Little Black Stretchy Pants

by Chip Wilson

  With interest coming in from US companies, it was time to increase our growth and get a solid foothold south of the border.

  One Step Closer to Global

  In my view, there are two classic reasons that Canadian companies meet their end at American hands. They either stay in Canada too long and get run over by an American competitor with economy-of-scale, or they expand into the US with a product only viable in Canada.

  I knew lululemon had the potential to be a global company because health and the desire for longevity crossed all cultures. I also knew our philosophy of transformational people development was a revolutionary international brand driver. Our success in America would depend on knowing when conditions were just right and then making a calculated move.

  The conditions were right. The steady stream of US interest in our company was showing no signs of letting up. Americans were buying a lot of our product when they ventured north, and we’d proven ourselves successful right across Canada. Our Canadian stores were generating enough revenue to justify the risk of an international expansion, and more importantly, we could afford to make a mistake.

  I felt my personal ties to the US would be advantageous in introducing lululemon to the American market. Although my younger brother Brett was born in Calgary, my mom and stepfather had taken him and my sister to pursue the oil business in Denver when he was ten. Despite the time we’d spent apart, Brett and I had a history of influencing one another’s plans at pivotal moments.

  Brett and Susanne

  After selling Wave Rave to Ride Snowboards in the late nineties, Brett and his wife Susanne began developing a social tech company called Two Jet in 2000, but they got caught in the 2001 tech bubble burst and lost almost everything.

  After Brett and Susanne closed Two Jet’s doors, I immediately spoke with him about opening the first lululemon store in the US. He said yes right away.

  I trusted Brett, and not just as my brother. I also knew he had the entrepreneurial gene and had already run retail stores. Having someone with Brett’s experience setting up our first US store meant I wouldn’t have to divert the attention of our Vancouver people who were busy growing the business in Canada. This wasn’t a franchise. The first stores in the US would be owned by the company, with Brett taking responsibility for the leasing, build-outs, hiring, and opening.

  As the plan of opening a store in the US took form, the first question that came up was one of precise location. I wrongly chose to do a hybrid model of a showroom and a flagship store. I believed the core yoga culture wouldn’t want us to set up on Santa Monica’s busy Third Avenue Promenade and look like a big-shot retailer. I wanted to do it softly. I picked a location a block away.

  When Santa Monica opened, things were much slower, even slower than we’d anticipated. In retrospect, we had a product the world wanted, wanted now, and wanted a lot of. There was nothing the world over comparable to what lululemon was doing. All I had to do was put lululemon on a busy street and let the maximum number of people discover it.

  As Brett recalls, “As the brand was taking off in Vancouver and Toronto, we opened in Santa Monica where nobody but travelling Canadians knew anything about the brand. Just getting a foothold in the US took work.”

  “The first time I had concerns about our company’s future was when we didn’t have instant success in Santa Monica,” says Deanne Schweitzer. “When we opened up the Santa Monica store it was probably the wrong location and wrong size of store. The build-out didn’t really feel like us, and we were really struggling to get Educators that were excited about the brand and what we were creating.”

  “There was a very naïve understanding of what it would actually take to begin the community-based branding process,” says Brett’s wife Susanne, “but it needed to happen in the same way it had in Vancouver. Slowly, organically, and through word-of-mouth.”

  Fortunately, Brett stuck to the formula: he went straight to the yoga community and began a grassroots campaign. Slowly but surely, that strategy paid off.

  Still, one store alone would not be enough. We knew we needed to get a few stores to accelerate the brand conversation in the US. Over the next year, following the Santa Monica store, Brett opened additional locations in Newport Beach, and then Cow Hollow in San Francisco. Cow Hollow was really a pivotal store opening because it was a launch beyond Southern California.

  It wasn’t easy to break lululemon into the United States, and I was constantly mindful of how hard it was for Canadian companies to take off in the US. But as we moved through 2004, it felt more and more like we were onto something unique and unstoppable.

  The Tipping Point

  I was starting to believe we’d reached our tipping point—that crucial moment where we moved from being an underground brand to becoming something everyone in mainstream society wanted.

  When the tipping point occurs, the last thing posers want is for the company to advertise or make products for them. They want only to buy what the target market wants because non-target customers want to look authentic.

  The underlying principle of surf, skate, and snowboard branding was to push the non-strategic customer away and play hard to get. The branding was clear about who the customer was not. It was also a strategy we employed again successfully at lululemon. I found this concept very difficult to explain to people and enroll them if they did not understand the West Coast athletic subculture.

  Lululemon’s tipping point came when two things occurred. First, we noticed customers coming in with friends and educating their friends about our products, just as a paid lululemon Educator would.

  Second, the stores got to be so busy that we could no longer fulfill on providing health and fitness advice to our Guests—there was simply not enough space. I shifted our focus from the Guest to our Educator, their families, and their communities.

