By Chip Wilson
A managing director of one of America’s largest PE funds once told me he thinks a change in litigation laws could add 2-3% to the country’s GDP annually.
Lawyers and self-interest groups control the day-to-day decision making at government, therefore there is no incentive to change. I think people who support short-term interests understand fully well they are doing the wrong thing for the long run (ex. gun laws). However, they want to be voted back in, so they focus on what will get them there. A good example of this in our own backyard ride sharing: the BC government is incapable of bringing in shared ride services because of the short-term interest vote of the taxi drivers. The rest of the world thinks BC has ancient views.
I think law makers can get away from self-interests and prioritize future generations by passing laws that will only come into effect 20 years in the future.
When the USA constitution was written, it built in checks and balances between judicial, congressional and the president. This worked perfectly up until 1995 when digitalization exponentially sped up the world of change. I believe that China with a 9-person ruling politburo, who can make anything happen quickly, will overtake the USA in all areas in the next 25 years.
By Chip Wilson
One of the great injustices of life is larger people pay the same as smaller people for airline seats. For larger people this is one of the worst experiences in life.
The reality is that like luggage, each person should pay according to their weight and how compact they choose to be. Large males should absolutely pay more as they use more space and weigh more. In the airline industry, weight is the big cost in estimating fuel usage.
When I ran lululemon I wanted to provide seating based on height, weight and length of flight and age. Flights can be a killer for employees and I wanted our people to arrive in the best shape to do business. I didn’t see any point in saving money on a flight if the employee had to stay an extra night and incur extra hotel and food bills because their flight was so miserable. To me employees’ health equals profits.
By Chip Wilson
We have come to know that sexual orientation is fluid and also a bell curve. For both sexes, one end of the bell curve starts out with extremely straight male and females then widens as both sexes take on some of their opposite sex’s tendencies and eventually thins out to men who are really female and women who are really men.
Transgender washrooms are popping up everywhere as a solve to people who can’t or don’t want to be defined as one sex or the other.
So I wonder, how in the Olympics do we justify male and female events? I would say a very feminine male should compete at the same level and against a very masculine female. But who knows exactly what is a male and female athlete? For sure I don’t think a male with a sex change should be compete against a feminine female. This just isn’t fair.
I am beginning to think that splitting the sexes at the Olympics is ridiculous, mostly because I see no reason to watch a competition where the playing field is uneven. I won’t watch the Tour de France because the playing field isn’t level as I don’t know who is on drugs and who isn’t.
Sex split in sports is pretty much a joke in the terms of a level playing field. To keep competition interesting to the consumer who pays for the athletes, I think sex should be eliminated in sport and all human beings should compete on the same level.
On an intellectual and non-physical level, I am perplexed as to why the 2017 TED conference profiled the women’s top chess player. Intellectually I think women should be praised when they are the intellectually best including both sexes. Otherwise I think elevating the “top intellectual woman” is demeaning to all women.
By Chip Wilson
When I was young, before the invention of volcanoes, I went to a regular public school. There was always one overweight person out of 300 people. As kids do, that person became the butt of a few jokes. Looking back on the situation as a parent, I am super sad for that kid.
As I walk by schools today I see 30% of students who would have been called overweight in the 1960’s. We have an epidemic, and we are so far into the forest, we cannot see the trees.
The first line I wrote on the side of the lululemon shoppers in 1997 was “Coke and Pepsi are the tobacco of the future: great marketing, terrible product”. Lululemon got about 40 legal letters from Coke and Pepsi as a result, which we ignored because we knew we were right.
Between sweet drinks, smartphones, sitting on the couch all day, access to year around fruit and junk food, our society has become fat. No pun intended, but the issue cannot be sugar coated.
I don’t believe society thinks any different about plus size men or plus size women. I find it interesting that by only talking about women it comes across as a women’s issue.
I read an article recently about an overweight woman who felt targeted, because whenever she went in to see a doctor they would want to discuss her weight. The doctors commitment is to delve into the most obvious solution to poor health. To blame the doctor is to shift responsibility and blame.
Even though being overweight can be caused by a variety of different factors – injury, genetics, parenting, poor choice of eating habits or being raised to think “overweight is ok”, the result is the same. According to research, being overweight causes multiple diseases, lower sexual activity, a minimized social life and usually an early death.
When we meet our future spouse, our big data computer brain is figuring out if that person is someone I want to raise children with and/or live with for the rest of my life. Our subconscious tells us a healthier person is more likely to be a better candidate.
We have to be responsible to ourselves for our own life and the way people view our ability to be healthy. Being healthy shows love and a strong commitment to your family.
