Little Black Stretchy Pants

by Chip Wilson

  My own abilities were (and are) creative and analytical. I wanted the Directors to keep their eyes on the hiring of management and create structural processes into which we could grow.

  The Advent people took on our employee development and slipped smoothly into our culture. I loved that they wanted to figure out why we were successful so they could transfer new knowledge to their other investments.

  Tom Stemberg, I found, was very keen to offer his advice on how to set up a board. However, Tom did not want to do Landmark, perhaps because he already felt successful in his life. His wife was also against the ideas of transformational development, and I believe this contributed to the roadblock Tom hit with our culture. I wasn’t worried. I thought he would come around once he saw how successful we were because of our development program.

  But, now that Tom was inside lululemon, he seemed sure our future value depended on “professionalizing” our company. Culture took a back seat, since, in Tom’s view, professionalization had little to do with culture.

  Bob Meers

  As the Board took shape, Advent had a recommendation for an operating partner. An operating partner is someone a private equity firm puts inside the company, who is paid for by the company but works to the benefit of the private equity firm and acts as their eyes and ears.

  Advent put forward former Reebok executive, Bob Meers. Bob had been with Reebok when it was the number one athletic company in the world, easily dominating the top position of the women’s fitness market with step classes.

  Where Reebok had failed, I thought, was in their decision to shift away from women’s fitness, a business they knew well and at which they were best in the world. They’d chosen to refocus on men’s fitness and big sponsorship marketing and were rapidly swallowed up by their massive competitors in the men’s market—primarily by companies like Adidas and Nike.

  What I liked about Bob were the lessons he’d learned. He’d seen the mistakes and had gained experience through them. He also understood women’s fitness, which was valuable to lululemon. Finally, he knew retail stores and real estate and came highly recommended by Advent. Most importantly, Reebok had been built on the foundation of Landmark, and Bob told me he had been through most of the courses.

  After meeting Bob, I realized he might be a good fit as CEO, as well as a member of the Board. I was a father to toddlers, and I was tired of travelling. Where else could I find a Landmark-trained athlete who understood the future of the women’s market? How else was I going to be the father I wanted to be?

  On our way to dinner in Boston, I asked Bob if he was interested in the position of CEO. He immediately lit up. With the CEO offer on the table, Bob proved himself very smart in negotiating his compensation.

  We announced both the private equity deal and Bob Meers’ appointment to the CEO position in a press release on December 8, 2005. In January 2006, Bob arrived in Vancouver to begin work. Bob and I shared an office for six months. Having a new CEO onboard didn’t alter the number of hours I spent at work, but it relieved me of almost all business travel. I could come home at night and spend time being a husband and father.

  Bob’s arrival brought a mix of excitement and wariness. He was a new, older, experienced, East Coast executive coming in to run an unorthodox, highly personal, female-dominated, West Coast company that operated like a family. This time, I’d expected the wariness, and I knew it would take a while to foster trust in the people working for me. This was why Bob and I worked in the same office for six months—I wanted to ensure he understood who we were at every level.

  Foreign Markets

  Before Bob joined us, I’d looked at some expansion plans beyond North America. I was reluctant to open stores in Europe because human resources complications were akin to those in California. I felt that their rules around hiring, firing, lunch breaks, vacation, cost of benefits, and the threat of legal ramifications created mediocrity at the retail level in Europe. In my opinion, that’s why few great retail managers come from Europe or California. It’s all due to the overregulation in those markets.

  Fortunately, there were other locations in which to look. Back when I was with Westbeach, a man named Kano Yamanaka was my Japanese distributor. In the years since, we’d maintained contact and become friends. As lululemon was picking up momentum, Kano and I decided that he would open a lululemon franchise in Japan with a view to opening a series of stores. Westbeach had had a lot of success in Japan, and I wanted to build on that with lululemon.

  Kano’s first store had opened a year earlier. Since then, it had performed moderately well even though it wasn’t in a prime location, it wasn’t big enough, it was spread over two stories, and so on.

  Playing it safe was not what we needed, as we already had a proven concept. I needed a prime location to ensure that if lululemon wasn’t great in Japan, it wouldn’t be because of the same challenges we’d experienced in Santa Monica. Like a science experiment, I had to remove all external variables to validate our business philosophy.

  It became apparent that Kano’s financial resources were not as deep as they once were at the apex of the snowboarding business. Perhaps he had stayed in the market too long. While Kano was doing his best with what he had, I wanted someone committed to prime locations, who could afford to build out the brand.

  We got an offer from Descente, a large Japanese company with a very modern CEO who wanted to westernize his staff and teach them what North American retailing was all about. He even wanted them to speak English. Lululemon bought Kano out of his franchise and made an agreement with Descente, who, under Bob’s approval, opened three more lululemon stores in Japan

  If I had not stopped travelling, I would have seen that our new top executives were reluctant to work in our stores. Consequently, the top of the organization started to lose an understanding as to why our stores performed so well.

  From the employees’ perspective, we didn’t necessarily want Bob’s new hires working in the stores because they were not athletic and not the brand. We didn’t have an executive onboarding program (that was my fault), and we eventually came to see new executives as inauthentic salesmen instead of authentic Educators.

