. The company currently has 47 stores in Canada, 108 in the United States, 18 in Australia, and 1 in New Zealand. Through distribution centers in the United States and Canada, and the 2009 addition of its e-commerce business, the company has been able to serve an increasing number of international markets. Since its customer base encompasses such a large number of people, the ethnic mix of its customers is quite diverse. Based on its product pricing, lululemon targets higher 7 income clientele. Given the global economic downturn, consumers worldwide have cut their discretionary spending. The company’s bottom line would be expected to decrease due to the high priced, discretionary” nature of its products; surprisingly, lululemon’s sales have continued to grow for the past twelve quarters. At this point however, it is unknown how the long-term effects of the changing global economy will affect the firm’s profitability. Uncertainties in political and legal areas also affect lululemon. The company has manufacturing facilities in the United States and Canada, but it also relies heavily on its factories in China, Taiwan, South Korea, Peru, Israel, Cambodia, Thailand, and Vietnam. International and country-specific rules and regulations play a significant role in getting the company’s products to market in a timely manner. Ensuring compliance with lululemon’s internal, international, and countryspecific policies is a time and capital-intensive effort. Recently, the company has had to deal with the California Transparency in Supply Chains Act of 2010. This law requires retailers and manufacturers doing business in California to disclose their efforts to eliminate human trafficking and slavery from their direct supply chains. This is just one example of the many legal hurdles that lululemon must address to operate effectively both domestically and globally while relying on foreign production facilities. Any potential changes in international trade laws could have a detrimental effect on lululemon’s operations. Additionally, changes in international tax regulations and country-specific tax laws play a large role in the variability of the company’s earnings and are an area that the company must continue to carefully evaluate. Technology has played a surprisingly important role in lululemon’s operations. Many of its product features are technology driven, including its use of silver thread in select products. Technology has also played a key role in lululemon’s expansion. The introduction of e-commerce in April 2009 has made it possible for the company to reach customers outside of its traditional bricksand-mortar locations. Virtually all of the company’s employees, ambassadors, and guests participate in yoga and/or running. Collectively, they provide a considerable amount of valuable feedback on how to improve existing products and create potential product line extensions. Guests are given the opportunity to provide feedback in stores and online. Ambassadors are local athletes and yoga instructors recruited by lululemon to help promote the brand and apparel. They are the focal point of the company’s unique “grassroots marketing” campaign, but are not paid by the company. Ambassadors are given products to test so they can provide crucial feedback for the company. In turn, they become fans of lululemon’s products and encourage potential customers to visit a store. Finally, lululemon’s physical environment is taken into consideration in the company’s operations. Whether it is reducing paper use or packaging waste at its corporate offices or gathering fabric remnants at its factories, lululemon is constantly striving to reduce its environ- mental footprint. Creativity IS Maximized When You Are Living in the Moment lululemon athletica constantly scans its external environment to identify potential key issues, including new trends that the firm might be able to serve by developing product 8 line extensions and/or entering new markets. Scanning keeps lululemon alert with respect to identifying new potential competitors. After a thorough environmental scanning, lululemon continues to monitor the environment and attempts to filter out the “noise” in an effort to identify what is actually important. Upon identifying potential issues, lululemon develops projections of anticipated outcomes should a potential issue become a real problem. Finally, lululemon conducts an assessment of the timing and importance of environmental changes and trends it observes. The implementation of this comprehensive analysis process led the company to introduce its running apparel segment and develop the ivivva brand for children. It also contributed to lululemon adding its e-commerce option to serve its global customer base. This process also keeps the company aware of potential competition, including the multiple entrants into its product field since the company’s founding in 1998. Jealousy Works the Opposite Way You Want It to The threat of new entrants within the