By Chip Wilson
In the early days of building Westbeach, and then lululemon, I knew for certain that if I wasn’t the one sweeping the shop floor at the end of the day, my business was likely to fail. I believe it was largely that innate determination to be the “water boy” of my teams that helped pave the way for our collective success. Recently, I experienced this belief echoed back at me while reading Sam Walker’s excellent book, ‘The Captain Class: The Hidden Force that Creates the World’s Greatest Teams’.
Walker is founding editor of The Wall Street Journal’s sports section, and after exhaustive research, he developed a theory of leadership, based on elite sports captains who inspired their teams to achieve extraordinary success. What resonated for me is how he concludes that the best teams (The sixteen most dominant teams in sports history, to be precise) all had a captain who fit an unexpected mold; someone who was neither the best athlete nor top scorer on the team, nor the smoothest or most inspiring communicator. The captains of the world’s best sports teams seem to simply be the individuals who are willing to work harder than anyone else. They don’t need or even want to be the hero—they want to help their teammates become legendary, by ensuring the team is functioning as a whole at the highest level possible. They are consistently of service to their teammates, rather than their own egos. In my experience, business happens to function in the same way.
In my book, Little Black Stretchy Pants, I speak about how at lululemon we developed a template for staff to set out a ten-year vision for their lives. The goal section of this template was split between family, career, and health. The goal-setter set two goals each for family, career and health, all to be attained within three different periods of time: ten years, five years, and one year. The goals fed into and were aligned with their vision.
In this way, lululemon became a leadership development company disguised as an apparel brand. We were in the business of naming team captains.
In any team-based scenario, it takes an extraordinary CEO or team GM to have to ability to spot these authentic, hard working, egoless people—and have the foresight to name them Captain.
By Chip Wilson
A young fast growing company will have many young, core, passionate employees with a strong love for the company culture.
As the company grows the need to bring in more experienced people who “have been there” seems inevitable and prudent. The question is: does bringing in “professionals” make the company better? The professionals are experts at interviews and know what the interviewee is looking for and how to sell themselves. They can easily fake it to get the job.
Professionals who have survived larger company politics are savvy in the Machaevellian ways of obtaining and maintaining power. They may also have a propensity to keep power by undermining or not developing a successor. Professionals know how to fake culture while internally not accepting that the culture is for them.
But great professionals steer a fledgling company away from common mistakes caused by growth. They bring in proactive business processes before the company needs them.
Now comes the big problem. A company grows and needs manpower. New professionals may need up to 40% more salary than existing employees as incentive to pull them from their existing job and city.
This creates an imbalance and a sense of unfairness among core employees. The core employees wait to see if the new employees are worth 40% more. The newly hired professionals are never worth 40% more because they don’t know the company as well as the core employees. Professionals are older and often come with a set unconscious attitude of “I know more than you”.
Existing employees are valuable because they are the cultural glue with the institutional knowledge that can have a company be profitable for decades. The core employees know more than anyone what the mechanisms of making profit are. A great professional knows what the profits could be, with the right mentoring.
The best professionals are those who mentor and develop the core employees to be the next set of company managers. These professionals have little ego and are team players. My observation is these great professionals are best at managing down but don’t know how to manage up.
Unfortunately large company’s provide accolades for achievement to those who are good at marketing themselves upwards to the CEO or the board. My experience is the best employees are too busy being phenomenal at their job to spend what is on their mind “frivolous” time being fake and “looking good” for the wrong reasons.
By Chip Wilson
“One day in mid-2001, I gathered our staff together and told them, “Nike is our competitor.” Considering we had only $4 million in yearly sales, it was a crazy thing to say.”
Read on for the second publicly shared excerpt from my new book, Little Black Stretchy Pants—the unauthorized story of how I built lululemon, available tomorrow October 16th on Amazon, Audible and Kindle.
My first business goal was to have a single store and ride my beach cruiser to work every day. I had achieved that goal. My second business goal was to have five stores to enable an increase in quantity and drive down productions costs. My third was to compete against Nike.
As Syd and Alexandra got to work on opening in Toronto, I thought a little more about my own expansion plans. I knew that making an amazing product at a reasonable price would get a lot easier once we got to five stores and could take ad- vantage of economy-of-scale production. Eventually, I knew, making several times more of something and having enough space in which to sell it would work better for us—especially since I’d committed to never doing wholesale again.
I could see long-term success. I knew if we didn’t grow, Nike would figure out what we were doing, set up across the street, and put us out of business.
But the real reason to grow was our people. They were just ageing into the stage where they were thinking of marriage. They wanted a bigger possibility in their career and to take on more significant challenges. We all knew if the company grew, we could afford children and mortgages and schools. I felt I had an obligation to give them every opportunity to fulfill their lives.
