The Business of Family

Big News

In early 2003, Shannon and I found out we were going to have a baby of our own. As the news settled in, I felt a tremendous amount of satisfaction with my life. With Shannon as my partner, we had grown a business from nothing. Now, that business was set to provide for the family we were creating.

Shannon was lululemon’s phenomenal lead designer. In fact, a few months earlier, the owners of Roots, a Canadian retail icon business with 150 stores, had come into our store, asking who our designer was. “My wife,” I told them. I welcomed them to interview her because I wanted her to have free choice and to follow her vision.

Shannon also provided design continuity for the brand, her work representing our original intent. Having a child might lessen Shannon’s involvement in our operations and successful formula, but by then we’d hired and trained great people underneath her (Andrea Murray, Cassandra Tse) and had tried to mitigate against her inevitable absences.

Things at lululemon were going exceptionally well. As an entrepreneur, it’s sometimes hard to believe you’ll ever have a company that’s bringing in enough money to create a rainy-day fund, but lululemon was now in a place where it would do just that. I paid off the debt I had taken on our house. That meant Shannon and I could start our family without financial worry and stress.

Partnering with the Hons

Meanwhile, the lululemon concept was translating smoothly across our locations. The success of the five Canadian stores confirmed we could thrive while doing business our way.

We’d put into place an exclusive manufacturing deal with my friends, Frankie and Elky Hon. Their Vancouver factory was working at 80 percent capacity, and they were always scrambling for business. I made them an offer: I would guarantee 100 percent production with one fabric for 50 percent of their business.

My 50 percent of the manufacturer’s profit meant I had eliminated yet another middleman. When great factory people like Frankie and Elky do not have to look for business and can focus on efficiency, amazing work can occur. We ended up making $2 million a year profit on the factory, and I continued to build a deeper and wider moat to protect against future competition.

As Frankie says: “We started with very small orders, 100 pieces at a time. Then Chip’s business bloomed crazily, and Chip suggested an exclusive partnership with us.” Much like my relationship with Josephine Terratiano, my relationship with the Hons grew organically, and, to this day, they’re like family. Eliminating two middlemen by owning our manufacturing and our own stores was a key reason for lulu- lemon’s rise to greatness.

Around the time of this partnership, a man named George Tsogas came in as a consultant to look at our inventory, distribution, and overall logistics. “When I first walked into the office,” says George, “all I remember is this big West Coast dude sitting on a yoga ball, shirtless, in board shorts and flip-flops. His first words were, ‘You’re way too serious, do not wear a suit again to this office.’ That was my first taste of Chip’s unique culture.”

At the time, George was a recent graduate of a Vancouver technology school. He was a young, natural leader who quickly modernized the processes in our warehouses and distribution centres. Not only that, George introduced the people working in the warehouses to our culture – he brought in fitness equipment, personal trainers, and development coaches.

Where there had previously been high staff turnover in our warehouse, people now stayed for the long-haul. This concept was almost unthinkable for part-time seasonal workers. Over the coming years, George would prove to be a major asset to the company, eventually rising to the position of VP Global Logistics and Distribution. He was one more valuable addition to our core team.

Toronto: Growing Concerns

There was one exception to the excitement – I was developing serious concerns about our Toronto franchise. While Syd Beder understood how to sell, he wasn’t embracing our business philosophy. Contrary to our training, he told the customers how pretty they looked and was attached to the old-school fashion model. He was going about things in his own way. He wasn’t investing in his Educators, and without our training, they were unable to connect with our Guests authentically.

What Syd failed to recognize was that the success of our brand was driven by our people development. No matter what the company’s goals were, the most important objective for lululemon was to remain true to our culture. That culture – and how it related to both our staff and customers – underpinned everything we did. Keeping to our core philosophy was what would give us long-term success.

To me, the culture of the company was so critical that it needed a valuable person to lead it – a person who had a major commitment to training. “A huge focus of this was training people to live great lives,” Delaney remembers. Because she was a poster child for personal success, I asked Delaney Schweitzer to be our first training manager.

The Buy-Out

The Toronto franchise was doing the same sales as Vancouver stores, or about $1,500 to $2,000 per square foot. This was double or triple what most retail stores did, and we were just in our infancy. This provided a hint on the sales multiples we could do if we implemented our business philosophy in Toronto.

