After Bob

Coke and Pepsi

That January, before he left us for good, Bob wanted to remove the first and most prominent branding statement from our Manifesto and our shopping bags.

“Coke, Pepsi, and all other pops will be known as the cigarettes of the future. Great marketing, terrible product.”

A typical businessperson would advise against this branding approach because of the risk of alienating people. Exactly! We didn’t want anyone who was wearing lululemon to be drinking Coke or Pepsi. It was bad for our brand.

In the ’70s, I correlated lung cancer with cigarettes before there was any real data. I did not allow smokers into the Westbeach store. By driving these customers away, my core customers became more fanatical.

In the ’80s, I correlated obesity in the US with Coke and Pepsi. Coke and Pepsi had marketed themselves as the American dream, but I believed it was one of the a primary reasons Americans were getting fat. I also knew only a company with absolute integrity could stand up to their massive marketing machines.

I wanted our Super Girl market to know the lululemon brand was not for soda drinkers. If we were aligned with our iconic health-inspired Super Girl, I knew the rest of the world would follow.

After we put our declaration on the Manifesto, Coke and Pepsi threatened to drown lululemon in lawsuits. I had always thought of lululemon as a social experiment. I believed our company could be the driver for social health. I believed I had a platform of integrity and an obligation to society to speak out against unhealthy things even if they were not yet scientifically proven.

“We had absolute conviction in what we were saying,” says Deanne Schweitzer. “We had to do a lot of research, due diligence, and legal work to prepare our side of the story and throughout that time we were in the process of going public. I would always follow Chip in focusing on what you believe to be true. In this case, we focused on supporting the claim we had made, and in the end, it was completely supported by facts.”

Bob made a point that since people were now much more aware of the health risks posed by colas, the item made the Manifesto seem dated. He said we’d already played our part. President Bill Clinton had led efforts to take pop machines out of schools across the US, and I wondered if the lululemon Manifesto had played some part in the President’s ruling – that is, until I attended the Clinton Global Initiative meeting in New York, sponsored by Coca-Cola.

I never wanted lululemon to appear dated. I deferred to Bob, and the slogan came off our Manifesto. The decision to remove this quote from the manifesto was a big mistake on my part.

A Coverup

The Manifesto on the side of our shopping bags was such a success that I wanted to take my theories a step further. I couldn’t get the entire Manifesto on the side of the small shoppers, so I started writing a list of short health philosophies I held.

When the health philosophies were printed on the side of the shoppers in 2008, Bob thought there would be public pushback and unwanted publicity. He ordered the side of the bags to be covered up with something vanilla. There was some online discussion, but social media was still in its infancy, and the whole incident blew over. The fear of standing for the health of our customer with perceived controversial statements was too much for Bob and the Board of Directors.

Resetting our Leadership

The CEO transition plan was for Bob to stay at lululemon until the fall, at which point Christine would take over.

In early 2008, Christine moved her family to Vancouver and completed the Landmark Forum. She was officially the first externally-hired executive to engage in our newly-formalized cultural onboarding.

Within a few weeks of Christine’s arrival, Bob was MIA. He was still being paid, but he was absent. After it became clear he wasn’t coming back, my instinct was to fire him. Why were we keeping someone around who wasn’t doing the job for which we were paying him?

But the Board of Directors didn’t want to fire Bob. As they explained, lululemon had not been public for long. Firing a CEO – even an absent one – would be bad optics. Investor confidence could be affected; analysts and advisors might recommend against buying lululemon shares. It just wouldn’t look good if we fired Bob. The company had to suck it up and pay him because the lululemon Board was willing to forego lululemon’s integrity and not release the news to our shareholders. It made me sick.

We were careful about the public message we released about Bob’s departure, simply saying he would “retire” from his position as CEO of lululemon at the end of June.1 I informally slipped back into the role of CEO, got rid of Bob’s hires, and righted the ship. It was a breath of fresh air. The silver lining of our time with Bob was learning what we didn’t want.

I still didn’t know why Bob had disappeared. As I thought about it, I was reminded of that private flight that Bob and I had taken with David Mussafer several months earlier. Bob and David had gotten up from their seats and had taken their conversation into the galley for privacy, but their voices carried – especially as things got more heated.

