capstone

Lululemon Atheletica Inc. is an athletic apparel company that designs, distributes, and retails athletic apparel and accessories for women, men, and female youth. The business was founded in 1998, by Chip Wilson and is based in Vancouver, Canada. The company is broken in to two major segments, company owned brick and mortar retail stores and online store that sells direct to consumers. The company sells a variety of athletic products, ranging from athletic apparel, like yoga pants and athletic tops, to fitness-related accessories, like yoga mats and water bottles. As of January 2016, the company operates over 360 stores across multiple countries including the United States, Canada, Australia, New Zealand, the United Kingdom, Singapore, Hong Kong, Germany, and Puerto Rico. At the end of 2016, the company reported $2.06 Billion in revenues a 14.6% increase from last year. The company continues to remain profitable with a net income making up 12.9% of revenue in 2016, and 13.3% of revenue in 2015. Strong growth is forecasted into the future as the sports apparel market is expected to reach an annual revenue of $171 billion dollars in the near future.

Lululemon faces fierce competition in the apparel market, major competitors like Nike and Under Amour continue to fight for market share in the hopes of diverting Lululemon’s customers into their own respective stores. Because of this fierce competition Lululemon has adopted a strategy that focuses on multiple key components:

1. Marketing a lifestyle rather than a product

a. By focusing their marketing campaign on the lifestyle the company is trying to provide, instead of the product itself, they are able to charge a premium for their product. This allows them to charge over $60 for some of their shirts, creating wide margins on their products.

2. Focusing on the yoga athletic market, a very specific niche market

a. This has proved to be a very smart strategy for the company as it has allowed themselves to differentiate themselves from competition like Under Amour and Nike.

3. Focusing on a vertical retail model that emphasizes small stores

a. There are two major components to this strategy. The first being that the company has very few franchises, so they are able to control consistency across 100 of stores. Second, they focus on stores that are sometimes half the size of the competition. The trade-off of having smaller stores is that they are able to have sales per square foot of $1700 in their corporate stores, compared to Gaps and Abercrombie & Fitch which trail below $500.

4. Purchasing minimal marketing but instead focuses building relationships with local Yoga Studios

a. Instead of spending money on television ads and other marketing material the company has instead decided to focus on building and strengthening relationships with yoga studios located around their stores.

The overall brand value of Lululemon experienced strong growth in the early decade of 2010. However, over the last few years the company has slowly seen a decline in its overall brand value. While it is hard to pinpoint exactly what was the cause of such a major decrease in their value, it can serve as an indicator that the brand may be suffering.

Revenue growth is expected to grow well into the future, with revenues projected to exceed $5 billion dollars by 2022. This would be more than double at its current value. Below we have provided a graph showing the trend in revenue growth.

Lululemon’s customer segment can be broken into the following categories with each category taking making up a percentage of the total purchasers.

The company has primarily focused on targeting women this has proved effective, but at the same time it leaves a major market on the sideline who’s needs aren’t being met.

Overall, Lululemon is a strong company with the opportunity for major growth in the future. However, internal efforts must be made to ensure that the company is positioned to capture changing consumer trends and also is able to compete in the fragmented apparel market. From a financial perspective the company seems to be very healthy. Their net margin is 4% higher than the industry average and this is thanks to the premium price that they charge on their products. Along with this the company has no debt on its balance sheet which makes the company very well positioned from a leverage standpoint. The table below highlights some of the key margins that stand out for Lululemon:

Beyond a financial standpoint, the company has engaged in numerous efforts to differentiate its brands and its products. Many of its customers treat the brand as a lifestyle, conveying a healthy lifestyle that they abide by. This unique branding has allowed Lululemon to charge a premium for its products and help grow its bottom line. Along with this, the company is continuing to put out new products that keep the brand relevant and keeps their customers coming back for more. The company has demonstrated strong growth over the years, however, that growth has been limited to only a few countries. This limited market share is both a weakness and an opportunity. The company will need to effectively navigate the global market in order to capture some of this growing market, otherwise competitors like Nike and Under Amour will steal it from them. By 2018, the global sports apparel market is forecasted to grow to $171 billion, that’s a $13 billion increase from 2016.

