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Lululemon Athletica Cast Study

Case Study Directions

· Read in your textbook Case #5: Lululemon Athletica, Inc. in 2017: Is the Company on the Path to Becoming a High Performer Again?

· Write a 5–7 page paper answering the questions below.

· At least 2 references of an academic or scholarly source is required for this case study paper.

· Use APA writing style for in-text citations and each reference source that you use.

· Remember, all wording that is not your own must be cited.

· Use headings to format the paper (not the questions). Use 12-point Times New Roman font, 1-inch margins, and double-spacing.

In addition to the above listed requirements, assignments are graded using the Case Study Assignment Rubric included in the online classroom.

Case Study Questions

1. How strong are the competitive forces confronting lululemon in the market for performance-based yoga and fitness apparel? Prepare a five-forces analysis to support your answer.

2. What does your strategic group map of the performance sports apparel industry look like? Is lululemon well positioned? Why or why not?

3. What do you see as the key success factors in the market for performance-based yoga and fitness apparel?

4. What does a SWOT analysis reveal about the overall attractiveness of lululemon’s situation?

5. What are the primary components of lululemon’s value chain?

6. What are the key elements of lululemon’s strategy going into 2017?

7. Which one of the five generic competitive strategies discussed in Chapter 5 most closely approximates the competitive approach that lululemon is employing?

NO Plagiarism

References must be able to be verified

Class: GEB4891: Strategic Management and Decision Making
Book: Essentials of Strategic Management: The Quest for Competitive Advantage

On June 1, 2017, shareholders of lululemon athletica—a designer and retailer of high-tech athletic apparel sold under the lululemon athletica and ivivva athletica brand names—were pleasantly surprised by the company’s announcement of a stronger-than-expected 5 percent increase in sales revenues in the first quarter of fiscal 2017 compared to the first quarter of fiscal 2016. But shareholders were still uneasy about the company’s prospects.

Two months earlier, on March 29, 2017, lululemon CEO Laurent Potdevin had told Wall Street analysts in a conference call that the company was off to a slow start in 2017, an outcome he attributed mainly to customer disappointment with the heavy emphasis on all-black and all-white assortments of apparel items on store racks and the merchandise displays on the company’s e-commerce website. In times past, lululemon’s offerings of fitness and workout gear had included many bold-color and patterned selections that were among the company’s best-selling items. Potdevin went on to say, “We should have been bolder with the color assortment. You are going to see more color showing up and we’ve added creative resources to bring visual merchandising to life in a more powerful way.”

During the same conference call, lululemon said that it foresaw fiscal 2017 revenues of between $2.55 billion to $2.6 billion and per-share earnings of $2.26 to $2.36, numbers that were below Wall Street’s current 2017 estimates of $2.62 billion in revenues and earnings of $2.56 per share. Investors swiftly responded to the forecasts of lower sales and earnings by punishing lululemon’s stock price. In after-hours trading on March 29, lululemon’s stock price fell 18 percent below the day’s $66.30 closing price. By the close of trading on March 30, 2017, lululemon’s stock price had declined to $50.76, some 23.5 percent below the price 24 hours earlier. Over the next 11 weeks, the company’s stock price traded between $48 and $54, closing on June 9, 2017, at $50.70, nearly 37 percent below the all-time high price of $81.81 in March 2013 when troubling signs of a falloff in store sales and customer traffic first began to appear at lululemon.

From modest beginnings as a family-owned startup company with 14 stores and sales of $40.7 million in January 2005, lululemon had rocketed to retailing prominence in North America during 2006 to 2012, building a fast-growing chain of over 200 retail stores in Canada and the United States that sold fashionable high-tech yoga and workout apparel at premium prices. Net sales rose 38 percent to almost $1.4 billion in fiscal year 2012 (ending February 3, 2013). But in March 2013, the company’s highly regarded brand image took a hit when design and quality problems in its women’s black Luon fabric bottoms provoked widespread complaints from customers that the sheer nature of the fabric was too revealing page 280of the garments worn underneath. The design flaw was widely publicized in the media, chiefly because lululemon had become a high-profile, fast-growing company with a popular and somewhat glamorous product offering and because its rapidly rising stock price had attracted considerable investor attention.

Over the next four years, annual sales revenue growth at lululemon stores remained stubbornly stuck far below the 37.9 percent gain in fiscal 2012—revenues grew 16.1 percent in fiscal 2013, 12.9 percent in 2014, 14.6 percent in 2015, and 13.8 percent in 2016. Moreover, average annual sales at lululemon’s retail stores open at least 12 months had dropped from a record high of $5.83 million per store in fiscal 2012, to $5.44 million in 2013, to $4.95 million in 2014, to $4.57 million in 2015, to $4.47 million in 2016—a disturbingly large 23.3 percent decline.

Not surprisingly, lululemon executives were doing their best to identify effective ways to rejuvenate the company’s sales growth. The issues of what to do seemed to hinge on answering several questions. Were the two disappointing performance metrics of slower revenue growth and eroding sales per retail store only a reflection of lingering damage to the company’s brand image stemming from the embarrassing publicity surrounding the revealing nature of the Luon fabric bottoms? Or were other troublesome factors also at work? Was the market signaling that the “fad for lululemon apparel” was over? Had the heretofore “must have” appeal of lululemon’s functional and stylish apparel among fitness-conscious women been undercut by mounting competition from rival makers of women’s fitness apparel, like The Gap’s 55 new Athleta-branded retail stores that specialized in women’s fitness apparel?

