Lululemon Market Segmentation Strategy

Lululemon's origin and vision

Back in 1998, self-described snowboarder and surfer dude Chip Wilson took his first commercial yoga class.  The Vancouver native loved the exercises, but he hated doing them in the cotton clothing that was standard yoga wear at the time. For Wilson, who had worked in thesportswear business and had a passion for technical athletic fabrics, wearing cotton clothes to do sweaty, stretchy power yoga exercises seemed totally inappropriate.  And so,the idea for Lululemon was born.

Wilson’s vision was to create high-quality and stylishly designed clothing for yoga and related sports activities using the very best technical fabrics.  He built up a design team, but outsourced manufacturing turning to low-cost producers, primarily in South East Asia.  Rather than selling clothing through existing retailers, Wilson elected to open his own stores. The idea was to staff the stores with employees who were themselves passionate about exercise andcould act as ambassadors for healthy living through yoga and other sports such as runningand cycling.  

The first store opened in Vancouver, Canada, in 2000.  It quickly became a runaway success, and other stores soon followed. In 2007 the company went public –Lululemon Athletica Inc (Nasdaq: LULU) -, using the capital raised to accelerate its expansion plans. It currently has a share price of USD$153 (5 October 2018).  As of 29 July 2018, Lululemon had 415 stores, 335 located in North America, sales in excess of USD$3.2 billion, a triple increase from approximately 5 years ago. Its market capitalisation has also increased to USD$20 billion.  Sales per square foot were estimated to be around $1,800 in 2013 –more than four times that of luxury department store Nordstrom, making Lululemon one of the top retailers in the world on this metric.  This figure has dropped significantly to USD$1534 in 2017.  LULU is ranked #4 of 67 stocked in the Fashion and Luxury category (StockNews.com).

Along the way, Chip Wilson stepped up into the chairman role.  Wilson hired Christine Day to be the CEO in 2008, while he continued to focus on branding.  Day had spent 20 years at Starbucks overseeing retail operations in North America, and then around the world.  Day stepped down as CEO in.

 As it has evolved,Lululemon’s strategy focuses on a number of key issues.  Getting the product right is undoubtedly a central part of the company’s strategy.  The company’s yoga-inspired athletic clothes are well designed, stylish, comfortable, and use the very best technical fabrics.  An equally important part of the strategy is to only stock a limited supply of an item.  New colours and seasonal items, for example, get 3-12-week lifecycles, which keeps the product offerings feeling fresh.  The goal is to sell gear at full price, and to condition customers to buy when they see it, rather than wait, because if they do, it may soon be “out of stock”. The company only allows product returns if the clothes have not been worn and still have the price tags attached.  

The scarcity strategy has worked; Lululemon never holds sales, and its clothing sells for a premium price.  For example, the company charges approximately $20-$40 more than its competitors.

Lululemon's business strategy and success

Lululemon continues to hire employees who are passionate about fitness; it was ranked 38thin 2017 of the 50 best places to work (Glassdoor).  Part of the hiring process involves taking prospective employees to a yoga or spin class.  Some 70% of store managers are internal hires; most started on the sales floor and grew up in the culture.  Store managers are given $300 to repaint their stores (any colour) twice a year.  The look and interior design of each store are completely up to its manager.  Each store is also given $2,700 a year for employees to contribute to a charity or local event of their own choosing.  One store manager in D.C used the funds to create, with regional community leaders, a global yoga event in 2010.  The result Salutation Nation, is now an annual event in which Lululemon stores host a free, all level yoga practice at the same time.  Employees are trained to eavesdrop on customers, who are called “guests”.  Clothes-folding tables are placed on the sales floor near the fitting rooms rather than in a back room so that employees can overhear complaints.  Nearby, a large chalkboard lets customers write suggestions or complaints that are sent back to headquarters.  This feedback is then incorporated into the product design process.

Lululemon now has an Ambassador Program; the intention is to celebrate and promote local leaders who reflect our culture and share our passion and dedication for elevating the health and fitness of our communities.  The program also nurtures a community of driven athletes and inspirational individuals to harness the brand’s passion, in order to inspire new and existing customers and boost sales.  The company also had a dedicated web page promoting various events held within the community.  