Jill Chatwood was one of the first Educators at the Toronto store. As she recollects, “There was always a waiting list for products. At one point, we had a binder with lists of people waiting for certain items to arrive. We would call them and make no promises, simply letting them know we had received new stock. Changing room line-ups were regularly waitlisted for longer than 45 minutes. We had people on the floor whose jobs were simply to bring up more stock by the armload and hang it up as fast as they could. Every day was like Boxing Day [or American Black Friday].”

I was happy with this. So was Syd. He wanted to sell lululemon clothes and didn’t want to run a lululemon store the way I’d intended with education. Every management issue led to a disagreement. Our communication was broken. Our differences were fundamental.

Part of this was Syd’s refusal to attend the Landmark Forum. Already in his 60s, perhaps Syd felt he’d already learned everything he needed to be successful. His business partner, Alex Morgan, was also disinterested in the course. If the two of them weren’t willing to commit to guided self-improvement, their employees wouldn’t get the opportunity to experience our culture. I experienced a divide between a West Coast athletic concept and an East Coast fashion context. To me, the fashion model was old and dead.

I needed to get the store back to ensure the cultural integrity of our brand. In my mind, without integrity, lululemon was nothing. What had to be done was clear: I needed to buy Syd out of the deal.

I went back to our franchise agreement to acquaint myself with the details of our buyout clause, only to discover there wasn’t one. The lack of a buyout clause in my Toronto franchise agreement wasn’t the first time I was responsible for a bad contract.

Syd was a shrewd person, and it would not be easy to come to terms with him. He also knew I could set up five stores around him and put him out of business, but I had better and bigger things to do.

The dollar figure we settled on was $2.5 million. I had sold the franchise to Syd for $25,000 just two years earlier. Even though the number we agreed to was enormous, it was clear the existing Toronto store, combined with other stores I could quickly build would be enough business to justify the price. I had little alternative but to find the money.

Over the years, I’ve learned hard lessons about borrowing money and the downward spiral that can result when financial liabilities overwhelm a company. My days at Westbeach had left me with a strong aversion to debt. But while learning fiscal responsibility had been an essential, valuable lesson for me, I also learned it’s just as important to know when not to be so dogmatic and when to adapt to a new situation. The situation with Syd Beder was shaping up to be one of those times.

I had nothing close to the money I needed to buy back the franchise. I went to my former private equity (PE) partner from Westbeach, Don Steele, whose children were both working at lululemon. I asked Don to buy 30 percent of lululemon for $2.5 million, but he declined as he had too much on his plate. He said with my cash flow I should be able to borrow the $2.5 million from the bank. It was such an unbelievable number I couldn’t believe a bank would lend it to a four-year-old business. It turned out the cash flow from the one Toronto store could cover the loan.

I had paid off the mortgage on my house, but the only way to secure a new loan was to put up the house as collateral. “Geez,” I thought. “Here we go again!” This hit even harder, as the house was inhabited by my pregnant wife and I.

I told myself that as daunting as it was to borrow such a huge amount of cash – and to put up my house as collateral – this was nothing like the old days when we borrowed money to keep the wolves from the door. This was a calculated risk with a huge potential benefit.

The biggest difference between the stress of borrowing money during my Westbeach days and this situation with lululemon was cash flow. The lululemon stores were all cash cows.

I had two factors in my favour: I knew what I could expect for income from the Toronto store, and I knew I could set up more Toronto stores to help pay back the loan in one year. I also knew that if I was going to buy back the store, it should happen sooner rather than later. It would only get more expensive, with more tense negotiation and more complicated terms.

Within a few months of realizing what had to be done, the negotiations were settled: Syd Beder was bought out, and the Toronto store was ours.

Briar Hill

The Briar Hill area of North Toronto was the residential centre of our customer base. I was 100 percent certain if we opened a new store in Briar Hill, it would be an instant success. We put our plan to open in Briar Hill into action, choosing a location that would be our flagship store. We wanted it to be iconic in the same way the first store in Kitsilano was.

I didn’t even want to put the store name outside, just a discreet logo and nothing more. I started to understand that just a logo was much more powerful a branding statement than a name alone. I became averse to using the lululemon name on stores going forward. It seemed like push marketing. I knew Super Girls loved the confidence we showed with just our logo.

This was radical thinking at the time, as no one in run-of-the-mill, old-school marketing would believe it was a good move to just go with a logo. I knew old-school marketers did not understand the subconscious thinking of our customer and her need to discover and not be pushed. The logo-only concept has since been shelved at lululemon under new leadership seeking out brand people who didn’t innately understand how branding subtleties increased the value of the lululemon brand. Most lululemon stores now show the lululemon name instead of differentiating themselves beyond the norm.