Had the recent moves of Under Armour, Nike, and adidas to offer much bigger selections of fashionable, high performance athletic and fitness apparel for women drawn sales and market share away from lululemon? Could the slowdown in revenue growth be due to a significant fraction of the company’s customers switching to lower-priced brands and/or brands they considered to be more trendy or appealingly designed? Were all of these factors in play and, if so, what market opportunities remained for lululemon management to pursue to pump up the company’s performance?

Likewise, the company’s shareholders were in a quandary about whether to hold onto their shares in hopes of a big turnaround in the company’s future prospects or to sell their shares and shift the proceeds to other investments. Even if top management came up with some promising ways to spur the company’s sales and profitability, how long would it be before stockholders could reasonably expect for the company’s $51 stock price (as of June 9, 2017) to climb steadily toward $80 per share (where it was trading in March 2013)?

Company Background

A year after selling his eight-store surf, skate, and snowboard-apparel chain called Westbeach Sports, Chip Wilson took the first commercial yoga class offered in Vancouver, British Columbia, and found the result exhilarating. But he found the cotton clothing used for sweaty, stretchy power yoga completely inappropriate. Wilson’s passion was form-fitting performance fabrics and in 1998 he opened a design studio for yoga clothing that also served as a yoga studio at night to help pay the rent. He designed a number of yoga apparel items made of moisture-wicking fabrics that were light, form-fitting, and comfortable and asked local yoga instructors to wear the products and provide feedback. Gratified by the positive response, Wilson opened lululemon’s first real store in the beach area of Vancouver in November of 2000.

While the store featured yoga clothing designed by Chip Wilson and his wife, Shannon, Chip Wilson’s vision was for the store to be a community hub where people could learn and discuss the physical aspects of healthy living—from yoga and diet to running and cycling, plus the yoga-related mental aspects of living a powerful life of possibilities. But the store’s clothing proved so popular that dealing with customers crowded out the community-based discussions and training about the merits of living healthy lifestyles. Nonetheless, Chip Wilson and store personnel were firmly committed to healthy, active lifestyles, and Wilson soon came to the conclusion that for the store to provide staff members with the salaries and opportunities to experience fulfilling lives, the one-store company needed to expand into a multi-store enterprise. Wilson believed that the increasing number of women participating in sports—and specifically page 281yoga—provided ample room for expansion, and he saw lululemon athletica’s yoga-inspired performance apparel as a way to address a void in the women’s athletic apparel market. Wilson also saw the company’s mission as one of providing people with the components to live a longer, healthier, and more fun life.

Several new stores were opened in the Vancouver area, with operations conducted through a Canadian operating company, initially named Lululemon Athletica, Inc., and later renamed lululemon canada, inc. In 2002, the company expanded into the United States and formed a sibling operating company, Lululemon Athletica USA Inc. (later renamed as lululemon usa, inc), to conduct its U.S. operations. Both operating companies were wholly owned by affiliates of Chip Wilson. In 2004, the company contracted with a franchisee to open a store in Australia as a means of more quickly disseminating the lululemon athletica brand name, conserving on capital expenditures for store expansion (since the franchisee was responsible for the costs of opening and operating the store), and boosting revenues and profits. The company wound up its fiscal year ending January 31, 2005, with 14 company-owned stores, 1 franchised store, and net revenues of $40.7 million. A second franchised store was opened in Japan later in 2005. Franchisees paid lululemon a one-time franchise fee and an ongoing royalty based on a specified percentage of net revenues; lululemon supplied franchised stores with garments at a discount to the suggested retail price.

Five years after opening the first retail store, it was apparent that lululemon apparel was fast becoming something of a cult phenomenon and a status symbol among yoga fans in areas where lululemon stores had opened. Avid yoga exercisers were not hesitating to purchase $120 color-coordinated lululemon yoga outfits that felt comfortable and made them look good. Mall developers and mall operators quickly learned about lululemon’s success and began actively recruiting lululemon to lease space for stores in their malls.

In December 2005, with 27 company-owned stores, 2 franchised stores, and record sales approaching $85 million annually, Chip Wilson sold 48 percent of his interest in the company’s capital stock to two private equity investors: Advent International Corporation, which purchased 38.1 percent of the stock, and Highland Capital Partners, which purchased a 9.6 percent ownership interest. In connection with the transaction, the owners formed lululemon athletica inc. to serve as a holding company for all of the company’s related entities, including the two operating subsidiaries, lululemon canada inc. and lululemon usa inc. Robert Meers, who had 15 years of experience at Reebok and was Reebok’s CEO from 1996 to 1999, joined lululemon as CEO in December 2005. Chip Wilson headed the company’s design team and played a central role in developing the company’s strategy and nurturing the company’s distinctive corporate culture; he was also chairman of the company’s Board of Directors, a position he had held since founding the company in 1998. Wilson and Meers assembled a management team with a mix of retail, design, operations, product sourcing, and marketing experience from such leading apparel and retail companies as Abercrombie & Fitch, Limited Brands, Nike, and Reebok.

