MIKAELA LATIMER JEN MCGURK

REBECCA MCKELLIPS SOPHIE MICHELOT

GEB 6895

12/5/2013

2

TABLE OF CONTENTS

INTRODUCTION

INDUSTRY INFORMATION

KEY ISSUES

OVERAL MARKET

INDUSTRY TRENDS

COMPANIES’ GOALS

INDUSTRY VALUATION DRIVERS

CHALLENGES

BUSINESS STRATEGIES

OVERVIEW OF PERFORMANCE

HOW THEY MAKE MONEY

FIRM DIFFERENCES IN BUSINESS MODEL

SUSTAINABLE COMPETITIVE ADVANTAGES

RECOMMENDATIONS

3

3

4

5

6

7

7

8

9

9

10

11

12

13

APPENDIX I

APPENDIX II

APPENDIX III

15

16

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3

Our final group project focuses on the industry dynamics and company strategies of

Under Armour and lululemon. Both Under Armour and lululemon are focused on high

quality-innovative performance athletic apparel products. Their product offerings place

the companies in a niche market and differentiate themselves from their competitive set.

We took a careful look at what made the competing firms operate successfully and made

strategy based recommendations for increased growth and profitability.

The performance apparel industry is made up of companies that design and sell

clothing, footwear and accessories. The product categories include basics to luxury items.

Traditionally, apparel companies wholesale large quantities of goods to retailers, who in

turn mark the items up and sell them to consumers for a profit. However, the lines are

becoming increasingly blurred between wholesalers and retailers because most apparel

companies now operate using both functions. Apparel companies establish retail divisions

so that they are given complete control over a line’s image and identity through branding

and merchandising. Retail stores are more profitable than wholesaling because the

middleman is eliminated. However, this increases the risk by having physical store

locations and managing inventory as to avoid markdowns ("Sport clothing and,").

The Internet is an important platform for retailers because consumers are becoming

increasingly more web-savvy. Ecommerce does not entail expensive storefronts and

related staffing so they are more profitable than traditional brick-and-mortar businesses.

Metrics that apparel retailers use to identify success are year-to-year sales, “comparable-

INTRODUCTION

INDUSTRY INFORMATION (see Exhibit 1)

store” sales, and sales-per-square-foot to measure how efficiently a retailer utilizes

floor space. Retailers’ success is visible in their reported gross and operating margins.

These margins are influenced by factors such as markdowns, promotions, and SG&A

expenses. Product mix also plays a roll in determining profitability as accessories generally

have a higher profit margin since they are one-size-fits-all ("Global retail sports," 2012).

The sports apparel industry is in the maturity phase of the industry (see Exhibit 1).

Newcomers such as lululemon are in the growth phase as they are focused on building

brand recognition. This approach has created a lucrative niche resulting in stolen market

share from major sports apparel leaders.

The recession hurt the industry in the five years leading to 2013. Consumer

spending on sporting and athletic goods fell, causing retail stores to decrease inventory.

However, consumers are becoming increasingly aware of the health benefits associated

with exercise and a healthy lifestyle. Because of this increased awareness, more consumers

are investing in athletic wear, which is expected to boost revenue in 2013("Global retail

sports," 2012).

Another key issue is that the international market remains volatile. Demand for sportswear

is largely driven by trends at the retail level. Fluctuating consumer preferences between

sporting activities play a main role in determining goods manufactured by the industry.

The demand for athletic goods has generally remained constant due to little shift in

demographics. However, demand is expected to weaken in the next decade as the average

age of the population increases. This trend is linked to the notion that older

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KEY ISSUES

5

OVERALL MARKET

consumers are less likely to participate in sports. There are also many substitutions

to sportswear (Bhayani , 2013).

Keys to success include inventory control, quality control, ability to adopt new

technology and a strong brand name.

