The Manufacturing Moat
By 2011, the growth of the streetnic market was picking up speed. I knew we were at the start of an exponential change in the way the world would dress. As we looked again at our competitors, I knew we needed to think strategically beyond simply big advertising.
In lululemon’s early days, we’d owned 50 percent of our main apparel factory (Charter Link, run by my good friends Frankie and Elky Hon). From a vertical retail perspective, we could change production to meet immediate needs and style changes. It was good for the factories, too – we stored fabric inventory on the factory premises and worked at full capacity, so we all made a lot of money.
The Hons were creative, smart, and very diligent. When I negotiated pricing with them, we would look at the market together and determine at what price we needed to sell our product to maximize the volume while still making the best margin.
Further, and maybe most importantly, lululemon’s 50 percent ownership of Charter Link essentially cut out any of our competitors from using the factory. If they did use the factory, we made money.
But in 2011, with the changing landscape and competitors rearing their heads, I thought I might try to revisit manufacturing as a strategic asset.
I knew Taiwan had the three largest technical fabric mills in the world. They could make the fabric lululemon needed. Of these three, Eclat Textile out of Taiwan was the most innovative and our best supplier. Eclat also happened to be a manufacturer and was a publicly traded company.
In 2011, lululemon had almost a billion dollars in profit sitting in the bank with no plan for its use. It seemed clear lululemon could buy enough shares in Eclat to become a 50 percent owner. If that worked well, we could also partner with the other two big mills. We could dig a huge new moat around the production of technical fabric.
Unfortunately, my idea fell flat with the Board. Billion-dollar investments in factories and mills were not our core business. Besides, they said, they’d seen nothing as of yet to indicate any serious competition from other brands.
I was frustrated with my own inability to describe to people how competition in the surf, skate, and snowboard industry had undermined Westbeach’s ability to protect our margins and business model. I thought smart, successful directors understood lululemon made its money from being vertical. I felt the world was catching up and on the verge of passing us by.
Well then, if building a moat around our manufacturing wasn’t an option, what about diversifying our product line? There was a wide range of products coming out of lululemon’s rising competition. For example, Nike produced apparel and shoes, and that was the direction in which Under Armour had gone as well.
For a time, I’d considered entering the footwear market to supplement our own product line. But, lululemon had grown so quickly that all our efforts were directed at keeping up with the production of our core products.
The best time to diversify, I thought, was two years before yoga apparel became widespread, when there was still a little breathing room. We were not quite at that point in 2011 but would be soon. The worst thing a company can do is to start planning when the need is already there – a company must invest prior to demand.
I also had reservations about footwear. Running shoes had an odour – rubber, plastic, glue, and leather – that evoked old-school, male-centric sporting goods stores. The shoe smell made me picture industrial light fixtures and dirty sports stores’ change rooms that only men found acceptable. This was the opposite of the beautiful design and atmosphere of our lululemon stores, which we’d designed specifically to welcome and appeal to female Guests.
Chemical odour aside, Nike had always done a hell of a job designing and producing footwear and had eradicated the toxic glue smell in shoes. For lululemon to compete in the shoe market, we would have to develop new technology and get ahead of Nike in what they did best. It seemed like a broad, uncertain gamble when most of lululemon’s efforts were directed at keeping up with its own production. Shoes also had the opposite store layout of apparel. Shoes have 30 percent of the retail store up front, and 70 percent in the back for warehousing whereas apparel is the reverse.
My theory was to own the entire athletic market of yoga. I believed if we were the best in the world at this, then the customer would give us the right to venture into other areas. Because the Vancouver yogi was also a 10k runner, running apparel was a natural fit.
In 2008, the only female running short was something our design team called the Nike diaper short. This short met the Midwest sensibilities of Americans, but it wasn’t attractive. I wanted to create running shorts with a waistband that mimicked my wife’s yoga pant design, so I shared my vision with one of the best designers I knew, Shannon Savage. Shannon created an iconic style. The only additions I made were the bar tacks along the back venting, so we could create an industrial trademark to own the look forever.
There was also outerwear, including winter jackets and other seasonally specific apparel, for lulu- lemon to consider. From my days of making outerwear with Westbeach, I considered myself an expert in the field. I knew our business model was perfect for mountain survival apparel. But I didn’t like where global warming was heading, and it seemed outerwear was always on discount. I hated discounting.
