LULULEMON: How it Captures the Market with only "A Balck Yoga Pants"?

Regarding sports shoes and apparel, the first brands that come to mind are likely Nike and Adidas, two foreign giants that have long dominated the Chinese market. However, in recent years, a series of factors, such as weak consumer demand, rising costs, the rise of domestic brands, and strategic missteps, have significantly slowed the growth of both companies.

At the same time, a company in the same sports shoes and apparel sector has achieved a 25% CAGR in both revenue and net profit since the pandemic, seemingly unaffected by macroeconomic factors. Its market value has also soared, surpassing Adidas in 2023 to become the second-largest publicly listed sports shoes and apparel company in the world, after Nike.

In terms of return on investment, this company's ROE has consistently maintained above 15%, making it a standard "Buffett-style good company." This company is Lululemon (Chinese: 露露乐蒙， hereinafter referred to as LULU).

Dolphin Research will take you deep into the analysis and study of how LULU, as a rising star in the mature sports shoes and apparel industry, has carved out an independent space.

This article serves as the first part of the LULU study, focusing on:

What is unique about LULU's business model?

What are LULU's core competitive barriers?

1. Starting with the Popular "Category Killer" in North America — The Yoga Black Pants

1. What is the magic of the "Black Yoga Pants"?

Before delving into LULU's business model, we first need to clarify what products LULU sells. From my observation of consumer goods companies, if one wants to achieve a breakthrough in a mature sector, starting with a promising niche category for differentiated competition is a classic entry point, and LULU is a typical representative:

As shown in the chart below, apparel accounts for over 90% of LULU's sales, with women's clothing making up over 70% of the apparel, which is LULU's core category.

Although LULU does not disclose specific details about the subcategories of women's clothing in its financial reports, according to the company's public communications, yoga-related products account for the highest proportion, and yoga pants are the company's core item. So the question arises, why does LULU focus on the relatively niche category of yoga?

Let's pull the timeline back to 1998 when LULU was founded. At that time, Nike and Adidas were focusing on the development of professional basketball and soccer shoes, respectively, starting from the two major sports in the world. Both brands had already achieved industry-leading positions in terms of product performance and comfort, gradually expanding into tennis shoes, running shoes, sports apparel, and other categories, making them global leaders in the sports brand market.

On the other hand, in terms of social background, we mentioned during the review of Coca-Cola that with the improvement of people's income levels and the rapid development of the internet, the dissemination of health knowledge and concepts has accelerated. At the end of the 20th century and the beginning of the 21st century, health awareness began to awaken in North America, with consumers paying more attention to quality of life and personal health, significantly increasing their willingness and ability to pay for a healthy lifestyle.

Against this backdrop, founder Chip Wilson, who came from an athletic background, keenly captured the trend of yoga becoming widely popular in North America. However, since the audience for yoga was primarily women, the sports apparel industry at that time generally followed the logic of "Shrink it and pink it" when developing women's clothing, which meant simply reducing the size and changing the color of men's sports products, with almost no products specifically designed for women.

At that time, women practicing yoga commonly wore traditional leggings, but these were not functionally compatible with yoga, reflecting two major pain points:

1) Fabric: The fabric of traditional leggings lacked sufficient elasticity and stretchability, which limited movement during more flexible poses. Additionally, their moisture-wicking performance was relatively weak, leading to discomfort and dampness after prolonged exercise.

2) Cut: Due to the imprecise cutting and design of traditional leggings, they often resulted in wrinkles or a tight feeling during certain movements, leading to the common issue of camel toe in women's private areas.

Therefore, Chip Wilson combined these two pain points and founded LULU, focusing on the differentiated market of yoga, initially investing all resources into yoga pants, which originally came only in black and five styles.

The seemingly ordinary "little black pants" perfectly addressed the aforementioned pain points:

Fabric: LULU innovatively adopted Luon fabric, made from 86% nylon and 14% spandex (as shown in LULU's 2007 prospectus, over half of their products used Luon at that time).

Nylon provides excellent moisture-wicking properties, while spandex offers outstanding four-way stretch, resulting in a fabric that is both stretchy and comfortable, making it a perfect material for yoga;

Cut: In terms of cutting, LULU solved the camel toe issue of traditional leggings through seamless crotch cutting and diamond-shaped lining design, making LULU's yoga pants suitable for outdoor sports scenarios as well.