There was enough potential in the existing staff to make it worth investing in re-training them the true lululemon way. Syd had hired a woman named Karen Wyder from Vancouver as his conduit to the head office. Karen was also the perfect Super Girl and took on the culture naturally. With Karen’s help, we rounded up the most amazing group of Torontonians who moved to Vancouver over the next few years and were powerhouses for the company (hats off to Erin Westelman, Jill Chatwood, Julie Ball, and Carla Anderson).

Bree Stanlake

Around that time, I was working as an Educator in the West 4th store. One day, I started talking to a Guest who told me she had just graduated from the MBA program at UBC in Vancouver, just like Darrell Kopke had. “Great,” I’d said. “Want a job?”

This Super Girl – whose name was Bree Stanlake – said yes. The next day she was up and running. Lululemon was, by then, attracting a lot of lawyers and MBA-level women – and I could tell Bree was special. She had the West Coast fresh, athletic energy about her, and was obviously intelligent. She was also looking for a great future. As the lululemon model was producing amazing cash, I knew we were entering an era where our executives could make a better salary than they could doing normal corporate work.

Bree would go on to become lululemon’s General Manager for Canada until 2012. As she says, “I started as an Educator in Vancouver, and worked in the Vancouver stores for about four months. Then one day Chip said, ‘Emergency meeting at the 4th Avenue Store tomorrow at 9:00 am.’ I showed up. He said, ‘Okay, it’s game time, you’re off to Toronto.’ I went over for the franchisee trip with Chip and Shannon and a couple others, and just got kind of thrown into the fire from there.

“At that point, there was only one store in Toronto,” Bree continues. “Then we opened all the other stores out there. I went from Educator to regional manager.”

One part of the training consisted of re-introducing people to the company’s ethos. Taking the focus away from sales and fashion, I educated the Toronto employees on the philosophy of the company. I enrolled everyone who hadn’t taken the Landmark Forum or written their vision and goals and ensured they had everything they needed to be successful. Within a month, everyone was re-energized and excited to be part of lululemon the way it was meant to be. They were fired up about moving forward, using a common language to communicate, and thinking big. Many people who stayed through the transition of the Toronto store would remain with lululemon for years to come.

In retrospect, there were a lot of unknowns in the Toronto buyout. A lot could have gone wrong. But in the end, it was an example of the importance of our culture and the areas in which we could not compromise.

“This was a major success in the history of the Canadian apparel business,” says Darrel Kopke. “There was a tribe, and that was a core element of it. There was a cultural distinction that this was not a product company. The tribe had an entrenched social infrastructure, and that created virality. We deliberately created an industry through a long and painful process.”

We set up the store business model to take advantage of the highly-educated, well-developed employees we were attracting. Each store manager was an entrepreneur, and we paid them accordingly. We sent our managers (all women) full company financials until 2006. We helped them become financially literate so they could make their own decisions as we were completely decentralized. Our managers had absolute control of their store windows, hiring and training, etc. We knew if we didn’t give them almost total control, we wouldn’t be able to keep intelligent minds active and they would get bored and quit. Our best branding came from stores who created tongue-in-cheek windows with a controversial political or social point of view. Customers talked and debated, and our managers’ intelligence shined because they challenged the Store Support Centre, as well as the status quo in retail. This made our work fun and edgy.

This model proved so profitable that we could pay a manager two-to-three-times what other retailers could. We completely upset the low-cost wholesale-retail model. This part of the business model was critical because we had to educate customers on what they could not see visually. We needed extraordinary Educators to deliver our message and to connect on the same educational level as our Guests.

As a side note, I do have to express a thought that occurred to me after the passage of many years. I’d been working side by side with employees for 24 years as an athletic person whose business dealings were mostly with teenaged boys, and then later with 20-something-year-old women. Looking back, I realize some of my staff may have seen me as a 45-year-old “father figure”, and how I communicated with them may have come across as the complete opposite of how their own fathers might have. Generational differences can at times create an unintended impact through the misinterpretation of intent. It is my fault for not understanding or considering the ramifications of the differing styles of communication at play and the impact on our relationships, culture and business.

