Toned and ready: Lululemon transitions

Is Vancouver-based yoga-wear phenom Lululemon flexible enough for global expansion?

Last month, for the fifth time in just seven years, Lululemon Athletica moved into new corporate headquarters. Relocating to a 31,000-square-foot warehouse with clear views of Vancouver's North Shore mountains (but nary a coffee shop in sight) did not go entirely as planned. On the second day, the phones still weren't working properly, and neither was the heat. Staff members, unaccustomed to dealing with a security system, were spending a great deal of time in the stairwell, locked out of their workspaces while their swipe cards lay forgotten on their desks.

Nonetheless, Lululemon's designers, marketers, production managers and inventory analysts were thrilled. The new spot is more than double the size of their previous digs. Replete with everything you would expect to find at your average office — plus a yoga studio with high ceilings and big windows, where employees enjoy free lunch-hour yoga classes — the Lululemon team feels like they've finally made it to the big leagues.

And they'd be right. Since 1999, sales of the yoga-inspired apparel company's stretchy pants and colourful tops have powered the once small startup into a national retailing powerhouse valued at $225 million plus. In the past year alone, Lululemon's staff grew by about 400 people. The move is the latest in a series of massive changes taking place at the athletic-wear company, now poised for global expansion — even though going global may destroy some of the unique factors driving the startup's phenomenal growth.

“My original goal was to have one store in Kitsilano, and never grow beyond that,” says Lululemon's 51-year-old founder Chip Wilson, who also was the entrepreneur behind Westbeach, a surf-and-snowboard clothing company Wilson sold to U.S. company Morrow Snowboards in 1997. “But then I surrounded myself with great twenty-five-to-thirty-five-year-old people. And they want a future and a family and a mortgage. In order to keep these people, I had to expand.”

Expand, indeed. Today, legions of Canadians swear by Lululemon's garb, much of which is made from a unique man-made fabric dubbed Luon that is both flattering and functional (see sidebar). Walk into a Sunday-morning class at Downward Dog, a popular yoga studio in Toronto's artsy Queen Street West neighbourhood, and you'll confront a sea of Lululemon-clad bodies. The joggers at Vancouver's Kits Beach are similarly clothed, and Lululemon is de rigueur at Calgary's mammoth athletics complex, the Talisman Centre.

It's not just athletes wearing the form-fitting garments, either. Lululemon pants are often lauded for their ability to flatter a woman's derrière, which appeals to female fashionistas, soccer moms, professionals — and the men who buy gifts for them. And a menswear line is now attracting a broader client base.

Since opening its first retail outlet in 1999, Lululemon has launched 27 stores in Canada, plus another nine abroad. Revenues have doubled every year for the past four years, and are now estimated to be about $120 million. And Lululemon achieved this growth without any traditional advertising — no television commercials, no radio ads, no national newspaper campaigns. The company doesn't even describe its in-house marketing team as such, labelling the division Community Relations instead.

Lululemon has largely relied on word of mouth. It generates buzz by supplying free clothing to yoga teachers, fitness instructors, and the like, and encouraging these “ambassadors” to spread the word. Store managers are funded to run their own local marketing initiatives. For example, the Santa Monica, Calif., store sponsors yoga on the beach.

“We've decentralized marketing,” says community relations manager Sara Gardiner. “The emphasis is on stores being active in their communities.” Every two weeks, community relations director Eric Petersen hosts an hour-long conference call with each store's community relations representative on the line, in order to share best practices and ensure everyone is on the same page.

Lululemon also pours money into its staff training division, since management considers a product-savvy staff key to making sales. (Its training and development team includes seven full-time employees, making it nearly as big as the company's design team.) As well, Lululemon pays for its employees to take up to two yoga classes a week at approved studios. That has helped keep staff happy and healthy, while simultaneously upping Lululemon's profile with its target market.

“I've never before worked for a company that cares so much about my life,” says Nicki Kagan, a sales associate (or “educator,” in Lulu lingo) at Lululemon in Toronto, who also runs a graphic and jewelry design business. “They genuinely want you to be proactive in your own life.” At head office, employees are encouraged to display professional and personal goals on posters over their desks. (Founder Chip Wilson's goals this year include doing the Grouse Grind, a popular hike up Vancouver's Grouse Mountain, 100 times.)