Additionally, LULU innovatively placed the inner seam on the outside of the body using flat seam technology, avoiding discomfort caused by seam edges rubbing against the body during yoga practice.

Due to precisely addressing the pain points of female consumers practicing yoga, the "Little Black Pants" became a unique product in the market upon its launch, with virtually no competitors.

As yoga gained popularity in North America, LULU's "Little Black Pants" successfully broke into the mainstream, and LULU became synonymous with yoga pants. It can be said that LULU's success is built on consumer insights and the creation of exceptional product strength.

2. Expanding Categories Based on "Little Black Pants"

Building on the great success of the "Little Black Pants," LULU has actively expanded into other categories in recent years. Currently, LULU has identified yoga, running, and training as core categories, while also venturing into tennis, golf, hiking, and other sports scenarios to "capture" more wardrobe space from consumers.

Source: Company reports, CICC

Regardless of the category, the fabric remains the core embodiment of LULU's strong product strength. LULU invests significant resources in fabric research and development. Although it does not produce and manufacture fabrics itself, LULU closely collaborates with third-party suppliers through its design and R&D teams, continuously developing fabrics based on consumer needs and feedback around the Science of Feel, driving technological innovation and fabric upgrades to optimize the product's close-to-skin experience.

Years of accumulation have enabled LULU to currently possess nine core fabrics, each of which can be used in different sports scenarios based on its unique properties. LULU has patented the technology and production processes for each core fabric (including fabric composition, weaving methods, functional treatment technologies, etc.).

Source: Company reports, HTI

Based on the above analysis, it can be seen that in terms of product strategy, LULU, like many successful consumer goods companies, initially established brand recognition through a flagship product and later achieved sustained growth by horizontally expanding categories based on that flagship product.

However, good products are just the beginning of LULU's success. The key to truly establishing brand loyalty and supporting LULU's high repurchase rates and high ROE lies in LULU's unique business model.

2. Where Do High Profit Margins and High Repurchase Rates Come From?

1. Positioning as the Hermes of Yoga Pants"I want to carry Hermès and wear lululemon for a lifetime." A few years ago, an article by a fashion blogger earned LULU the title of "the Hermès of yoga pants."

The reason for equating LULU with Hermès can be summed up in one word—expensive. As you can see from the image below, the pricing of LULU's yoga pants is 2-3 times that of Adidas and Nike, not to mention many brands that do not match the positioning of Adidas and Nike.

The extremely high pricing also allows LULU to maintain a gross margin that is far ahead of its competitors, with a gross margin close to 60%, exceeding its peers by more than 10 percentage points. However, the question is why such high pricing still does not affect LULU's skyrocketing sales?

Dolphin Research believes that in addition to LULU's exceptional product strength, the core lies in LULU's precise identification of its consumer profile even before the brand was established. In the autobiography of founder Chip Wilson, it is mentioned that LULU's target users are a group of "Super Girls": women aged 24-35 living in first-tier cities, who love sports and travel, are well-educated, adept at social media, own their own apartments, and have an annual income of over $80,000.

In summary, they are women, wealthy, love sports, and pursue a healthy and fashionable lifestyle, so it is not difficult to understand why "Super Girls" are willing to pay a premium for LULU's exceptional product strength.

2. Deepening community operations to create customer stickiness

If high pricing is the key to supporting LULU's high profit margins, then high stickiness is inseparable from LULU's "religious" community marketing.

Unlike traditional sportswear companies like Nike and Adidas, which generally separate marketing and store operations, LULU cleverly integrates marketing and store operations.

Before delving into LULU's marketing model, let's look at a set of data:

a. LULU currently operates all 700+ stores globally using a direct sales model. Direct sales can manage inventory in real-time, control the pricing system, avoid excessive inventory and discount clearance, maintain brand positioning, and stabilize prices.

b. From the perspective of single-store sales efficiency, LULU has the highest sales efficiency in the North American apparel industry, more than twice that of Nike and Under Armour, and is only second to Apple and Tiffany (jewelry brand) among all offline retail formats.

The high sales efficiency is not only due to LULU's high pricing but also relies on the high conversion and repurchase rates brought by LULU's community marketing:

LULU's community marketing has two key roles - Educator and Ambassador:

Educator - KOC: The Educator is essentially the staff at LULU's direct-operated stores, many of whom are loyal fans of LULU and undergo "brainwashing" brand training upon joining.