Despite the company’s focus on providing quality, it has not all been plain sailing for Lululemon.  In 2010. Wilson caused a stir when he had the company’s tote bags emblazoned with the phrase “Who is John Galt,” the opening line from Ayn Rand’s 1957 novel, Atlas Shrugged.  Atlas shrugged has become a litertarian bible, and the underlying message that Lululemon supported Rand’s brand of unregulated capitalism did not sit too well with many of the stores’ customers. After negative feedback, the bags were quickly pulled from stores.  Wilson himself stepped down from any day-today involvement in the company in January 2012 andstepped down as chairman in 2013 and removed himself from the business completely in 2015.

Former CEO Day was not a fan of using “big data” to analyse customer purchases.  She believed that software-generated data gave a company a false sense of security about the customer.  Instead Day personally spent hours each week in Lululemon stores observing how customers shopped, listened to their complaints, and then used their feedback to tweak product development efforts.  On onevisit to a store in Whistler, British Columbia, Day noticed that women trying on a knit sweater found the sleeves too tight.  After asking store associates if they had heard similar complaints, she cancelled all future orders.

In early 2013, Lululemon found itself dealing with another controversy when it decided to recall some black yoga pants that were apparently too sheer, and effectively “see through” when stretched due to the lack of “rear-end coverage”.  In addition to the negative fallout from theproduct itself, some customers report being mistreated by employees who demanded that customers put the pants on and bend over to determine whether the clothing was see-through enough to warrant a refund!  This quality control issue cost the company a US$17miillion write-off from the recall of over 17% of their popular Luon leggings. A few months after the incident, Day stepped down as CEO and was succeeded by Laurent Potdevin in January 2014.

Over the years Lululemon has continued rapid growth but recently the company has been in the spotlight once again. CEO Potdevin left the company abruptly in February 2018 due to misconduct including having a relationship with a subordinate, a female designer at the company.  Due to his lack of leadership and his inappropriate actions, he left the internal culture of the company ‘toxic’.  

Lululemon Athletica‘s appointed its new CEO in July 2018, Calvin McDonald, who has come from a top executive role at makeup chain Sephora, part of the LVMH conglomerate. 

1. How would you describe Lululemon’s market segmentation strategy?  Who do you think are Lululemon’s typical customers?

2. What generic business-level strategy is Lululemon pursuing? Does this strategy give it an advantage over its rivals in the athletic clothing business? If so, how? 

3. In order to successfully implement its business-level strategy, what does Lululemon need to do at the function level? Has the company done these things? 

4. How might the marketing and product missteps cited in the case impact upon Lululemon’s ability to successfully execute its business-level strategy?  How important is supply chain management in quality control? What should Lululemon do to make sure that it does not make similar mistakes going forward?  

5. How might the most recent ‘toxic’ culture cited in the case, impact upon Lululemon’s ability to successfully execute its business-level strategy?   

Lululemon's origin and vision

The topic introduces the concepts of strategic management considering the business organisation named Lululemon within the apparel and clothing industry.

The strategic management involves continuous planning, analysis and monitoring of business actions for fulfilling the needs, goals and objectives of the organization effectively. 

The business organisation was facing quality control issues, because of which, focus differentiation and market segmentation will be essential for managing products and services accessible to the customers with ease and effectiveness. 

The topic will also illustrate about the ways of implementing business level strategies along with approaches to gain competitive advantage in business with the management of a proper and effective culture at Lululemon. 

The targeted clients of Lululemon are basically those who are aware of health and fitness and are more inclined towards sports activities, fitness goals and aimed at living a healthy life. 

The four different kinds of market segmentation approaches are demographic segmentation, behavioural segmentation, psychographic segmentation and geographic segmentation. 

A suitable market segment has been identified as the target market to break down the market into segments and fulfil the needs and preferences of the homogenous group of people with similar kinds of needs, characteristics and preferences. 

To segment the market, the company targeted the health and fitness cautious clients and even made new range of clothing items available after every 3 o 12 weeks for attracting more clients (Hill, Jones and Schilling 2014). 

To manage the market segmentation strategy, the company also sold products at full prices, mentioning it may soon be out of stock.