Under Armour and lululemon athletica’s major competitors in the industry are Nike

and Adidas AG/Reebok. With the exception of lululemon athletica, all of these competitors

offer footwear. It is estimated the global sports apparel market will grow at a CAGR of 4%

from 2012-2019. (Trefis, 2013)

Nike designs, develops and markets high-quality footwear, apparel, equipment and

accessories. They sell their products in company-owned stores, online and at a mixture of

independent distributors and licensed operators in over 180 countries. Nike’s sales are

expected to rise modestly in 2013. Nike’s supply chain is vertically integrated. The

company has attempted to improve its revenue during the recession through cost cutting

strategies, resulting in improved profit margins. Nike currently enjoys a 47% market share

of the domestic footwear industry ("Sporting goods wholesaling," 2013).

Adidas AG has had a significant presence in the US market since the 1950s. They operate

company-owned stores, through licensed retailers and online. Adidas’ share of the industry

continues to grow, reflecting their strong brand name. Reebok is the second leading

manufacturer of footwear with a market share of sixteen percent. Reebok became part of

Adidas sportswear group in 2005. In 2009, Adidas Group went from a vertically

integrated brand to a functional multi-brand structure for both brands. Reebok and

Adidas both outsource production. Adidas focus has been on marketing and distribution

that is catered to each country’s buying habits. Adidas/Reebok’s strategy is broad

differentiation. Adidas targets soccer and basketball players, whereas Reebok is popular

with fitness and fashion consumers ("Sporting goods wholesaling," 2013).

According to the National Recreation and Park Association (NRPA), as household

income increases fitness inactivity decreases. It is also reported that there has been a 7.3

percentage rise in running/jogging since 2010. According to the Sporting Goods

Manufacturers Association, there was a 2 percent increase in overall participation in

outdoor sports such as camping and hiking from 2010 to 2011 ("Nrpa," 2012).

As the PESTL model shows, there is a trend toward healthier, more active lifestyles,

with older demographics and women becoming more active. Consumers are more health-

conscious and older demographics in the US, the EU, Japan, and other developing countries

across Latin America and Asia, which increases the consumer base of which retailers can

sell products to. The retail industry is shifting as work processes and working

environments adapt to older workers’ needs since the youth population of workers ages 30

and under is declining and those over 50 increases, particularly in developed economies

("To cope with," 2011). Rising price of raw materials as well as high oil and logistics costs

increases the cost of goods and decreases profit margins ("Soaring fuel prices," 2011).

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INDUSTRY TRENDS (see Exhibit 2)

Increasing wages in BRIC countries also decreases profit margins ("Finding elusive

labor," 2013). Globalization levels are increasing, especially through e-commerce (Shah,

2013).

We established that lululemon and UnderArmour operate in the performance sports

apparel industry. We believe that the industry valuation drivers are:

The annual revenue generated by each firm, as well as their annual growth rate

(CAGR): these two indicators testify the dynamism of a company and its ability to

increase its sales.

The number of locations where products are distributed: whether the distribution is

organized through external retailers or through corporate-owned stores, the

number of locations distributing the products gives an indication of the geographic

coverage of a firm and its ability to reach customers.

The brand image and the sport sponsorship: brands belonging to the performance

apparel industry have to convey a specific marketing story toward their customers

(actual and potential). The brand image is highly linked to sports sponsorship (for

instance, athletes and sports events for UnderArmour, yoga teachers and yoga

events for lululemon).

The goals stated by each company can be found in the Appendix. Overall, we can underline

that the main objective of Lululemon is to provide favorable conditions to reach a

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COMPANIES’ GOALS (see Exhibits 3 & 4)

INDUSTRY VALUATION DRIVERS

sustainable growth, whereas Under Armour is increasing its efforts toward global

expansion and manufacturing capacity.

Both companies are facing different challenges in the attainment of their goals:

lululemon:

The lack of brand recognition: lululemon remains a brand for yoga fans and

female consumers.

The fierce competition: powerful companies such as The Gap and Nike are

attacking lululemon target market threatening the firm’s growth.

The difficulty of reaching new markets and offering diverse products.

UnderArmour:

The necessary international expansion: UnderArmour remains a North American

brand., with 94% of net revenues in North America. (UnderArmour, 2012) The firm

needs to build global brand recognition and directly compete with other local

brands.

