Baby Steps

How Lululemon can overcome current controversies by entering the baby clothing market.

When Vancouver-based Lululemon Athletica (Lulu) first opened in 1998, founder Chip Wilson imagined a “community hub where people could learn and discuss the physical aspects of healthy living.” By relying heavily on the expertise and feedback of professional yoga instructors, Lulu began developing products that complemented the workshops and classes offered in its very own stores. Over the past decade, Lulu quickly became a Canadian retail success story earning itself a reputation for quality and innovation in the high-end active-wear industry by using patented high-performance fabrics with its signature yoga pants line. Lulu built a tremendously loyal following, adopting the mantra “friends are more important than money” and propelling it to be Canada’s fastest-growing brand in 2012.

A Little Too Transparent

Unfortunately, despite its storied past, in the last year Lulu has had to deal with turbulent public relations. First, on March 18th, 2013, the company recalled all black Luon pants, its highest selling item, due to a design flaw that made the pants too sheer. Shortly thereafter, CEO Christine Day announced she would be stepping down once a successor was found. Chief Product Officer Sheree Waterson also resigned following the Luon incident. Lulu’s share price dropped 8% following the recall and more than 20% after the CEO’s announcement. The company subsequently saw a decline in sales and responded by lowering its original revenue and earnings-per-share forecasts for the remainder of the fiscal year. Making matters worse, on November 6th, 2013, Mr. Wilson caused an uproar when he blamed the shape of women’s bodies for causing the yoga pants to be too sheer and occasionally pilling. These recent shortcomings have damaged brand integrity and harmed investor confidence. Lulu needs to take action in order to reestablish its brand image.

The Original Yogis

While Lulu has entered into international and men’s-only markets, there is another expansion strategy that can quickly restore investor confidence. Babies; the original yogis, could provide Lulu with a low-risk, low cost opportunity to boost the firm’s market position. Lulu’s flexible and unique materials mesh well with babies’ unique needs. Lulu has pre-existing technologies designed to be stretchy, moisture wicking, gentle on skin, odor-resistant, temperature controlling, and sun-protective. These features cater to both mothers and babies, and Lulu only needs to produce baby-sized versions of its existing products.

The entire Canadian children’s-wear industry is worth $4.6 billion, with babies aged 0-4 representing 50% of the market. Children’s-wear is dominated by five major players which make up 70% of the market: Toys “R” Us , The Children’s Place Retail Stores, Ascena Retail Group, Carter’s, and The Gymboree Corporation. Baby apparel items are priced similarly across the leading retailers, suggesting that the major players compete primarily on price. In contrast, Lulu will be well positioned to steal market share from the incumbent children’s-wear players by entering the market with a superior quality product offering backed by a well-known brand.

For example, Lulu could introduce a one-piece jumper into its current collection. With fabric technology that insulates, controls moisture and odor, and benefits from Lulu’s chic branding, a one-piece jumper could function as an everyday outfit. This durable product would lessen the burden on mothers to constantly purchase cotton outfits for their child’s casual every day wear.

A Natural Fit

Lulu’s primary customer base are women aged 25-34 who have high disposable incomes, lead busy lives, and are concerned with maintaining a healthy lifestyle. As these women are of childbearing age and many have young children, Lulu does not need to attract a new customer demographic to enter the baby’s clothing market.

Lulu is also well positioned to fulfill the psychographic shopping habits of this target market. Mothers are exceptionally concerned about the well-being of their newborns. Studies show that over half of mothers prefer to research products before shopping and want their children to have the highest quality products irrespective of price. This is evident by the fact that baby budget planners suggest a minimum clothing budget of $750 per year for a child under the age of five. In this regard, Lulu has an advantage with the quality of its products being the key selling point.

Lulu maintains its devout following in part by impressive secondary offerings such as complimentary mom and baby yoga classes. Lulu can continue to impress by providing an online platform for mothers to access resources and share recommendations with one another. In doing so, Lulu can continue developing its brand and push its newly developed baby products.

Crawl Before You Walk

For Lulu, the most effective means of initial distribution is via its pre-existing online store, which drives nearly 300,000 visits each month. Research shows that 62.5% of moms research clothes for their children online, of which 40% make a purchase. When launching its babyline, Lulu should test the market by initially offering its products for sale online and in flagship stores, which will allow for mothers to see and feel the innovation provided by Lulu. As Lulu has one of the highest retail revenues per square foot in North America, the potential negative impact of introducing new products storewide needs to be considered. Selling primarily through its online platform will mitigate potential revenues lost from core product lines being replaced by baby apparel in brick and mortar stores.

The price for Lulu’s baby apparel should be set in line with the gross margins of its other products at 55%. Although this represents a higher gross margin than that of other baby apparel manufacturers, which have a 35% gross margin, Lulu’s fabric technology and brand equity justify a higher price point.


The Value of Lulu Babies

Based on projections, Lulu can expect to attain a sales figure between $50 million (gross margins of $28 million) and $85 million (gross margins of $47 million) annually from the launch of a baby line. These estimates include only the expected additional sales from pre-existing Lulu customers, while the launch of a Lulu baby line should also attract new customers who had previously not shopped there.

Lulu is entering an epoch where it must implement a low-risk and low-cost option to restore investor confidence and reinvigorate its brand image. It can do this by providing a superior solution to the universal needs of babies and by extension, their caregivers. As such, Lulu is expertly positioned to enter the high-end baby apparel market with few outstanding obstacles. It has already captured and impressed the target market, produced fabrics that would fit the distinct needs of babies, and established online and in store distribution channels. The baby’s apparel strategy also follows one of Lulu’s favourite adages: “the world moves at such a rapid rate that waiting to implement changes will leave you two steps behind: do it now, do it now, do it now!”