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Lululemon vs under armour business strategy analysis


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Lululemon vs under armour business strategy analysis

  3. 3. INTRODUCTION 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. INDUSTRY INFORMATION (see Exhibit 1) 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- 3
  4. 4. 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. KEY ISSUES 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 4
  5. 5. 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. OVERALL MARKET 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 5
  6. 6. 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). INDUSTRY TRENDS (see Exhibit 2) 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 healthconscious 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). 6
  7. 7. Increasing wages in BRIC countries also decreases profit margins ("Finding elusive labor," 2013). Globalization levels are increasing, especially through e-commerce (Shah, 2013). INDUSTRY VALUATION DRIVERS 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). COMPANIES’ GOALS (see Exhibits 3 & 4) 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 7
  8. 8. sustainable growth, whereas Under Armour is increasing its efforts toward global expansion and manufacturing capacity. CHALLENGES (see Exhibit5) 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. 8
  9. 9. OVERVIEW OF PERFORMANCE (see Exhibits 6 & 7) 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. BUSINESS STRATEGIES (see Exhibit 8) 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. 9
  10. 10. 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. HOW THEY MAKE MONEY 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 10
  11. 11. 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) FIRM DIFFERENCES IN BUSINESS MODEL (see Exhibit 9) 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 11
  12. 12. 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. SUSTAINABLE COMPETITIVE ADVANTAGES (see Exhibit 10) 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. 12
  13. 13. 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. 13
  14. 14. 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. 14
  17. 17. APPENDIX III 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. E Economic: Increasing oil and logistics costs. Raw materials price increase. Increasing wages in BRIC countries. 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. T Technological: Increasing trend of global e-commerce. 17
  18. 18. 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). 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 18
  19. 19. EXHIBIT 5: SWOT ANALYSES Lululemon: S O 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 W Top Management Issues Customer Perceived Quality Issues Limited Global penetration Dependence on third party suppliers Limited marketing and advertising scope T 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 Highly focused on innovation High brand recognition, utilizing endorsements and athlete groups Sustained profitability and continued growth Broad product base O 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 W T 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 19
  20. 20. EXHIBIT 6: OVERVIEW OF PERFORMANCE Performan ce measure Growth profit margin (%) Operating profit margin (%) Net profit margin (%) Return on assets Return on equity Return on investment Changes in working capital EPS Market share Lululemon Ratio UnderArmour Trend Ratio Trend 54.04  -1.63 pts 48.28  +0.36 pts 25.33  -2.14 pts 11.52  +0.15 pts 18.13  -1.68 pts 6.88  -0.14 pts 27.84  - 2.56 11.98  -0.42 31.82  -4.53 17.18  + 4.78 30.71  -4.34 15.7  +0 -32.3  13.7 in 2011 +9.1  -146 in 2011 1.85  -0.01 1.38  +0.17 0.69% 1.36% EXHIBIT 7: SHARES PERFORMANCE Lululemon: 20
  21. 21. UnderArmour: 21