Global climate change meant one coast was too hot and one was too cold well into December. If the heavily populated East Coast was warm, 30 to 40 percent of seasonal inventory would be unsellable. I decided lululemon was to be the best in the world at mid-layer clothing that could sell from fall to late spring.
What I called Après Yoga, or clothing to get to and from a sweaty endeavour, was a big gap in the market that we could own. Instead of diversifying our line into footwear or outerwear, I strongly felt our focus needed to be on continued design and innovation of our core products.
Unless we redefined lululemon as something other than a yoga company.
Crests and Descents
Through my years as an entrepreneur, especially through the different sports of the surf, skate, and snowboard apparel industry, I’d seen a tendency of crests and descents. Westbeach, like many businesses, had always crested and descended, crested and descended, repeatedly, like a wave pattern, with no real change. The question now was how much this applied to lululemon. Were we stuck in this pattern as well? How could I change the context before yoga crested?
Evolution is crucial to a company’s success. Enhancing and evolving the brand by being the future, because riding into the commodity market with hundreds of competitors is my definition of failure. It can even lead to eventual bankruptcy or buyout.
I loved the business model of the workout studio where I took my first yoga class. Ron Zalko wasn’t one to sit on his butt. He was always evolving, and he was the first with every new fitness trend in Vancouver. He said you shouldn’t be stuck in your ways just because they work.
When you’re moving forward ahead of a trend, you can become the coolest gym in town, keep your customers, and charge a higher premium. The coolest, most athletic people want to be in the future right now.
A renewed, refreshed customer response drives your product for the rest of the world.
This made me wonder how lululemon could evolve. My recurring strategy was to take myself out of the competition altogether. I hated how the commodity market revolved around low-paid, uninvolved employees. I knew it didn’t fit into our business model. Commodity is a boring business that requires uncreative bureaucrats to run it.
I believed in yoga the same way I believe in swimming or cycling. It would never go away, but it would become mainstream, and not be a future brand-driver. We’d originally succeeded not just by making apparel, but by creating new meaning and new futures for people, Guests, and Educators alike. We gave people something they hadn’t had before. Now lots of other companies were trying to get in on that.
Perhaps lululemon could evolve by creating a whole new meaning for people. I needed to deter- mine what that meaning might be. I found the answer by looking at my life as a swimmer, the lululemon Manifesto, my dad’s mantras, and lululemon’s roots in yoga.
Taking Mindfulness to the Board
My own experiences with mindfulness had begun with my athletic background, specifically the times when I felt the runner’s high – that endorphin rush that comes from a combination of intense physical activity and being mentally attuned to the present moment.
I’d thought more about mindfulness as a business in 2009. At that time, lululemon was moving like a rocket ship and was keeping me very, very busy. On top of that, I had three young sons, plus two sons in their late teens, and a working wife – all the responsibilities of a modern family. For my own health and wellbeing, I was trying to work out two or three hours a day. Smartphones were just coming to the market and connection to work had begun.
I found the only time I had to shut down – to become mindful of nothing more than the present moment – was whenever I was peeing. I’d go into the bathroom, pee, close my eyes, and try to find a mental black dot. Then I’d float through that black dot for almost 60 seconds and be in nothing. I’d come out of the bathroom thinking how perfect I felt. I understood that my brain worked the same as an errant phone or hard drive and that all I had to do was turn it off and then back on again to realign information and make it run faster and more efficiently.
With millennials in particular, I saw the value that mindfulness might add to their lives. Millennials could not see the water in which they were swimming. They never had the context of “no digital” in their lives. Millennials held it as a source of pride that they could multitask, but I felt this was false. As the lululemon Manifesto says, “The mind can only hold one thought at a time.” Without the right tools to keep them grounded, I knew millennials would push themselves off the edge.
In 2011, I wondered if lululemon could own this concept. I wondered if we could bring it to the world, be authentic about it, and invite a whole new generation of people to create new meaning in their lives through our brand. Imagine if lululemon owned the concept of mindfulness just as it had yoga. I knew I had a wall to climb. At Westbeach, the internal resistance to transform the company from surf and skate into snowboarding had been overwhelming. When I started lululemon, everyone over the age of 30 thought the yoga apparel idea was dumb. I thought my track record would speak for itself as I presented a new idea.
