In the spring of 2001, I was approached with an offer from Syd Beder, a Canadian apparel veteran based in Toronto.

Syd had at least 25 years’ experience in the industry. His business partner, Alexandra Bennett Morgan, had happened upon lululemon in Vancouver and liked what she saw. Syd knew the ins and outs of production, so he immediately recognized the quality of construction and materials we used. The two of them believed in yoga and its growth in popularity.

Syd wanted to open a lululemon franchise in Toronto.

The offer was a dilemma for me. A big part of me just wanted to keep my little shop in Kitsilano and preserve lululemon as it was, simple and local. However, sales had taken off so much I was having a hard time thinking small. Back when Westbeach had become successful with snowboard apparel, there was just never enough money to facilitate the growth we’d needed to take us to the next level. I didn’t intend to repeat that with lululemon.

I wanted us to reach a larger audience – I just didn’t want to start our expansion in Toronto. Saying no would have consequences, however. Syd was experienced, and I got the feeling if I didn’t jump at the franchise offer, he would give the concept a try and create a lululemon knock-off of his own. If he copied us, he had enough background to do it well and corner the whole Eastern Canada sales market before I even got there.

It seemed I could ink a contract with Syd and make an ally, or I could say no and create an instant competitor. So, I signed the agreement . . . but did so without legal advice. In those days, even though we were becoming successful, every penny still meant something.

Once the agreement was signed, Syd Beder paid $25,000 for the right to sell lululemon clothing in Canada’s most populous city.

A Declaration

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 increase units sold and drive down production costs. My third was to compete against Nike even though Nike was worth a million times more than lululemon.

As Syd and Alexandra got to work on opening in Toronto, I thought a little more about my own expan- sion plans. 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 15 of us in a room – the whole company – and Chip declared we would open 300 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 lululemon 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 that we had a better product and business model than Nike. We were reaching the female market in a way Nike couldn’t because their culture was focused on winning and men. We were doing so well that I envisioned 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 all our 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.

Showrooms Defined in Toronto

Meanwhile, Syd’s plans to open in Toronto were progressing. I liked the way he was building enthusiasm by word-of-mouth. In June of 2001, he invited people to his own loft apartment where he’d set up a few racks of lululemon clothing. Since it was invite-only, Syd’s loft had an exclusive, underground feel to it, much like the feel of our original second-floor store. People had to know someone to get in, so it generated a lot of curiosity. It was pull instead of push marketing.

Syd partnered his exclusive “loft store” concept with a focused campaign targeting Toronto’s yoga studios. He took rolling racks of clothes to the studios for people to try on as they were coming in and out of classes. It was precisely the grassroots marketing that had worked for us in Vancouver.

Eight months later, in February 2002, Syd opened the lululemon store on Queen Street West. By then, the customer base was already established, and right away the store started putting up fantastic numbers. It felt like a well-executed success.

More than that, the Toronto opening reassured me that if a similar plan was followed – opening inexpensive showrooms, educating the public, networking with yoga studios, and inspiring grassroots word-of-mouth conversations – the lululemon concept could work just as well almost anywhere. We had a successful formula for growth and expansion. We just needed to stick to it.

Our First Quality-Control Problem

We had fundamental confidence in our products. We didn’t even do sales or discounts. Then, in 2002, we experienced a quality control problem and had to recall approximately 2,000 pairs of pants due to the pilling of the fabric.

I knew that authorizing the recall would nearly kill the company but I was prepared to take that risk to maintain product integrity. I fully acknowledged the flaw in that batch of fabric.

With technical knits, a thousand things can go wrong. Most bolts of fabric have one flaw, and that’s okay. Some have two, and it might be a problem, but three is a big issue. The problem comes when no one can predict what combination of three things out of a thousand creates a massive error.

From this moment on, I became the “King of Luon.” I checked everything we made, and when I couldn’t check it, I made sure there was a designated king or queen to check it on my behalf. Our livelihoods were based on the quality of our proprietary Luon.

After we pulled all the affected pants off the shelves, we had our Educators speak to every Guest that walked into our stores. We posted a notice above the cash register. We told our Guests we were responsible, and we knew it was a problem. We wanted them to return the subpar pants they may have already purchased. We would replace them with another pair from a different batch.

Though we did a good job of taking care of our Guests and maintaining our integrity, I was now sitting on thousands of pairs of defective pants. I looked at them and realized that despite not living up to our high standards, they were still really good pants. The question was, what to do with them.

We held a design meeting. At the meeting, it came to my attention that many customers had complained about how they would love to take their dogs walking wearing our Luon pants, but they couldn’t because the dogs’ hair would stick to the Luon.

Here, I thought, was a unique solution.

We took the pilling pants and built another pair of loose, woven, slick nylon pants over top of them. Dog hair wouldn’t stick to the woven nylon. What started off as a pragmatic way to put superficially defective pants to good use became lululemon’s winter “dog walking pants” – one of our bestselling items of all time.

Around that same time, a woman entered the West 4th store determined to be refunded for a pair of pants that were pilling. This style of pants was not from the previously mentioned run. An object – I suspected a metal buckle on her hip purse – had repeatedly been slicing into her lululemon pants, as the flaw was specific to one location on the pant. She berated me in the middle of the store, in front of other Guests and Educators, demanding that I reimburse her for a faulty product.

My dedication to selling quality clothing – and honest admittance of past flawed production – gave me the confidence to refuse this woman a refund. I also knew that lululemon was defined not just by who we sold to but who we didn’t sell to. We believed in exclusivity. Our brand flourished because we did not want liars, con artists or people who did not love themselves in lululemon apparel.