Lululemon: From Niche Market Pioneer to Apparel Ubiquity

How Lululemon created an activewear empire from a niche product with broad appeal

It was late January 2015 and I was attending a dinner hosted by the Private Equity firm I was working for at the time. Seated next to me at the table was a Senior Executive leading design and branding at Lululemon, the yoga/fashion apparel company in which my firm held a stake. I listened intently throughout the course of the dinner as the executive animatedly decried the abomination of Nike’s shift towards neon athletic apparel, discussed the relative merits of liners and airflow in men’s athletic shorts and pondered the now-ubiquitous Lulu logo and shopping bag.

In truth, I had not been involved in our firm’s investment and knew very little about the company, but I was aware of its incredible growth and the devotion of its customers, and from this brief conversation I felt I had caught a brief glimpse at the reasons for its success.

Lululemon’s Business Model – “Athleisure” and the Creation of a Market Segment

The Lululemon story began in 1998 after founder Chip Wilson attended his first yoga class. Wilson loved the Yoga experience, but deplored the uncomfortable cotton athletic wear he had to wear. Thus, Lululemon was founded in a yoga studio with the goals of providing high quality technical wear to yoga practitioners, as well as to spread positivity amongst customers, employees and the community1.

These goals have remained core to the Lululemon vision and the company has since become a much bigger winner in the +$200bn2 apparel market due to its unique business model, creating a new market for high performance, high fashion and high priced activewear apparel that has achieved cultural crossover and gained broader acceptance as a form of casual wear. This segment of the market pioneered by Lulu, dubbed “Athleisure” 3 experienced rapid adoption, while the company attracted a devoted customer following that has propelled the brand from a niche market pioneer to broader apparel market ubiquity. The company was able to make this transition, and capture significant value, due to its focused business model and approach to value creation, supported by a complementary operating model.

The Lulu Shopping Bag - Checkout item turned fashion Symbol
The Lulu Shopping Bag – Checkout item turned fashion Symbol

The firm creates value by understanding and targeting a very specific customer segment (a mid-30s, high income, health conscious, sophisticated couple known internally as Ocean and Duke4), providing them with high quality and well-designed apparel, and by expanding the concentric circles of value by providing these customers with a strong sense of authenticity and community/belonging. This has enabled the company to capture value by driving rapid adoption of this new product niche, high customer loyalty leading to repeat sales, and a consistently high price point.

Value Capture & Business Model Outcomes:

  1. Product Adoption & Segment Growth: According to market research firm NPD, the Athleisure segment has driven the majority of growth in the U.S. apparel market in recent years2 and has propelled the activewear segment to nearly 10% of the market and to double-digit annual growth rates5.
  2. Customer Loyalty: In a 2014 brand study, Lulu had the strongest brand loyalty amongst competitors like Nike, Under Armour and Gap, with 55% of U.S. customers and 70% of Canadian customers calling Lululemon their “favorite brand.”6
  3. Sustained High Price: Lulu sells the majority of its items at a high pricepint, with its $100 women’s yoga pants providing a prime example. Moreover, the company is able to sustain its high prices, with 95% of apparel sold at full price.7

An Operating Model to Support Sustained Success

Lululemon’s ability to create and expand the Athleisure segment and continue to capture value is underpinned by an operating model that is aligned with the company’s relentless focus on the customer, and continuing to provide that customer with innovative high-quality product as well as a unique brand experience.

Store-Level Execution & Employee Training – At the heart of the company’s success in driving adoption and customer loyalty, by emphasizing a sense of community and authenticity, is the store experience. The company has made the operational decision to distribute its products solely through company-owned stores, in order to control the customer experience. Within the store, experience is largely driven by employees. As a result, the company has developed a rigorous employee hiring and training process, seeking to place highly enthusiastic employees that radiate “positivity” on the floor. Sales associate are termed “Educators” and the company’s operating culture highly encourages them to display the aspirational values of the brand. For example, employees post their 1, 5 and 10 year goals publicly in the store and are encouraged to attend group exercise and yoga sessions with their fellow employees, which are subsidized by the company8. In this way, employees become enthusiastic advocates for the brand, both within and outside of the store, and that genuine enthusiasm and common-ground with customers drives a unique brand experience.