“I did it,” Bob kept saying. “I did it, I got the stock to X amount for two months, now pay me.”

I now believe Bob had worked out a side deal with Advent that enabled him to cash out if the stock got to a particular value for two consecutive months. Perhaps there was a public disclosure about such an incentive package, but it was never brought up in a Board meeting to which I was privy. Had I known, I think I would have watched for short-term decision making. This was a clear case of Advent working for themselves and not for the good of the company.

In February 2008, MarketWatch summarized the situation like this: “All [Meers] had to do was to be on the job when lululemon’s LULU, +0.04 percent share price hit a certain level and its private-equity investors sold a slug of shares . . . this puts management’s interests in line with private equity, not necessarily with public shareholders.”2 The same analysis described the inherent dangers of these kinds of deals because they “[align] management’s interest with the wrong group of shareholders – those who are cashing out.”3 It will be important to remember this paragraph as I continue to demonstrate conflicts and self interests of so called “committed directors” in the pages that follow.

I realized that Bob had done everything in his power to get the share value to where it needed to be to trigger his exit, and that he was likely incentivized to maximize that share price. The easiest way for him to do this was to carelessly open new stores.

I realized then that it had never been Bob’s intention to set lululemon on a course of sustained, long-term growth. He was incentivized for short-term results, also to PE’s David Mussafer and Tom Stemberg’s benefit because they both maximized their share value and cashed out.

In Darrell Kopke’s words: “I was with lululemon for the IPO process. Bob Meers was there to protect himself during this process, so he brought in his own people. There was a pure, selfish manipulation of the market for their own benefit. It changed the company from one with a legacy on the health of its community to one that cared only about getting stock prices up to maximize options. I learned about revenue smoothing and presenting oneself on an earnings call to make the stock look good.”

Public earnings calls where the management reports on the financial metrics of the last quarter to Wall Street analysts “seemed” to be a waste of my time. The analysts knew so little of the technical apparel industry and they kept trying to put old streetwear metrics to a new way of operating. For example: our employee development costs were way above industry average and so management and the board kept trying to cut costs, unaware that this was directly correlated to the best sales-per-square-foot. Analysts also punished us if margins dropped, instead of looking at profit. One of my strategies was to lower pricing to take market share in certain categories to dominate the long run. The last thing a public CEO wants to explain is why margins are dropping when sales are increasing. We had multiple strategies that became prohibitive to public reporting.

In the end, Bob made around $30 million on stock appreciation. Instead of announcing that he was no longer the CEO, he simply walked away. As a result, Christine’s rise to CEO was expedited, and her development under Bob was truncated, much like the development of the Power Women Christine subsequently hired underneath her.

There was a lot for me to learn from the Bob Meers era. It was also my introduction to the art of looking good to maximize short-term gains.

Christine Becomes CEO

Lululemon’s shareholders’ annual general meeting (AGM) was held in June 2008, and Christine Day was publicly appointed as CEO. It was a boon to investor confidence, with magazines like Forbes describing it as a breath of new life for the company.4

Unsurprisingly, the US side of the business was struggling, and stores were not hitting their projections.

The first thing we did was coach Christine on our fundamentals. Christine had solid real estate experience from her time at Starbucks, and she knew what a good deal looked like. She reset deal terms, brought the economics back in line, and looked to the streets and the lifestyle centers to complement the mall stores. We also hired store staff from the local communities and invested in their training.

Just like Bob had done with the Coke and Pepsi slogan, the first thing Christine wanted to do as CEO was to eliminate another of our Manifesto slogans: “Children are the orgasm of life. Just like you did not know what an orgasm was before you had one, nature does not let you know how great children are until you actually have them.” We thought she was joking as that particular statement and the greater Manifesto were the number one reasons people said they applied to work for lululemon. After we realized she was serious, we took it as a good moment to coach Christine on how tipping point branding worked.

Using different cultural tools, we had learned ways to be authentic about being inauthentic; we’d found new ways of being open and unapologetic about who we are and how we protect ourselves. This understanding and training allowed us to coach each other in moments where we reverted to being inauthentic.