Brisk expansion ensued. The company ended fiscal 2006 with 41 company-owned stores, 10 franchised stores, net revenues of $149 million, and net income of $7.7 million. In 2007, the company’s owners elected to take the company public. The initial public offering took place on August 2, 2007, with the company selling 2,290,909 shares to the public and various stockholders selling 15,909,091 shares of their personal holdings. Shares began trading on the NASDAQ under the symbol LULU and on the Toronto Exchange under the symbol LLL.

In 2007, the company’s announced growth strategy had five key elements:

1. Grow the company’s store base in North America. The strategic objective was to add new stores to strengthen the company’s presence in locations where it had existing stores and then selectively enter new geographic markets in the United States and Canada. Management believed that the company’s strong sales in U.S. stores demonstrated the portability of the lululemon brand and retail concept.

2. Increase brand awareness. This initiative entailed leveraging the publicity surrounding the opening of new stores with grassroots marketing programs that included organizing events and partnering with local fitness practitioners.

3. Introduce new product technologies. Management intended to continue to focus on developing and offering products that incorporated technology-enhanced fabrics and performance features that differentiated lululemon apparel and helped broaden the company’s customer base.

4. Broaden the appeal of lululemon products. This initiative entailed (1) adding a number of apparel items for men, (2) expanding product offerings for women and young females in such categories as athletic bags, undergarments, outerwear, and sandals, and (3) adding products suitable for additional sports and athletic activities.

5. Expand beyond North America. In the near term, the company planned to expand its presence in Australia and Japan and then, over time, pursue opportunities in other Asian and European markets that offered similar, attractive demographics.

The company grew rapidly. Fitness-conscious women began flocking to the company’s stores not only because of the fashionable products but also because of the store ambience and attentive, knowledgeable store personnel. Dozens of new lululemon athletic retail stores were opened annually, and the company pursued a strategy of embellishing its product offerings to create a comprehensive line of apparel and accessories designed for athletic pursuits such as yoga, running training, and general fitness; technical clothing for active female youths; and a selection of fitness and recreational items for men. Revenues topped $1 billion in fiscal 2011 and reached almost $1.6 billion in fiscal 2013.

Headed into fiscal year 2017, the company’s products could be bought at its 351 retail stores in the United States and Canada, 27 stores in Australia and New Zealand, and 28 stores in nine other countries, in addition to the company’s website www.lululemon.com and assorted other locations. In the company’s most recent fiscal year ending January 29, 2017, retail store sales accounted for 72.7 percent of company revenues, website sales accounted for 19.3 percent, and sales in all other channels (showroom sales, sales at outlet centers, sales from temporary locations, licensing revenues, and wholesale sales to premium yoga studios, health clubs, fitness centers, and a few other retailers) accounted for 8.0 percent.

Exhibit 1 presents highlights of the company’s performance for fiscal years 2012 to 2016. Exhibit 2 shows lululemon’s revenues by business segment and geographic region for the same period.

lululemon’s Evolving Senior Leadership Team
In January 2008, Christine M. Day joined the company as executive vice president, Retail Operations. Previously, she had worked at Starbucks, functioning in a variety of capacities and positions, including president, Asia Pacific Group (July 2004 to February 2007); co-president for Starbucks Coffee International (July 2003 to October 2003); senior vice president, North American Finance & Administration; and vice president of Sales and Operations for Business Alliances. In April 2008, Day was appointed as lululemon’s president and chief operating officer, and was named chief executive officer (CEO) and member of the Board of Directors in July 2008. During her tenure as CEO, Day expanded and strengthened the company’s management team to support its expanding operating activities and geographic scope, favoring the addition of people with relevant backgrounds and experiences at such companies as Nike, Abercrombie & Fitch, The Gap, and Speedo International. She also spent a number of hours each week in the company’s stores observing how customers shopped, listening to their comments and complaints, and using the information to tweak product offerings, merchandising, and store operations.

Company founder Chip Wilson stepped down from his executive role as lululemon’s chief innovation and branding officer effective January 29, 2012, and moved his family to Australia; however, he continued on in his role of chairman of the company’s Board of Directors and focused on becoming a better board chairman, even going so far as to take a four-day course on board governance at Northwestern University.1 Christine Day promoted Sheree Waterson, who had joined the company in 2008 and had over 25 years of consumer and retail industry page 283experience, as chief product officer to assume responsibility for product design, product development, and other executive tasks that Wilson had been performing. Shortly after the quality problems with the black Luon bottoms occurred, Sheree Waterson resigned her position and left the company. In October 2013, lululemon announced that Tara Poseley had been appointed to its Senior Leadership Team as chief product officer and would have responsibility for overseeing lululemon’s design team, product design activities, merchandising, inventory activities, and strategic planning. Previously, Poseley held the position of interim president at Bebe Stores, Inc; president of Disney Stores North America (The Children’s Place); CEO of Design Within Reach (DWR); and a range of senior merchandising and design management positions during her 15-year tenure at Gap Inc.

In the aftermath of the pants recall in March 2013, the working relationship between Christine Day and Chip Wilson deteriorated. Wilson made it clear that he would have handled the product recall page 284incident differently and that he did not think there were problems with the design of the product or the quality of the fabric. But the differences between Day and Wilson went beyond the events of March 2013, especially when some consumers began to complain about the quality of the replacement pants. Wilson returned from Australia in May 2013, and weeks later Christine Day announced she would step down as CEO when her successor was named. A lengthy search for Day’s replacement ensued.