  I believed if we made our Educators icons of their communities, their presence would be of inspiration to our Guests. This was better for business, but more importantly, it was a better way of elevating the world from mediocrity to greatness.

  Category Killer

  Part of lululemon’s success—even in our slow, early expansion into the US—was that we were a category killer.

  A category killer refers to having so much of a desired product that a business becomes the only place customers will go for it. It effectively ‘kills’ the competition in that category. For instance, many years earlier, I knew of a ski shop in Whistler that was rather mediocre, selling every product everybody else sold. But one day I walked into that mediocre ski shop and saw they had devoted their entire store to selling only ski or snowboard gloves. Before long, if you had to get a pair of gloves, you knew there was only one place to go… that formerly mediocre ski shop.

  I wanted to do what no one else had done before. I dreamed of a large, athletic store whose stock was 80 percent women’s clothing. What I believed missing in the market was the ability buy a hundred styles of technical clothing in one store that all worked together. The store would match luxury store standards but be set up in a functional way.

  Instead of buying in outfits, a woman would go to sections for pants, shorts, bras, etc. The change rooms would have five hooks and a bar, so a woman could hang her purse, jacket, and street clothing, and still have five garments she could try on in the change room.

  The lighting would be perfect, and each room had to have a three-way mirror so a woman could be self-critical of her backside and choose freely whether to buy or not. I didn’t want to force a woman outside the change room to get beauty validation from a commission-oriented salesperson.

  To expand on this concept a little more, you might be best in the world at making something, the way lululemon was the best in the world at making black Lycra pants. But to become a category killer, pricing also had to be considered. One option is three-tiered pricing: a low, medium, and high pricing model that all depends on levels of quality.

  I preferred not to use that model because l
ululemon couldn’t make a low-price garment in the first place. I wasn’t reaching for a discount product or demographic (I recently saw a documentary about Steve Jobs, where he said something along the lines of: “Make them pay full price, make the best in the world, and the best will come.”). I was aiming for the athlete who wanted something that worked. I couldn’t think of producing a profitable medium-tier garment that didn’t work for the athlete.

  As the three-tiered pricing model was not an option, another option was to make sixteen pairs of pants all look different. These included high-rise, low-rise, crop, long, and even loose-fitting. We did just that.

  In this way, we appealed to the woman who appreciated quality and would spend $90 to $100 on a pair of pants. She would recognize that she was buying the best black Lycra pants in the world and would likely want to buy ten of the variations we were offering, rather than one of this and that from ten different companies.

  This truly set lululemon apart as a category killer.

  Dumpster Diving and Headbands

  Once we’d started making decent profits as a category killer, I thought of different ways to own the yoga market. Yoga mats, straps, and blocks were the only things we bought from other suppliers to round out the store’s offering. Because of yoga clothing, we were a natural stop for mats.

  Yoga mats were really a commodity product, as the product was hard to differentiate. They weren’t rocket science, so to speak. But, I realized if I could sell yoga mats at cost, it would bring more people through the door, which would sell more clothes. I could envision hundreds of lululemon stores selling millions of yoga mats. I also wanted to encourage people and provide them with a low-priced gateway to experiencing yoga. In the era before great search engines, I had no idea how to find a manufacturer. So, I got scrappy.

  I decided I had to find the source of production. I waited until after dark and then went dumpster diving in the alley of a mat supplier. I figured all I had to do was find a cardboard box with the return address of their Asian supplier.

  I was successful.

  I sold yoga mats at cost. Store sales jumped and so did profit even though we made zero margin on yoga accessories. Once I controlled the market, I raised the price on the mats to a point where I could make a small profit but kept it low enough so that it wasn’t economical for anyone else to enter the market. This was part of my ongoing build-a-moat-around-our-success-and-don’t-let-the-competition-in model.

  Another cool idea came from seeing scrap fabric. When I was abroad, I remember watching fabric fall to the floor of a sewing factory and thinking, “God, that’s a lot of waste, what can I do with those scraps?”

  As Shannon recalls, “The lululemon headband was born out of the hemming process. One of the seamstresses used to take the ends of the pants she cut off and wear it as a headband because her hair got in her eyes while sewing. We thought, ‘What a great idea! Let’s take these pant ends and sell them.’”

  Thinking back to my mother’s talent as a quilter, cutting small scraps into small triangles and squares and make caps and headbands seemed like a natural next step.

  Every headband looked different, which was always a bonus of quilting. I extrapolated this idea of variability to the drop-down waistband on the groove pant. Women would sift through twenty pants looking for the colour combination that would best suit them. I had figured out how to do mass production and still make each garment different. Guests loved this.

  Headbands were especially popular with younger girls who used them to differentiate themselves amidst a sea of school uniforms. They would become one of lululemon’s best-selling items.