Similar to Apple's "Genius," in addition to daily sales at the store, a more important responsibility, which may even take up more time, is to convey product knowledge, brand philosophy, organize community activities, explore user needs, and promote user conversion.

These Educators not only wait for users to enter the store but also employ proactive customer acquisition methods, such as:

a. Regularly hosting a series of free community activities at nearby gyms, yoga studios, and outdoor venues;

b. Leading community members in activities such as yoga, running, and boxing, where users can choose their favorite courses to participate in for free through LULU's official mini-program.

Through high-frequency, multi-scenario offline activities, not only can LULU reinforce its brand positioning of "healthy lifestyle," but these offline activities also provide excellent opportunities for product display and experience.

Existing LULU users can more intuitively feel the product's functionality and comfort during exercise, enhancing product stickiness, while potential users can significantly increase conversion rates through trying on products and word-of-mouth within community organizations, potentially becoming loyal fans of LULU.

Overall, as the role closest to consumers, Educators hold a core position in LULU's community marketing and possess a high degree of autonomy.

LULU, as the brand owner, primarily empowers Educators, with the organization of activities, creation of a sports atmosphere, and selection of Ambassadors fully under the responsibility of the Educators, with headquarters having no authority to intervene.

For LULU, the selection of this important role of Educator is also very strict, as influencing potential consumers, conducting detailed community operations, and establishing & maintaining relationships with Ambassadors all require high-quality Educators.

Ambassador - KOL: Unlike most sports shoe and apparel brands whose ambassadors are mainly well-known athletes and sports stars, LULU's ambassadors are very down-to-earth, primarily consisting of coaches from community yoga studios, gyms, and Pilates studios, who are considered mid-level KOLs in their respective fields and bring a certain amount of traffic.

In addition to regularly leading community members in a series of exercises, the responsibilities of Ambassadors also include actively initiating topic discussions within the community, sharing exercise experiences, dressing tips, and other content to create a positive community atmosphere, enhancing the stickiness among community members and their recognition of the LULU brandFor brand ambassadors, not only can they receive free or heavily discounted products provided by LULU each year, but they also get to be the first to experience new sportswear and equipment launched by LULU. Additionally, LULU creates special promotional posters and videos for each brand ambassador, showcasing their sports stories and achievements, providing ample exposure for the ambassadors. According to research, the annual maintenance fee for a single ambassador exceeds 20,000.

More importantly, brand ambassadors have the opportunity to connect with other LULU brand ambassadors, professional athletes, industry experts, and participate in various high-end sports social events and industry seminars, accumulating connections and resources for their future development in the sports field or related industries.

For LULU, the key is that through the community built by brand ambassadors and educators, they have gradually gained a group of users who love sports, pursue a healthy lifestyle, and have high engagement. Moreover, through in-depth community operations and avoiding large-scale advertising, marketing efficiency is also higher.

As seen in the chart below, LULU's brand promotion expense ratio is significantly lower than its peers:

From the above analysis, it can be seen that LULU has successfully built a vertical marketing closed loop of "brand-store-product educator-brand ambassador-user" based on its stores, with educators and brand ambassadors at the core, and sports experiences as the activity form. Through the dual interaction of KOLs and KOCs, they have created a highly engaging brand community, resulting in efficient communication. Dolphin Research feels that even before the domestic private domain operations became popular, LULU had already mastered this more efficient and lower-cost customer acquisition method compared to traditional marketing, accumulating a solid base of private domain fans.

Summary: "Fabric + Community" can lead to success, but business growth is still a marathon.

In summary, in the mature industry of sports shoes and apparel, as a follower, LULU naturally cannot compete with comprehensive sports shoe and apparel giants like Adidas and Nike, which have existed for decades in terms of brand history or product variety. LULU cleverly chose to enter the then-blank yoga market, conquering North American consumers with a pair of yoga pants that are both aesthetically pleasing and functional.

In Dolphin Research's view, the secret to LULU's success lies in choosing a differentiated route, precise positioning, finding its core audience through exceptional product strength, and continuously reinforcing consumer brand loyalty through differentiated community marketing. These two points also constitute the core competitive barriers of LULU's main product categories.But the differentiated and focused approach has allowed LULU to establish a foothold, but in terms of capital market value, what is more attractive is telling the story of long-term sustainable growth. In the next article, Dolphin Research will explore LULU's future growth potential and long-term investment value from an investment perspective, so stay tuned!