In the meantime, Chip Wilson triggered a firestorm when, in an interview with Bloomberg TV in November 2013, he defended the company’s design of the black Luon bottoms saying, “Quite frankly, some women’s bodies just actually don’t work” with the pants. Although a few days later he publicly apologized for his remarks suggesting that the company’s product quality issues back in March 2013 were actually the fault of overweight women, his apology was not well received. In December 2013, Wilson resigned his position as chairman of lululemon’s Board of Directors and took on the lesser role of non-executive chairman. A few months later, Wilson announced that he intended to give up his position as non-executive chairman prior to the company’s annual stockholders meeting in June 2014 but would continue on as a member of the company’s Board of Directors (in 2013 and 2014, Wilson was the company’s largest stockholder and controlled 29.2 percent of the company’s common stock).

In early December 2013, lululemon announced that its Board of Directors had appointed Laurent Potdevin as the company’s chief executive officer and a member of its Board of Directors; Potdevin stepped into his role in January 2014, and to help ensure a smooth transition Christine Day remained with lululemon through the end of the company’s fiscal year (February 2, 2014). Potdevin came to lululemon having most recently served as president of TOMS, a company founded on the mission that it would match every pair of shoes purchased with a pair of new shoes given to a child in need. Prior to TOMS, Potdevin held numerous positions at Burton Snowboards for more than 15 years, including president and CEO from 2005 to 2010; Burton Snowboards, headquartered in Burlington, Vermont, was considered to be the world’s premier snowboard company, with a product line that included snowboards and accessories (bindings, boots, socks, gloves, mitts, and beanies); men’s, women’s, and youth snowboarding apparel; and bags and luggage. Burton grew significantly under Potdevin’s leadership, expanding across product categories and opening additional retail stores.

Tension between Chip Wilson and lululemon’s Board of Directors erupted at the company’s annual shareholder’s meeting in June 2014 when he voted his entire shares against re-election of the company’s chairman and another director. In February 2015, after continuing to disagree with lululemon executives and board members over the company’s strategic direction and ongoing dissatisfaction with how certain lululemon activities were being managed, Wilson resigned his position on lululemon’s Board of Directors. In August 2014, he sold half of his ownership stake to a private equity firm. In June 2015, lululemon filed documents with the Securities and Exchange Commission enabling Wilson to sell his remaining 20.1 million shares (equal to a 14.6 percent ownership stake worth about $1.3 billion) in the event he wished to do so.

Meanwhile, Wilson, together with his wife and 27-year-old son J.J., formed a new company in 2014—Kit and Ace—that specialized in high-end clothing for men and women made from a machine-washable, high-performance, cashmere fabric. The innovative clothing line was designed for all-day wear and included a range of items suitable for running errands or attending an evening event. J.J. Wilson was in charge of running the business until September 2016 when a new president was brought in, 20 percent of the head-office staff of 280 persons were laid off (in addition to 10 percent laid off earlier in the year), company operations were restructured, and plans were announced to close 15 locations over the next two years. Prior to the layoffs and restructuring, Kit and Ace had 61 retail locations (including short-term lease “pop-up” stores) in the United States, Canada, Australia, Britain, New Zealand, and Japan and a total of 700 employees. Except for the pop-ups, the stores featured onsite tailors and sparkling water, as well as art and design elements from local artists and photographers. In April 2017, Kit and Ace announced it was immediately closing all of its locations in the United States, Australia, and the United Kingdom, some of which were thought to be popular and profitable (although the company as a whole had yet to become profitable). All seven Canadian locations were to remain open; a Facebook posting said customers could continue to purchase at the company’s website, www.kitandace.com.

The Yoga Marketplace
According to the “2016 Yoga in America” study conducted by the Yoga Journal and Yoga Alliance, in 2015, there were 36.7 million people in the United States who had practiced yoga in the last six months in a group or private class setting, up from 20.4 million in page 2862012 and 15.8 million in 2008.2 About 72 percent of the people who engaged in group or class yoga exercises were women, and close to 62 percent of all yoga practitioners were in the age range of 18 to 49.3 About 74 percent of the people who practiced yoga in 2015 had done so for five years or less. The level of yoga expertise varied considerably: 56 percent of yoga practitioners considered themselves as beginners, 42 percent considered themselves as “intermediate,” and 2 percent considered themselves to be in the expert/advanced category. Spending on yoga classes, yoga apparel, and related items was an estimated $16.8 billion, up from $10.3 billion in 2012 and $5.7 billion in 2008.4 Spending was forecasted to grow at a compound annual rate of just over 3 percent through 2020.5

The market for sports and fitness apparel was considerably larger, of course, than just the market for yoga apparel. The global market for all types of sportswear, activewear, and athletic apparel, estimated to be about $148 billion in 2015, was forecasted to grow about 4.3 percent annually and reach about $185 billion by 2020.6 In the United States, sales of activewear and all types of gym and fitness apparel (which included both items made with high-tech performance fabrics that wicked away moisture and items made mostly of cotton, polyester, stretch fabrics, and selected other manmade fibers that lacked moisture-wicking and other high-performance features) was the fastest growing segment of the apparel industry.7

lululemon’s Strategy and Business in 2017
lululemon athletica viewed its core mission as “creating components for people to live longer, healthier, fun lives.”8 The company’s primary target customer was

a sophisticated and educated woman who understands the importance of an active, healthy lifestyle. She is increasingly tasked with the dual responsibilities of career and family and is constantly challenged to balance her work, life, and health. We believe she pursues exercise to achieve physical fitness and inner peace.9

In the company’s early years, lululemon’s strategy was predicated on management’s belief that other athletic apparel companies were not effectively addressing the unique style, fit, and performance needs of women who were embracing yoga and a variety of other fitness and athletic activities. Lululemon sought to address this void in the marketplace by incorporating style, feel-good comfort, and functionality into its yoga-inspired apparel products and by building a network of lululemon retail stores, along with an online store at the company’s website, to market its apparel directly to these women. However, while the company was founded to address the unique needs and preferences of women, it did not take long for management to recognize the merits of broadening the company’s market target to include fitness apparel for activities other than yoga and apparel for population segments other than adult women.