  Contemplating the Future

  The year 2005 had arrived, and I still couldn’t see any competitors on the horizon. No one wanted to spend the kind of money necessary to build the retail stores they’d need to compete with our vertical retailing model. No one could match our successful formula, unique designs, high-quality Luon, free hemming, flat seams, or anything else that made lululemon so unique.

  Nevertheless, I’d recently begun to wonder if the time was coming—sooner rather than later—when the growth of the brand would outpace my ability to keep up with its demands. So many people started to tell me that I didn’t have the expertise to run a billion-dollar brand. My stated vision and goals were focused on family goals. This meant choosing to prioritize family while doing the best for both lululemon and its employees. JJ and Brett were young teens, and I only had a limited amount of time to be the best dad I could be to them. I also had a two-year old and twins on the way—I wanted to go to every school concert and every bike ride to Kits Beach with them.

  With that in mind, what were my next steps? Would I partner with a larger retailer? Did lululemon need a more experienced CEO? How could I ensure my family was taken care of for life?

  I had turned down the offer from Victoria’s Secret, but I still had a stack of letters of interest from big public companies and private equity firms. Everyone, it seemed, wanted to participate in lululemon’s phenomenal story.

  I knew the business of my business, but I was frightfully naïve about businesses that invested in businesses and the motivations of the people who run them. Who would I get to advise me, I wondered? I knew no one inside my small circle of friends who qualified. I had been working hard, and the speed of growth was phenomenal. Every step was exhilarating. But, I had not taken the time to develop the relationships I would need in the future. I thought I could get the advice I needed with PE.

  Chapter 20:

  The Valuation

  Selling Part of the Company

  If we were going to get involved with a big company or private equity, the first step was understanding the value of lululemon. Naively, I had a ballpark figure in my head of about $25 million—a number which seemed intangible, surreal, and very weird to me. But my GM, Darrel, and CFO, Brian, had determined that the company was worth about $225 million, about ten times the number I’d come up with.

  From my end, I knew we had a great brand. All our profits were being reinvested in the company because the return on each dollar doubled each year. Shannon and I were not drawing salaries, and we were only pulling enough out of the business to cover living expenses. In retrospect, I could have borrowed $40 million unencumbered from the bank to give my family a lifetime of security. I had told the top-tier of our senior employees that I would give them 10 percent of the company if we ever went public. This incentive probably drove the wrong actions, but I didn’t understand that at the time.

  I would soon have three boys under the age of two, and my priority was to be present as a father. I knew lululemon’s future meant a lot of travel around the world to find perfect store locations, and to Asia, specifically, to maintain my partner relationships with mills and factories. I was not astute enough to talk to advisors. This may seem counterintuitive, but in retrospect, I needed to talk to people who had been through the experience of PE before. I limited my options to either continuing as CEO and prioritizing the business, or to selling part of lululemon. Selling would allow me to bring in advice, partners, and financial oversight, and give me an opportunity to prioritize my family. I chose family, and I will never regret this choice.

  “We had the best of both worlds,” says Darrell Kopke our GM. “Highly profitable growth in the front end, and timely, accurate, and useful information in the back end. We implemented software and payroll systems and then had to replace some of them as we grew. This paid off when we looked for the outside investors.” The reality was that we had such a great foundation of Operating Principles, a world-class people development platform, and a strong employee pipeline (based on ideas from the book The E-Myth), that the company was relatively easy to run. The hard work had been done, and we simply needed to replicate what we had built. The company’s profitability and cash flow were best-in-class.

  I felt out of my depth, and I wasn’t confident that I could broker the deal I believed we deserved. Corporate finance and tax wer
e a weak point for me, and I’d never been a natural negotiator. I was the best in the world at making a product and asking a fair price for it (my theory always has been that customers could take it or leave it). I didn’t know what I didn’t know, and I wasn’t even sure where to look for help.

  I needed help with negotiations and valuation.

  The Beauty Contest

  I decided to work with a local Vancouver business broker who had come highly recommended. It took a month to create a package to send out to the private equity companies and retail operations that had asked about lululemon. The package profiled the brand, explained our history, and showcased our culture. We wanted to give them all the tools they needed to evaluate our company and understand who we were.

  This was a process called a beauty contest—introducing a client to people who could provide financial solutions or make potential investments in their company.

  One of the first retail operations we met with was Liz Claiborne. Executives from the longstanding women’s apparel company were in Vancouver conducting due-diligence on another deal when they came across lululemon. The Liz Claiborne people offered $500 million at $100 million per year to be paid out over five years. They also asked that lululemon perform within their overall corporate structure, meaning we would have to conform to their system for finances, shipping and receiving, and technical infrastructure.

  After some deliberation, I turned down the Liz Claiborne offer. I felt the $100 million for five years was too thin a spread, but more importantly, that their culture was not the right match for us. I was worried our people would have a tough time working under that much structure. All things considered, Liz Claiborne was a little bit too corporate, too big. I thought the culture clash would be too big an obstacle to overcome.