One day in mid-2001, I gathered our staff together and told them, “Nike is our competitor.” Considering we had only $4 million in yearly sales, it was a crazy thing to say. My handful of staff didn’t know whether to laugh or run for the door.
As Delaney Schweitzer recalls, “There were fifteen of us in a room—the whole company—and Chip declared we would open three hundred stores, that we’d be across North America, and that soon we’d be mentioned in every board meeting at Nike. As crazy as that sounded, every one of us was like: ‘I’m in.’
“A few years later, we hired a production person from Nike,” Delaney continues. “He told us that the second he gave his notice and said that he was going to lululemon, they immediately had him escorted out of the building. At that point, Nike had created a small team to dig into the lulu- lemon story and understand our stores. They couldn’t figure out the connection we were making with people. When he said, ‘You’re on the agenda at Nike, they’re talking about you, they’re trying to figure you out,’ it was proof positive that Chip’s declaration had come true.”
Small as we were, we were united in the opinion we had a better product and business model than Nike. We were reaching the female market in a way Nike couldn’t because they did not have the culture. We were doing so well that I could envision if we didn’t expand, Nike could replicate our business. This was closely related to what I’d considered when taking Syd Beder’s offer. It was sobering to consider the demise of our company while the brand was still in its infancy.
I knew our staff were more than up to the challenge of growing lululemon. By that point, I’d paid for our core people to attend the Landmark Forum, and I’d seen them come back empowered and communicating in a way they’d never known before. They’d become people who were no longer willing to settle for mediocrity in their lives—or in the company to which they’d devoted themselves.
In fact, instead of targeting Nike as competition, it even occurred to me to model lululemon after McDonald’s and become a real estate company. Our stores were profitable enough to pay for their own real estate.
The possibilities were endless.
By Chip Wilson
I believe every person has ten moments or decisions in their life that stay with them and affect who they become. For me, one of these moments happened at a swim meet when I was ten.
Read on for the first publicly shared excerpt from my new book, Little Black Stretchy Pants—the unauthorized story of how I built lululemon, and the lessons learned along the way.
Noel, Brett, and I had all been swimming for as long as I could remember. My siblings and I had access to a swimming pool every summer as my mother had worked as a lifeguard in San Diego, and my dad had a summer director job at a Kiwanis camp for underprivileged kids. That was our introduction to swimming.
“Our parents would get up every morning in the wee hours and take us three kids to swim practice. Yes, even in the freezing cold winters,” says my sister, Noel.
It worked for my parents, too—given their relentless schedules, it was good for them to find something with which to occupy us. Our family life soon revolved around seven or eight practises a week and meets on the weekends. Everything was swimming.
Swimming was also a great activity for us because it was affordable. All you needed was a bathing suit and a pair of goggles, and you were good to go. Despite that, I managed to find something I so desperately wanted but couldn’t afford— the perfect swimsuit. The only swimsuits available in Calgary at the time were made by Speedo, and they were all solid colours. In fact, when Speedo introduced simple stripes on their suits, it took the swimming scene by storm.
One day when I was eleven or twelve, I saw a suit at a swim meet that was totally different. The material was a colourful flower pattern. I wanted it immediately.
I asked the kid wearing it where he’d gotten the suit. “Texas,” he replied.
I’d become used to not being able to afford the clothes I wanted, but I was determined to get that suit. My mom considered it, and I suggested to her that if I liked the style of the suit, then maybe other kids would like the style, too. If we ordered a bunch and sold them, I told her, then we could make a small profit and use the money to cover the cost of my suit.
We brought in the bathing suits, and they sold like crazy. We’d purchased the suits from the supplier for maybe thirteen dollars, then sold them for double that. They were something no one had ever seen before—something new. Since they weren’t available in Canada, their exclusivity gave them an additional appeal. As I had negotiated with my mother, I got my own suit for free. It was a small but powerful success.
That experience taught me about importing, shipping costs, and sales. Because I had been on a couple of age-group teams at the national level and was a good swimmer, I also noticed that others started to follow what I wore. I couldn’t afford an on-deck tracksuit, so I wore torn, beat-up, loose jeans and graphic t-shirts. That ensemble was emulated and soon became standard swim meet gear. Nike later realized the power of tastemaker athletes and changed the sports business model with sponsorships.
I believe every person has ten moments or decisions in their life that stay with them and affect who they become. For me, one of these moments happened at a swim meet when I was ten. Although I had a naturally athletic build, I was a very mediocre swimmer overall. I hadn’t done anything spectacular in my age-group.