The scarcity strategy has worked fine for the company to sell the clothing products at premium prices, which also resulted in forming a huge customer base and higher revenue generation (Hill, Jones and Schilling 2015). 

Lululemon’s business level strategies are aimed at gaining competitive advantage by focusing on the delivery of yoga and sports inspired clothes that are stylish as well as comfortable made with the best technical fabrics. 

The company manages refund or return of clothing items only when the clothes are not worn or still have the price tags attached to it.

The Ambassador program has also helped in promoting local leaders who have reflected the culture of the place along with promotion of health and fitness of the communities.

The program has also induced the behaviours of clients and made them share their passion and dedication towards athletics, health and fitness of the communities.

The store manager of the company stores has also been associated with the use of funds for the creation of partnerships with community leaders during a global yoga event (Hill 2017).

This has also created positive mind sets among the people and influenced their buying behaviours for higher sales revenue and profit generation too. 

The focus differentiation strategy is the main focus of the organisation that combines the three business strategies at the functional level.

This has been an effective strategy for targeting the smaller groups of clients with differentiated products and services offered to them (Drnevich and Croson 2013) 

Lululemon's business strategy and success

The focus differentiation has helped in targeting smaller groups and fulfilled their needs and preferences and establish a sense of trust and loyalty among the customers.

The focus differentiation strategy enabled serving the clients more than its competitors in business by becoming a leader in delivering products to a niche market (Eden and Ackermann 2013). 

The focus differentiation enabled meeting the needs of narrow market segments and adapt to changing demands and expectations of customer regarding the products along with differentiation of those to be unique from its competitors. 

Based on the case study, there was unregulated capitalism.

The software generated data provide false statements regarding security of products and negative feedbacks were provided by clients.

The black yoga pants were too much sheer that enabled see through feature, because of which, there was also lack of rear end coverage. 

The clients also complained about poor customers’ services provided by the employees and even they were mistreated who demanded them for a refund (Hitt and Duane Ireland 2017). 

With the proper management of stocks and supply chain activities, the manufacturing and production processes improved, leading to extra refined materials used for the development of products along with lowering down of manufacturing costs and production costs. 

In case the quality of supply chain is poor, the products are likely to get destroyed or broken before the estimated warranty period.

The quality control is important part of the supply chain management, which can also reduce the chances of risks associated with the rate of return and hazardous failures related to the products (Wheelen et al. 2017). 

The quality control in supply chain enables audit of supplier relationships along with inspecting the materials and finished goods inventory required to manage the value added activities properly. 

CEO Potdevin left the company with inappropriate relationship with the subordinate of the company

The leadership skills lacked and inappropriate actions were undertaken, which further affected the culture of the organisation. 

The focus differentiation was though useful and effective still it lacked proper focus on quality, which made many customers unsatisfied with the kinds of products delivered (Meyer, Neck and Meeks 2017).

The false sense of security and inappropriate behaviour by the employees to serve the clients further affected the culture negatively and resulted in a toxic culture which create negative impact on the business level strategy too. 

Drnevich, P.L. and Croson, D.C., 2013. Information technology and business-level strategy: Toward an integrated theoretical perspective. Mis Quarterly, 37(2).

Eden, C. and Ackermann, F., 2013. Making strategy: The journey of strategic management. Sage.

Hill, C.W., Jones, G.R. and Schilling, M.A., 2014. Strategic management: theory: an integrated approach. Cengage Learning.

Hill, C.W., Jones, G.R. and Schilling, M.A., 2015. Strategic management theory. Cengage Learning,.

Hill, T., 2017. Manufacturing strategy: the strategic management of the manufacturing function. Macmillan International Higher Education.

Hitt, M. and Duane Ireland, R., 2017. The intersection of entrepreneurship and strategic management research. The Blackwell handbook of entrepreneurship, pp.45-63.

Meyer, G.D., Neck, H.M. and Meeks, M.D., 2017. The entrepreneurship?strategic management interface. Strategic entrepreneurship: Creating a new mindset, pp.17-44.

Wheelen, T.L., Hunger, J.D., Hoffman, A.N. and Bamford, C.E., 2017. Strategic management and business policy. pearson.