Christine had received one call about the slogan, from one offended person. Her direction to remove the quote was a response based on reaction and fear, and not one of choice. She may have been new to our culture, but Christine had completed our executive onboarding. With coaching, she quickly came around and withdrew her directive.

The Great Recession

The 2008 economic downturn, now known as the Great Recession, began only a few months after Christine became CEO. This major event – considered the worst stock market plunge since the Depression in the ’20s – had been building since the American subprime mortgage crisis in 2007.

Things only got worse from there, culminating in the Lehman Brothers investment bank collapse in September. Despite massive government bailouts, the damage was done, and everyone was hit hard. The DOW fell 500 points, and there was a massive sell-off of stocks on Wall Street.

It was scary to watch our stocks drop from $45 to $5, almost overnight (especially after we’d gone public at $18). All at once, nearly every company could be bought for cents on the dollar, and everything we felt we’d achieved by going public was suddenly underwater. Nobody knew if anyone, anywhere in the world, would be working the next day.

Times were tough for several months. We didn’t have to lay off much staff but hiring slowed substantially. We closed our stores in Japan, and we saw a much slower holiday season.

However, overall, lululemon weathered the storm. Through the worst of the recession, the fundamentals of lululemon seemed to be as strong as ever, and we didn’t have to sell our soul as so many other companies did. As we came to the end of 2008, we didn’t have to focus our efforts on merely staying alive.

It occurred to me that in past downturns, people had been known to turn to gambling and drugs, but in the new world, people were managing stress with athletic endorphin hits. My theory seemed to be verified as our sales continued to soar.

E-Commerce Revisited and the Lab Concept

The excess inventory triggered by the Recession drove us to invest in e-commerce, and our platform launched in April 2009. To supplement it, we sent out widespread email blasts to our customer base whenever we had a new product. E-commerce was very successful for us - even with a limited product line available, we were quickly selling inventory almost as fast as we could stock it.

I was always concerned a pure e-commerce play (without the costs of retail stores) could under- mine lululemon just as the vertical model I developed was undermining wholesalers. The Board was very keen on e-commerce because they could see it working in other companies for which they were also directors. At the time, if I had to choose between e-commerce or owning our own manufacturing, I would have picked manufacturing. But at that moment, manufacturing would not have helped our excess inventory position created by the financial crisis.

In retrospect, the recession was the best thing that ever happened to lululemon. We stopped growing, got our processes in place and reset our foundation for growth. We had nothing else to do. Even during the recession, our stores made their way up to sales of $1,000 per square foot in the US while maintaining about $3,000 per square foot in Canada (the average retailer does about $650 per square foot).

I had always wanted to recreate the laboratory inside the store like we had in our original Kitsilano location. We had an unused lease in Vancouver, and we had $1 million dollars in excess fabrics, zippers, and trims. We had an internal “quick turn” pod to turn this excess inventory into cash, but I wanted a fishbowl in which to test new designers.

We hired new designers and turned them over every three months. We let them loose on samples and excess fabric in the floor space of the new building to create street clothing from technical fabrics. With creative freedom, these new designers brought a great dynamic into the brand in a highly uncertain time.

My experience told me we had to go through 15 designers to find one amazing designer like my wife Shannon, or four or five others like Shannon Savage (another incredible designer). A designer who could consistently create multiple new ideas, four times a year. I knew finding a Shannon Wilson or Shannon Savage-type creative was more valuable to the bottom line than our CEO or CFO.

We would open more labs in New York City’s Soho and eventually another in Vancouver’s Gastown. It was one more innovation that helped get us through very uncertain times and develop local athletic design talent unavailable anywhere else in the world.

Effects of the Recession

Christine did a fantastic job with real estate deals, resetting our strategies to a fundamental successful formula, investing in e-commerce, and working with the back-end public details and financials. We came out of the Recession with increased cash flow and a massive surplus of money.

On March 9, 2009, lululemon’s share price was hovering just under $2.25, far less than what it had been just after we’d gone public in 2007. From there, however, our share price began a rise that would continue steadily until 2013.