In 2009, lululemon opened its first ivivva-branded store in Vancouver, British Columbia, to sell high quality, premium-priced dance-inspired apparel to female youth (ivivva was a word that lululemon made up). The Vancouver store was soon profitable, and 11 additional company-owned ivivva stores were opened in Canada and the United States during 2010 to 2013. From 2014 to 2016, the opening of new ivivva stores accelerated, bringing the total to 55 stores at the end of fiscal 2016.

In 2013 and 2014, the company began designing and marketing products for men who appreciated the technical rigor and premium quality of athletic and fitness apparel. Management also believed that participation in athletic and fitness activities was destined to climb as people over 60 years of age became increasingly focused on living longer, healthier, active lives in their retirement years and engaged in regular exercise and recreational activities. Another demand-enhancing factor was that consumer decisions to purchase athletic, fitness, and recreational apparel were being driven not only by an actual need for functional products but also by a desire to create a particular lifestyle perception through the apparel they wore. Consequently, senior executives had transitioned lululemon’s strategy from one of focusing exclusively on yoga apparel for women to one aimed at designing and marketing a wider range of healthy page 287lifestyle-inspired apparel and accessories for women and men and dance-inspired apparel for girls.

As lululemon began fiscal year 2017, the company’s business strategy had six core components:

· Broaden the lululemon product line to include both more items and items suitable for purposes other than just fitness-related activities.

· Grow lululemon’s store base, both in North America and outside of North America.

· Broaden awareness of the lululemon brand and the nature and quality of the company’s apparel offerings.

· Incorporate next-generation fabrics and technologies in the company’s products to strengthen consumer association of the lululemon and ivivva brands with technically advanced fabrics and innovative features, thereby enabling lululemon to command higher prices for its products compared to the prices of traditional fitness and recreational apparel products made of cotton, rayon, polyester, and/or other manmade fibers lacking the performance features of high-tech fabrics.

· Provide a distinctive in-store shopping experience, complemented with strong ties to fitness instructors and fitness establishments, local athletes and fitness-conscious people, and various community-based athletic and fitness events.

· Grow traffic and sales at the company’s websites (www.lululemon.com and www.ivviva.com) to provide a distinctive and satisfying ivivva online shopping experience and to extend the company’s reach into geographic markets where it did not have retail stores.

Product Line Strategy

As of June 2017, lululemon offered a diverse and growing selection of premium-priced performance apparel and accessories for women and men that were designed for healthy lifestyle activities such as yoga, swimming, running, cycling, and general fitness. Currently, the company’s range of offerings included:

Women

Men

· Sports bras

· Tanks

· Sweaters and wraps

· Jackets and hoodies

· Long-sleeve and short-sleeve tops and tees

· Pants and crops

· Shorts

· Skirts and dresses

· Outerwear

· Swimwear

· Socks and underwear

· Scarves

· Gear bags

· Caps and headbands

· Sweat cuffs and gloves

· Water bottles

· Yoga mats and props

· Instructional yoga DVDs

· Tops

· Jackets and hoodies

· Pants and shorts

· Gear bags and backpacks

· Caps and gloves

· Swimwear

· Socks and underwear

· Run accessories

· Yoga mats, props, and instructional DVDs

As 2017 progressed and more ivivva stores were either closed or converted to lululemon stores, a growing percentage of ivivva revenues were being generated at the ivivva website. The ivivva product line, while featuring dancing apparel, also included apparel for yoga and running. Specific ivivva-branded items included leotards, shorts, dance pants, crop pants, tights, sports bras, tank tops, tees, jackets, hoodies, pullovers, caps, headbands, socks, bags, and other accessories.

lululemon’s Strategy of Offering Only a Limited Range of Apparel Sizes In the months following the product recall of the too-sheer pants in March 2013, lululemon officially revealed in a posting on its Facebook page that it did not offer clothing in plus sizes because focusing on sizes 12 and below was an integral part of its business strategy; according to the company’s posting and to the postings of lululemon personnel who responded to comments made by Facebook members who read the lululemon posting:

Our product and design strategy is built around creating products for our target guest in our size range of 2 to 12. While we know that doesn’t work for everyone and recognize fitness and health come in all shapes and sizes, we’ve built our business, brand, and relationship with our guests on this formula.

page 288We agree that a beautiful healthy life is not measured by the size you wear. We want to be excellent at what we do, so this means that we can’t be everything to everybody and need to focus on specific areas. Our current focuses are in innovating our women’s design, men’s brand, and building our international market.

At this time, we don’t have plans to change our current sizing structure which is 2 to 12 for women.10

page 289In June 2017, some four years later, the largest size appearing in the size guide for women on lululemon’s website was 12/XL which was said to be suitable for a 33-inch waist and 43-inch hips.

