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 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:
- 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.
- 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
- 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.
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
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.