yoga apparel industry is very high, and this poses a threat to lululemon’s continuous efforts to succeed. Virtually every company that has any semblance of active wear in its product lines and manufacturing capabilities is an actual or potential competitor. As noted previously, leading global companies, such as Nike and Adidas, and regional powerhouses such as Under Armour, have joined the market.49 The ease of market entry has also opened the door for retailers such as GAP, Nordstrom, Eddie Bauer, Macy’s, and many others in recent years. These new entrants bring additional capacity that, theoretically, should reduce lululemon’s profits, especially in an industry where switching costs are very low. As a testament to the power of its brand and culture, this has yet to become a reality for lululemon. The company has high standards for its suppliers and this requires a large investment of lululemon’s time to ensure they are up to standards. In a retail setting, timing is very important. Because lululemon champions product exclusivity as a main component of its popularity, having an adequate and timely supply of product is crucial. In addition, lululemon does not own any of its manufacturing facilities. In fact, more than 36 percent of its product offerings are produced by 5 of its 45 manufacturers. If something were to happen to any one of these five manufacturers, it would have devastating effects on lululemon’s supply chain. Additionally, 90 percent of its products are produced in Asia, with 49 percent produced solely in China. Any global political or environmental events that affect this part of the globe would have material ramifications on lululemon’s product supply. The vast number of similar products available from many different brands means that buyers have multiple choices available to them. Additionally, lululemon’s products are on the high end of the price spectrum. A change in buying habits or a large decrease in discretionary spending could affect lululemon’s ability to operate as profitably as the company desires. Surprisingly, lululemon has continued to grow at an admirable pace in spite of the global economic downturn and decline in discretionary spending. Not only is it charging more than some, if not most, of its competitors, but it is selling more than it ever has. Its brand equity combined with extremely loyal customers and a highly successful grass- roots marketing campaign have made lululemon a force in the industry. 9 Dance, Sing, Floss, and Travel lululemon athletica uses a clear set of strategies to achieve the company’s vision – “To be a community hub to provide our guests with knowledge, tools and the components for people to live longer, healthier and more fun lives.” Listen, Listen, Listen The company relies on its ability to maintain the value and reputation of its brand by successfully anticipating and adjusting to customer preferences and changing needs. lululemon concentrates on providing an active and comfortable communication relationship with its customers. One example is the fact that executives go into the stores and observe customer behavior. Further examples include yoga instructors providing frequent and detailed inputs to the firm’s research and development process, sales staff treating their customers as guests rather than buyers, and apparel folding stations located near the dressing rooms so employees can over- hear and respond to comments and complaints. By building relationships with its customers, lululemon is better able to design and produce products that satisfy their needs. For instance, the design team “identifies trends based on market intelligence and research, proactively seeks the input of our guests and our ambassadors” to develop products in conjunction with suppliers. This process ensures that its products are of the highest quality and able to perform according to customer preference. Goal Setting Triggers Your Subconscious Computer The company concentrates on creating value through its grassroots marketing, superior service, and communication with customers. Supply-chain activities also play an interesting role in lululemon’s strategy. The company creates artificial scarcity through limited production runs and purposely seeks to maintain low levels of inventory. This strategy keeps the already sought-after clothing at a demand level that exceeds supply. As a result, lululemon rarely has leftover inventories, which serves as an advantage in the ever-changing retail industry. When new lines are released to the public, excitement is generated, and these lines typically sell out before their anticipated expiration date. According to the Wall Street Journal, this creates a “feeling of scarcity that increases the psychological need to purchase the products.” Your Outlook on Life Is a Direct Reflection of How Much You Like Yourself The company relies on its unique capability to design and create technologically advanced products and market those unique products to a