(July 9): More than eight years ago, I wrote a column for The Edge about athleisure firm Lululemon athletica, which had high margins, strong growth and a niche following. In apparel retailing, where margins are slim, technology is a disruptor, fixed costs are high and competition is fierce, Lululemon’s “differentiated” business model stood out. The stores of the Vancouver-based yoga-wear firm had become temples to the fledgling brand, where fans would try out stretch yoga pants, buy mats or tote bags and hang out with other yogis. I also noted at the time that Lululemon’s stock was starting to get Wall Street’s attention.
Eight years on, Lululemon has a cult following, and over the past 18 months, it has been one of the best-performing retailing stocks on Wall Street. From a scratchy start-up in Vancouver selling overpriced yoga gear, Lululemon has emerged as a premier upmarket global retailer. Last week, it splurged US$500 million ($696 million) to acquire digital in-home fitness start-up Mirror, a fitness TV firm that leverages smart mirror technology, and has been dubbed the Peloton Interactive of fancy workout furniture, after the iconic stationary exercise home bike firm. “Mirror’s target customer is very similar to Lululemon’s higher-income, active lifestyle customer base,” notes Bank of America analyst Rafe Jadrosich in a recent report.
Founded two years ago by ballet dancer Brynn Putnam, when she realised she was pregnant and needed more in-home workouts, Mirror has grown into a serious fitness play in less than 24 months. Putnam built a prototype with a cheap tablet, a piece of glass and Raspberry Pi, a small, low-cost computer. An Instagram post by singer Alicia Keys, an early customer, went viral and helped Mirror raise money for expansion. Revenues of the interactive mirror maker are set to exceed US$100 million this year.
For its part, Lululemon sells iconic yoga pants, leggings and sports bras for women, unisex jogger pants, ABC pants and sweat-wicking tops for men, as well as accessories such as water bottles, backpacks, tote bags and personal-care products, including US$34 dry shampoo, US$48 face moisturiser as well as deodorants. It has morphed from a mostly yoga-centric customer base to more of a lifestyle brand. A key part of Lululemon’s transformation has been its move away from physical stores to e-commerce and the pivot from a female-friendly brand to one whose men’s apparel make up one-fifth of the sales even as it expands its footprint outside North America, particularly in China. Last year, it chalked up profits of US$645 million on revenues of US$3.97 billion.
Vertical retailing
The secret sauce in its successful formula has been to control the entire value chain of making and selling apparel by keeping a firm grip on costs and continuously improving efficiencies. Long before iPhone maker Apple opened its own stores, Lululemon pioneered the concept of vertical retailing. Unlike other apparel firms, Lululemon designed and manufactured its own line of clothing and sold them at its own stores instead of using wholesalers or franchisees. By controlling all aspects of apparel retailing, it commanded software-like gross margins. Even though it has since outsourced actual manufacturing to Chinese factories, it still tightly controls the rest of the supply chain, which helps give it near 55% gross margins compared with Nike’s gross margins of under 40%. In comparison, Apple’s gross margins are in the 37%-to-39% range.
Controlling the entire value chain and keeping running costs in check allows Lululemon to spend more money on a pipeline of future products that are better and indeed different from those of competitors. Part of Lululemon’s success can be attributed to its timing. It grew slowly as a niche retailer and, by the time e-commerce got traction after the 2008 financial crisis, Lululemon had enough stores where customers could get a touch or feel of the product, try out their sizes and then buy it in the store or online. Retailers such as GAP, whose yoga-gear brand Athleta competes with Lululemon, had too big a footprint and could not shut down most of their stores and move everything online.
There are essentially two business models for apparel and sneakers. A firm such as the beleaguered Under Armour might sponsor big-name athletes like basketball star Steph Curry, paying him US$14 million, put a big logo on its products and charge an arm and a leg. Yet, because Under Armour outsources everything and overspends on sponsorships and advertising, it has low margins and cannot spend enough money on R&D or innovation to compete effectively with Nike or Adidas. There is also the “Instagram model”, where fashion retailers get a bunch of “influencers” like the Kardashian siblings to tout products made by outsourcers on social media. While Instagram-reliant retailers sell a lot of clothing, they do not make a lot of money.
It is not what the stuff sells for or, indeed, what it costs to make, but the retailer’s ability to extract high-enough margins that is the key to profitability. Under Armour may make a T-shirt for US$20, sell it to wholesalers for US$40, which then sell to the customer for US$60, but it still has lower margins than Lululemon, which makes yoga pants for US$12 and retails them for US$36 or triple the markup, since the yoga gear firm has eliminated the middle man and controls the entire supply chain. Moreover, unlike other retailers that spend a ton of money on fashion magazines, runways or social media influencers, Lululemon focuses on trying to make the best product and getting it directly into the hands of customers.
