Lululemon Industry Analysis: PESTEL and Five Forces Review

Industry Overview: PESTEL Analysis

The performance-based yoga industry is generally favorable for Lululemon. A PESTEL analysis helps explain certain aspects of the external environment. The main political influence on Lululemon concerns trade in textiles — specifically, how trade policy can affect the company's ability to acquire goods from suppliers around the world and what tariffs or trade barriers it might face in doing so. In general, Lululemon faces the same political environment as its main competitors, which means that changes in that environment are unlikely to convey a strong advantage or disadvantage to any single industry player. The political environment is otherwise not a major factor.

The economic environment in 2016 is generally favorable. The economies of both the United States and Canada are improving, placing more consumers in the company's target market, which skews toward those with higher levels of disposable income. The company's prolonged period of growth after its early years has corresponded with a prolonged period of economic expansion.

The social environment is also favorable for Lululemon. More people are taking an interest in fitness, and yoga in particular is quite popular. The company's holistic approach to health is viewed favorably by its target market. There are indications that similar social conditions exist in other markets, providing opportunity for expansion, and that these trends will continue. A generally aging population offers ample opportunity as people develop greater interest in health and well-being over time. The downside of the social environment is that the company's target market holds high standards, meaning that recent reputational issues — such as those surrounding Chip Wilson's public comments — are likely to damage the brand.

The technological environment is generally favorable. Fabric technology has improved significantly over the years, initially providing Lululemon with superior materials on which to build its business. The company is now a leader and can select from the best available fabrics or develop its own, enabling it to deliver higher-performance clothing than its competitors. Online retail has also evolved considerably, providing Lululemon with an excellent sales channel. The development of content marketing in recent years has further extended the company's ability to reach consumers through online business-to-consumer sales, leveraging its strong brand recognition to win new customers.

The natural environment is not generally a major concern for Lululemon, though the company must remain conscious of the environmental impact of its products — for example, the dyes used in manufacturing — since any poor environmental performance would resonate negatively with its target market. The legal environment is another area where the company should not face significant problems, but any legal misstep would negatively affect the brand.

Porter's Five Forces

Porter's Five Forces framework provides a tool for examining the profit potential of an industry. The market for yoga clothing in particular is generally favorable, especially for a leading player like Lululemon. The five forces are: the bargaining power of buyers, the bargaining power of suppliers, the threat of new entrants, the threat of substitutes, and the intensity of rivalry.

The bargaining power of buyers is generally medium. Several competitors exist in this industry, but most are specialists like Lululemon. The company's ability to differentiate itself from more mainstream athletic apparel brands is critical to maintaining separation and reducing consumers' inclination to shop around. When consumers are less willing to comparison-shop — because of the strength of Lululemon's brand and their loyalty to it — the company retains greater pricing power. Targeting relatively affluent consumers who are less price-sensitive about things they genuinely want also reduces buyer bargaining power. In principle, however, cheaper yoga clothing is fairly easy to obtain, and it is the role of Lululemon's marketing to convince consumers to forego that option.

The bargaining power of suppliers is generally low. The fabrics used in apparel are typically commodities, and while there are many producers, there are only so many major buyers. As a major player in yoga clothing and a recognized name in athletic apparel more broadly, Lululemon is large enough to hold significant bargaining power over its suppliers. Knowing it has strong pricing power over buyers also gives the company flexibility in how it manages supplier relationships, allowing it to become a preferred customer of choice over time — further enhancing its long-run bargaining leverage.

The threat of new entrants is high. There are many apparel designers globally. While yoga is a relatively new and growing category, there are also many large athletic apparel companies — such as Nike and Adidas — with the means to enter this market should they consider it worthwhile. Key to fending off powerful new entrants is maintaining the perceived exclusivity of the premium yoga segment, but even this will not prevent entrants who start as dedicated yoga brands. The reality is that there is only so much a designer can do within the constraints of yoga wear and performance fabric, and this limited scope for differentiation combined with modest economies of scale is likely to attract new competitors.

The threat of substitutes is reasonably low. Lululemon's founding premise was that traditional athletic clothing was a poor substitute for apparel expressly built for yoga. Consumers who buy Lululemon or fall within the company's target market are therefore unlikely to turn to substitutes. They may consider rival yoga brands, but not substitute product categories.

The intensity of rivalry is not yet high, but it is trending in that direction. Lululemon's success has attracted new entrants of varying size and strategic orientation. While the company enjoys a unique and strong market position, rivals will continue to emerge. Competitive intensity may increase significantly as the market matures. There is a genuine risk that new entrants will grow supply capacity to a point exceeding demand — at least in the short run — and this may already be occurring. Although Lululemon lacks a single direct rival, it faces numerous competitors chipping away at different corners of its business. Overall, the environment remains generally positive, and the company's ability to exert bargaining power over both buyers and suppliers has served as a buffer against mounting competition. Nevertheless, bigger competitive challenges are likely ahead.