Lululemon Athletica – Case Report

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Executive Summary

The purpose of this report is to provide a recommendation that will aid Lululemon in making a strategic decision in order to solve the problems faced by the company.  The report contains current issues, industry analysis, competitive analysis, financial analysis, alternatives and a plan of action.

When the company was founded by Chip Wilson in 1998, no one could have predicted its astonishing growth during the seven years that followed. By 2009, revenue had reached an outstanding 57%. Lululemon developed a cult-like status in the Yoga industry. The company’s founder had rightly identified a market niche that was underserved-young, healthy women who practiced Yoga. The offering of high-performance yoga apparel and the community feel at Lululemon’s stores gave the company a competitive edge that was envied by competitors.

When product quality issues surfaced in 2003 due to see-through Luon yoga pants, Lululemon recalled 17% of its products, causing a loss of $67 million in sales. Some key management personnel left the corporation.

In addition, Lululemon faced a number of new competitors who were targeting Lululemon’s core segment of women customers.  Lululemon needs to address some major issues:

• How to fix the product quality issues that resulted in the yoga pants recall
• How to restore the company’s brand image
• How to remain competitive in a profitable and growing yoga industry

Our recommendations are to:

• Open new stores
• Sign two celebrities
• Implement Six Sigma to ensure that product quality issues do not happen again

Lululemon has sufficient free cash flow and is able to raise capital if necessary in order to solve the key issues. Our detailed analysis can be reviewed in the pages that follow.

Table of Contents

Executive Summary        0

Key Issues        1

Material Quality Issues        1

Increased Competition Issue        1

        1

Decline in Business Growth and Financial Performance        2

Situational Analysis        2

Current Strategy        2

Key Success Factors        3

PEST Analysis        3

Political        3

Economical        4

Social        4

Technological        4

Competitive Analysis        4

Nike        4

Under Armour        5

Adidas        5

Athela        5

Financial KPI (Key Performance Indicator)        5

Decision Criteria        6

Alternatives        6

Celebrity Endorsement        7

Improved Quality Control        8

Redefinition of Product Strategy        8

Continued Expansion and Status Quo        9

Recommendation and Implementation        9

Exhibits        11

Exhibit 1 SWOT        11

Exhibit 2 PEST        11

Exhibit 3 Porter’s five forces        12

Exhibit 4. Competitors analysis        12

Exhibit 5 Financial analysis        13

Exhibit 6 Decision Matrix        14

Exhibit 7 Options        14

Exhibit 8 Six Sigma        15

Bibliography        16

Key Issues

Material Quality Issues

In 2013, there was a problem with the sheerness of yoga pants in one of their trademarked Luon brand. This incident led to a 17 percent recall of all women’s bottoms sold. The costs for this recall was $67 million. This was roughly the fourth major product quality issue in a year. A Credit Suisse Analyst was quoted as saying that the problem was caused by Lululemon’s focus on bigger buys to keep shelves stocked and as a result, the quality assurance and quality control may have taken a backseat (Star, 2013).

Although this issue has caused a significant 17% drop in the revenue, Lululemon still has some competitive advantage. It has an established loyal fitness-conscious female customer base. A survey conducted by Target Research, titled “"Lululemon U.S. Canadian Attitudes & Usage Study" found out that 55% of U.S. Lululemon shoppers between the age of 25-35 still considered Lululemon as their favorite brand. In Canada, 70% of shoppers said the same (The motley fool, 2014). Despite the current turmoil, Lululemon is still a growing, profitable business—one year’s results do not necessarily indicate an overly negative trend.

Increased Competition Issue

The company is also confronted with an increase in competition from three new entrants such as Athleta, Lucy and Bebe, who are aiming to capitalize on Lululemon’s success with women’s active wear and fitness apparel. Established athletic companies such Nike, Addidas and Under Armour are also launching their own stylish apparel for fitness conscious women at a price lower or same as Lululemon’s retail price. Full threat analysis can be found in SWOT^[1].

Brand & Public Relations Issues

Lululemon has good marketing and brand-building capabilities to sell their products and have a unique core competence that is focused on yoga and apparel items. When the Luon problem happened, the company did not use an official spokesperson to respond to the media and general public. The response in the media was poorly executed. The founder, Chip Wilson, made inappropriate comments by blaming the incompatibility of the pants to certain female body types (Luzt, 2013).

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