The reinforcement of the distribution channels: UnderArmour is dependent upon

sports retailers and faces competitors such as Nike directly on store shelves.

The conquest of new markets: UnderArmour needs to intensify its efforts in the

footwear market to successfully compete.

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CHALLENGES (see Exhibit5)

Both companies have seen tremendous growth over the past years. The following is a

summary of performance:

Growth dynamism: lululemon seems to have reached a first hurdle in its growth

since the creation of the company. The company’s profitability is slightly decreasing,

showing the necessity for lululemon to sustain its economic growth through product

diversification and geographic expansion. UnderArmour on the other hand

maintains its revenue growth; and forecasts to maintain continued growth at a

staggering 5 year compound annual rate of 19.3%. (UnderArmour, 2012)

Profitability evaluation: lululemon is strikingly profitable; we attribute this to its

product margins. UnderArmour shows more stability in its profitability ratios; sales

have increased year over year, while holding cost of goods sold relatively stable,

final net income is at 7% of net revenues or $12,844,447,000. (UnderArmour, 2012)

Both companies are relative dwarfs in the sports apparel industry: the percentage of

market share owned by both companies can be explained by the plethora of

competitors in the industry and the lack of global coverage from both firms.

lululemon

lululemon utilizes a generic differentiation business strategy. Before opening a store

the company opens a “showroom” where educators interact with guests through yoga and

fitness classes to understand customers in their target market. Therefore management

and products differ from store to store. This practice proved successful and has created a

loyal customer following due to the unique experience and products provided in each store.

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BUSINESS STRATEGIES (see Exhibit 8)

OVERVIEW OF PERFORMANCE (see Exhibits 6 & 7)

lululemon is focused on creating sustainable future growth and expanding globally as a

multi-channel and multi-brand organization. This will be completed through the

company’s heavy investment in product research and development. The product line is

designed to withstand five years of use and utilizes patented fabric. lululemon’s vision is to

“elevate the world from mediocrity to greatness by focusing on quality over quantity”.

Under Armour

UnderArmour also utilizes a generic differentiation business strategy. Before entering a

new product category the company thoroughly investigates it’s viability and competitive

advantage, which has resulted in major successes. This practice has created a highly

successful product base, which consumers will want to return to.

UnderArmour is focused on creating revenue growth and expanding globally. This will

be completed through the company’s heavy investment in product research and

development. UnderArmour’s vision is to “To empower athlete

everywhere”(UnderArmour, 2012), will be achieved through their expansion in

eCommerce, their increased global presence and their technologically advanced product

line.

lululemon

lululemon products are only available through their 226 worldwide stores, showrooms, in

select studio partners, and online. The product line includes yoga inspired clothing and

HOW THEY MAKE MONEY

10

accessories for women, men and youth. The following programs are sources of

company revenues:

Wholesale program–partner with leading fitness and yoga studios.

Yoga hard goods program– supply studios essentials (i.e. yoga mats, blocks and

straps).

Team sales program– offer teams technical athletic gear.

Valuation can be achieved by increasing dollars per transaction, number of

transactions, reach, brand recognition/awareness, and gaining market share.

Under Armour:

UnderArmour products are available online and through major distribution outlets. The

product lines consist of mens, womens, and childrens clothing and accessories.

UnderArmour is expanding in footware products, and performance technology. While

UnderArmour is expanding in growth every year consistently, 94% of all revenue remains

from North America exclusively. (UnderArmour, 2012)

lululemon and Under Amour have successful business models where their quality products

create value for consumers. Over the last three years, both companies have achieved 25%

sales growth. In order to continue at this pace, the companies will need to grow their

customer base and consider backward vertical integration. This can be achieved for

lululemon by gaining sales from aboard, creating a more expansive male product line, and

entering the production and fabric manufacturing industry. For Under

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FIRM DIFFERENCES IN BUSINESS MODEL (see Exhibit 9)

Armour, overseas sales and growth is important and key to increased profits, growth,

and expansion in the women’s product line and increased sales direct to consumer through

retail outlets and eCommerce business.

lululemon’s sustainable competitive advantages include their brand image, culture, and

reputation for high quality products. This advantage was created by the company’s first

mover positioning of their signature “Luon” fabric. The fabric uniqueness enabled the

company to charge a premium price and set itself apart from the competition.