  We were beginning to understand the difference between “experienced” new management and lululemon’s “self-developed” people. I had turned to experts to expand our business but discovered there were no experts for our new technical retail model. The self-developed people of lululemon lived to support others in being great and were “leaders creating leaders.” This was part of the reason lululemon could grow so fast without ever losing control.

  Australia

  Lululemon’s first Australian store was a brand-starter on Melbourne’s Chapel Street. I was expecting a three-to-four-year brand build. There were many reasons I thought lululemon would be a natural fit in Australia. A love of the outdoors and a healthy, active lifestyle is a deeply ingrained part of Australian culture, just as it is on the Pacific Coast of North America. It’s casual and laid back—a place where women would find functional athletic clothing a natural extension of themselves.

  But I’d also looked at Australia to solve a problem. A big issue with North American apparel is that excess inventory is sold at a discount at the end of a season. I realized that if I could get stores open in Australia, I could move the end-of-season winter goods to Australia at the beginning of their fall season and vice versa. This would eliminate discounting in North America. It was a brilliant idea in my mind.

  By moving inventory back and forth with Australia, I could give each hemisphere something brand new, in the right season, at full price. Even if the product we transferred only “broke even” after the transfer, it was better than discounting.

  A central part of our retail store rollout consisted of opening an out of the way, inexpensive showroom where we would open the doors only a few days a week. We would educate, hold design meetings and network with a local community before opening a store. We had the cash flow to play the word-
of-mouth strategy in Australia and wait for the tipping point. We also had to learn about their labour laws, and customs and duties before going all-in.

  US Rollout

  An April 2006 analysis on Canadianbusiness.com described Bob’s plans in the following way: “Meers… seems determined to relive Reebok glory by building lululemon into a ubiquitous global brand… Meers quickly ticks off his plans: additional outlets in Los Angeles, San Francisco and Seattle. A new store in Chicago. Multiple shop openings in New York City and Boston in Q3 or Q4.”21

  To assist his plan, Bob hired a top retail executive named Celeste Keely who had run the Western US for Abercrombie & Fitch. Lululemon’s primary strategy was the real estate expansion in the US, which Bob had made a cornerstone of his tenure as CEO. The vision was to build the US in the same mould as Canada.

  The expansion looked good, but the new stores were in expensive, high-profile shopping malls, and I didn’t know to what extent we’d first seeded cities with a cool, urban street location, or if we’d been proactive in creating excitement or building networks in the local yoga and athletic communities. We wanted to ensure the locations were correct for Super Girl customers. It was at this point the light bulb went on, and we now understood the power of the showrooms and pop-ups and community that we didn’t realize we had invented.

  We were ready for expansion. New stores would add substantially to lululemon’s valuation, as analysts would model out their profit a year in advance and then recommend a higher price for the lululemon stock if we were to go public. The idea of an IPO was still highly conceptual to me, but it seemed Advent and Highland talked about it constantly.

  I thought I had made the right moves to succeed in the US. I had hired an experienced CEO, I had Tom Stemberg who seemed well versed in US real estate, and Advent who were private equity retail experts. I believed the PE partners when they said lululemon needed another four to five years to mature.

  New York City

  We’d recently signed the lease for our first store in New York City. Lori Jane Budd—a former track athlete, Calgary lululemon Ambassador, and most recently, manager of the highly successful Oakville, Ontario lululemon store—was on her way to Manhattan to run the new location.

  As Lori recalls, “I told Chip that if he ever opened a store in NYC, I was the person to do it. Without hesitation, he responded with ‘Great! I will pay you $80,000 a year to manage it.’ I was beyond ecstatic at his apparent confidence in me… yet slightly overwhelmed, but that night I sat down with my husband and put my one-, five-, and ten-year goals down on paper for the first time.

  “I managed the Oakville store for over a year,” Lori continues, “and it became one of the top performing stores in the company and produced many managers that moved to other stores and regions. In early 2006, a lease was finally signed in Manhattan, and I was offered the position of Store Manager. I promoted my assistant manager to take over the Oakville store and planned my move to NYC.

  “Bringing this company to NYC exceeded every expectation I ever had. We attended unlimited yoga and fitness classes around the city, meeting instructors, and talking about the brand. There was no middle ground—people either hadn’t heard of us yet, or they were already obsessed.”

  To borrow from Frank Sinatra, if you can make it there, you’ll make it anywhere. His lyrics were top of my mind as we decided on lululemon’s next big expansion. New York City has always been a world leader in retail and apparel—in some ways, taking lululemon to NYC was something we had to do.

  Expanding into New York was nerve-wracking, partly because of the high rents. It was a surprise to set up in Lincoln Square and see how little space we could get. Sometimes a company might open in New York, taking a high rent, and not make any money on the location. They would just use it as a marketing ploy to build the brand since New York has that major international appeal. Despite the size of our store, we managed.