Employing unconventional techniques hasn't been hassle-free. Wilson ran into trouble with one Toronto-based franchisee disagreeing with him over how to run the store; Wilson ended up buying back the Queen Street West outlet. (Nine stores are still franchise-owned and operated, but most new stores are corporate-owned.) And some employees have refused to take the Landmark Education courses that Lululemon strongly encourages as part of its management training. (Thousands of satisfied customers vouch for Landmark Education's flagship Forum program, a three-day workshop “designed to bring about positive and permanent shifts in the quality of your life.” Landmark is not without controversy, however: in the past it has been accused of being a cult.)

Such issues aside, one thing is clear: up to now, the company's unique management style and corporate culture, combined with its commitment to quality through design, translate to red-hot sales and consistent demand for their tank tops and capri pants across the nation. There is backlash from some yogis who prefer natural fibres over Lululemon's pricey gear, and from others who are merely offended by the idea of paying nearly $100 for a pair of workout pants. But with revenue growth rising, Lululemon is hardly concerned about a few renegades.

Buoyed by success at home, and in keeping with Lululemon's corporate manifesto — which, akin to Nike's famous Just Do It slogan, instructs staff to Do It Now! — Wilson began looking for opportunities internationally. In 2003, Lululemon's first U.S. store opened in Santa Monica, chasing the estimated US$2.95 billion Americans spend annually on yoga gear.

Since then, six more stores have opened in the U.S, but expansion stateside has proved a tough slog. For one thing, securing good real estate was a struggle. Lululemon's Santa Monica store is big and bright, but it doesn't get the foot traffic it would if it was located a few blocks over, on the Third Street pedestrian mall. Wilson was wary of bankrolling further expansion on his own: “Canadian companies haven't been successful in the U.S.”

To further facilitate expansion, Wilson cut a deal last December with two Massachusetts-based venture capital firms, Advent International Corp. and Highland Capital Partners, selling a 48% stake in Lululemon for about $108 million. (Rumour has it that Nike and Adidas were both interested in purchasing Lululemon. Furthermore, Tom Stemberg of Highland Capital says that “some of the multibillion-dollar funds were literally in a bidding war to be the largest investor.”)

Wilson acknowledges the cash was attractive. “I had no intention of selling,” he admits, “but it is a special time in the world, where there is way too much money chasing too few quality products.”

The deal netted Lululemon more than just money. “What I was really looking for,” says Wilson, “was a board of directors that was strong, and could help me hire the right people. Or at least give me some kind of structure for what to do next. Lululemon is, maybe, a $120-million company. Could I take it to the next level? I'm not sure that I could. I was falling into the zone of I don't know what I don't know.”

The result: A new, experienced CEO, Robert Meers. Meers was at Reebok International from 1984 to 1999, ultimately heading the corporation as president and CEO. He helped grow Reebok's revenues from US$13 million to US$4.6 billion, and assisted the brand's expansion into 120 different countries. Today, Reebok is owned by Adidas, thanks to an acquisition that was completed in January of this year.

Meers moved to Vancouver from Boston in January of this year to take charge. He seems determined to relive Reebok glory by building Lululemon into a ubiquitous global brand. “There is a whole network of people I know around the world who would welcome the opportunity to do it again,” he says.

Meers quickly ticks off his plans: additional outlets in Los Angeles, San Francisco and Seattle. A new store in Chicago. Multiple shop openings in New York City and Boston in Q3 or Q4. And four more stores in Tokyo this year. In 2007, Lululemon will move into the southern U.S.: Florida, Texas and Washington, D.C. Next year will also see Lululemon's arrival in Europe, and further expansion in Asia. “Our store sales in the U.S. continue to grow very rapidly,” says Meers. “I won't talk numbers, but I can tell you [the growth] is encouraging us to take an aggressive expansion plan.” And staff at head office are fully behind Meers. Starry-eyed over the possibility of going global, most employees' attitudes seem overwhelmingly optimistic.

