The success of Lululemon Athletica Inc. has been one of the biggest and arguably most mysterious stories in retail over the past year: a premium-priced product, sold with extensive reliance on feel-good intangibles, flourishing while so many other retailers have flagged. But on a sunny Saturday afternoon in Vancouver, you could pop into any store—the flagship Kitsilano location, for example—and, by doing nothing more than people-watching, easily get a sense of what underscores its success.
What you'll see: mostly women, the staff youthful, the customers (called "guests" in Lululand) ranging from teenagers up to senior citizens. But it's not so much how customers and staff look (although it has to be said, there is a common rosy glow about them). It's more to do with how they sound. All of them are engrossed in avid conversation. Lululemon on Saturdays is a seriously chatty place. Women comparing notes on fabrics or special-edition collars. Staff modelling wraps and toques, detailing product features. Light shimmers of giddy laughter rippling through the lineup to the change rooms.
What's notable here is that it's not just shopping that you're hearing. It's community building. And if you have any doubt that Lululemon is deliberate in encouraging this sensibility, you need only read the slogans that adorn their shopping bags, advertisements and websites. Communitarian sentiments such as "That which matters the most should never give way to that which matters the least" and "Jealousy works the opposite way you want it to." "Friends are more important than money" and "What we do to the earth we do to ourselves." Plus, my personal favourite: "Dance, sing, floss and travel."
Christine Day, CEO since 2008, tends to reinforce this sensibility. She says that she considers Lululemon to be "part of, and contributing to, a bigger macro-trend that affects consumers from their early teens to their 70s. Investing in your health will pay big dividends for individuals and society...elevating the world from mediocrity to greatness."
But then, what's interesting about the chosen quote is that it layers an interest in community over a reference to Atlas Shrugged, Ayn Rand's treatise on the essential shamefulness of being merely like everyone else and the necessity that truly great people strive through all obstacles toward individual dominance. Rand's 1957 novel is one of the core documents of libertarianism, bear in mind. Yet Day makes no bones about acknowledging the inspiration of the book and the life of its author. "I believe in a culture of personal accountability and not compromising your values," Day tells me. " Atlas Shrugged is both about not accepting mediocrity and being personally accountable for the life you are creating."
Day, who came to Lululemon after 20 years at Starbucks, where she was president of the Asia Pacific Group of Starbucks Coffee International, lives in Vancouver with her husband and the youngest of her three children. Befitting a Lululemonite, she does yoga and lives the Vancouver lifestyle: hiking and biking and walking the seawall. Yet it is her performance as CEO that has mesmerized analysts and the markets. With 122 stores in Canada and the United States, and 100 more now under consideration, this is a company well on its way to mass popularity. Lululemon saw its stock climb to almost $60 this fall, up over 280% from when Day joined the company, and a whopping 250% gain year over year.
If you want to know how Lulu has done it, however, don't bother reading the financial statements. They reflect good numbers, of course: net revenue up 39% in the second quarter to $212.3 million year over year; comparable store sales 18% higher on a constant dollar basis and income from operations up 74% to $59.5 million (both over the same period). But no matter what the numbers say, when a stock is trading at 48 times earnings in the retail sector, something other than arithmetic is involved. This would be yet another contradiction that Lululemon artfully manages to maintain: in this case, a company seemingly devoted to its "guests" that nevertheless refuses to give them exactly what they want.
Need a Scuba Hoodie? You're in luck if you like Heathered Rose Petal, but there's no more in the Blackswan Creekside Camo. Got your eye on an Integrity Hot Tank? No problem, so long as you're not size 8, 10 or 12. And don't even ask about the Gratitude Wrap originally released in 2009, which sold out almost immediately and started selling on eBay for $250, because while Lululemon did re-release that item in October, 2011, it did so only in a single store, in Coquitlam, B.C., which then promptly sold out in most sizes.
Frustrating? Über-Lululemon fan and dedicated brand blogger Christina Chalmers certainly thinks so ( lulumum.blogspot.com—"a place where fans can drink the lemonade together"). But then, she's not surprised either. Because, having followed the brand as closely as virtually anyone on the planet over the past few years—Chalmers posts almost daily about company and product developments, including information on products in the pipeline that the retailer has asked her to remove in the past—she also knows that active discouragement is a key part of Lululemon's very savvy plan. It even has a name.
"It's called the 'scarcity model,'" says Chalmers. "And it's about frustrating the customer."
Which might sound scandalous, but Christine Day isn't shy about using the term herself. In a 2010 conference call, when the topic of inventory strategy came up, she said that while Lululemon didn't want to be running out of core items in stores, "frustrating [customers]on that special jacket in terms of scarcity, I'm willing to do."
Why would a company treat its guests this way? What seems highly counterintuitive (potentially fatal if publicized) is not necessarily so after considering how this rather unique brand was built and the growth challenges it now faces. According to Vancouver-based retail strategist and Lululemon-watcher David Ian Gray of DIG360 Consulting Ltd., this is a brand that has been built very deliberately. And from the beginning, Lululemon founder Chip Wilson was "very clever about guerrilla-style marketing." What Gray is referring to is the way that Lululemon promotes itself not merely as a product—with objective features that might be compared to similar premium-priced products—but as a set of ideals expressed in those slogans of well-being and self-worth that adorn its bags, most of which obliquely reference yoga's spiritual roots.
Which is not to say that the identification with yoga requires you actually to do any yoga. "Lots of people don't care about the yoga and just buy the product because it makes their bum look good," Gray says. "But Lululemon has done a great job of wrapping the brand up in a lifestyle." That is, Lululemon is very skilled at making a healthy-seeming, one-for-all shell around what is essentially an egocentric stab at looking great.
