Lululemon Avoids the Markdown Bug
By
Tom Ryan
Lululemon
Athletica, which last week reported a 60.2 percent hike in third quarter
earnings, appears to be one of the few retailers to navigate this recession
without resorting to pervasive markdowns.
After
the financial collapse last fall, many Wall Street observers felt Lululemon
would feel the brunt of the recession given its pricy goods. Jackets
range from $99 to $128; pants, $74 to $168.
Not
that the Vancouver-based retailer of yoga wear and other athletic apparel
wasn’t impacted. The 10 percent same-store sales gain in the third quarter
came after three periods of declines. But it now expects earnings to
rise for the year on healthy sales and full-price selling.
On
its third quarter conference call, Christine Day, CEO, indicated that
Lululemon ultimately benefited from a few key steps designed specifically
to reduce markdown pressures amid the recession:
- A
focus on securing space in high-quality factories to support a quick
turn on goods. While costing more up front, the move reduced inventory
on hand while enabling quicker turnaround. Items are now replenished
in two weeks to 45 days; - An
emphasis on “more value” products with added technical functionality,
colors and fabrics without increasing prices. Likewise expanded its
organic cotton and natural fabric lines at competitive prices to provide
a greater point of differentiation; - Reducing
prices of some key accessories to drive traffic and to solidify its
position as the leading yoga retail and lifestyle destination. Its
yoga mat was cut to $28 from $54; - Increasing
availability of items such as tops for layering to standard offerings
at the lower end of its price range, $50 to $70.
Most
of these moves hurt margins while driving sales in the first half. But
gross margins in the third quarter improved to 49.9 percent from 48.1
percent with the aid of improved sourcing on fall merchandise and reduced
markdowns.
“Our
focus on sourcing and supply chain initiatives, as well as adding value
for the guests have paid off with increased sales providing leverage
on depreciation and occupancy, while supply chain initiatives improved
our initial product margin,” said Ms. Day.
Also
helping is a continued strong response to the concept with its focus
on healthy living. Grassroots efforts such as offering complimentary
yoga classes is helping Lululemon further bond with local yoga and fitness
enthusiasts. And strong demand for its core yoga collections as well
as its new running collection is also driving the top line.
“Our
focus on new colors and styles delivered weekly creates a scarcity model
that provides an immediate guest purchase,” said Ms. Day. “This focus,
combined with an upbeat staff and store environment have proven over
and over to be a winning formula.”
Discussion
Questions: What do you think of the many ways Lululemon added value during
the downturn without resorting to promotions? Is there one that particularly
stands out?
What’s missing in the narrative is their very intelligent, thought-thru marketing that is spot-on and a model to any specialty retailer looking to gain market share in a “commoditization of everything retail” world.
Let’s see…constantly changing products, improved sourcing, on-the-pulse assortment, upselling through added value ‘tech’ features, and as Bob states above, brilliant marketing. No surprise that sales and margins are up.
Best of all, they didn’t (like so many others) destroy their brand by cutting prices ridiculously over the past year.
This retailer is walking the walk on all levels. Offering high quality on trend goods at value prices and an enhanced shopping experience is the gold standard in my book. People want a great deal these days, but are willing to pay more if you connect with them in a meaningful way. Lululemon provides an “all in” experience for their customers who want it. From the clothing to the yoga classes they become your workout partner, which sets them apart in a meaningful way. A very smart move for a retailer in a commoditized market.
Lululemon currently embodies all the classic characteristics of a “high-fidelity” brand. They make a technically superior product. The technical differences yield a functional difference (clothes fit and wear better than competitors). And most importantly, their branding and store experience create an emotional connection with their consumer.
When you have all three of these things in place, it’s like putting a flack-jacket around your brand. The issues that hurt most retailers are less likely to affect them.
Their supply chain efforts are intelligent and reinforce their positioning, while tightening up their efficiencies.
It’s refreshing to find retailers that have used something other than debasing the price (and perceived value) of their assortments to weather the drop in sales.
Here’s the thing that most retailers either don’t understand or choose not to think about–lowering your prices means that you have to sell disproportionately more units to get to the same place. If you lower your average prices 20%, you have to sell 25% more units to get to even. If you lower your prices by a third, you have to sell 50% more units. All the discussion about why lower prices don’t generate more business seems a little silly. It’s only math.
What Lululemon is doing is absolutely the right answer to how to survive (and prosper) in our current environment. Figure out how to put more in the product while maintaining the same price, shorten the replenishment cycle, and reprice ancillary accessories.
Shopping at Lulu is more of an experience than just buying yoga pants. The layouts are the best in the apparel category. Styles, service, and available health resources round out the experience. That said, Lulu’s equity is in it’s brand. Having a massive sale would damage that equity. Using back-end tactics to reduce prices and offer value is the right strategy for an operation like Lulu. It’s all about the brand for Lulu. How else can you get people to buy $100 plus plus plus yoga pants?
Let’s look at Lululemon and why they perform so well.
1) The leadership group including Ms. Day are brilliant…that’s always a great strategy and the bench strength investors look for.
2) They execute flawlessly and always fire on all cylinders…not just sometimes but all the time.
3) The have no competition. They have created the perfect “Blue Ocean”…an uncontested marketplace.
From my vantage point, so many other retailers in Canada can follow their lead but it’s going to take some real out-of-the-box thinking and the will to let go of some old habits in retailing.
That what Lululemon did and look at them fly!
What I like about this story is Lululemon’s fundamental strategy. They’re laser focused on the yoga market and haven’t tried to overextend and thus weaken their brand. Yes, they’ve made all the operational moves to constantly offer more of what their customers want at a price that allows them to succeed. Unlike other specialty retailers that started with a focus but have expanded to try to mean something to everyone, Lululemon has stayed true to their core values and thus mean everything to someone. That’s how you survive a recession.
Lululemon has been an ongoing case study in the new school of soft goods and retail. It’s a “smart” company with a strong brand, customer focus, and smart sourcing without following the herd and training customers to only buy markdowns. Substance to go with form, merchandised via social media and with real content.
They do so many things right, unlike most of the legacy brands and merchants (sounds like the airline industry, doesn’t it? – comparing JetBlue, Virgin America and Southwest to American, United and Delta!).
One other great story in this category that comes to mind is Bonobos. These are companies–and brands–that make customers want to both buy from and have a relationship with them. Everyone wins, including the shareholders.
Lulu is a badge brand for women. Real badges never need markdowns.
As long as the sales remain strong, everyone will think that Lululemon is a genius. The minute they start to miss their numbers, and lose sales to Target as Target knocks off their product line, people will wonder why Lululemon did not react sooner. I give them credit for convincing consumers to purchase their products at high prices, but I’m not sure they are a chain that will remain long-term. Their target market is limited, and their high-priced appeal is even more so.
Lululemon is doing the important things right as the readers have described very well. They have created a community within their core consumer group, listening to and fulfilling client wants, needs, and aspirations using a solid marketing strategy. What is refreshing and profitable is the unrelenting focus on the longer term, in the way that yoga “wardrobes” are structured, while delivering the value that clients expect.
They seem to do a great job of managing their inventory. I think they are the market leader in a hot exercise segment.
Black basics are not markdowns. Promotions can help drive volume. Seasonal fitness messages encourages new business.
Look around your yoga class and you can see the impact of their brand. What Nike has done for basketball, Lululemon has done to yoga wear.
Good real estate and not being over exposed also helps the margins.