Analysts at Thomson Reuters were impressed with our performance and the uniqueness of lulu- lemon’s position in the market. “Few Canadian retailers have found this kind of success expanding south of the border,” Reuters said.5

Christine hit the ground running and the next two years were golden.

We didn’t have a brand or marketing team because our brand spend was hidden in people development, quality processes, store locations, and anything else “off the cuff” I wanted to do in response to social changes in the world. Everything we did seemed to strengthen the brand.

I kept my desk in the middle of the design area, and we produced our best innovations and products ever. My wife and I hired a dancewear designer named Antonia Iamartino to bring femininity to the functional yoga look. This idea put us four years ahead of anyone even thinking of competing with us.

From an innovation standpoint, we set the goal to become the best athletic bra manufacturer in the world by 2013. We contracted the University of Manchester to study breast movement. Lululemon produced radio wave bonding seams, laser venting, and cell phone pockets on every garment. I brought silver threads into our garments to kill bacteria and to end stink.

A “home run design” (a design that drives company profits) was the Scuba Hoodie. From my years in the surf, skate, and snowboard business, I knew the hoodie was an iconic garment and my wife Shannon had made a test version of it in 2001. I wanted to make the best hoodie in the world. The absolute beauty of vertical retailing was that it allowed us to make what no one else could afford. With my friend Elky Hon, we developed a super-soft cotton fabric, thicker than any hoodie ever made. When we combined the fabric with a scuba neck and a 2-inch-wide hem at the hood, we had reinvented a classic item. Finally, by inserting the logo on the front seams, we realized that the Scuba Hoodie would account for up to 20 percent of sales at Christmas in 2009. The key innovation that made this garment look perfect after five years of wear – we preshrunk the garment before we inserted the zipper. With this method, the zipper never buckled, even after multiple washings.

The Oprah Effect

Around that time, we got a call from Oprah Winfrey’s people, in preparation for her “Oprah’s favorite things” episode. Shannon and I flew to Chicago to be in the audience and give out pants. Our share price instantly jumped by $10. We had 75 stores in the US, but with Oprah’s boost, suddenly millions of Americans heard about lululemon for the first time.

To be honest, I was torn about a celebrity endorsement. I’d become more and more aware of the in- creasing influence of celebrities on many facets of life. The excitement over what a celebrity was wearing was something I couldn’t understand. It felt as though they were being paid to wear stuff, just like the Nike endorsements. That’s not what we ever wanted to do.

When a celebrity would walk into one of our stores in California, our staff would automatically want to give them clothing for free – a practice I opposed.

Ultimately, we did well in the US because we got back to basics. Instead of opening poorly located stores to push the stock price, we built more studio pop-ups, we developed the local markets, we developed our people, and we focused on education. It took time, but the community was ready for us when we came in, and that was, by far, the most important thing.

We found ourselves in a good position at the end of 2009.

Defining Who I Am

The great years at lululemon, 2008-2010, were an expansive time for me personally because I got to focus on my love of innovation.

To understand me, you would have to know I am an extremely finicky person. Everything about clothing bothers me. If I could spend the rest of my life in a Speedo, I probably would. Every fibre, seam, fit, and colour on most garments irritates me. I’m annoyed by anything un-functional.

I want my clothing to work for me. I want to know exactly how my body is positioned in any sport and I want a perfect ergonomic design to enhance my ability to perform. Pockets must be an exact length, and at the right angle. I must be able to get at my smartphone in two rings. I need a place for my earbuds. My backpacks must have a pocket for everything, and I must be able to get at my toothbrush, Kindle, laptop, phone, lip balm, cards, sunglasses, computer cords, pens, and vitamins in under three seconds.

I have to have a place for my wet clothing, and I need a backpack with breathability for stinky shoes.

I want zippers to open with one hand and to be positioned perfectly. I want venting, so air flows through the front, under my armpits and escapes out the back. I want manual venting so I can control for sweat and outside weather.