It wasn’t about abandoning yoga or our core products – it was about moving to where the puck was going before it got there. If I could get lululemon to own mindfulness, I knew our ability to maintain an aura around our brand would build a moat around competition and provide superior branding. With superior branding comes increased demand, which means higher margins and less discounting.
If we could add mindfulness into people’s lives with the same success that I’d had with surf, skate, snowboard, and yoga, it seemed we could add between $5 and $10 billion to our market cap before 2015.
It might take a few years to bear fruit, but we needed to prepare for the future. Otherwise, a brand that is not generating new concepts will eventually consume itself.
Even beyond the business opportunities mindfulness offered, mindfulness itself represented to me the final frontier of personal development. Consider this: a runner’s high, which occurs after 35 minutes of aerobic activity, floods the mind with dopamine. Dopamine locks us into the present by eliminating our past from our thoughts.
As time went on, some athletes realized they did not have to get a dopamine hit from athletics to be present. The runner’s high could be achieved by simply choosing to be in the moment. Choosing the present became known as mindfulness. If we understand this, we can choose to be mindful a thousand times a day.
I’d discussed owning mindfulness as a concept with Christine as far back as 2010, and in November 2011, I took my proposal to the Board. Owning mindfulness could start right in our stores, I said.
I envisioned our stores opening at 9:50 a.m. instead of 10:00 a.m. and inviting our customers to come in early and join our employees for a 10-minute, guided meditation. As mindfulness gained attention across the world, I could see it was what people would want – the same way they’d found yoga. We might open mindfulness studios in the future, but at that time, all we needed was 10 extra minutes in our stores every morning.
From a financial perspective, there would be a small advertising cost to get the word out. There would be the added expenses of having our 300 stores open 10 minutes earlier. We would also need to bring in mindfulness teachers and experts to introduce the training, at least until our staff could master the work of being mindfulness leaders.
I calculated an expenditure of $800,000 to be included in the 2012 budget – a very modest number, given lululemon’s revenue – to get the ownership of mindfulness underway. I proposed a launch date of four months.
I also provided whatever metrics I could find to support my proposal, but really, there isn’t much in the way of metrics when you’re creating the present from the framework of an unknown future. That wasn’t a bad thing, I told the Board – if there were detailed metrics available, that would’ve meant that mindfulness had already arrived on the market, and this proposal would be too late.
To my disappointment, the Board and upper management once again erred on the side of caution.
They pared my request for $800,000 down to $250,000.
Realistically, this amount was a nonstarter. Through multiple start-ups, I knew $250,000 would not provide critical mass to launch mindfulness before others did. Christine and the Board just did not want to spend any money to invest in the business. Once again, Michael Casey made sure the message was clear – lululemon would play it safe and protect the money in the bank.
As the illustrious entrepreneur and author Peter Diamandis said, “the day before something is a breakthrough, it’s a crazy idea.” If an idea could be quantified, it would have been done already. No one wants to change. Change is hard. But change is the only constant, and today the rate of change is faster than ever. The Board may not have meant any harm by their unwillingness to be anything beyond mediocre, but the end result had lasting harmful effects.
I was getting more depressed with each opportunity we passed up. I understand it takes a particular type of person to visualize the future. If you ask a genetically predisposed, risk-averse person about an unprovable future, they will likely say no. Especially if they think their responsibility is to protect the money.
Looking back on it as I write, it’s interesting to see the way mindfulness has exploded over the past few years. Nowadays, you can subscribe to many online meditation tools. Companies such as Google, General Mills, Target, Virgin, and Intel have all invested heavily in internal mindfulness training for their employees. I know lululemon could have been the iconic leader of this next social movement, which in turn, could have doubled the company’s value.
I remember a story of how, in the ’70s, Detroit automotive executives took the same road to work every day, and everywhere they looked they saw Detroit cars and concluded business was great. If they had taken a different route to work, through California, for example, they would have seen small, economy-sized Japanese cars starting to appear – cars that would take hundreds of billions of dollars in value away from the Detroit companies.