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Lululemon Competitive Forces

Essay by   •  November 10, 2017  •  Course Note  •  2,345 Words (10 Pages)  •  2,297 Views

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Lululemon Case Study

  1. How Strong the Competitive Forces are

Rivalry among Competitors - High

  • This force is vigorous in the industry. Established brands are expanding their production and marketing of products putting rigor behind it. And the recent entrants are also attracted due to high level of growth opportunities making the rivalry more intense.
  • Competitive Rivalry is high in the sports apparel industry. The competitive landscape is made of numerous big players such as Nike and Adidas, but at the same time there are many smaller new brands (Net-a-Sporter, Sweaty Betty, Gap Athleta) invading the market, which address the same niche market as Lululemon for example. According to our calculations (based on financial information on Yahoo Finance), Nike holds ~19% and Adidas ~10% of the global sports apparel market in 2014. Lululemon in contrast accounts for only 1.1%,
  • Since it targets a niche of the market. In comparison, brands like Under Armour hold a market share of 2.1% and Puma quite similar 2.0% (Yahoo Finance/ Statista). There is strong competition concerning price, design, technological fabrics, features, branding and in-store experience (Lululemon). What is more the sports industry is exposed to rapid changes in customer preferences and technological development. If firms fail to adapt quickly, they are endangered to lose market share. Having a strong brand image and good reputation can save a brand from inability to adapt as quickly as other players; however this may only be true for a limited amount of time until customers feel the need to switch to competitors (Trefis).
  • Lululemon is confronted with greater level of competition of wholesalers, direct sellers of premium performance athletic apparel made of high tech fibres especially Nike, Adidas, and Under Armour.
  • Nike has a powerful and well known global brand name, an extensive and diverse line of athletic and sports apparel.  In 2013, the apparel sale was $6.8 billion out of $25.3 billion of total making it a real time giant in the industry. Nike is the largest in the industry with 40000 retail accounts, 753 company owned stores, 23 distribution centres and selling arrangements with independent distributors and licensees in over 190 countries making it a top class competitor difficult to beat.
  • Adidas and Reebok is the next largest player in the industry with $7.8 billion revenue. Their products are centred on high tech performance garments for a wide range of sports activities. They sell their products in every country virtually. Backed by third party retailers, 1661 company owned ‘concept’ stores,  779 outlets, 300 other stores backed by well customized websites making the online presence gravitational in the industry.
  • Under Armour –total sale of $2.33 billion of which $1.76 on apparel. Apparels are aesthetically appealing like Lululemon, high performance fabrics, they regularly upgrade their fibre to fit next generation to gain competitive edge over other players through differentiation.   25000 stores worldwide, selling through own outlets and website.
  • All above players invest immensely on quality improvement, innovation, high technology fibre and market their apparel to create consumer awareness making the competition tough for Lululemon.

  • Barriers to Entry

Moderate

Because of the omnipresent fitness trend, many new players have entered the sportswear market recently. Capital requirements do exist, but they could be held rather small because a company can start small and develop with accessible distribution channels like online sales or opening a small sports studio with a shop. Therefore, product differentiation is of high importance in the sportswear sector, especially concerning design, materials and branding. Furthermore, economies of scale can make a big difference when it comes to producing sports apparel. Sourcing costs as well as manufacturing costs tend to decrease with scale thus may encourage larger firms to enter in the market. Lastly, legal barriers are moderate. Many brands have patents for their unique athletic purposed materials but apart from that there are no significant barriers.

  • Bargaining Power of Buyers

High

The bargaining power of sportswear customers tends to be high, since there is low cost in switching to various alternative brands. All three brands face difficulties since they work with a very competitive pricing system in order to prevent customers from switching brands. Apart from this, consumers today are more conscious about what they are buying. They most likely inform themselves online before making the purchase thus tend to be extremely sensitive to quality standards and alike. Most important in the sports apparel sector is thus a strong brand image preventing customers from switching due to brand loyalty (Surowiecki 2014).

Bargaining Power of Suppliers

Low

Bargaining power of suppliers is inclined to be moderate, since most materials used for the basic lines are commodities. When it comes to the specific fabrics, Nike and Adidas for example produce them in specialized sections of their plants thus there the bargaining power is higher. However, there is a fairly large pool of suppliers; Nike for instance produces with third-party contract manufacturers in various countries like Vietnam, China, Indonesia, Argentina, Brazil, India and Mexico (Trefis). No single apparel factory accounts for more than 6% of Nike’s whole production. Lululemon uses a similar spreading risk method: they operate with 65 different suppliers and do not hold any long-term contracts. Therefore it can be said that the bargaining power of suppliers is restricted.

Threat of Substitutes

Moderate

The threat of substitutes is moderate in the sportswear market. For example: LULU’s core product line of yoga pants could be substituted by regular fitness pants, running pants, leggings or other products that serve the same need. There are many similar product ranges and many offer identical quality at a lower retail price. However, Lululemon’s fitness-conscious target group tends to purchase apparel specifically suited for yoga exercises. In the end, specialized clothing has many advantages for the consumer like a higher flexibility and better fit. Nike’s case is quite similar: if people for instance want to buy a running outfit, they tend to purchase the specialized clothing instead of just any shorts. Nike maintains a very strong quality perception thus sports conscious people would probably trust the brand over other alternatives.

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