Duke

Shannon was admitted to hospital to deliver our baby in mid-October 2003. I remember it raining as hard as I’d ever seen it rain in Vancouver. Things happened quickly once we were there. We didn’t know whether we’d be having a boy or a girl until the moment our son, Duke, took his first breath. As soon as I could, I picked up JJ and Brett from school and brought them to the hospital, where they each held their little brother. At that moment, I felt that life couldn’t get much better.

Shannon was eager to strike a balance between being a new mother and remaining a creative force at lululemon. She’d worked right until Duke’s arrival and made her return to the office when our baby boy was around 10 days old, bringing him in with her every day. But, after three weeks, as much as she loved being back in the office and working, she felt she wanted to spend more time at home with Duke.

“Designing for lululemon was my absolute dream job,” says Shannon. “It just fit me perfectly. Though it was uncomfortable to let it go, there was a bigger goal that needed attention. I’m fortunate that Chip had been so inclusive with me about the business. There’s never been a line between what’s his job and my job. He’s always open, always sharing. We got to have those conversations before the actual changes happened.”

I fully supported her decision to step back for the time being. Speaking for Shannon, it’s unfortunate that at the time she wasn’t recognized as one of the world’s great designers. Looking at the success of design on a revenue basis, one could argue she was the best in the world. However, New York fashion media would be loathe to think an athletic apparel designer was a “real designer,” so no press ever came her way.

In addition to adding Duke to our family, 2003 was a watershed year for lululemon. I felt as if we’d reached a tipping point in Canada. We had systems in place for each new store opening that laid the essential groundwork for entering a new market.

The essential building block to our growth other than our people development program was what I’d learned from Michael Gerber’s book The E-Myth1. The myth holds that entrepreneurs have control of their lives, when, in fact, they don’t – entrepreneurship is a 24/7 operation with no downtime. The solution is to set up the business from day one as though it were a franchise, so that it could successfully operate without the founder. I was meticulous in documenting our quality-control, brand, design development, people development, and store operations. Because the first store operated so well on its own, I could spend time in my area of excellence, which was conceiving and directing where lululemon would be five years in the future.

Yoga and athletics were becoming even more popular among our target market of educated women in their early 30s. I also believed the prudish way Americans dressed for athletics was ready for a change. I envisioned a future when West Coast functional clothing combined with flattering European design lines would change the way the world dressed.

We knew how to generate interest by working with yoga studios and the community. Plus, as more people in Canada grew to recognize the lululemon brand, it would be even easier to break into new retail environments.

In the life of any company, there are cycles of growth that force those driving the bus to figure out where they need to steer. This was the point we’d reached. Things were taking off, and I had to choose where we were going next.

Addressing this plan meant asking critical questions. Who were we? What did I want lululemon to be? Were we a local company that thrived on being quirky and small? Or were we on the cusp of becoming a major international brand?

As I faced the questions of where we were going next, I also kept investing in our culture and people. Bree Stanlake recalls, “It was just unbelievable. It was a group of people who just truly believed in what we were up to. It was grounded in our belief in the product, and everybody’s almost maniacal, fanatical adherence to product quality, innovation, and walking the walk.

“We all wore it all the time, and exercised in it, and did yoga in it, and really just believed in what we were doing, which was elevating the world from mediocrity to greatness.”

Honing the Culture

A key component of the lululemon culture was family values. As part of our hiring practice, we screened for people who wanted families. We wanted our people to meet the perfect mate, we wanted people to have children, and we wanted the family nucleus to be an energy generator. I believed if our employees’ families worked, then our company worked.

Delaney Schweitzer’s team put together a training checklist that included chapters on culture, product knowledge, store operations, community, inventory, Guest conversations, and Guest experience. Everything was covered. One of their first assignments was to create a curriculum called Foundation, which would serve as lululemon’s onboarding program.

Jenna Hills, one of our Robson Street Educators, became part of Delaney’s team. “We were accountable to ensure that every single employee got invited to attend the Landmark Forum,” Jenna recalls. “Landmark Education was our other foundational training program. It gave us a common language and allowed us to be real with one another. By living the principles of personal responsibility and integrity, we became unstoppable.

“We believed if we did a great job of providing people with the tools to be 100 percent accountable for everything in their lives, not much else was needed,” says Jenna.

We made a big cultural shift by changing our vision. I decided that our existing vision of “making components for people to live a longer, healthier and more fun life” wasn’t big enough. Our vision became our mission, and our new vision became “elevating the world from a place of mediocrity to greatness.”

This vision aligned better with our mantra of “giving without expectation of return.”