  If world-class logistics managers knew how the staff at our smallest stores (located in Lincoln Square and West Edmonton Mall) problem-solved, they’d hire them at a salary of half-a-million dollars a year. Our employees were amazing.

  Michelle Armstrong

  Meanwhile, the question of going public was looming larger by the day. In 2006, just after we’d made the private equity deal with Advent and Highland, PricewaterhouseCoopers was brought in to assist with auditing lululemon.

  A young woman named Michelle Armstrong was the manager of the audit. She came out to lululemon in March of 2006. We were so impressed with Michelle that we offered her a job as Director of Finance, to augment Brian Bacon as our CFO. Up to this point, I hadn’t put a lot of effort into hiring finance personnel. Working in the stores, I had developed an acute sense of the business and could tell within a few percentage points the exact profit and cash flow of the company. My new partners did not have this same insight, and at $110 million in sales, we could no longer only operate based on my innate sense of numbers.

  Much to Michelle’s—and everyone’s—surprise, the prospect of the IPO came up within a few months of her joining lululemon.

  As Michelle puts it, “When I got hired they told me it would be a two- to four-year time horizon for us going public, but then in August [2006], Bob brought me into his office and said, ‘Actually, we’re going to start the process now.’”

  This wasn’t just a surprise to Michelle—most of lululemon was surprised. I wish that I had the type of relationship with Michelle at that time where she would have felt comfortable letting me know the IPO was coming sooner than expected. The world in early 2006 was awash in capital, and there were a lot of parties eager to invest in IPOs. Under Armour had just gone public, as had Crocs, both at high valuations. David Mussafer, Steve Collins, and Tom Stemberg all advised me that lululemon needed to make the move sooner rather than later.

  I didn’t know that Advent and Highland were already thinking of their exit. I expected Bob Meers would preside over a five-year period of growth, after which we’d presumably open the books and assess our options. I didn’t know how closely his profit motive was tied to that of private equity.

  Conflicts of Interest

  I had been transparent that I was not averse to going public. I thought the IPO and public experience would allow me to be a valuable mentor to my children if they ever, one day, took their companies public.

  At a Board meeting just before going public, Tom said I had to clean up my personal connections to rid myself of conflicts of interest as a future Director of a public Board. To clean up, I had to change three things. The first was to let go of my sister-in-law, Susanne Conrad, as a Board advisor since she would be a conflicted Director as my relative.

  “Because I was a family member,” Susanne recalls, “there was a fear about optics. I was asked to step down just before the company went public. I would have liked to stay on the Board. I think I sustained the company culture at the Board level.”

  Even though we’d lost Susanne from the Board, it was still very important to have her as part of the team. I wanted her to coach and develop our top one-hundred people every quarter, as her background was executive-level coaching. Working with Delaney Schweitzer’s Training and Culture team, Susanne would become one of lululemon’s most beloved speakers. The curriculum Susanne developed, ‘igolu’ (now known as “Lightyear Leadership”), is a comprehensive self-leadership methodology that she delivered to thousands of lululemon employees and Ambassadors from 2007 until January of 2017.

  As Susanne remembers: “Delaney (SVP retail) and I worked to make lululemon a place where people could come and be with like-minded people, workout, sweat, and make work a place where we could transform some of the most difficult things in life with humour and love.”

  Susanne had the energy and advocacy I wanted on the Board. I was sorry to lose her, but the company was lucky to have her in the years that followed. I asked Rhoda Pitcher, a change-management consultant, to replace Susanne on the Board. I was counting on Rhoda to hel
p us protect the company’s culture through the coming changes.

  The second thing I had to do before going public was sell my 50 percent stake in our manufacturing partner. I was okay with this if lululemon bought my share. The ownership of factories was an essential part to ownership of the vertical model, but Tom and Michael Casey deemed factory ownership too risky. They didn’t want to be in the manufacturing business. They didn’t see it as an integral part of the business model, but rather as a distraction.

  The third change we had to make was to replace my lawyer, confidante, and our company secretary, Jon McCullough. Tom said we needed an American law firm who understood US public law.

  Each of these steps seemed so incremental that there was never one specific moment where I thought to say stop.

  The E-Commerce Mediation

  Another thing lululemon needed to clean up before our IPO was our e-commerce. I had waited to properly invest in e-commerce while our company was in rapid growth. We couldn’t manufacture quickly enough to fill our own stores, so we didn’t need an e-commerce store just yet. I understood that e-commerce had come to stay, and I appreciated its power in completing a top-to-bottom vertical model with absolutely no middleman to skim profits.

  In 2006, I felt that e-commerce was good for a commodity product—something a customer already understood—while lululemon was primarily touch and feel. At that time, there was no video to educate e-commerce customers on our product. Our value was not in the look of the garment but in the tactile feel and technical features. A photo worked for fashion but not for lululemon. Today, you can ship three or four garments to somebody so they can try them on and return them if they so choose. There was nothing near that level of sophistication in 2006.

  Lululemon had its own selection of commodity products, including yoga mats and yoga straps. We also had a few items to sell at a discount. So, I made an agreement with a digital company to sell commodity and discount products online. It was a small agreement with no buyout clause.