Lululemon as The New Retail Business Model
From shops closing down to consumers facing increased unemployment, many apparel retailers have been struggling with the pandemic. Despite the stock value dip during the pandemic announcement in March, Lululemon Athletica (NASDAQ:LULU) shares have increased 30%+ YTD from the continual support of a loyal customer base for its online engagements and product quality. Still, this phenomenon should not be regarded as just a short-term spike.
In this article, we explore 2 aspects from which we believe enables Lululemon to sustain significant growth, and therefore be a company worth investing in in the long run.
1. The Lulu-Large Total Addressable Market (TAM)
Lululemon Athletica is a Canadian-founded technical athletic apparel company for women and men with a focus on yoga. Although their first products in 1998 were designed just for women and their yogi pursuits, Lululemon has since diversified into offering clothing and equipment for cycling, running and other physical activities for both women and men.
Whilst technological advancements provide many benefits to operation efficiency and innovation, they also create a lot of stress and anxiety for individuals to stay productive at work. Yoga has long been marketed as an effective way to improve and maintain both mental and physical health.
The global yoga clothing market size is expected to reach US$47.8 billion by 2025, expanding at a CAGR of 6.2% over the forecast period between 2018 and 2025 (NB: Asia Pacific dominated the yoga clothing market in 2018 with a revenue of US$11.9 billion and looks to remain a key catalyst for growth in the next 5 years).
The increasing demand for both Yoga and other health-related products has been evident in the past 10+ years where Lululemon’s worldwide net revenue experienced consistent growth, with a 1,025% increase from 2008 to 2019 and a 21% increase from 2018 to 2019. In 2019, they also ranked within the top 5 in brand value of apparel brands worldwide.
As such, Lululemon does a great job addressing the needs of a very large market by addressing relevant lifestyle values and diversifying into other athletic products. These trends are likely to sustain as companies are increasingly accepting working from home conditions and consumers are focusing more on their health and wellbeing.
2. The Lulu-Loyal Customer Base
During COVID-19, the company has maintained bonds with their loyal customer base with online classes and other social media campaigns (e.g. #thesweatlife for staying active at home). Particularly where quarantine and closure of public spaces have been implemented in many countries, people seem to still enjoy spending on products associated with athleisure and wellbeing. Regardless of the pandemic, Lululemon’s ability to retain consumer loyalty is attributed to a few key reasons unique to their business model:
Retail and Online Shopping Experience
- Independent Sales Channels: Whilst their competitors (e.g. Under Armour) have been more reliant on other retailers, Lululemon has seen more success where they market their products predominantly through their own sales channels — despite charging premium prices. Over 90% of its revenues come from their own stores and digital platforms, such as their online store and mobile app.
- Taking Personal Shopping Online: They offer virtual personal shopping services, where you can make an appointment with their staff who answer questions on products and help you find the right gear and sizes for you via voice or video chat.
Attention to Product Design
- Science of Feel: Many of their loyal customers swear by their products’ quality. The company custom designs all their apparel according to function with a large range of advanced fabrics using their ‘science of feel’ method. They also provide comprehensive information of the fabrics on their products’ price tags for store visitors to read and detailed instructions on how to wash each unique material on their website.
Overall, Lululemon’s growth is not just a short-term side effect of the pandemic. Moreover, the above points are not the only reasons that their business model will bring them and their shareholders long-term success. Along with their strong online presence, the company’s focus on athlesiure will prove to be a significant advantage in becoming a staple part of consumers’ lives, especially in an era of nomadic and fast-paced living.