China and the Future of Technical Apparel

Group 2Back to the Beginning

This book is not so much the lululemon story as it is the history of athleisure – or as I call it, “street technical” (streetnic). Athleisure is a default term that New York fashion media used in the hopes they could claim authority over the single biggest change in how people dressed in the history of the world…a change the fashion media missed out on. Street technical apparel, which began in 1979, is still in its infancy 40+ years later. I believe true technical apparel – that is, fashion that is not just made to look technical – will continue to save us time and assist mankind in performing to our greatest potential.

After experiencing the exponential growth of lululemon from its founding in 1998, I also kept my eye on another brand across the water in North Vancouver: Arc’teryx. Almost since its inception, Arc’teryx held the title of the world’s best technical outdoor jacket brand. Ironically, it seemed to have gotten this reputation almost by accident.

Arc’teryx got their start by making the world’s best “life or death” climbing harnesses, before deciding to go into apparel. In their ignorance of how to make apparel, Arc’teryx did what they knew best – they made outdoor jackets like they made climbing harnesses. The designs were overbuilt, with military-level quality control. The construction was superior to previous jacket construction and was consequently very expensive.

However, living in Vancouver and snowboarding at the nearby ski resort of Whistler, I noticed that mountain guides were almost all exclusively wearing Arc’teryx jackets. Arc’teryx had exactly the same design ethos as lululemon, but from a different context. I remember thinking that if I could buy Arc’teryx and implement lululemon’s innovative retail formula, Arc’teryx could be just as valuable as lululemon.

Every couple of years from 2004 onwards, I returned to the idea of buying Arc’teryx. But lululemon was a rocket ship. We could barely hire and develop people fast enough to keep up with the demands of the business we had…we couldn’t possibly take on Arc’teryx, too. It was one of life’s great opportunities but one I was outwardly resigned to letting go of.

Finally, in 2018, though I still owned 22 percent of lululemon, I decided to return to my plan of actively acquiring Arc’teryx. I hired an investment banker to investigate a bid.

Arc’teryx had been sold a few years earlier to a sporting goods conglomerate out of Helsinki, Finland, called Amer Sports. In addition to Arc’teryx, Amer owned a number of other impressive global brands including Salomon in France, Atomic Skis in Austria, Peak Performance in Sweden, and Wilson Sports in Chicago, to name a few. However, I knew Arc’teryx could not fulfill its potential with its ultra-conservative approach to business.

Amer tangled their public financials in a way that made it hard to evaluate, and consequently difficult to take over. But after 30 years in the apparel business, I can observe a store for 10 minutes and estimate what yearly sales and profit are with less than a 5 percent margin of error. I knew Arc’teryx still had great upside from within the crowded group of Amer brands.

I became more and more excited about getting involved.

The size of the deal was going to be over US$5 billion. I knew I did not have the expertise to succeed alone in a deal as complex as the one that was proposed. I determined I would need to find a world class private equity firm and a partner in China. Unbeknownst to me, the same week I was working on my offer, an offer to acquire Amer came in from a consortium that consisted of Anta Sports, the Chinese leader in sportswear and athletic shoes; FountainVest Partners, a private equity firm from Hong Kong; and Tencent Holdings, a Chinese multinational investment holding conglomerate. Together, they’d made a bid at US$40/share, or US$5.9 billion.

My due diligence on these companies told me they were phenomenal.

Anta Sports in particular, interested me. The company had soared past its competitors in 2020 to become the dominant sportswear player in China, with 11,000 wholesale Anta stores and 1,500 Fila stores. The 48-year-old leader of Anta, Ding Shizhong, and his family had built the company from the ground up as an athletic shoe brand before acquiring Fila’s China operations and subsequently expanding their sportswear offering. I was encouraged that Anta understood vertical retailing and I was sure they knew just how lucrative the direct-to-consumer business model could be.

Building on those strengths, FountainVest was led by an experienced ex-Goldman Sachs team with an impressive resume of deals. This deal would be their biggest.

I was disappointed that the consortium had reached Amer before I had heard of their plans; however, the players in the consortium were a dream team. I thought that perhaps I could participate as a partner and that they would see value in my experience, location, and understanding of the Vancouver technical apparel market.

It seemed possible to me that Anta was making their move to become a global company and that the Amer deal would be the first step in that direction. I believed that the accelerated success of Amer brands was possible if backed by the retail machine Anta was running in China. Why? By 2018, I had travelled to, partnered with, and produced products in China for over 30 years. I have observed China’s massive changes and determined that China has a distinct advantage. In fact, I believe that China’s greatest strength is what Western liberal democracies typically consider to be China’s greatest weakness: valuing group identity over individual identity. China’s government and public company governance structures appear to allow for quicker decision-making. China’s decisions are weighted towards the good of the whole, with less emphasis placed on minority interests or on pressure from a minority of voices on social media. I believe that quick decision-making may be the number one differentiator in the midst of the world’s fast-paced digital revolution.

In the end, I became a 20 percent partner in the Amer deal. I also invested $100 million USD in Anta to become a 0.06 percent shareholder. In 2021, Anta and lululemon are valued at $52 billion and $41 billion USD, respectively. Lululemon briefly passed Adidas in value in 2020 and, extrapolating to the end of 2023, lululemon will permanently pass Adidas; however, Anta will surpass both Adidas and lululemon.

Now at the age of 65, my sole job is to support and expand upon the vision of Chairman Ding as the leader of our consortium. In this role, I get the opportunity to think critically about organizational structure and to help find great people to build out our team. My excitement comes from believing that Amer creates the greatest possibility to elevate the lives of 20 and 30-year-olds via transformational development inside the athletic business. This is what I was meant to do.

As I edit this in early 2021, we are emerging from the COVID-19 virus crisis. Global retailers have struggled and while ecommerce sales have skyrocketed, they have not come close to making up for the loss in store sales. What is clear to me is that Euro luxury and fast fashion, as we know them, will likely continue to die over the next two to three years and e-comm only companies from China with economy-of-scale pricing will become the new Zaras of the world.

As during the world wars of the last century, people will lack the funds to be frivolous. I believe health, longevity, athletics and spending time outdoors will become even more important. It is obvious to me that functional, comfortable, stylish, quality athletic brands will take a great leap forward to the detriment of disposable fashion apparel.

I foresee a great leap forward for bricks and mortar retail. The economics of running a retail store prior to the COVID pandemic was barely break-even. E-commerce had taken the guts from retail stores, and then the COVID-19 pandemic delivered the knock-down punch. However, retail stores are highly economic at half the rent, especially when stores can run their e-commerce business from the same location. Bricks and mortar shopping provides the brand essence for online purchasing. Retail stores can provide the tactile feel and olfactory sensations and can confirm sizing so customers can buy off e-commerce with confidence, which in turn reduces the number of product returns.