Additionally, the company has developed a loyal customer base that has grown quickly

due to the lack of competition in the Yoga apparel industry. As a result, lululemon is

considered a lifestyle brand. lululemon does not use traditional marketing and advertising

techniques. Instead, lululemon partners with running clubs and other social activities to

gain brand recognition. Their retail stores provide up to $1000 of free products to yoga

teachers, fitness instructors and others to market their product lines. The company also

offers in-store yoga classes to build trust and loyalty among its consumers. Through this

innovative marketing strategy lululemon is able to maintain an advantage over brands that

create a similar product for half the price.

UnderArmour has created a sustainable competitive advantage in their technological

innovations, their brand image, their relentless pursuit to arm every athlete, and their

commitment to quality. The company has developed a loyal consumer base, and is

continuing to expand that base in North America. Ffuture growth will be focused on global

expansion.

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SUSTAINABLE COMPETITIVE ADVANTAGES (see Exhibit 10)

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RECOMMENDATIONS

lululemon:

Intensifying geographic expansion through stores openings in North America, and in

the foreign markets already targeted by the firm: this will accompany the growth of

the company and improve its brand awareness.

Diversifying its revenue sources by aggressively targeting new businesses and new

markets: lululemon has to impose its brand among men’s business, young women

business, and adapt its products to other sports and plus size consumers. These are

major sources of missed revenues for the company and will provide the company’s

desired growth.

Increasing its brand awareness and loyalty: lululemon must continue its efforts in

terms of product innovation to increase its customer value proposition and

eliminate competition.

Focus on quality: the company's products had a major manufacturing defect. This

led to a costly product recall. Moving forward, lululemon must focus on quality in

order to charge a premium price for their products. This will enable the firm to

continue to command their premium price and reduce rivalry among their

competitors.

UnderArmour:

Boost sales and gain market share: to beat the competitors (such as Nike, Adidas,

Reebok) Under Armour must continue to develop cutting edge, innovative products

that appeal to all genders and ages.

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Improving the distribution of its products: UnderArmour has to ensure its products

can be easily accessed and purchased by customers.

Expanding its operations abroad: UnderArmour must create brand awareness in

foreign markets, and give a more global dimension of its sponsorship policy.

Expand its product line to include accessories and footwear. This is a segment of the

business that is lacking and should be addressed for continued growth of the

product line.

APPENDIX I

LULULEMON ANNUAL INCOME STATEMENT LULULEMON ANNUAL BALANCE SHEET

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APPENDIX II

UNDER ARMOUR ANNUAL INCOME STATEMENT UNDER ARMOUR ANNUAL BALANCE SHEET

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APPENDIX III

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EXHIBIT 1: INDUSTRY LIFE CYCLE

High sales and profits

Emphasis on lower costs and price competition

Fight for market share with high promotional expenditures (sponsorship)

High degree of differentiation in products lines

EXHIBIT 2: PESTEL ANALYSIS

P Political: FDI policies.

Economic: Increasing oil and logistics costs. Raw materials price increase. Increasing wages in BRIC countries.

E

S

Socio-cultural: Increase in demand for sports-style apparel and favorable demographic conditions throughout Asia are expected to boost the sports apparel market. Trend toward healthier, more active lifestyles, with older demographics and women becoming more active. More health-conscious older demographics in the US, the EU, Japan, and other developing countries across Latin America and Asia.

Technological: Increasing trend of global e-commerce. T

EXHIBIT 3: LULULEMON’S GOALS FROM THE 2013 ANNUAL REPORT

1. Open 38 new stores in North America by 2014, and 5 men’s only stores

2. Expand our activities abroad through the opening of 5 new stores in Australia and New Zealand by 2014, and 10 showrooms in Asia and Europe by 2016

3. Increase eCommerce sales by 5% in FY 2014

4. Increase social media presence to 1 Million likes on Facebook page by FY 2014

5. Increase revenues by 5% during FY 2014, through the introduction of new product technologies, expanded product categories(bags, underwear, outerwear), and product ranges with new athletic activities (tennis, golf, cycling, swimming).