particular/targeted group of individuals. The company indicates that it may expand its product variety and target new market segments that share the same interests as the target market: healthy life- styles and stylish performance wear. 10 Sweat Once a Day The vast majority of lululemon’s revenues come from product sales in its stores located throughout the world; but a small portion comes from sales at the five ivivva branded stores. The company notes that ivivva’s clothes are for very seriously active girls. The products are designed with inputs from several parties including ice skaters, gymnasts, and dancers. At least in the near term, if not the mid-term as well, revenue growth is expected to come from newly established lululemon locations, increases in ivivva’s sales, and from additional online sales activity. Finally, two percent of total revenues come from wholesale operations. Revenue from whole- sale operations – originating in premium yoga studios, health clubs, and fitness centers – are not expected to grow dramatically. Wholesale operations are viewed as offering “an alternative distribution channel that is convenient for our core consumer and enhances the image of our brand.” Do It Now, Do It Now, Do It Now The company’s success has been built on lululemon’s ability to deliver quality products that are carefully and successfully tailored to address customers’ preferences. The company has been able to create these products through input received from customers and through its grassroots marketing that utilizes ambassadors, such as local athletes and yoga instructors. As the company grows in size and continues to expand globally, can it maintain the community-centered and symbiotic relationships it has historically relied on for success? International growth is another issue for lululemon to consider. To date, lululemon has expanded internationally into various countries such as the United States, Australia and New Zealand. These developed countries share common languages and have similar cultures, meaning that the barriers to expansion in these countries are lower than the barriers in emerging markets such as China and India. With further expansion, will the company be able to replicate its success in countries with significantly different cultures? Founder’s Controversial Statements Lululemon founder Chip Wilson is thought of by many as a man with unorthodox opinions. For instance, in a 2009 interview with Canada’s National Post Business Magazine, he admitted to having chosen the company name because “it’s funny to watch [Japanese] say it.” Wilson also stated on a blog his opinion that the rise in divorce rates and breast cancer among “Power Women” was due to a combination of smoking, taking birth control pills, and the additional stress which came from taking on the career responsibilities once held mostly by men. He attributed Lululemon’s growth as stemming from the coming together of “female education levels, breast cancer, yoga/athletics and the desire to dress feminine.” Another highly controversial statement of Chip Wilson’s involves his opinions regarding child labor laws. Wilson argues that “third-world children should be allowed to work in factories because it provides them with much-needed wages.” 11 Misleading Advertising In 2007 the New York Times cast doubt on the authenticity of Lululemon’s VitaSea line of products. Lululemon claimed that its VitaSea products were infused with seaweed, which had medicinal properties including stress relief. In November 2007, the New York Times released an article claiming that it had tested VitaSea products and could not find seaweed fiber in the product. Lululemon responded by refuting the claims of the New York Times. However, Canada’s Competition Bureau claimed that these claims of health benefits from seaweed were unsubstantiated and ordered Lululemon to remove all such labeling. Corporate Culture Wilson founded his company on the values of Ayn Rand. The notion of striving for greatness resonated with Wilson after having read Rand’s book Atlas Shrugged at the age of 18. Since then, he has utilized the concept as a way to market his brand. Wilson admits that the firm tries to hire employees with Type A personalities, or those with more competitive personalities who are concerned with achievement and personal improvement. New hires read books selected by Chip Wilson that he feels is critical to personal development. Employees are also required to write out their goals for the next ten years, which are then posted in Lululemon stores. Employees are encouraged to exercise regularly and remain close-knit. Some have questioned how this competitive culture obsessed with greatness fits in with the yoga tradition based on Buddhist and Hindu philosophies. Others have claimed that Lululemon’s corporate culture is almost “cultish” in its style. Too-Sheer Yoga Pants A more recent ethical problem for Lululemon occurred in March 2013, when they released black Luon yoga pants that