Before we had an HR department, a brand team, or any of that, we had Training and Culture. Training and Culture was our brand and HR department, all rolled into one.

New York Fashion Media

Even as we grew as a company and changed the way women dressed and lived, New York fashion magazines completely ignored us. We were persona non grata. To this day, I think the media turned a blind eye to lululemon because we did not fit into their codependent business model of paid advertising in exchange for editorial coverage.

The fashion media model of the 2000’s relied on getting wholesale clothing samples delivered months before a magazine was published. Wholesale companies made samples to show store buyers on an 18-month production cycle from design inception to in-store sales. The samples that wholesalers used to sell their product to retailers were made available to the fashion media for magazine photo shoots.

Because we were accountable only to ourselves, lululemon had a nine-month production cycle. We didn’t do photoshoots. We had no reason to as we sold only in our own stores. The value of lululemon products lay in the tactile feel and function of the garments, and these aspects could never be effectively relayed to the customer through photography.

Our nine-month production calendar also kept us ahead of the fashion houses. We had created the future of apparel and all-day performance, and our business model made it too easy for fashion media to ignore. Rather than embrace the future of apparel, the New York fashion media thought by calling it a “trend” it would go away. Mickey Drexler, CEO of J Crew, famously said “J Crew will not participate in the athletic trend.”

Looking back, I wish I had documented more of the lululemon story in a diary or taken more photo- graphs to capture the context of our early years. We didn’t make samples, and we didn’t believe in media advertising, so we never did photo shoots. My personal culture – and therefore lululemon’s – was never one of self-promotion or “look at me.” This came back to bite me in the future as social media evolved. Because there was no documented history of lululemon, the media took control of our story.

There is a brilliant book out now called The Four Billion Dollar Tweet2, by Ryan Holmes of Hootsuite. This book describes how CEOs, companies, politicians, and individuals can use social media as a tool to speak directly to their customers or their voters.

As lululemon was successfully eliminating the wholesaler and going directly to the customer, proper use of social media would have allowed us to communicate directly with our loyal consumer. I would then have had a voice to offset sensationalized media and social media comments made by those outside out tribe. Unfortunately, I didn’t change with the times – but that’s a story for later in this book.

Throwing Logs on the Fire

The opportunity to grow and expand lululemon sustainably was also an opportunity to share what made us unique. The more we grew, the greater the opportunity to elevate the world from mediocrity to greatness – one Educator and one Guest at a time.

I was clear that we were not in the wellness business. We were not interested in making sick people well. We wanted to give people the opportunity to be their best. By being their best, they would elevate those around them. It seemed to be an idea everyone was excited to get behind. People were calling us a cult and employees were in on the first wave of lululemon tattoos.

“Lululemon could have died in November 2003,” says Darrell Kopke. “The problem was cash flow like it is for every other apparel business. We went from two to 11 stores and invested all our money in inventory. Our warehouse was piled to the roof with clothing, and we had no readily available money to pay for future orders. We bet the farm that we would sell everything that Christmas.

“By the second week of December, we knew that lululemon was going to be unstoppable. Our sales were through the roof. We sold through tons of inventory, and we had our first million-dollar month at one of our stores. We would open a store, and within three months, it had paid itself off. We were just throwing logs on the fire.

“We made a ton of mistakes, but we were able to make them because we were allowed and encouraged to, and we had the kind of revenue growth that enabled us to make mistakes and still live through it.”

Darrell is right. We were really good at celebrating mistakes and learning from them. A big part of our growth was driven by empowering our people and creating an environment that would foster creativity and new ideas. This was especially relevant as it related to our Guests and our community. For example, we originally held yoga classes in the first store to increase foot traffic coming up the stairs. When we moved to the street-level store, we had as much foot traffic as we could handle, so we stopped offering in-store yoga.

A while later, our community people came up with the idea to reinstate in-store yoga at every location. I’ll admit I was not aligned with the idea at the time, but the employees wanted to do it, and it ended up having fantastic results. It proved that allowing our people to take ownership was a vital part of our company’s successful formula.

At Westbeach, I’d often led by command-and-control. At lululemon, after setting the culture and documenting the Operating Principles, I chose to lead by developing and mentoring others. I was fanatical about developing people because the future was so huge that I had to get out in front of it. I made it my job to delegate so aggressively that I had to do nothing outside of mentoring. Inside of nothing was the ability to be the future before it occurred. It was now time for me to think about how to establish lulu- lemon outside of Canada for the first time.