Lululemon Athletica: Strategic Business and Financial Analysis

Company Overview and Supply Analysis

Lululemon Athletica Inc., founded in 1998 in Vancouver by Chip Wilson, specializes in the design and production of high-end technical clothing for athletes and yoga practitioners. Operating primarily in North America and Australia, the company initially targeted educated women who strive to live active and healthy lives as its primary customers. The first store opened in November 2000 and was designed to function as both a retail outlet and a social community hub, where people could come together to discuss physical and mental aspects of healthy living. As the dual function proved difficult to manage due to overcrowding, the company shifted toward training its staff to carry forward that community ethos within a more structured retail environment.

One of the company's core goals is to train people so that they positively influence their families, customers, and the broader community. The company's vision is to "elevate the world from mediocrity to greatness." Three types of strategic sales programs were created as the company partnered with the right people to spread the concept and practice of yoga and to raise community health levels. Lululemon places emphasis on quality over quantity, and its strategy centers on building strong relationships with partners while producing high-quality yoga and athletic clothing (Lululemon.com).

Lululemon is regarded as one of the fastest-growing brands in Canada. The company operates more than 220 stores worldwide in addition to its online store (Kowitt & Leahey, 2013). According to Forbes magazine in May 2015, the enterprise value of the company was $9.2 billion, and it employed a total of 6,383 people. The company's growth is remarkable: its enterprise value was approximately $3.245 billion in 2012, demonstrating substantial expansion in a short period.

Revenues and stock price have grown significantly in recent years. In early 2009, the stock price was approximately $3 per share, rising to $56.88 per share on NASDAQ by February 10, 2016 — a roughly twentyfold increase in six to seven years. Annual sales reached $1.8 billion in fiscal 2015, combining online channels and 354 globally distributed stores. The five-year average sales growth rate through 2015 was 31.6%, while operating income growth was 32.8%, figures that underscore the company's strength during a relatively short operating history.

There have been some setbacks in recent years, most notably in 2013 when the company was forced to recall 17% of its stretchy black yoga pants following persistent complaints about unacceptable levels of sheerness. In 2016, the company planned the launch of stand-alone men's stores alongside broader global expansion as the world economy continued to recover from the 2008 recession.

Lululemon's competitive advantages over rivals include its use of technical fibers in products, its distinctive in-store shopping experience, and its strong brand image. Beyond its dominant position in the North American market, which generates most of its revenues, Lululemon has been targeting the Asian market, where demand for trendy athletic fabrics and garments is rising.

External Analysis: Porter's Five Forces and Rival Companies

Porter's Five Forces provides a useful framework for understanding Lululemon's competitive environment across five dimensions:

Bargaining Power of Suppliers: Lululemon enjoys considerable power over its suppliers because many vendors compete for association with the brand. The raw materials used in company products — such as rubber and cotton — are readily available, giving Lululemon broad choice among suppliers. As a result, suppliers tend to have relatively low bargaining power.

Bargaining Power of Buyers: Customers hold significant bargaining power because switching costs are low. Buyers can easily move to a competing brand if Lululemon's products fail to satisfy them, which keeps the company under pressure to maintain quality and value.

Threat of New Entrants: The threat from new entrants is moderate. Established players benefit from economies of scale, while new entrants can reduce upfront capital costs by outsourcing business processes overseas. Access to distribution channels can be a challenging proposition; however, the growth of internet retail has made it easier for new entrants to reach global customers. While building a recognized brand from scratch is difficult, the low switching costs for customers remain an advantage for new competitors.

Competition from Rivals: Competition in the sports apparel market is intense, as companies vie for larger customer bases and greater market share. Poaching customers is relatively straightforward in this industry given the low cost of switching between brands.

Threat of Substitutes: The threat from substitute products is low, as few high-quality substitutes for dedicated sports apparel currently exist.

Rival Companies: The yoga and sports apparel industry includes a range of competitors. Direct competitors include large corporations such as Nike, Adidas, Under Armour, and Gap, as well as smaller companies and startups such as Lole, Lucy Activewear, and Prana.

PESTLE Analysis

A PESTLE analysis reveals the key external forces shaping Lululemon's operating environment:

Political: For Canadian companies like Lululemon, NAFTA has made it easier to open additional branches across North America, reducing trade barriers and enabling smoother cross-border operations.

Economic: Economic weakness in parts of Europe and the broader stagnation of the global economy — driven by low oil prices and a slowdown in China — have the potential to negatively affect the company's global expansion plans. Economic downturns make consumers more price-conscious, making it imperative for retailers to increase their degree of product differentiation in order to justify premium pricing.

Sociocultural: A growing global appetite for active and healthy lifestyles has driven demand for Lululemon's products and represents further growth potential. An increasing consumer focus on ethical sourcing is also shaping purchasing decisions (Lululemon.com).

Technological: The proliferation of e-commerce — enabled by advances in internet technology and smartphones — has supported the company's online growth. The continued expansion of internet access in developing economies such as India and Brazil presents additional growth opportunities. Social media also opens a valuable advertising and marketing channel that could serve as a source of competitive advantage for Lululemon.

Legal: The company holds a number of patents for its products, providing a clear legal advantage over rivals and competitors.

Environmental: Lululemon's commitment to ethically sourced products and efforts to reduce its carbon footprint have positioned it at the forefront of sports apparel companies responding to environmental concerns.

References

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