become sheer when the wearer bends over. They instituted a massive recall which comprised 17 percent of all the women’s pants sold in their stores. Afterward, investors attempted to sue Lululemon, claiming that they purposefully hid defects in the pants. However, the lawsuit was dismissed the next year. A few months later, in November 2013, Chip Wilson defended his product by suggesting that women’s bodies are to blame for the fabric’s sheerness and their tendency for pilling. He also claims that many women buy pants that are too small for them, which wears them out. Critics viewed this as a sexist comment, exacerbating the issue at hand. In the midst of consumer outrage, Wilson stepped down as Chairman of the Board. Customer Privacy Lululemon is known for wanting to avoid collecting large amounts of customer information through big data techniques. Instead, they desire to have a close and open relationship with customers. One of the ways they do this is by listening to customers as they shop in the store. Lululemon takes customer complaints or concerns seriously and 12 will attempt to make decisions based on this information. Although this emphasis on listening to the customer is an important part of Lululemon’s customer relations, some people believe Lululemon takes it too far. A less well-known ethical risk that the company practices is the training of retail employees to eavesdrop on their customers. Christine Day, the former CEO, used to spend much of her time in retail stores, pretending to be a customer, in order to listen to complaints and observe shopping habits. When she was with the company, she had stores set up their clothes-folding tables next to the fitting rooms so employees could better overhear any complaints. Case Flash Forward 1 Why analysts say Lululemon’s growth strategy is a stretch LINDSEY RUPP AND LAUREN S. MURPHY, BLOOMBERG NEWS | June 19, 2013 11:33 AM ET Lululemon Inc. says it can double its size in the U.S., build an international unit almost from scratch and get men hooked on US$88 yoga pants. More and more analysts are saying those plans are a stretch. As the company looks for a new chief executive officer to succeed the retiring Christine Day, there’s growing evidence the yoga-wear powerhouse can’t sustain its current growth. The company needs someone who can replicate Day’s success in maintaining the company’s culture and translate it abroad, said Sam Poser, an analyst at Sterne Agee & Leach Inc. in New York. International Expansion Expanding overseas is not necessarily a panacea, either. Nike, the world’s largest sporting-goods company, shows the troubles Lululemon’s high-priced products may face abroad. The Beaverton, Oregon-based shoemaker in September said it had resorted to discounting merchandise in China to clear inventory that wasn’t selling well, which was in turn hurting demand for new products. In addition to cost, culture might derail lululemon’s international expansion. Already, a few sections of people in the U.S. who subscribe to the traditional norms of dressing in public are raising an alarm about yoga pants becoming a mainstream clothing alternative, and lululemon might face a much bigger backlash in conservative societies such as China, India, etc. New Competition Lululemon is running out of room to expand in North America, and sales gains at established stores are slowing as brands such as Gap Inc., Nike Inc.and Under Armour encroach on its turf. “It’s unlikely that it’s going to stay on this double-digit trajectory,” Jahnia Sandford, a Columbus, Ohiobased analyst for Kantar Retail, said in an interview. “It’s a very small company, and the goals that they have are very, very big for what they may or may not be able to pull off in the next three years.” In 2008, San Francisco-based Gap bought Athleta Inc., located in nearby Petaluma, for about US$150-million and has been using its rival’s playbook to expand, including hooking up with local yoga instructors, sponsoring classes such as Mommy & Me Yoga and training staff to make recommendations tailored to customers’ interests. While the chain had only 35 North American locations as of Jan. 28, compared with 186 for Lululemon, Gap plans to add 30 more Athleta stores this year. 13 ‘Niche Player’ Lululemon had “benefited from being considered a little bit of a niche player,” Denise Lee Yohn, a San Diego-based branding consultant, said in an interview. “As they grow, then the larger, more established retailers maybe start seeing them more as a competitive threat — and that puts more pressure on Lululemon to be more aggressive with their prices or their marketing.” There are early signs the competition is starting to drag on Lululemon’s growth. Perhaps more challenging will be getting its current customers to make more purchases on return trips once they’ve stocked their wardrobes and to bring in new shoppers outside of its base of yogis and runners, Sandford said. “The lifestyle focus is definitely a way to garner competitive