The result is that, compared to more price-driven products, Lululemon apparel gives its customers the feeling that they're purchasing a lot more than mere "value." Buy a Cabin Long Sleeve T-shirt and you're involved in bettering yourself. Pick up one of those cute Lucky Luon headbands and you're joining a community of like-minded people. Those ideas combine powerfully, creating a sensation quite unlike that which accompanies the purchase of other premium-priced products. Lululemon isn't an indulgence, like Bordelle lingerie or Dolce & Gabbana pumps. It's a thing of virtue. Budget in other spending categories if you must, the brand seems to whisper, but don't stop taking care of your body and building a better society.
With the stores full of shoppers and the stock price rising, it would appear investors believe Lululemon is pulling this off handsomely, creating real-world social networks that support the brand and insulate it from yoga-wear competitors (which now include the likes of Nike, Adidas and Under Armour). The challenges facing Day, however, stem precisely from the fact that investors are the ones making this appraisal. Publicly traded retail operations, Gray reminds me, need to show growth. That can come from same-store sales increases, but, at some point, those top out and the retailer has to expand.
The bigger problem is that Lululemon's canny branding—which creates that aura of virtue—is fundamentally at odds with the mass popularity that will ensue if Day delivers to investors the growth they're demanding. The "specialness" of a brand is hard to sustain when you see it on every street corner or, in this case, on every other woman in your yoga class or in the elementary school playground when you pick up your kids. That sense of being part of a haloed community starts to dissipate when the group has grown so big that it encompasses almost everybody—which is exactly what happened mid-'90s to the Gap, or mid-2000s to Starbucks. "Starbucks still has a halo compared to, say, McDonald's," says Gray. "But, yes, success does tend to make you ordinary."
When I ask Day whether expansion represents a threat to brand "specialness," her answer is unambiguous: "Yes, which is why you see us focus on scarcity of certain product styles. It is our goal not to have women wearing the same thing in their fitness classes."
The question going forward is whether the balance can be maintained; stripped of their virtuous aura, those Groove Pants are just $98 sweats, after all. According to blogger Christina Chalmers, there are already signs that the brand is in transition from niche to mass, and that the special aura is indeed being dispelled by its ubiquity. "I'm getting a lot of comments from people saying, 'I went to the gym today and there was another girl wearing my top!'" Chalmers tells me. "And that's not good." Meanwhile, in the process of growing more ordinary, Lululemon will also further open itself to comparisons with other ordinary brands, and the inevitable price side-by-sides that will follow. Case in point: a $69 Zellers jacket, released this year, modelled on the $228 Lululemon Audrey Jacket. Zellers reportedly sold out of them within a week in several Vancouver stores.
In the end, the growth-driven transition from special to ordinary may not be one that Day can avoid. But it may not be something investors want her to avoid either. There's a lot of money to be made in being a massively popular item, even if not a virtuous one. Gray considers this to be part of a natural evolution that brands must follow.
"The management challenge is to have this brand sustain itself," he says, "but also to reinvent at the appropriate moments. The Gap, Starbucks, Apple—these are all brands that have had their moments of reinvention."
Lululemon's expansion, meanwhile, should remain Day's central concern, Gray argues. "I'm not saying [existing brand features]aren't important to her, but in terms of day-to-day activities, she has tremendous experience in rolling out a lifestyle brand, and that's what she was brought in to do."
Certainly that's what the analysts seem to think. Although with Day's remarkable success so far, Edward Yruma of KeyBanc Capital Markets, who follows Lululemon, does not see much upside potential in the stock price; he rates it an underweight. "Lululemon Athletica is one of the best growth concepts in our coverage," he wrote in a September, 2011, release, "but valuation remains full." Yruma goes on to say that investors might like to hold off for a better price point before they purchase. In other words: Wait for the inevitable fall.
One gets the feeling that even moderating interest in the stock markets will not deter Day, however. Asked to comment on personal philosophy, she quotes Ayn Rand again: "The question isn't who is going to let me, it's who is going to stop me!" I'd say: probably nobody.
Anti-CEO of the Year From $6.2 billion to $1.2 billion in under five months: the stunning mismanagement of Sino-Forest
Two weeks after an almost unheard-of short-seller named Carson Block levelled fraud allegations against Sino-Forest Corp., CEO Allen Chan finally showed his face.
In a pre-recorded video posted online on June 14, Chan tried to explain how his complex Mississauga-based timber company works—what with all its foreign subsidiaries and its unnamed brokers. His main message: Just trust me. Big intermediaries handle all of our sales, he said, but you can't know their identities for competitive reasons.
That was the last time investors saw Chan. The next thing anyone knew, the Ontario Securities Commission was ordering the Hong Kong native and four other company officers to resign in late August. Though the decision was later revoked because the OSC didn't have the legal authority to level such a ruling, Chan abdicated anyway.
It appears that while Sino-Forest's management was publicly defending itself, the OSC had uncovered a number of e-mail accounts outside the company's internal network that revealed information about some questionable deals. Very little of the OSC's case has been disclosed, but the public perception is that the regulator's findings are damning.
Now, not only has Chan—the company's founder and supposed rock—left, a cease-trade order against Sino-Forest is in place in Canada. In the three months following the release of Block's allegations, Sino-Forest's shares plummeted 75%, and a company with almost 4,000 employees and $2 billion in annual sales that was once worth $6.2 billion is now worth a little over a billion dollars. No one knows if Sino-Forest can survive, because few people trust its management, never mind the issue of whether its stock will ever trade again. Investors who stood by the CEO and held on may never get their money out.
Corporate chief execs don't always have to be liked, and they don't always need to be open with the public (witness Steve Jobs), but they do, most certainly, have to maximize value for shareholders. On that very vital front, Allen Chan has failed—miserably. —Tim Kiladze