Anyway, at this swim meet, just as I was getting ready for the 100-metre backstroke, my dad came over to me and said, “Chip, I’ve got this theory…”
It wasn’t unusual to hear this—my dad had many theories about vitamins, nutrition, and athletics, long before the wellness movement became popular. My dad also believed pain was all in the mind. As such, the mind could learn to control that pain and harness it to train and compete.
In athletics in 1965, the prevailing theory of how to approach a race was to save your energy until the end and make sure you looked good at the finish line. “Let’s try something different,” my dad said. “Why don’t you just go full out from the start, instead of saving it up and looking good at the finish? If you collapse or start to drown, I’ll come and get you right away, but instead of thinking it’s a 100-metre race, think of it more like it’s 25 metres. Just a one-length sprint and take it one length at a time and go for it.”
I went with his theory and ended up breaking a Canadian record, finishing the race eight or nine seconds below my previous time. We had to do the race again the next day because the officials thought it had been a mistake with the clock, but I did it the same way again, and it worked just as well the second time.
As I look back at my life now, I realize this event focused in me a new way of thinking. I’ve long noticed how most people never give 100 percent in their relationships, business, or commitments. Personally, I’ve always been afraid of failing because I haven’t given something 100 percent. I’ve been fearful of someday lying on my deathbed, thinking, “God, if I’d just gone for it, would it have been successful?” I think I owe this mindset to that one moment at age ten when my dad gave me his “poolside theory.”
By Chip Wilson
I have no problem admitting to the mistakes I’ve made—without them, I wouldn’t be where I am today. Here’s the thing: when life or business is going well, mistakes are usually masked and we tend to view them as nothing more than slight setbacks. When things are going really well, we tend to think it’s not worth our time to truly analyze our mistakes.
In this same context, when life and/or business is experiencing a downturn, as everything inevitably does, our mistakes are exponentially magnified. Even in our sleep, we go over and over the situation to determine what went wrong, and we agonize over what we will do differently to insure it never happens again. We agonize over our mistakes when things aren’t going well because our reptilian brains tend to want to ensure we will survive.
In today’s modern world, of course, we are not typically being chased by sabre tooth tigers or other predators, but our human brains are still looking for the tiger around every corner—whether in our personal lives or in business.
The big opportunity some of us tend to miss in the business of mistakes, is that when we are in a periodic of economic or personal downturn and we make a mistake, suddenly we’ve created this incredible opportunity to improve. Rather than beat ourselves up, we should try to see our mistakes not as failures or as something to bottle up and ignore, but as golden opportunities to better ourselves and our lives.
In the business world, this logic applies more than ever. People and especially public corporations like to cover up mistakes in order to keep up appearances for the short term. As most CEOs tenure lasts just 5 years, their incentive to keep up the “looking good mask” (for quarterly earnings or to enhance their curriculum vitae for their next job) is dominating and is often a simple matter of ensuring they too survive in the wild (AKA: increase their salaries as soon as possible).
I believe that great people and great companies create a culture of “mistake coaching”. In practice, this means that allowing an employee who makes a mistake to determine why the mistake was made (and assess the ramifications) becomes much more valuable than simply letting that person go. After all, a new employee is likely to make the same mistakes as their predecessor, while the company continues to miss the opportunity to gain the “mistake coaching” knowledge and improve for the better. It’s pretty simple—make more mistakes! Just be sure you’re willing to learn from them.
By Chip Wilson
I often speak of the challenges that come along with being a successful entrepreneur today – from work/life balance (no such thing!) to hiring effectively, to mastering your product and its market share. The reason I speak about entrepreneurs with such passion is that I have personally experienced the triumphs and tribulations of this lifestyle for many years now. When I founded my first company, Westbeach, I began with a long list of attributes that I believed would ensure I would become a “successful” entrepreneur – and boy, did I ever miss the mark.
For instance, I believed I could never take a vacation or enjoy any days off; that I had to be in on every single move and decision, because I absolutely had to do it all on my own. I failed to recognize that people love to help someone who is passionate and working hard to accomplish their dream – all you have to do is drop your ego’s need for self-sufficiency and simply reach out. Every successful venture includes a team with well-balanced skills (design, sales, customer, creative, etc.,) which are next to impossible to find in one person alone. Yes, being an entrepreneur means being in the work 24/7, but don’t assume that simply not taking a break or asking for help will ensure success.
If you’re an entrepreneur today, I wonder if you couldn’t sit down right now and list out all the things you too have convinced yourself of; what are the beliefs you hold about being a “successful entrepreneur”? I would bet the farm you’d be writing out a significantly long list (which I would love to read).