Retail Distribution and Store Expansion Strategy
After several years of experience in establishing and working with franchised stores in the United States, Australia, Japan, and Canada, top management in 2010 decided that having franchised stores was not in lululemon’s best long-term strategic interests. A strategic initiative was begun to either acquire the current stores of franchisees and operate them as company stores or convert the franchised stores to a joint venture arrangement where lululemon owned the controlling interest in the store and the former franchisee owned a minority interest. By year-end 2011, all lululemon stores were majority-owned. However, in January 2015, lululemon decided to enter into a license and supply arrangement with a partner in the Middle East which granted the partner the right to operate lululemon branded retail locations in the United Arab Emirates, Kuwait, Qatar, Oman, and Bahrain for an initial term of five years. Lululemon retained the rights to sell lululemon products through its e-commerce websites in these countries. Under this arrangement, lululemon supplied the partner with lululemon products, training, and other support. A similar licensing arrangement was entered into with a partner in Mexico in November 2016, but no licensed stores were operating in Mexico as of January 29, 2017.

As of January 29, 2017, lululemon’s retail footprint included:

· 245 company-operated stores in the United States (45 states and the District of Columbia)

· 51 company-operated stores in Canada

· 27 company-operated stores in Australia

· 9 company-operated stores in the United Kingdom

· 5 company-operated stores in New Zealand

· 3 company-operated stores in Singapore, Hong Kong, and China

· 2 company-operated stores in South Korea

· 1 company-operated store in Germany, Puerto Rico, and Switzerland

· 3 licensed stores in the United Arab Emirates (not included in statistics relating to company-operated stores)

· 1 licensed store in Qatar (not included in statistics relating to company-operated stores)

· 42 ivivva stores in the United States

· 13 ivivva stores in Canada

In addition, the company operated over 50 small showrooms in various locations in the United States, Canada, Germany, France, Sweden, the Netherlands, Japan, and Malaysia where it was contemplating opening new retail stores in upcoming years. Five new lululemon stores were opened in the first quarter of fiscal 2017.

Management had announced that new store openings would be concentrated in the United States, Asia, and Europe, primarily in those locations where showrooms were already open or would be opening soon. In spite of lululemon’s recent declines in sales-per-square-foot performance (see the bottom portion of Exhibit 1), management believed its sales revenues per square foot of retail space were close to the best in the retail apparel sector—for example, the stores of specialty fashion retailers like Old Navy, Banana Republic, The Gap, and Abercrombie & Fitch typically had 2016 annual sales averaging less than $500 per square foot of store space.

However, in June 2017, lululemon unexpectedly announced that it would move sales and promotion of its girls’ ivivva dance and activewear apparel to a mostly online format; plans called for closing 40 of the company’s 55 ivivva-branded stores, along with all ivivva showrooms and other temporary locations. Approximately half of the remaining 15 ivivva stores, all located in metropolitan locations and having a sizable clientele, were to remain open and continue to retail ivivva apparel; the other seven to eight ivviva stores were scheduled to be converted into lululemon stores. Management indicated the ivivva restructuring would likely be completed by November 1, 2017. In announcing the change in strategy for ivivva, lululemon forecast that the ivivva restructuring would result in a charge of $50 million to $60 million against fiscal 2017 earnings, of which $17.7 million was recognized in the first quarter of fiscal 2017 (which reduced the company’s first quarter 2017 diluted earnings per share from $0.32 to $0.23).

lululemon’s Retail Stores: Locations, Layout, and Merchandising
The company’s retail stores were located primarily on street locations, in upscale strip shopping centers, in lifestyle centers, and in malls. Typically, stores were leased and were 2,500 to 3,000 square feet in size. Most all stores included space for product display and merchandising, checkout, fitting rooms, a restroom, and an office/storage area. While the leased nature of the store spaces meant that each store had its own customized layout and arrangement of fixtures and displays, each store was carefully decorated and laid out in a manner that projected the ambience and feel of a homespun local apparel boutique rather than the more impersonal, cookie-cutter atmosphere of many apparel chain stores.

The company’s merchandising strategy was to sell all of the items in its retail stores at full price.11 Special colors and seasonal items were in stores for only a limited time—such products were on 3-, 6-, or 12-week life cycles so that frequent shoppers could always find something new. Store inventories of short-cycle products were deliberately limited to help foster a sense of scarcity, condition customers to buy when they saw an item rather than wait, and avoid any need to discount unsold items. In one instance, a hot-pink color that launched in December was supposed to have a two-month shelf life, but supplies sold out in the first week. However, ample supplies of core products that did not change much from season to season were inventoried to minimize the risk of lost sales due to items being out of stock. Approximately 95 percent of the merchandise in lululemon stores was sold at full price. 12

One unique feature of lululemon’s retail stores was that the floor space allocated to merchandising displays and customer shopping could be sufficiently cleared to enable the store to hold an in-store yoga class before or after regular shopping hours. Every store hosted a complimentary yoga class each week that was conducted by a professional yoga instructor from the local community who had been recruited to be a “store ambassador”; when the class concluded, the attendees were given a 15 percent-off coupon to use in shopping for products in the store. From time to time, each store’s yoga ambassadors demonstrated their moves in the store windows and on the sales floor. Normally, each store displayed pictures of its local yoga ambassadors on its walls. Exhibit 4 shows the exteriors of representative lululemon athletica stores.

lululemon’s Showroom Strategy
Over the years, lululemon had opened showrooms in numerous locations both inside and outside North page 291America as a means of introducing the lululemon brand and culture to a community, developing relationships with local fitness instructors and fitness enthusiasts, and hosting community-related fitness events, all in preparation for the grand opening of a new lululemon athletica retail store in weeks ahead. Showroom personnel:

· Hosted get-acquainted parties for fitness instructors and fitness enthusiasts.