In-store yoga class
In-store yoga class

Customer Orientation & Feedback Collection – As previously mentioned, the company has developed a highly detailed customer archetype, called Ocean and Duke, which influences decision making throughout the organization, from design to marketing and customer interactions. In addition to this, the company is constantly refining its model of what customers demand, with each store containing a chalk board for customers to provide feedback that is relayed on to the corporate design team.7

R&D Investment & Design Focus – The company invests heavily in fabric innovation and design, with its anti-odor silver weave product a good example (and one I personally can vouch for), with odour fighting metal mesh incorporated into the fabric. The company has also invested in a substantial innovation lab in its Vancouver headquarters where employees and athletes can test and provide feedback on new products.9

Short Product Lifecycles & Scarcity – In addition to product design and innovation, the company’s ability to attract a premium price is driven in part by its deliberate use of scarcity and short product life cycles. New products are given 3, 6 or 12-week lifecycles and are specifically stocked to run out, giving customers a sense of urgency in the purchasing decision, creating exclusivity and putting a lesser focus on price.7

Marketing & Promotion Execution – The final piece of the puzzle driving product adoption and a sense of community can be seen in the company’s approach to promotions. Rather than celebrity endorsers, Lulu leverages community Key Opinion Leaders, enlisting popular regional yoga instructors for example. This has been an important for the company to shape the perception of the brand and reinforce the authenticity of the product. 10

Going Forward

While the company has had some struggles in recent times, primarily related to a handful of product defect incidents, as well as a series of insensitive public comments made by founder Chip Wilson, the company’s market position has shown resilience, despite an onslaught of competition from down-market copy cats (Athleta), and entry from activewear giants such as Nike and Under Armour. While these threats will surely continue, I believe the company’s unique and focused business model, supported by key elements of its operating model, will allow it to continue to offer a compelling value proposition to its core customer base and creates a sustainable advantage in the market.














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Student comments on Lululemon: From Niche Market Pioneer to Apparel Ubiquity

  1. Really interesting post! I’ve always wondered how Lululemon is able to charge such a premium for yoga pants and avoid the dangerous discounting downward spiral that so many other retailers are struggling with. It’s incredible Lululemon sells 95% of its units at full price in a context where consumers are looking for value and often trained to not buy until something is on sale.

    I have two main concerns with their business model, which you pointed out at the end (and which have impacted their share price). I think it’s risky that some recent incidents have been against the two pillars of their value proposition, and we know tight alignment between core customer values and execution is critical.

    Firstly, the promise of high quality technical wear – Lululemon had quality control issues, where they had to recall 17% of its bottoms because they were too sheer. Customers who spend $100 on yoga pants expect quality. I think increased focus on quality, even if it’s at the expense of margins, is critical to sustain its competitive advantage going forward.

    Secondly, and perhaps more concerning, are the marketing disasters where Chip Wilson implied that women complaining about sheet pants were too large to be wearing them!! If a core value of the company is to ‘spread positivity among customers, employees and the community’, then such attitudes definitely detract from brand equity. While Wilson was forced to step down, I really do hope that all the elements of Lululemon’s operating model, such as the employee training and customer-orientation are indeed authentic. It’s powerful for a business to achieve financial success, but also create and empower its communities.

  2. A few things that I think about when evaluating Lulu’s operating model and business model:

    1) Competition: While Under Amour and Nike are large giants competing for a slightly different customer base, there have been many alternate models that have emerged such as Bandier in NYC. They stock premium brands like Michi, Alo and Splits59 in order to target the very same customers as Lulu while also providing variety. There comes a point in the luxury athleisure segment where the proliferation of Lulu becomes dilutive to the brand. Everyone and their mother, quite literally, is wearing the same thing. While the chief designer may be critical of Nike, he must understand the importance of evolving and changing Ocean and Duke as the context changes as well.

    2) Unhappy Employees: The attempt to build culture within the employees is important for a luxury brand like Lulu. Recently, there have been many articles written about the cult-like status of the store-level employees with extreme pressure to attend group exercise. Some articles have aired grievances very similar to the issues Nordstrom faced in its earlier days with off-the-clock required activities (group exercise, finishing work, etc.) that are not mandatory, but implicitly are to move up. We must remember that these are hourly wage workers and not salaried workers as well. It could be difficult to build this unique type of culture and sustain it in the long-term given its current HR practices.

  3. I would love to know more about how Lululemon executes its “Feedback Collection” with its “R&D Investment & Design Focus” team in Vancouver. It was certainly beyond the scope of this assignment, but I’m always looking for best-practices when it comes to collaboration between satellite locations (like Lulu Retail stores) and in-house design/R&D teams.

  4. I agree with Aileen and Amy’s concerns about issues with internal culture and particularly the point Amy raised about quality. Lulu has built their strategy on building pillars around maintaining the high price point, and is relying on these for continued growth.