advantage and brand loyalty, but you’re definitely chasing your sales a little bit instead of sustaining them over a long period of time,” Sandford said. “You have to acquire new shoppers in order to drive a portion of your growth at some point.” Case Flash Forward 2 Lululemon facing calls for board reform, transparency Euan Rocha & Solarina Ho | BONDS NEWS | Wed Apr 29, 2015 | 4:02pm EDT The uproar around yogawear retailer Lululemon Athletica two years ago was about a little too much transparency. Now some shareholders are complaining about a lack of it. Lululemon shares tumbled and executives departed following a high-profile 2013 recall of its signature yoga pants that were deemed too see-through. Its founder Chip Wilson later clashed with the board over how things were being run. While the stock largely recovered from the pants debacle, some investors say the Vancouver-based company - which holds its annual meeting June 3 - must do more to improve its corporate governance. "There needs to be serious reform on this board," said Roger Hardy, chair of Hardy Capital Partners, a longtime shareholder. "They've got to look themselves in the mirror." Lululemon, which is pursuing international expansion in the face of growing competition, averted a proxy war last year when Wilson agreed to sell half his stake to Advent International, a private equity firm. Advent now has two seats on the board, a development Hardy said is positive. Wilson quit the board in February. When the board reached a settlement that essentially ended a face-off with Wilson last year, it vowed to have an independent expert review its governance policies and board make-up. But more than eight months later, it has yet to outline any findings from the review or make any changes to its governance practices. Wilson still owns a 14.2 percent stake and has the right to nominate one member of the board, but has not done so. He said in an email that he has had difficulty finding a qualified candidate willing to join the board given the fact that the governance review he pushed for has not led to anticipated changes to the board's structure, composition and plurality voting system. A veteran fund manager, who asked not to be named, said he built a position of over 300,000 shares in Lululemon, but has begun to sell it down solely because of governance concerns. "There's something wrong in the governance of this company," he said, citing Lululemon's staggered board structure and plurality voting system and its failure to effectively engage with all shareholders. "In my entire career, I've never seen a company run its shareholder relations program the way they 14 are running theirs," he added. Lululemon declined to comment on the review, or on investor comments. The retailer has a staggered board - meaning not all directors stand for election each year - and it uses plurality voting standards that lets a director be elected even if more votes are withheld than cast in favor. Lululemon's proxy circular states its board structure is a safeguard against a buyer gaining control without paying fair value. But the practices are frowned upon by corporate governance experts as they reduce the ability of investors to agitate for change. Brad Allen, who advises boards on corporate governance practices, notes that more than 90 percent of S&P 500 companies have nonstaggered boards. "Both from a governance perspective and from the perspective of trying to be transparent and shareholder friendly, Lululemon has a lot of work left," he said. 15 After reading the case on lululemon athletica Inc. – please type in your answers of around 400 words for each of the 5 questions listed below. PLEASE HAVE THE QUESTION ON THE TOP AND LET YOUR ANSWER FLOW FROM THAT – AND COMPLETE YOUR ANSWERS FOR THE CASE IN NOT MORE THAN 4 PAGES SINGLE SPACE! 1. Define the generic business-level strategy used by Lululemon. Who is the targeted customer? What customer need does the company satisfy? How does the company use its competencies to satisfy the need? 2. What industry is Lululemon competing in? Analyze the competitive forces in the external environment using Porter's five forces model. 3. Discuss the advantages and disadvantages of Lululemon’s small size relative to its larger competitors. Be sure to address issues related to governance, resources, and structure. 4. What challenges will Lululemon face when expanding into Asia? Focus on factors such as pricing, brand awareness, positioning, customer acquisition, distribution, etc. Within these markets address the differences in culture/business practices and recommend a global strategy for Lululemon. 5. What ethical dilemmas/issues has Lululemon faced over the last few years? Analyze the impact of the ethical issues by addressing the stakeholders involved, consequences of the ethical issue and laws/standards that are relevant to the issue, if any. How could Lululemon have handled these issues differently?
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