Without my background in athletics, lululemon would never have come to be. When I was a competitive swimmer, the water provided a natural cooling system. After my swimming era ended and I started running or biking or playing squash, my body went into overdrive, and it would take 45 minutes of perspiring to cool down. As someone that exercises three times daily, the very thought of putting on a non-stretch-cotton collared shirt, tie and – god forbid, a jacket – was appalling to me. That is no way to dress or live life. I saw no reason to wear clothing that I associated with an archaic way of dressing. A suit seemed to be a piece of apparel in which to look good while feeling terrible.

The West Coast had no overhangs of the East Coast uniform. Especially in the extreme sports realm.

I am a technical apparel scientist. I observe the body of every person I see in complete detail, and I log, extrapolate, and run algorithms from the information I absorb. I have done this since I was 10 years old. I see a body and correlate gender, age, sport, muscle, fat, height, race, passion, and colour of clothing.

I study bodies down to the molecular level in my desire to make the perfect garment. I want to know exactly what type of body performs best for each sport. I want to know exactly how a short, muscular gymnast operates and wears clothing differently than a wiry marathon runner.

I am passionate about solving for testicular compression when on a bicycle or during extended periods of sitting. I want to understand how different sized chests affect performance in different sports and what is needed for athletic perfection. I want to know which bodies correlate to which fabrics in winter and again in summer. I was meant to do what I do. I love analyzing why each Olympic sport requires radically different clothing to allow the athlete to perform microns better than a competitor.

I live, eat, and breathe apparel technology, and at no time in my life could I do this with more freedom than the years immediately following the Great Recession.

My mind always seems to be in the future. I have a difficult time articulating a fuzzy futuristic idea in the present with no firm data beyond gut belief.

I had to marry into humour, and my wife always makes me laugh. I have a poster near my desk that said, “If I could remember your name, I would ask you where I left my keys.”

The Olympics

One highlight of our great years was the 2010 Olympic Games, which took place in Vancouver. Seven years earlier, our city had been named to host the event. This was a great guerrilla marketing opportunity for lululemon, and I knew that we could make the most of it by unleashing the creative brain of Eric Petersen.

Like me, Eric had a very unorthodox and irreverent approach to marketing (exemplified by the Times Square yoga demonstration). I told him I had questionable respect for the International Olympic Committee. I saw the IOC as an organization that had created a great athletic event, but that contradicted what they stood for with the acceptance of sponsorship money from corporations like Coca-Cola and McDonald’s.

John Furlong, a long-time member of the Canadian Olympic Committee, was made the CEO of Vancouver’s Organizing Committee (VANOC), which was set up shortly after the city won the bid. John is one of my heroes. I have never seen a person inspire a country and an organization to do so much with so little. If John calls me up at any time, I am at his service.

I ran into John in 2004 and told him that lululemon was going to put in a bid to provide clothing for the Canadian athletes.

I absolutely did not want to win the bid to sponsor the Canadian team. Sponsorship deals usually come with a lot of IOC regulations that restrict creative freedom. My goal was to inform everyone that lululemon was going to pay top dollar to guarantee our sponsorship as a ploy to motivate Roots to pay an exaggerated premium. This money would help VANOC stage a successful Games, and that success would ultimately benefit the City of Vancouver for years to come.

For 30 years, Roots Athletics had outfitted Canadian Olympic athletes, but creating high-performance technical clothing was way outside their wheelhouse. It just wasn’t their core business, but they’d had a monopoly on providing clothing for our Olympians because no one else thought to compete for the rights. I figured that if lululemon put in a bid of $2 million, Roots would have to put in a higher bid to be an official clothing sponsor.

We put in our bid, but then the Hudson’s Bay Company stepped in with an offer of their own…$100 million. This was both to outfit the Canadian athletes and become an official sponsor for three Olympic Games. Their exorbitant bid was one of the dumbest business decisions I’d ever seen. Just like all sponsorship I had experienced, I believed Canadian athletes would end up with mediocre quality apparel and would have to pretend they liked it.

Laws were introduced to protect the Olympics’ paying sponsors and give them special legal protection. Embargos were put on words like Vancouver, 2010, Olympics, Games, winter, gold, silver, bronze, sponsor, Whistler, and medals. The legislation making this special protection legal was supposedly in- tended to address “ambush marketing” (by which they meant attempts by businesses to associate themselves with the Olympics without becoming official sponsors).