Workout-at-home beneficiary
Lululemon and Mirror are both seen as beneficiaries of a new home-based fitness boom in the aftermath of the pandemic. The business model of fitness centres and gyms has been fundamentally altered, creating an opportunity for workout-from-home players such as stationary bike firm Peloton. People working from home need comfortable, casual, yet smart, clothing that looks good even on video conferences, allowing them to switch from work to cooking, and chatting with co-workers or clients on Zoom Video to attending yoga class, riding the bike or doing push-ups after work.
So, what does Lulu see in the Mirror? Basically, a stand or wall-mounted interactive floor-to-ceiling TV that doubles as a mirror. The 22in wide, 52in high and 1.4in deep mirror is a combination of a lot of different technologies and software. It costs US$1,495 and streams live and on-demand yoga, pilates and other workouts. You can even work out remotely with your friends using a Mirror App on your smartphone or tablet. Unlike your Peloton bike or treadmill, which you can tuck away in some corner of your home, Mirror is always in-your-face.
The Mirror acquisition amplifies Lululemon’s own powerful message, helping it showcase its apparel and stay in front of its customers. Mirror will be on the walls of Lululemon stores and prominently reflected on its website. Think of how many more yoga pants or leggings or yoga mats it will be able to sell as Mirror sales burgeon. Instructors whose classes are live-streamed on the Mirror will be wearing the latest Lululemon gear in a variety of colours, helping drive sales.
When you buy a Mirror, you also subscribe to a US$39-a-month membership that allows you to stream all the workouts. You are essentially working out with a reflection of yourself as well as an instructor whose live or archived feed is streamed to your bedroom or wherever else you have the mirror installed. Peloton already has one million subscribers. Mirror is where Peloton was in 2016 in terms of subscriber numbers, with 70,000 customers, notes Jadrosich, who forecasts the firm will have 600,000 subscribers by 2023, with more than US$700 million in revenue. For comparison, Peloton ended its financial year 2019 with 511,000 subscribers and annual revenue of US$915 million.
Lululemon CEO Calvin McDonald has been focused on selling an experience rather than just yoga pants or water bottles. Last year, Lululemon opened a massive 25,000 sq ft “experiential” store in Chicago, which has two in-store yoga studios as well as a separate meditation studio; a café called “Fuel”, where you can grab healthy organic vegan food such as US$12 “power bowls” with kale and roasted sweet potatoes or a US$13 Beyond Meat burger topped with roasted mushrooms, avocado and Sriracha ketchup; and a juice bar that serves nitro cold brew coffee, kombucha on tap and freshly pressed US$10 acai-berry smoothies.
Now, they can have smart mirrors in every Lululemon dressing room so, while trying out yoga pants, you might be able to see how you will look in downward-facing dog, a popular rejuvenating yoga pose. Eventually, you might be able to purchase directly by just touching the mirror. Want to see how your Lululemon pyjamas will look in different colours? Just swipe right on the mirror. Okay, that option is not available yet, but you get my drift.
Stretching out
The Mirror purchase transforms Lululemon from a traditional retailer into a subscription-based firm with strong recurring revenues. For a monthly premium membership of, say, US$100 a month, you could get discounted Lululemon gear, streaming video lessons, discounted mirror and other hardware, as well as membership to its exclusive experiential stores with meditation and yoga studios, juice bars and an array of vegan fare. It is all about making the product, as well as the services linked to it, stickier and then building a moat around it. Lululemon already had a great brand but needed hardware and services, alongside its fashionable yoga gear, to make it all work. Lululemon calls its customers “guests” or “members” of its “community” and dubs its sales people “brand ambassadors”. Now, it finally has a chance to monetise its “cult” status the way iconic brands like Apple or Tesla have successfully done. Think of Lululemon as eventually having an Apple-like ecosystem.
If you are a Lululemon fangirl — or, for that matter, fanboy — you can participate in yoga classes, buy pants or backpacks or lip balm online and even attend virtual fitness events that are accessible only through the Lulu Mirror; or you can walk into its experiential store, attend a yoga class, grab a Kombucha and try out a few of its yoga pants in different pastel shades in the mirrored dressing room. Indeed, in Lululemon’s ecosystem, you can check out anytime you like, but you can never leave.
Lululemon investors can now look to a Netflix-style monthly revenue stream, Soul Cycle-type “sticky” community and Peloton-like hardware margins. It is karma that the yoga-gear retail chain got to where it is this far and so fast. Though retail stocks have been battered and bruised in recent years, Lululemon shares are up 34% this year, 432% over the past three years and 570% since I wrote about it more than eight years ago. Mirror might just be the next catalyst that keeps the Lululemon stock airborne.
Assif Shameen is a technology and business writer based in North America
