The Rise of Lululemon

Closing Case: The Rise of Lululemon

In 1998, self-described snowboarder and surfer dude Chip Wilson took his first yoga class. The Vancouver native loved the exercises but hated doing them in the cotton clothing that was standard yoga wear at the time. For Wilson, who had worked in the sportswear business and had a passion for technical athletic fabrics, wearing cotton clothes to do sweaty, stretchy, power yoga exercises seemed inappropriate. Thus, the idea for Lululemon was born.

Wilson’s vision was to create high-quality, stylishly designed clothing for yoga and related sports activities using the very best technical fabrics. He built a design team, but outsourced manufacturing to low-cost producers in South East Asia. Rather than selling clothing through existing retailers, Wilson elected to open his own stores. The idea was to staff the stores with employees who were themselves passionate about exercise, and who could act as ambassadors for healthy living through yoga and related sports such as running and cycling.

The first store, opened in Vancouver, Canada, in 2000, quickly became a runaway success, and other stores followed. In 2007, the company went public, using the capital raised to accelerate its expansion plans. By late 2017, Lululemon had over 380 stores, mostly in North America, and sales in excess of $2.34 billion. Sales per square foot were estimated to be around $1,560—more than four times that of an average specialty retailer. Lululemon’s financial performance was stellar. Between 2008 and 2017, average return on invested capital–an important measure of profitability–was around 31%, far outpacing that of other well-known specialty retailers, while earnings per share grew tenfold.

How did Lululemon achieve this? It started with a focus on an unmet consumer need: the latent desire among yoga enthusiasts for high-quality, stylish, technical athletic wear. Getting the product offering right was a central part of the company’s strategy. An equally important part of the strategy was to stock a limited supply of an item. New colors and seasonal items, for example, get a 3- to 12-week lifecycle, which keeps the product offerings feeling fresh. The goal is to sell gear at full price, and to condition customers to buy it when they see it rather than wait, because if they do it may soon be “out of stock.” The company only allows product returns if the clothes have not been worn and still have the price tags attached. The scarcity strategy worked. Lululemon never holds sales, and its clothing sells for a premium price.

To create the right in-store service, Lululemon hires employees who are passionate about fitness. Part of the hiring process involves taking prospective employees to a yoga or spin class. Some 70% of store managers are internal hires; most started on the sales floor and grew up in the culture. Store managers are given funds to repaint their stores, any color, twice a year. The interior design of each store is largely up to its manager. Each store is also given $2,700 a year for employees to contribute to a charity or local event of their own choosing. One store manager in Washington, D.C., used the funds to create, with regional community leaders, a global yoga event in 2010. The result, Salutation Nation, is now an annual event in which over 70 Lululemon stores simultaneously host a free, all-level yoga practice.

Employees are trained to eavesdrop on customers, who are called “guests.” Clothes-folding tables are placed on the sales floor near the fitting rooms rather than in a back room so that employees can overhear complaints. Nearby, a large chalkboard lets customers write suggestions or complaints, which are sent back to headquarters. This feedback is then incorporated into the product design process.

Despite the company’s focus on providing a quality product, it has not all been clear sailing. In 2010, Wilson caused a stir when he emblazoned the company’s tote bags with the phrase “Who is John Galt?” the opening line from Ayn Rand’s 1957 novel, Atlas Shrugged. Atlas Shrugged has become a libertarian bible, and the underlying message that Lululemon supported Rand’s brand of unregulated capitalism did not sit well with many of the stores’ customers. After negative feedback, the bags were quickly pulled from stores. Wilson himself stepped down from day-to-day involvement in the company in January 2012 and resigned his chairman position in 2014.

In early 2013, Lululemon found itself dealing with another controversy when it decided to recall black yoga pants that were too sheer, and effectively “see through,” when stretched due to the lack of “rear-end coverage.” In addition to the negative fallout from the product itself, some customers report being mistreated by employees who demanded that customers put the pants on and bend over to determine whether the clothing was see-through enough to warrant a refund. One consequence of this PR disaster was the resignation of then CEO Christine Day. The company is also facing increasing competition from rivals such as Gap’s Athleta Urban Outfitters’ Without Walls, and Nike Stores. Most observers in the media and financial community believe that the company can handle these challenges and continue on its growth trajectory.

Sources: D. Mattoili, “Lululemon’s Secret Sauce,” The Wall Street Journal, March 22, 2012; C. Leahey, “Lululemon CEO: How to Build Trust Inside Your Company,” CNN Money, March 16, 2012; T. Hsu, “‘Pantsgate’ to Hurt Lululemon Profit: Customer Told to Bend Over,” latimes.com, March 21, 2013; C. O’Commor, “Billionaire Founder Chip Wilson Out at Yoga Giant Lululemon,” Forbes, January 9, 2012; B. Weishaar, “No-moat Lululemon faces increasing competition but is regaining its customer base,” Morningstar, December 17, 2014.

For the week 1 assignment, address the following questions:

• What opportunity did Chip Wilson see that led to the establishment of Lululemon?
• Why are Lululemon’s sales per square foot so high?
• How would you characterize Lululemon’s business-level strategy?
• What are the main threats to Lululemon’s business?
• What are Lululemon’s main strengths? What are its weaknesses?
• What must the company do to maintain its competitive advantage?

Title your file(s) with: CourseID_GroupNameW1Assignment (ex. EN101_Group1W1Assignment), and upload your paper.

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