Of course, some of our beliefs hold true: that an entrepreneur has to be able to work the 18 hour days, not for the money, but because they have an idea that they need to find out if the world wants as well. But, believing you have all the answers, especially when you’re just starting out, is going to ensure only one thing: that you are your own biggest stumbling block on the road to success. Don’t be a know-it-all entrepreneur!
By Chip Wilson
It’s no secret that I’ve done my share of hiring (and firing) in my day, for better and for worse. I’ve learned a lot of lessons on my own journey and wanted to share what I have come to identify as being of the utmost importance when searching for that “perfect hire”. It’s more simple than you’d think – don’t hire boring people!
My approach has always been to kick off the conversation by asking the applicant what it is they do in their spare time: “tell me, what do you like to do?” This is how you find out whether they are living in choice and what choices they’re making.
I begin the interview process assuming that everyone in the chair across from me is amazingly interesting and has the dexterous ability to learn how to do new things and think in new ways at the drop of a hat. Because of this generous assumption, I always want to hire a person who is reading, creating, expanding and fulfilling measurable goals in their “spare time”. I want to hire the hobby creative writer or hobby birder – people who are excited about their jobs, excellent at what they do, but choose to be involved in additional creative outlets or ventures. Because being intentional about how you live your life, and investing time in your self-growth is never boring.
By Chip Wilson
In the 1990’s, athletic competitors were Nike, Adidas, Puma and Reebok and the focus was all on shoes. Reebok owned the women’s “step up” market and could have become the dominant player, but they bet the farm on the competitive men’s sponsorship model and failed. They were then bought by Adidas, which had world dominance in soccer (especially as their younger German brother, Puma, fell behind). Adidas used Reebok as a vehicle to win the American non-soccer market.
Understanding logos is an important part of understanding the differentiation in the athletic market by sex, age and income. When I was young, I wanted t-shirts with big logos. I wanted other people to understand who I was, and because I was inarticulate and insecure, the logos presented my image and talked for me. I hoped my logo marketing would have the girls think I was cool. As I grew older and became more confident, I no longer needed the large logos. At the same time, I stopped growing and I could afford better quality clothing that lasted longer. I didn’t want disposable t-shirts and I wanted discreet logos. I wanted my clothing to match the quality of person I thought myself to be.
This insight influenced how I developed my companies. In my initial three businesses of surf, skate and snowboarding, the target market was 14-18-year-old boys. Logos were large and necessary. In the 90’s much of Nike’s and GAP profit came from large logoed t-shirts. In 1997 this trend came to an end leaving many Nike retailers with unsellable inventory.
Until 2006, athletic companies focused on low margin shoes. They were not apparel people and clothing was just an afterthought. They did not understand that athletic clothing provided higher margin and larger sales than shoes. The first forays into apparel from Nike, Adidas and Puma were for the most part non-functional and non-technical. Later on, Under Armour exploded onto the scene by exploiting a market gap in men’s football technical tops (“first-layer” shirts worn underneath uniforms) and building an entire business around it. Under Armour peaked when it raised money to fund its sponsorship wholesale model. Like Nike, they used the sponsorship model of paying athletes to endorse its products. Because Under Armour used a large logo format for branding, the product appealed primarily to teenage boys and insecure older men who wanted to look “in the know”. It hasn’t mattered that Under Armour sponsorships seemed “bought” as the wearers of Under Armour product were not sophisticated enough to care.
Nike applied the same model in its apparel, but used a smaller logo and placed it on the left breast – in the same spot as knockoff corporate golf shirts. Because Nike was more discreet, it sold product to a more sophisticated buyer than Under Armour. Nike’s big sponsorships “appeared” to be more authentic as their partnered athletes wanted to use the product.
I’ve always believed that savvy consumers see through the bought loyalty of sponsorships. Indeed, the more sophisticated the buyer is, the more likely they are to appreciate true garment technology rather than celebrity endorsements. At the end of the day, these consumers are after a product with better quality and a smaller logo. The athletic companies are fortunate because consumers give them permission to use their logos on clothing a person can wear anyplace, anytime.
Adidas lost ground in the early 2000’s as their purchase of Reebok did not pan out. Nike, meanwhile, continued a very long and successful push into the world’s number one sport (soccer), while also driving aggressive shoe innovation. For a while, it appeared as though Adidas had lost its mojo and Nike would dominate the shoe market. However, Adidas had the foresight to start a joint venture partnership in China, which resulted in thousands of Adidas-branded stores there well before any other competitors.
In 2014, Adidas successfully reintroduced retro shoes and quickly followed up with more innovation. Overall, Adidas had among the best athletic stock value increases in 2017. I’m interested if they can leverage their future with a new foundation.