Data provided by Statista

A major concern risk that faces Lululemon is its reliance on its suppliers overseas. If any of these suppliers implement major changes into their prices they could have a material impact to Lululemon’s bottom line. Along with a potential risk related to their suppliers, Lululemon also suffers from cyclical trends that impact consumer spending. During periods of low wage growth, the company may experience a decline in sales if consumer is unable to afford the premium that is placed on the product. A future concerns the company will have to deal with is the fact that the market is changing more towards wearable tech, a trend the company has yet to catch on to. If the company is unable to catch on to this trend, then there is a real possibility that market share could be loss to competitors like Nike and Under Amour. Below we have provided a SWOT analysis table that gives a more comprehensive overview of some of the topics we have mentioned above.

Strength

Weakness

1. Limited global penetration despite high quality apparels

2. Brand recall is less as compared to international players

1. The company is continuously producing new styles of sports apparel for men and women.

2. It is joining up with fashion designers to produce new clothing styles and widen their product lines

3. The company has a large presence

4. Marketing strategy limits company’s expenses.

Internal

1. The world sports apparel industry is expected increase manifold

2. The market is driven by a trend toward healthier, more active lifestyles, with older demographics and women becoming more active

3. Better reach and penetration into emerging economies.

Threat

Opportunity

External

1. Sports clothing industry is highly fragmented, with many brands competing, from basic discount brands to high-end fashion names

2. Challenges faced by sports apparel companies include constantly changing fashion trends, tough competition and more price-conscious shoppers

The company has a large presence

Marketing strategy limits company’s expenses.

Based on our analysis above, we have broken down our recommendation into the following components:

1. Compete with the competition by making investments into wearable technology products.

2. Continue to expand the number of stores, but begin to focus on new markets where apparel growth is strong.

3. Diversify your customer base by introducing more price conscious products.

4. Begin reaching out to men

Given how the market is changing for apparel it is crucial that Lululemon adopts products that fit consumers changing taste. Competitors like Under Amour are making large investments into researching wearable technology. We recommend that Lululemon do the same. This way they continue to attract new consumers, ensure that they have products with high margins into the future, and have products that they can continue to use to compete with other competitors.

It is no surprise that markets like China hold enormous opportunity for companies like Lululemon. Rising incomes and strong growth in the purchase of premium products makes China an ideal market for Lululemon. However, the company must proceed with caution before entering markets. They have to ensure that they understand the consumer taste that exist in those markets and make sure that they adapt their products as necessary. If they fail to take the proper step of researching these markets, the company could put at risk its financial health and its market base in already existing markets.

Lululemon has been successful at being a brand that is able to charge a premium for its products. However, as their growth slows because of the reality that their market is limited in the number of high-end consumers that exist, they will need to expand into lower-end markets. Our belief is that the company should begin to explore lower price products that will appeal to a new market that is not currently served by Lululemon. While the brand has advertised a lifestyle, we believe that expanding that image to a broader market base would allow Lululemon to capture more customers.

Reach Out to Men:

References Lululemon Athletica. (2016, October 4). About Us: Lululemon. Retrieved from Lululemon: http://www.lululemon.com Statista. (2016, October 4). Lululemon Athletica. Retrieved from Statista: http://www.Statista.com Thompson, A. (2016). Craftign & Executing Strategy: A Quest for Competitive Advantage. New York: McGraw Hill.

Net revenue of Lululemon worldwide from 2008 to 2022

(in million U.S. dollars)

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 353.59 452.9 711.7 1000.84 1370.36 1591.19 1797.21 2060.52 2650 3250 3710 4080 4460 4810 5170

Customer Segment, by Percentage.

Women Joint Men 0.9 0.02 0.08

Total revenue of the global sports apparel market 2011-2018

(in billions of USD)

2011 2012 2013 2014 2015 2016 2017E 2018E 132 135 141 146 152 158 165 171

Brand value of Lululemon from 2012 to 2015

(in million U.S. dollars)

2012 2013 2014 2015 1350 1692 1545 1149

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