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EXHIBIT 4: UNDERARMOUR’S GOALS FROM THE 2013 ANNUAL REPORT

1. To increase revenue by $4 billion by 2016

2. To generate $500 million of revenue through two platform innovations: Charged Cotton and Storm

3. To increase revenue from men’s business by $1.5 billion by 2016

4. To increase revenue from women’s business by $960 million by 2016

5. To increase revenue from youth’s business by $470 million by 2016

6. To increase revenue from footwear’s business by $600 million by 2016

7. To expand operations abroad: in Asia (China, Japan, South Korea, Hong Kong), Latin America (Mexico, Brazil, Panama, Chile), Europe (UK, Germany, France, Benelux), Australia. The goal is to get 12% of revenues from international sales by 2016.

8. To develop direct-to-customer sales through the opening of 141 stores by 2016, and ecommerce growth

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EXHIBIT 5: SWOT ANALYSES

Lululemon:

S

O

W

T

Brand Loyalty Great future growth model Fabric technology patents Technological advances in product lines Continuously producing new products, with a faster turnaround time versus industry average

Sports apparel industry is projected to continue growing Rising utilization of eCommerce Expansion of product line to include larges size ranges, and footware Emerging markets are increasing customer base, as disposable income increases

Top Management Issues Customer Perceived Quality Issues Limited Global penetration Dependence on third party suppliers Limited marketing and advertising scope

Low barriers to entry Cannibalization of customer base, as low switching costs occur Fashion trends rapidly change More consumers are cost conscious after the recession Global wage increases

UnderArmour:

S

O

W

T

Highly focused on innovation High brand recognition, utilizing endorsements and athlete groups Sustained profitability and continued growth Broad product base

Sports apparel industry is projected to continue growing Rising utilization of eCommerce Expansion of product line to include larges size ranges, and footwear Emerging markets are increasing customer base, as disposable income increases

Dependence on third party suppliers and distributers Global presence and growth is minimal, with very little global brand recognition Lean implementation and cost cutting measures have been a low priority Differentiation efforts to distance competitors have been minimally successful

Low barriers to entry Cannibalization of customer base, as low switching costs occur Fashion trends rapidly change More consumers are cost conscious after the recession Global wage increases

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EXHIBIT 6: OVERVIEW OF PERFORMANCE

Performance measure

Lululemon UnderArmour Ratio Trend Ratio Trend

Growth profit

margin (%)

54.04 -1.63 pts 48.28 +0.36 pts

Operating profit

margin (%)

25.33 -2.14 pts 11.52 +0.15 pts

Net profit margin

(%) 18.13 -1.68 pts 6.88 -0.14 pts

Return on assets

27.84 - 2.56 11.98 -0.42

Return on equity

31.82 -4.53 17.18 + 4.78

Return on investment

30.71 -4.34 15.7 +0

Changes in working capital

-32.3 13.7 in 2011 +9.1 -146 in 2011

EPS 1.85 -0.01 1.38 +0.17 Market share

0.69% 1.36%

EXHIBIT 7: SHARES PERFORMANCE

Lululemon:

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UnderArmour:

ARENAS: Where will we be active?

Lululemon UnderArmour

1) Which product category? Sports bars, tanks, tops, jackets, hoodies, outerwear, pants, crops, shorts, skirts, bags, headwear, socks & underwear, yoga mats

Apparel, footwear, accessories, licensing revenues

2) Which market segments? Women, men, young girls, yoga fans, runners Women, men and youth

3) Which geographic areas? Canada, USA, Australia, New Zealand, Hong Kong, United Kingdom

Canada, USA, Europe, Asia

4) Which core technologies? Clothes design

Technical fabrics

Fabric innovation

Performance monitoring

technology

5) Which value-creation stages?