In the early 2000’s Adidas had very little creativity inside the company, so the company made a strategic move in 2005 into a “collaboration” with Y-3 and then Stella McCartney. Adidas basically contracted out what they were not good at and have continued down this lower margin path. Puma made a brief comeback in the mid 2000’s when it was bought by a Hollywood producer who strategically placed Puma product in movies. He bought low and sold high and Puma has floundered ever since.
The biggest innovation and opportunity came with lululemon. In 1998, we invented the ‘streetnic’ (street technical) market and the technical vertical apparel business. Not only did lululemon have zero competition in the women’s athletic apparel market, but the women’s market was twice the size of the men’s business. As a bonus, the vertical model was far more profitable than the wholesale business as lululemon eliminated the wholesale middleman and did not use low profit shoes as an entry point to sell the apparel. Lululemon was started in 1998 and hit the ground running, since I already had 18 years of prior vertical retail experience that spanned from design to manufacturing to bricks and mortar.
There are numerous reasons why the wholesale model for athletic apparel is flawed. The established wholesale companies are forced to inject minimal technology into their product because they share their profits with their retailers and cannot afford the extra costs. The athletic wholesale companies make samples to show buyers far in advance of store delivery and the process takes 18 months. Even worse, retailer buyers tell the athletic companies what they will buy so innovation and creativity is directed by third party merchants who buy based on last year’s sales metrics. The tail is wagging the dog. Wholesale buyers consistently weaken the brand power of a manufacturer because last year’s, best-selling commodity products have less risk and makes for easier planning. It also makes for a boring product with little innovation.
By contrast, lululemon was beholden to nobody with a mandate to make a better-quality product at a better price than a wholesaler. Because lululemon had no one to show samples to, the turnaround from design to store floor only takes 9 months – amazing for technical fabrics. Lululemon became a fast “design to store” operation. Wholesalers with less margin are forced to follow lululemon’s forward designs with a product of less quality. For example, the wholesalers use inexpensive Polyester and lululemon uses expensive Nylon. Polyester holds in stink and nylon does not.
Wholesale has another huge downside. Nike and Under Armour suffered tremendously in 2016 with the bankruptcy of Sports Authority. Not only did the wholesale companies not get paid, but they were stuck with massive amounts of inventory in production for future seasons, which they could not ship to a non-existent Sports Authority. Nike and Under Armour worked to unload this inventory at low margins through entire 2017. Wholesalers sales dropped, inventory increased, and available cash dried up. Under Armour’s bonds were classed as junk and Under Armour’s market cap dropped from 18 billion in 2016 to 5 billion in 2017.
Lululemon is in full control of its cash flow as it gets paid each day by its own stores and ecommerce. In 2012-2013, the lululemon board and CEO stopped reinvesting in the foundations of the company and were unable to take advantage of what was the biggest change in the way people dressed in the history of the world. Lululemon’s leadership operated for quarterly reporting and was blind to future exponential growth and it lost its leadership position in apparel. Lululemon let the analysts into its front yard then into the living room, then the kitchen and then into bed. Analysts knew everything about the company except what made the company great, and what made it money.
In 2017, after getting the crap kicked out of it with the bankruptcy of Sports Authority, Nike has announced its first partnership with Amazon and has declared it will only have 40 quality wholesale retailers by the end of 2018. Going forward I think Nike has made the tough decision to change its business model for the future and it has great legs. Its stock is fairly valued, and I would invest as I believe it to be a better performer than market average.
On the surface, Nike’s new model does not rid it of wholesale pricing markups. Nike must align wholesale offline pricing with online pricing, as its online pricing cannot undercut its wholesale accounts. If it undercuts the wholesalers the partnership collapses. This leaves Nike open to a competitor who does not have to support wholesale pricing markups and can develop a better product at a better price than Nike.
However, I am sure Nike will produce a different styled and priced product for online to create a dual-brand pricing model. Nike has enough global presence to use its mega stores as marketing centres, while leveraging ecommerce channels to champion lower prices as part of a long-term plan to diminish competition and ultimately improve profits. An uniformed analyst will punish Nike for lowering margins as it morphs into a new business model.
Meanwhile, lululemon is introducing shoes made by another company into its mix. A brick-and-mortar shoe store usually has a large back room and a small front display area, whereas apparel is the opposite. I suspect lululemon is testing shoes and has prearranged a deal to buy the shoe company after testing. Lululemon is using its large brick-and-mortar presence to show shoes for ecommerce, but not stock them in the stores. The APL shoes which lululemon now carries do not have the technical advantage required to authentically enter the market. This is like Starbucks selling high volume, poor quality food without understanding that food quality is subconsciously correlated to coffee quality.
