Lululemon (NASDAQ: LULU) is an athletic activewear company that sells apparel for yoga, running, and fitness activities. Initially, the brand is known for women’s yoga apparel, but it has grown into men, casual, and lifestyle brands.
The stock is listed on the Nasdaq stock exchange and has a market capitalization of $42 billion. The company has an annual revenue of $3.9 billion, with a growth of 18% year-over-year.
The company generates strong earnings during the pandemic after recent expansion into men, digital, and international markets. The popularity has increased as more people work from home and choose more comfortable and stylish apparel than formal attires.
The strategy has propelled the brand into direct competition with Nike, Adidas, and Under Armor. Therefore, it is crucial for managers, investors, employees, and customers to understand industry intensity, competitive advantage, and long-term profitability.
Porter’s Five Forces industry and competition analysis is the best framework to evaluate the business’s competitive advantage. The following is a summary of the framework and the competitive advantage analysis of Lululemon.
What is Porter’s Five Forces Industry and Competition Analysis?
Porter’s Five Forces industry and competition analysis is a qualitative business analysis to evaluate the competitive advantage and long-term profitability. The primary goals are to determine the level of competition, evaluate the strength and weaknesses, and establish the corporate strategy.
Michael Porter developed the framework in 1980 as a Harvard Business School Professor. He published the strategy in a book called “Competitive Strategy: Techniques for Analyzing Industries and Competitors.”
Michael Porter identified the five forces that shape every market and industry. The five forces model analyzes the intensity of the competition, attractiveness, and long-term profitability.
Lululemon: Porter’s Five Forces Industry and Competition Analysis
The framework provides a qualitative and comprehensive strategic analysis to evaluate the competitive analysis beyond the current competition. Porter’s Five Forces model will help the brand to build a strategic position and create a competitive advantage.
Threat of New Entrants
The barrier of entry for the textile and apparel industry is low. Many brands offer similar yoga and athletic products, such as Sweaty Betty, Athleta, Patagonia, and Fabletics. Big brands like Nike, Under Armour, Puma, and Adidas exploit the trend and saturate the market.
However, Lululemon is the pioneer of the athleisure brand, and the company has a long history of creating innovative products. Lululemon operates an innovation hub called Whitespace in Vancouver and New York City to create a new value proposition for customers and develop effective barriers to protect its competitive advantage [1].
How Lululemon increases the barrier of entry and lowers the threat of new entrance:
- Innovation is the front and center of Lululemon’s brand and product differentiation strategy.
- Innovative products increase brand loyalty from the existing customers
- Novel products give new customers a reason to buy the Lululemon brand.
- Diversification is crucial to capture a new market segment and extend the brand beyond women.
- Online sales are essential for creating a new income source in the digital economy.
- Mirror’s acquisition helped Lululemon enter the fitness equipment market and directly compete with Peloton and Fight Camp.
- Casual clothing and footwear are the next frontiers for increasing the competitive advantage of the Lululemon brand.
Bargaining Power of Suppliers
The bargaining power of suppliers is high as Lululemon does not operate any manufacturing facility. Lululemon gets the raw material from 65 suppliers, and 30% of Lululemon products are made from trademarked Luon fabric, which comes from a single supplier [2].
Lululemon manufactures its product from 35 companies throughout Asia, China, and North America. It is an important strategy as the highly seasonal fashion industry requires quick responses to new trends.
How Lululemon lowers the bargaining power of suppliers:
- Lululemon is on the right track to diversify the material source and manufacturing facility to lower the supplier’s bargaining power.
- Horizontal integration is a better strategy as the apparel industry is highly seasonal and requires no capital cost.
- An efficient supply chain is crucial to minimize cost, increase quality, and improve delivery speed.
- Leveraging the Lululemon brand is key to securing suppliers and making them dependent on Lululemon’s orders.
Bargaining Power of Buyers
The bargaining power of buyers is low as Lululemon sells at a premium price. Lululemon’s strategy to target the high-end market has proven successful in maintaining its competitive advantage.
The strong brand association with the luxury athleisure market creates a sustainable competitive advantage. It attracts new buyers who want to be perceived as part of an exclusive social community.
How Lululemon lowers the bargaining power of buyers:
- Diversification into the casual lifestyle market allows Lululemon to maintain premium prices and lower the buyer’s bargaining power.
- Expansion into an online store captures revenue during a pandemic and maintains a premium price.
- Rapid innovation creates strong differentiation from competitors, keeps the brand fresh, and recruits loyal customers.
Threat of Substitutes
The threat of substitutes for the Lululemon brand is high. The big athletic brand produces similar products, and new start-ups saturate the market. The key source of competitive advantage is brand loyalty.
Lululemon has a solid and loyal customer base. The company has many followers that create a unique community for the health and fitness market. After hours, Lululemon converts the store to a yoga studio to maintain solid communities and offer service beyond apparel products.
How Lululemon lowers the threat of substitutes:
- Lululemon is on the right track to offer more services rather than product-oriented ones.
- Yoga classes, a strong social media presence, and dedicated Lululemon stores are a source of competitive advantage.
- Lululemon does not sell its product in non-operated company stores. This strategy creates scarcity and makes Lululemon an exclusive high-end product. It creates a high demand and allows the company to charge premium pricing.
Industry Rivalry
The rivalry among existing players is intense. The competitors use a pricing strategy to drive the price down, gain market share, and decrease overall profitability.
The competitive athleisure market becomes a real threat for Lululemon operating in the high-end market segment. The economic downturn will drive customers away to go for more affordable brands.
How Lululemon lowers the intensive of the industry and competition:
- Differentiation in the product, place, price, and promotion are the foundation of Lululemon’s competitive advantage in an intense industry.
- The competitors capture the lower-end markets, but it will take significant time and investment to penetrate Lululemon’s market share.
- Innovation, Research & Development, and Intellectual Property are the building blocks of Lululemon’s competitive advantage.
- Supply chain, horizontal integration, and continuous improvement will lower the unit cost to create a buffer during a market downturn.
- A solid social media presence, community, endorsement, and online marketing will enhance the brand value.
Implication of Porter’s Five Forces Industry and Competition Analysis on Lululemon
Lululemon has a low entry barrier, high bargaining power of suppliers, low bargaining power of buyers, high threat of substitutes, and intense rivalry.
However, Lululemon has strong differentiation and innovation to compete in an intense industry rivalry. Lululemon begins eroding the big brands’ market share in the athleisure and lifestyle segment.
Lululemon has a strong, sustainable competitive advantage as the company is structured as an agile organization. The company can identify a game-changing trend in the apparel industry and manage to venture into emerging opportunities.
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