Product design

Marketing and sales

Service and distribution

Product design

Marketing and sales

Distribution and

eCommerce

6) VEHICLES: How will we get

there?

Internal development

Outsourcing of manufacturing

Internal distribution system

Internal development

Outsourcing of

manufacturing

Internal distribution system

7) DIFFERENTIATORS: How will

we win?

Image: self-fulfillment, love,

communication, travel, sunshine,

friendship, happiness, goal setting,

breathing, sweating

Price: cf table below

Product reliability: sustainable

products, high quality, innovation

Heatgear for when it’shot

Coldgear for when it’s cold

Allseasongear for between

extremes

All available in

compression, athletic, and

loose fits

8) STAGING: What will be our

speed and sequence of moves?

Conquest of North America first, then

Western countries and Asia

Fast moves to become public

Conquest of North America

first, then Western

countries and Asia

Continue growth, and YOY

growth

9) ECONOMIC LOGIC: How will

we obtain our returns?

Premium prices due to proprietary

product features and high-quality

service

Premium prices due to

proprietary product

features and high-quality

service

EXHIBIT 8: STRATEGY FORMULATION

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EXHIBIT 9: FIRM DIFFERENCES IN BUSINESS MODEL

Customer Value Proposition

Lululemon Under Armour

Target Customer

Female, male, and youth who practice yoga, tennis, cycling, golf, swimming, and dance. Appeals to wealthy clientele due to price point.

Men, women, and youth who are pro or amateur athletes, military personnel, and college teams. Target sports football, basketball, baseball, hockey, soccer, skiing, and golf.

Job To Be Done Clothing that appeal to individuals who want to be protected from sweat and odor while practicing yoga.

Clothing that appeal to individuals who want to be protected from sweat and odor while playing sports.

Offering Solely corporate owned stores. Corporate owned and products are wholesaled to sporting goods retailers.

Revenue Model Niche market, price premium, higher margins.

Niche market, price premium, higher margins

Key Resources and Processes

Technologically advanced fabrics, designed and manufactured internally.

Advanced fabrics, strict inventory control, vendor code of conduct for decreased overseas manufacturing liability.

People Designers, marketing staff, ambassadors. Designers, marketing staff, and sponsors. Technology, products

Fabrics- Luon, Swift, Luxtreme, Natural Blends, and Mesh and Liners

Coldgear, HeatGear, Protect this House, Armour 39

Channels Corporate owned stores and ecommerce that reaches multinational markets.

3rd party, suppliers, manufacturers, and retailers.

Brand High quality innovative products. Every product must make athletes better. That’s our guarantee.

Mission The lululemon athletica manifesto is a set of inspirational sayings that guide our culture.(lululemon, 2012)

To Make all athletes better through passion, design and the relentless pursuit of innovation (Under Armour, 2012)

Vision Considered the same as the above mission statement(lululemon, 2012)

To empower athlete everywhere (Under Armour, 2012)

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EXHIBIT 10: VIRS ANALYSIS

Lululemon:

Resource/Capability Valuable? Rare? Difficult to

imitate? Without

substitutes? Implications for

competitiveness?

Innovative Fabrics Yes Yes Yes No Temporary competitive advantage

Brand image Yes Yes Yes Yes Sustainable competitive advantage

Trademarks Yes No No No Competitive

parity Retail Operations

Yes No No No

Competitive parity

Culture Yes Yes Yes Yes Sustainable competitive advantage

Reputation Yes Yes Yes Yes Sustainable competitive advantage

UnderArmour:

Resource/Capability Valuable? Rare? Difficult to

imitate? Without

substitutes? Implications for

competitiveness?

Innovative Technologies

Yes Yes Yes No Temporary competitive advantage

Brand image Yes Yes Yes Yes Sustainable competitive advantage

Quality Yes Yes No No Temporary competitive advantage

Retail Operations

No No No No

Competitive Disadvantage

Culture Yes Yes Yes Yes Sustainable competitive advantage

Reputation Yes Yes Yes Yes Sustainable competitive advantage

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