    Community – While the internal culture has taken heat for being oppressive and cult-like their customer community is stronger than ever. Just check out the 10,000 strong “agents of change” who head to Vancouver each year for SeaWheeze – a half marathon put on by Lululemon in the middle of a weekend of yoga, positivity, mindfulness, and of course brunch. I think even as Lululemon grows, these ties will remain strong. Some will leave for Bandier looking for a more unique look, but the masses have been tightly pulled into the concentric circle. (

    Quality – They’ve had other quality control problems beyond the sheerness debacle – in 2007 they advertised health benefits of a seaweed infused fabric (not kidding here) that later they retracted (

    International Growth – My greatest concern is Lululemon’s dependence on store growth to drive company growth, and their ability to expand successfully in new international markets. In recent years their same store growth has declined, only rebounding in the last couple of quarters. Retail store sales represent ~75% of Lululemon’s sales, and growth in the number of stores has sustained the 13% revenue growth in FY15. (You can see the a chart on same store growth vs revenue growth (and sourced info) here: Unless Lululemon can turnaround their existing stores, their continued success is at serious risk to success in new markets. As of February 2015, the US, Canada, and Australia markets are highly saturated with some room for expansion, but not much left.

    Lululemon Stores, February 2015
    US 200
    Canada 46
    Australia 26
    New Zealand 5
    United Kingdom 2
    Singapore 1
    Total 280

    Source: Lululemon 10K:

    Lululemon will need to expand to new markets to continue growth, particularly Asia, and with a product tied to athletics I worry about how they will translate. There is a desire for branded international goods in Asia, but different cultures have different athletic cultures, and Lululemon may need to adjust their products or community engagement to have continued success. This will be a relatively new challenge for them, and if internal culture, quality control, or competition become too much, it could break the successful model they have now.

  5. Thanks all for the comments — a few responses on some of the key issues raised (which I think are absolutely the right top of mind concerns)

    Quality – Agree that this has been a huge risk for the company. It’s difficult to externally comment on the underlying reasons for the quality issues that have occurred, but when the problems occurred, the company took proactive measures to make recalls and correct the issues. It’s clear that this a key focus for the company and given their internal focus on quality and design and the operating model they have established, it would be my belief that they are well positioned to correct these issues, avoid them in the future and continue to provide high quality product. Moreover, their innovation in the space continues to lead the market and they have released several performance fabrics that differentiate them from competitors (the silver mesh fabric mentioned in my post is a great example).

    Culture & Community — The board clearly recognized the negative PR attracted by Wilson time and again, and was able to get him out of the company, with his entire stake in the company being sold to Private Equity firm Advent International. While this may seem like an easy thing to accomplish — getting a vocal founder to peacefully leave the business without creating any public PR issues was a big success. On the culture issues raised about employee happiness — think this is the double-edged sword of having such a strong culture. In reading many of the employee accounts of time spent at Lulu, it seems clear that for every 1 disgruntled and uncomfortable employee, there are many more strong advocates. I believe this could be an unfortunate but unavoidable outcome of the strong culture that made the company successful in the first place.

    Competition & Expansion — As acknowledged in my post, competition will continue to be a key concern, but the company has thus far undeniably owned the space to date. International expansion should be a focus for the company, but at least in developed markets, I see know reason the company cannot manage a successful expansion. In 2009, the business was still a relatively small Canadian focused company but managed a scaled expansion into the U.S. very successfully.

  6. Great post (and thread with insightful comments!) One additional way the company has linked its business model of an “aspirational active community” to its operational model is by targeting local yoga and fitness instructors to be its retail store employees. At least in Canada, many of the people you see working in a Lulu store also work in the industry in some kind of part-time or class-based way – personal trainers, yoga teachers, dancers, etc – and work in retail to supplement their other income. This helps to ensure a) your store employees are great “active lifestyle” brand ambassadors, b) can speak about product benefits from a position of knowledge, and c) the employee discount is given to people most likely to purchase a large amount of product for their own use and then wear it in highly-visible class settings.

    I think it’s really interesting how Lulu was successful in building a brand and a community in a fairly niche segment – yoga – that was highly gender-segmented at the time of it’s inception, and leveraged it into a broader athletic wear brand. Initial forays into dancewear, gymnastic wear, figure skating apparel were logical extensions, but later success in selling men’s clothing and apparel for less-related activities like golf and hockey speak to compelling customer value and top-quality products. Despite the importance of high quality to encourage adoption from these diverse groups of customers and to justify the price point, I can’t help but think that the growing competition may create pressure to cut costs and protect margins. I know Lulu off-shored production of its products several years ago – did you come across any other cost-cutting measures that you feel risk compromising quality?

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