· Recruited a few well-regarded fitness instructors in the local area to be “store ambassadors” for lululemon products and periodically conduct in-store yoga classes when the local lululemon retail store opened.

· Advised people visiting the showroom on where to find great yoga or Pilates classes, fitness centers, and health and wellness information and events.

· Solicited a select number of local yoga studios, health clubs, and fitness centers to stock and retail a small assortment of lululemon’s products.

Showrooms were only open part of the week so that showroom personnel could be out in the community meeting people, building relationships with yoga and fitness instructors, participating in local yoga and fitness classes and talking with attendees before and after class, promoting attendance at local fitness and wellness events, and stimulating interest in the soon-to-open retail store. Lululemon used showrooms as a means of “pre-seeding” the opening of a lululemon retail store primarily in those locations where no other lululemon retail stores were nearby. Because the showroom strategy had worked so well in getting lululemon stores off to a good start, management quickly adopted the use of showrooms to pre-seed the opening of ivivva stores. As of late June 2017, lululemon had around 15 showrooms for its lululemon brand; all ivivva showrooms were in the process of closing down operations.

Wholesale Sales Strategy
Lululemon marketed its products to select premium yoga studios, health clubs, and fitness centers as a way to gain the implicit endorsement of local fitness personnel for lululemon branded apparel, familiarize their customers with the lululemon brand, and give them an opportunity to conveniently purchase lululemon apparel. Also, when certain styles, colors, and sizes of apparel items at lululemon retail stores were selling too slowly to clear out the inventories of items ordered from contract manufacturers, lululemon typically shipped the excess inventories to one or more of the 11 lululemon factory outlet stores in North America to be sold at discounted prices and also sold these items on its website accessed at a menu selection labeled “we made too much.”

Lululemon management did not want to grow wholesale sales to these types of establishments into a significant revenue contributor. Rather, the strategic objective of selling lululemon apparel to yoga studios, health clubs, and fitness centers was to build brand awareness, especially in new geographic markets both in North America and other international locations where the company intended to open new stores. Wholesale sales to lululemon’s outlet stores were made only to dispose of excess inventories and thereby avoid in-store markdowns on slow-selling items.

The company’s wholesale sales to all these channels accounted for net revenues of $186.7 million (8.0 percent of total net revenues) in fiscal 2016, some 30.8 percent more than the net revenues of $142.7 million (6.9 percent of total net revenues) from these channels in fiscal 2011. The big increase was primarily the result of sales at three recently opened (2015) outlet stores that were open for the full year in fiscal 2016, increased net revenues at the company’s other 11 outlet locations, and an increase in the number of showroom locations.

Direct-to-Consumer Sales Strategy
In 2009, lululemon launched its e-commerce website, www.lululemon.com, to enable customers to make online purchases, supplement its already-functioning phone sales activities, and greatly extend the company’s geographic market reach. Management saw online sales as having three strategic benefits: (1) providing added convenience for core customers, (2) securing sales in geographic markets where there were no lululemon stores, and (3) helping build brand awareness, especially in new markets, including those outside of North America. As of early 2017, the company operated country- and region-specific page 292websites in Australia, Europe, the Middle East, and Asia, and brand specific websites for both lululemon and ivivva (www.ivivva.com) products in North America. Lululemon provided free shipping on all lululemon and ivivva orders to customers in North America; a shipping fee was charged to buyers in a number of international destinations.

The merchandise selection that lululemon offered to online buyers differed somewhat from what was available in the company’s retail stores. A number of the items available in stores were not sold online; a few online selections were not available in the stores. Styles and colors available for sale online were updated weekly. On occasion, the company marked down the prices of some styles and colors sold online to help clear out the inventories of items soon to be out of season and make way for newly arriving merchandise—online customers could view the discounted merchandise by clicking on a “we made too much” link.

Direct-to-consumer sales at the company’s websites had become an increasingly important part of the company’s business, with e-commerce sales climbing from $106.3 million in fiscal 2011 (10.6 percent of total net revenues) to $453.3 million in fiscal 2016 (19.3 percent of total revenues)—equal to a compound annual growth rate of 33.7 percent.

In addition to making purchases, website visitors could browse information about what yoga was, what the various types of yoga were, and their benefits; learn about fabrics and technologies used in lululemon’s products; read recent posts on lululemon’s yoga blog; and stay abreast of lululemon activities in their communities. The company planned to continue to develop and enhance its e-commerce websites in ways that would provide a distinctive online shopping experience and strengthen its brand reputation. In 2016, the company’s websites were all redesigned and relaunched to improve their look and functionality.