Lululemon has the possibility of reimagining its retail footprint as ecommerce showrooms for not just shoes but for apparel. It could show five times the number of styles and ship direct from a single Asian warehouse to the global customer and minimize duties and shipping costs to the final consumer.
Under Armour is developing e-commerce only stores in China as a way of circumventing the wholesale model as they go internationally. This will be a brilliant international strategy if it works. A pure ecommerce play will net higher margins than lululemon’s brick-and-mortar model, which has to account for retail overhead in the pricing of its goods. However, Under Armour will also have to support its global wholesale pricing in China, which minimizes the effectiveness of its ecommerce play.
I suspect that lululemon does not have the courage nor the vision to lower margin and reflect the natural shift to a lower-cost but more profitable ecommerce model. Why? Because uninformed analysts would panic over short-term lower margins and guide investors away from the stock. If the analysts are scared, then so is the lululemon board, even though their mandate is to drive long-term value.
No real ‘streetnic’ competitor to lululemon has emerged yet. But just like lululemon had appeared with a better business model than the wholesaler (because it eliminated the wholesale middleman and delivered a better-quality product at a better price), a pure online competitor can do as well. The problem is that pure online competitors seem unable to grow their brand or attain critical mass of shoppers to buy pure ecommerce without some bricks and mortar retail. Customers need to know the fit or quality before confidently shopping online – this is forcing pure ecommerce players to open retail showrooms as a branding expense.
Ecommerce play works phenomenally well for lululemon, because it has enough global presence for consumers to understand its quality and sizing proposition. In addition, stretch fabrics made with 12% lycra have a forgiving fit and generate far fewer returns – among the lowest in the world of apparel. Furthermore, because Vancouver has a significant Asian population, it already understands sizing for the crucial Asian market.
Athletic apparel doesn’t emerge out of a vacuum. The physical location of a company is critical in recruitment, retention, culture, etc. Under Armour is in an uninspiring city of Baltimore and has a high employee turnover – especially in creative departments. Adidas, in Germany, has the same challenges, because of its remote rural location. Nike is in Portland, which is a very cool city but not international, and its fashion plate is fundamentally conservative mid-America. The athletic arm of the Gap, Athleta, is based in San Francisco, but it is merchant-run and not design-led, and past sales metrics leads its buyer to select apparel for the low price, low quality, non-athletic poser market.
Lululemon has the optimal physical location – Vancouver is international in outlook and operates business on the same day as its Asian retail and manufacturing business. The city also has a large population of athletes and creatives, including expats from Europe and Asia who bring global experience and a distinct sense of style. Unfortunately for lululemon, the board tends to overlook these resources, instead preferring to hire fashion and wholesale executives from the very companies lululemon does not want to be.
Lululemon and Adidas have a large competitive disadvantage to Nike and Under Armour as maternity leave is one year in Canada and Europe. Lululemon’s core employee is the same age as its core consumer, a 32-year-old female athlete. As 95% of lululemon’s designers are females, most of which take their one year maternity leave with each child, it is absolutely crucial for lululemon to hire 6 months ahead of the curve with a superbly strong pipeline. But the pipeline investment has been lapsing, as the expense does not work for maximizing short-term public financial reporting. The loss of intellectual capital and high turnover due to the lack of strategic planning around this issue has cost lululemon over 200 million dollars.
Embracing a global sensibility can give lululemon an edge as it continues its international push. This global mentality is second nature to European companies like Adidas, which have always thought beyond their borders. Nike has been around long enough to be global and, like lululemon, had its quality roots in Japan. Plus, Nike’s success in the soccer realm has only increased its international credibility. Under Armour, by contrast, has a firmly American identity—rooted in American football and American athletes. This appeal does not necessarily translate internationally.
By contrast, the lululemon model—centered not around sponsorship but around a real community of brand loyalists—works internationally and is more authentic, self-generating and longer-lasting. The community model will continue to win the long-term brand hearts of customers. Lululemon currently boasts strategy but little vision, which limits its potential. Specifically, there’s a great deal of talk of innovation for the analysts and press, but I see very little true progress.
When Nike comes out with real innovation like flyknit (the lightweight, high-strength shoe fabric), the world knows about it. This elevates the Nike brand, and their entire product line can demand a higher margin. Lululemon, by contrast, has focused too heavily on short-term fashion, rather than long-term technology, to stimulate sales.