We planned to navigate around the IOC rules and make fun of their seriousness. In December 2009, just two months before the opening ceremonies, lululemon avoided all embargoed words and called the apparel “Global Sporting Event That Takes Place in British Columbia Between 2009 and 2011 Edition.”

We put the slogan on labels inside of a line of hooded sweatshirts, toques, and T-shirts, which came in combinations of colours representing Canada, the US, Germany, Norway, and Sweden, which were the countries we expected to have the most visitors at the Winter Games. We also included gold zippers on the Canadian hoodies.

VANOC couldn’t ignore what we were doing because they had a legal obligation to protect the IOC sponsors, so they sent us some threatening letters. Despite the letters, VANOC couldn’t do anything since we’d been so careful and smart about our wording. Their only real option was to express public disappointment in us.

Bill Cooper, Director of VANOC’s digital rights management, accused us of bad sportsmanship.6 Cooper also plugged the “real” merchandise being sold by the Bay.7

That didn’t matter to us. The uproar caused a lot of media attention, which was basically free advertising for lululemon. Break-even, innovative, controversial marketing won the day once again, and I couldn’t have been happier.

Vertical Victory

There had been no template for a vertical technical product, nor a how-to manual for lululemon’s business model. We were winning because we were inventing daily. We leapfrogged the East Coast “lifestyle retail industry” because we reinvented on top of reinvention.

Each day I walked into the office and asked myself, “If I had to compete against lululemon, what would I do?” This allowed me to dismantle and put back together what was working today for what would be best for the future. I was fanatical about building a moat around our success. However, getting rid of processes or products that were working at the moment but were taking resources away from a bigger and better future, was becoming more difficult. Management’s short-term bonus plans put roadblocks into any change that would affect metrics of the one-year plan.

We were also open and undefended about our weaknesses, and we coached each other whenever we found ourselves complaining or out of integrity. We enjoyed feedback because we wanted each other to succeed. This wasn’t just internal – this was the culture we brought to our customers, which they then brought to their families and to the community. Through our Ambassadors and community-building formula, we could see consistent proof of how we were elevating the world from mediocrity to greatness.

Lululemon was firing on all cylinders.

The Founder and the CEO

From 2008 to 2010, Christine and I worked very well together. It was like a great marriage where each partner appreciates the other’s differences, synergy exists, and everyone wins. Christine was a pure operator who knew exactly what to put in place to handle our high growth and multiple store openings. I was the brand builder, strategist, product innovator, and cultural founder. I knew where the market was going, and Christine knew how to build a solid chassis to get us there.

The financial crisis ended quickly. It ended even faster for lululemon because our business suffered minimally. We’d maintained our status as a cash cow, and we kept to my mandate of no debt and lots of money in the bank. I wanted lots of money in the bank because I knew opportunities would present them- selves, and with that money, we could move fast and stay ahead of future competition.

We continued the same incredible sales and profit numbers we had done since inception. We just had to keep doing more of what we were doing and hone our expertise. We were coming to the end of 2010 with no visible competition.

Our stock had climbed dramatically and our shares split. We were all living a utopian life. The Super Girl managers were driving the company. They cared, they had integrity, they were smart and responsible, and every decision they made was for the long game.

At this point I stopped attending the quarterly analyst calls. Within the definition of integrity, I felt that lululemon should be open and undefended on these calls, which we were not. We would only take soft questions from the analysts and anyone with a tough question was ignored. If we could be open and undefended, then there wouldn’t be any tough questions because there was nothing to hide. My authenticity didn’t mean providing the competition with any undue information, but rather that if we told them our worst, then they would believe our best when we said it.

Lawyers and litigation dominated these conversations, and I believed I could do more for the company by working on the company than I could in attending these calls.

In hindsight, it was a mistake for me to have stopped attending the calls. As time went on, the analysts created a relationship with Christine that poured accolades on her that she had never received before and this seemed to change her perception of herself. The level 5 leader we expected, as defined in the book Good To Great, as one who acknowledges her management as the reason for success instead of herself, seemed to be fading.