Product Design and Development Strategy
Lululemon’s product design efforts were led by a team of designers based in Vancouver, British Columbia, partnering with various international designers. The design team included athletes and users of the company’s products who embraced lululemon’s design philosophy and dedication to premium quality. Design team members regularly visited retail stores in a proactive effort to solicit feedback on existing products from store customers and fitness ambassadors and to gather their ideas for product improvements and new products. In addition, the design team used various market intelligence sources to identify and track market trends. On occasion, the team hosted meetings in several geographic markets to discuss the company’s products with local athletes, trainers, yogis, and members of the fitness industry. The design team incorporated all of this input to make fabric selections, develop new products, and make adjustments in the fit, style, and function of existing products.

The design team worked closely with its apparel manufacturers to incorporate innovative fabrics that gave lululemon garments such characteristics as stretchability, moisture-wicking capability, color fastness, feel-good comfort, and durability. Fabric quality was evaluated via actual wear tests and by a leading testing facility. Before bringing out new products with new fabrics, lululemon used the services of leading independent inspection, verification, testing, and certification companies to conduct a battery of tests on fabrics for such performance characteristics as pilling, shrinkage, abrasion resistance, and colorfastness. Lastly, lululemon design personnel worked with leading fabric suppliers to identify opportunities to develop fabrics that lululemon could trademark and thereby gain added brand recognition and brand differentiation.

Where appropriate, product designs incorporated convenience features, such as pockets to hold credit cards, keys, digital audio players, and clips for heart rate monitors and long sleeves that covered the hands for cold-weather exercising. Product specifications called for the use of advanced sewing techniques, such as flat seaming, that increased comfort and functionality, reduced chafing and skin irritation, and strengthened important seams. All of these design elements and fabric technologies were factors that management believed enabled lululemon to price its high-quality technical athletic apparel at prices above those of traditional athletic apparel.

Typically, it took 8 to 10 months for lululemon products to move from the design stage to availability in its retail stores; however, the company had the capability to bring select new products to market in as little as two months. Management believed its lead times were shorter than those of most apparel brands due to the company’s streamlined design and development process, the real-time input received from customers and ambassadors at its store locations, and the short times it took to receive and approve samples from manufacturing suppliers. Short lead times facilitated quick responses to emerging trends or shifting market conditions.

Lululemon management believed that its design process enhanced the company’s capabilities to develop top quality products and was a competitive strength that helped differentiate lululemon apparel from the offerings of rival brands.

Sourcing and Manufacturing
Production was the only value chain activity that lululemon did not perform internally. Lululemon did not own or operate any manufacturing facilities to produce fabrics or make garments. In 2016, fabrics were sourced from a group of approximately 65 fabrics manufacturers. Garments were produced by approximately 35 contract manufacturers, five of which produced approximately 63 percent of the company’s products in fiscal 2016. However, the company deliberately refrained from entering into long-term contracts with any of its fabric suppliers or manufacturing sources, preferring instead to transact business on an order-by-order basis and rely on the close working relationships it had developed with its various suppliers over the years. During fiscal 2016, approximately 47 percent of the company’s products were produced in Southeast Asia, approximately 28 percent in South Asia, approximately 15 percent in China, approximately 1 percent in North America, and the remainder in other regions. The company’s North American manufacturers helped provide lululemon with the capability to speed select products to market and respond quickly to changing trends and unexpectedly high buyer demand for certain products.

Lululemon took great care to ensure that its manufacturing suppliers shared lululemon’s commitment to quality and ethical business conduct. All manufacturers were required to adhere to a vendor code of ethics regarding quality of manufacturing, working conditions, environmental responsibility, fair wage practices, and compliance with child labor laws, among others. Lululemon utilized the services of a leading inspection and verification firm to closely monitor each supplier’s compliance with applicable law, lululemon’s vendor code of ethics, and other business practices that could reflect badly on lululemon’s choice of suppliers.

Distribution Facilities
Lululemon shipped products to its stores from five owned or leased distribution facilities in the United States, Canada, and Australia. The company owned a 307,000-square-foot distribution center in Columbus, Ohio, and operated a leased 145,000-square-foot facility in Vancouver, British Columbia, a second 110,000-square-foot facility in Vancouver, and a leased 150,000-square-foot facility in Sumner, Washington, to supply stores in Canada, the United States, and some locations in Europe and Africa. A leased 55,000-square-foot distribution center in Melbourne, Australia, supplied stores in Australia and New Zealand. In some instances, the company utilized third-party logistics providers to warehouse and distribute finished goods from their warehouses in Hong Kong, China, and the Netherlands. Management believed its five internally operated facilities, together with its third-party logistics providers, would be sufficient to accommodate its expected store growth and expanded product offerings over the next several years. Merchandise was typically shipped to retail stores through third-party delivery services multiple times per week, thus providing stores with a steady flow of new inventory.

lululemon’s Community-Based Marketing Approach and Brand-Building Strategy
One of lululemon’s differentiating characteristics was its community-based approach to building brand awareness and customer loyalty. Local fitness practitioners chosen to be ambassadors introduced their fitness class attendees to the lululemon brand, thereby leading to interest in the brand, store visits, and word-of-mouth marketing. Each yoga-instructor ambassador was also called upon to conduct a page 294complimentary yoga class every four to six weeks at the local lululemon store they were affiliated with. In return for helping drive business to lululemon stores and conducting classes, ambassadors were periodically given bags of free products, and large portraits of each ambassador wearing lululemon products and engaging in physical activity at a local landmark were prominently displayed on the walls of their local lululemon store as a means of helping ambassadors expand their clientele.