Still, this is a company that has thrived, in large part, with a corporate culture defined by its West Coast vibe. Where else but Vancouver could a company that instructs employees not just to “do yoga,” but to “be yoga,” get off the ground? Lululemon's head office workers practise what they preach — a “healthy, balanced, fun-filled way of life…filled with runs at the beach, hiking, biking and a walk to work.” (Lululemon's accounting department goes running together every Tuesday, Wednesday and Thursday at 4:45 p.m.) Can such a culture survive this kind of expansion?

Meers, and Stemberg, who founded office-supply store Staples and grew it into a US$12-billion business, were recruited to bring method to the madness with a detail-oriented approach. But, with new systems and processes being implemented, maintaining Lululemon's unique, yoga lifestyle-focused environment may be a challenge.

Meers says he buys into Lululemon's corporate culture. “I don't want this to sound warm and fuzzy,” he says, “but I believe very strongly that a healthy lifestyle, fitness and exercise is a major way of empowering people to feel good about themselves physically and mentally.” What's more, he says he's Zen about the expansion. “Lululemon's expansion plans are not volume driven. The expansion plans are not compromising on the product, or the store experience, or the community involvement. Not compromising on the genuine efforts to encourage people to live a healthier life. The volume will be what the volume will be.”

Sure. But he is a transplanted East Coast businessman. On the phone with a store manager, Meers is clearly keen on talking numbers — volume, if you will. Meers says Lululemon's greatest challenge now is “making sure we have the manufacturing, sourcing, logistics and distribution systems capable of supplying our expansion goals.” No doubt that will take some time. But some of his underlings might say that preserving the firm's atmosphere will be the greater challenge.

There are other hurdles too. As with any major clothing label, Lululemon will need to keep designs current. In the past, the company has relied heavily on feedback from customers in order to achieve this. In fact, the original store was a design studio surrounded by a retail shop, where customers trying on clothes could tell the designer exactly what they thought of the product. Currently, most head-office employees work the floor in one of Lululemon's retail outlets about one day per week. That way, customer feedback goes straight to the top.

Lululemon is proud of this open process. But as stores proliferate, this method of communicating could get chaotic. What's more, the designers will need to create items for areas of the world with vastly different climates and cultures.

As the company grows, some of the flexibility that has helped make Lululemon so successful may fall by the wayside too. As it stands, Lululemon manufactures about half of its product at factories in Vancouver. The rest is made in Asia and elsewhere. If a certain design is selling fast, Lululemon relies on the Vancouver factories to produce more of that item, quickly, and then restocks its stores. But, according to Wilson, additional production facilities will definitely be located in Asia, not in North America. That might slow the process.

There is also more competition now. When Lululemon first got off the ground, it was one of the only companies around producing specialized yoga gear. Today, it is squeezed from both sides, as small players like Lotuswear, whose designs mimic Lululemon but sell at a fraction of the price, spring up, and large companies launch their own upscale activewear lines, such as the one designed by Stella McCartney for Adidas.

A final question is distribution. Up until now, Wilson has been adamant that Lululemon gear must be sold only at Lululemon shops and approved yoga studios. “I don't think department stores can do justice to the technical aspects of the line,” says Wilson. “I don't think they can train staff.” Fair enough — Lululemon has certainly found success in Canada without relying on middlemen. But few global athletic-wear brands take this approach. That doesn't mean it's impossible. It's just not average. And it certainly is not how Reebok did it.

Despite the many challenges, Lululemon is in an enviable position. Sales at home continue to rise, and brand awareness continues to grow. As Meers points out, “there is still growth potential in Canada.” Moreover, with the arrival of experienced American leadership, there's a renewed sense of enthusiasm regarding the company's future. Lululemon is so confident, it is even launching a new brand, Oqoqo. Oqoqo clothing is made from natural, organic and/or sustainable fibres like soy, bamboo, hemp and cotton, and is regular streetwear. Aside from a token yoga piece in every collection, there is nothing athletic about it at all.

So all the hurdles notwithstanding, Lululemon's quest for global markets is now underway. And it's easy to envision a few well-placed photos of yoga-mad Hollywood celebs such as Madonna or Gwyneth Paltrow in Lululemon gear taking the brand from Canadian sweetheart to global phenomenon, buoyed by yoga's massive popularity. On balance, prospects for the brand's international success look as good as their clients.