  22. 22. EXHIBIT 8: STRATEGY FORMULATION 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  Clothes design   Product design  Marketing and sales  Service and distribution  Internal development  Outsourcing of manufacturing  Internal distribution system  5) Which value-creation stages? 6) VEHICLES: How will we get there?   Fabric innovation Performance monitoring technology  Product design  Marketing and sales  Distribution and eCommerce Internal development Technical fabrics 4) Which core technologies?  Outsourcing of manufacturing  Internal distribution system Image: self-fulfillment, love, communication, travel, sunshine, friendship, happiness, goal setting, breathing, sweating     Price: cf table below   7) DIFFERENTIATORS: How will we win?  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   Fast moves to become public  Premium prices due to proprietary product features and high-quality service 8) STAGING: What will be our speed and sequence of moves? 9) ECONOMIC LOGIC: How will we obtain our returns?  Continue growth, and YOY growth Premium prices due to proprietary product features and high-quality service Conquest of North America first, then Western countries and Asia  Conquest of North America first, then Western countries and Asia  22
  23. 23. 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. People Technology, products Designers, marketing staff, ambassadors. Fabrics- Luon, Swift, Luxtreme, Natural Blends, and Mesh and Liners Corporate owned stores and ecommerce that reaches multinational markets. Channels Brand Mission Vision Advanced fabrics, strict inventory control, vendor code of conduct for decreased overseas manufacturing liability. Designers, marketing staff, and sponsors. Coldgear, HeatGear, Protect this House, Armour 39 3rd party, suppliers, manufacturers, and retailers. High quality innovative products. Every product must make athletes better. That’s our guarantee. The lululemon athletica manifesto is a set of inspirational sayings that guide our culture.(lululemon, 2012) Considered the same as the above mission statement(lululemon, 2012) To Make all athletes better through passion, design and the relentless pursuit of innovation (Under Armour, 2012) To empower athlete everywhere (Under Armour, 2012) 23
  24. 24. EXHIBIT 10: VIRS ANALYSIS Lululemon: Resource/Capability Valuable? Rare? Difficult to imitate? Without substitutes? Innovative Fabrics Yes Yes Yes No Brand image Yes Yes Yes Yes Trademarks Yes No No No Yes No No No Culture Yes Yes Yes Yes Reputation Yes Yes Yes Yes Resource/Capability Valuable? Rare? Difficult to imitate? Without substitutes? Innovative Technologies Yes Yes Yes No Brand image Yes Yes Yes Yes Quality Yes Yes No No Retail Operations No No No No Competitive Disadvantage Culture Yes Yes Yes Yes Sustainable competitive advantage Reputation Yes Yes Yes Yes Sustainable competitive advantage Retail Operations Implications for competitiveness? Temporary competitive advantage Sustainable competitive advantage Competitive parity Competitive parity Sustainable competitive advantage Sustainable competitive advantage UnderArmour: Implications for competitiveness? Temporary competitive advantage Sustainable competitive advantage Temporary competitive advantage 24
  25. 25. REFERENCES Bhayani , R. (2013, 9 15). Fabric prices rise on weaker rupee. Retrieved from Finding elusive labor cost advantages within bric nations. (2013, 8 13). Retrieved from Global retail sports apparel market 2012-2017: Market trends, profit and forecast analysis. (2012, 2). Retrieved from Nrpa. (2012). Retrieved from Shah, K. (2013, 10 22). Global e-commerce trends in 2013: Personalization and mobility. Retrieved from Soaring fuel prices pushes logistics industry in the red. (2011, 8 23). Retrieved from Sport clothing and accessories industry: Market research reports, statistics and analysis. (n.d.). Retrieved from Sporting goods wholesaling in the us. (2013, 11). Retrieved from To cope with labour shortages, retailers will have to hire greater numbers of older workers, says ilo report. (2011, 9 20). Retrieved from lululemon. (2012). lululemon manifesto. Retrieved from Under Armour. (2012). Under armour mission, vision, and values. Retrieved from Lululemon Annual Report 2013 Gap’s Athleta looks a lot like Lululemon, S. Maheshwari, 7/26/2012, Bloomberg businessweek Lulu for him?, R. Warnica, 4/15/2013, Canadian Business Product recall is sheer hell for the maker of yoga pants, A. Ashworth, 3/20/2013, The Times Lululemon's Reaction to Yoga Pants Mishap: Brilliant Marketing, 3/20/2013, L. Kulikowski, TheStreet WHY THE GAP IS STALKING LULU, J. Sutherland, 9/17/2012, Canadian Business WIN BIG WITH SPORTING GOODS, B. Borzykowski, 4/1/2013, Canadian Business Under Armour Annual Report 2013 Under Armour Investor Day 2013, 6/5/2013 Moving beyond shrink it and pink it, M. Soat, Feb. 2013, Marketing News Under Armour's Aggressive Plan To Expand Overseas, M. Burke, 10/17/2013, Forbes 25