From 2013-2015, being unable to trade in lululemon stock without upsetting the market, I invested in Nike and Under Armour, precisely as they were ramping up for a massive growth curve. I did very well with these stocks, but not well enough to offset losses from my sizable, 30% position in lululemon, as the company continued to lose market share and value. I did well to sell Nike and Under Armour before the Sports Authority bankruptcy – not because I was smart, but because I believed ecommerce would take its toll on wholesale retailers caught in a commodity game.
I think Adidas has a good foundation and now can leap forward. With Nike leaving its wholesale accounts, Adidas could do very well filling the gap. However, the Sports Authority bankruptcy lesson will hang heavily on Adidas. Adidas massive presence in China will prove to be more profitable as the income level of the Chinese continue to rise.
Under Armour stock price has risen from the grave in 2018 and is rising in 2018 with all other retailers who have proven to analysts they can thrive in the new world of ecommerce. This is one company I believe doesn’t have a solid brand foundation, as its teen market and apprehensive adult market is finicky. Under Armour’s entry into low-end department stores like Kohl’s to replace its Sports Authority sales is a short-term fix for long-term brand pain. The stock is too risky for me.
Lululemon’s market value is marginally higher than it was five years ago in 2013. In comparison to the overall stock market gains and the massive growth in the industry, it lost its leadership position due to lack of reinvestment and is worth billions less than its potential. Nonetheless, it still has the best business model if a perfect combination of ecommerce and brick-and-mortar plays out.
Lululemon’s biggest opportunity is taking advantage of high vacancy rates to renegotiate its leases at a 30% discount over the next three years. With these savings, lululemon can continue to make brick-and-mortar super profitable and drive brand like no other athletic company. Lululemon is five years late when it comes to expansion into global markets, and it is doing one billion less in its men’s business than it should. However, competitors are also not changing fast enough and lululemon has far more opportunity than it realizes. Lululemon will easily add another 20% to its value in 2018 despite its heavily weighted Private Equity ownership that is poised to sell down its position. Given my experience with Private Equity, I imagine short-term decisions might be occurring to boost short-term stock value to allow Private Equity to sell down.
Everyone, including me, is wondering how Amazon will affect the ‘streetnic’ market. I am careful not to be one of those people who said no one will want a home computer. Technical apparel is a different business than disposable streetwear. The technical apparel business is driven by people who design mountain gear where clothing must work for survival. To eat, live and breathe the technical business, a leader must be an athlete who envisions apparel as a bridge to solve all of life’s problems. This fanaticism drives quality, brand value and higher margin. I think Amazon and Alibaba will only win the non-commodity ‘streetnic’ market by buying brands where the owner is incentivized to continue being a technical problem solver.
In late 2017, I was asked to meet lululemon’s Creative Director who told me he was thinking of leaving lululemon because financial metrics were inhibiting design. I met him with two of his team members and he showed me his design vision for lululemon. At the end of the meeting, I told him his presentation was the same one I made for lululemon twenty years ago. It became apparent lululemon prioritized fashion designers and fired athletic designers. Lululemon is generally not innovating but only adding fashion to past innovations. This inevitably leads to a low-margin commodity fashion business. The board has strengthened lululemon’s back-end to provide for superb operational stability. But if the number one creative hire is twenty years too late to the party, something is wrong. Lululemon lacks leadership with the ability to interview and hire superior creative people to differentiate its westcoast branding position. When Private Equity controls an innovative product company, their route to increase value is usually to buy innovation. When buying innovation, they have to arrange for the founder to join the board or management. So, look for lululemon to start buying brands to increase value.
Under Armour made some terrible investments in digital technology in 2016. I am personally anti “built in digital apparel technology”. Digital garments feel uncomfortable and I observe people think health metrics are a great idea for forty-five days and then stop using them. People don’t want to think that hard.
When I was seven years old my dad told me that an electronic gadget would flex over my wrist and it would control my life. I overheard Steve Wozniak say the only thing he hated about the iPhone was the bulk in his pocket. The “life control wrist monitor” will run our lives. It will prick our skin monthly to access fluids. It will monitor all body functions and compare personal data to big data and provide a daily synopsis and probabilities of possible issues with solutions. It will also suggest health specialists to book virtual appointments.
I believe the future of apparel will be a single stretch, form-fitting Star Trek outfit (like Olympic athletes) which, due to 3D food printing technology, will fit everyone perfectly. I will own only one garment and I will wear it every day for 18 hours a day. Fabric technology will be embedded and the garment will not stink or stain. It will flex perfectly with the body and control heating as well as cooling with flexible vent holes or twisting fibres. I will choose the cosmetics of the outfit from one of the hundreds of design apps on my wrist phone screen and my stretch outfit will instantly change color or print.
That is the future for technical clothing, in my opinion —and today’s smartphone and technical apparel companies are poised to be at the forefront of this revolution.