DEEPER DIVES: Is Lululemon Losing Its Grip?

Good Morning,

First, as always, thank you for joining.

Matt and I have the bones put together for the Leading Logistics Youtube channel. This is where we are going to be keeping a lot of our podcast content as well as other live streams, interviews and [insert the next thing that captures our attention here].

We will have all of the Wake Up and Deliver podcasts up by the end of the weekend.

There is a ton of talk in the market when it comes to efficiency, operations and execution. The feature piece today is about Lululemon and I use it to try and show you what types of things to look for when analyzing the market. I blend retail results and their (fluffy) guidance to highlight some of the headwinds they aren’t talking about.

It’s this type of information you need to take hold of and understand what it means and how it will impact your business (both as a retailer, or as a service provider looking to align with retail fulfillment).

Here’s what this issue brings:

• Lululemon is facing numerous market challenges. From dupes to operational efficiency, can they really outsell their problems?
  

• Mobile ordering is destroying the Starbucks experience. What are the real issues behind the “we have an app for that” strategies in the market these days
  

• Never get oversold with a software promise. Technology will never be able to solve for fundamental issues with an operating model

The Lemon May Be Dying On The Vine. Can International Growth Save Them From “Dupe” Culture?

Lululemon surged in popularity during the pandemic and had been doing pretty well ever since.

But under the surface, the tides may be changing.

Once the darling of the athleisure world, they are starting to face significant headwinds as they try to maintain their market dominance.

Despite solid financial performances in recent quarters, the company’s stock has been in decline. The biggest issue they face are concerns among investors about its future, especially in its critical U.S. market.

Here’s a situation when hitting solid numbers, still leaves people feeling like something is wrong.

Revenue Growth:

Net revenue increased by 7% to $2.4 billion compared to Q2 2024, or 8% on a constant dollar basis.

Americas: Revenue grew by 1%, or 2% on a constant dollar basis.

International: Strong performance with a 29% increase, or 31% on a constant dollar basis.

Earnings:

Diluted earnings per share (EPS) were $3.15, up 18% from $2.68 in Q2 2024.

Gross profit grew by 9% to $1.4 billion, with a gross margin increase of 80 basis points to 59.6%.

Income from operations was $540.2 million, up 13% from Q2 2024, leading to an operating margin increase of 110 basis points to 22.8%.

The most concerning thing from Lululemon’s performance is the flat U.S. market.

The Americas (traditionally Lululemon’s most profitable region) saw net revenue increase by a mere 2%, while comparable net sales actually fell by 2%. 

This is a massive performance difference to the 37% revenue growth the company experienced in Mainland China (where it has been focusing much of its recent expansion efforts).

The Pressure of Competition and Market Shifts

Lululemon’s struggles in the U.S. only increase with the rise of new competitors like Alo Yoga, Skims, and Fabletics.

These brands have successfully tapped into a younger, and more diverse customer base.

In contrast, Lululemon’s reliance on community events and partnerships with local fitness influencers, appears less impactful in rapidly changing retail landscape that’s starting to become dominated by social influence (and social commerce).

Adding to the pressure is the increasing popularity of “dupes”—lower-cost, high-quality alternatives to premium products (a huge social trend at the moment).

In China, for example, local brands are producing near-identical replicas of Lululemon’s products at a fraction of the price.

These dupes aren’t cheap knock-offs; they often use similar materials and manufacturing processes, making them appealing to younger consumers who like the look, but have zero interesting in paying $100 for leggings.

As these “alternatives” gain traction, Lululemon’s premium pricing model could face huge challenges, especially in markets where economic conditions are pushing consumers towards more budget-friendly spending habits.

Operational Challenges And Attempted Fixes

Lululemon is facing significant operational challenges marked by rising costs and efficiency pressures.

The company has been heavily investing in expanding its distribution centers, enhancing technology infrastructure, and growing its global store footprint, particularly in international markets like China.

But these efforts have led to increased operating costs.

Employee expenses, distribution center operations, and technology upgrades (which have outpaced revenue growth in some regions) are all rising.

Additionally, Lululemon's reliance on a concentrated supply chain in Asia exposes it to risks that could further impact operational efficiency.

Contrast these operational challenges with their current strategic focus.

They basically think they can “sell their way out” of how consumers are interacting with the brand.

CEO Calvin McDonald has acknowledged the company’s recent missteps, particularly in its women’s business, and has outlined plans to introduce more “newness” into its product lines by Spring 2025.

More “newness” means more skus and faster inventory turns, as they focus on increasing season variants.

Add to this the growing focus on men’s apparel (which was up +11% in revenue) which further broadens out the sku and variant list and you have a situation where A LOT of new product is going to have to flow through DCs and stores.

More products will also add complexity to a struggling eCommerce business. The more skus you have, the hard it is properly distribute that inventory to minimize you costs of shipping.

Lastly, their membership program is creating a mixed bag of results when it comes to profitability.

With over 20M people now subscribed to the program, you would think it would be doing wonders to drive sales.

But, it’s free to join.

And here are the perks:

The program includes 3 “perks” that cost Lululemon money (exchanges on sale items, easier returns) or have them capturing less revenue (free hemming).

Not a great mix.

Lululemon’s future success will depend on its ability to adapt to new market realities.

The company’s brand remains strong (particularly in international markets like China) but the challenges it faces in the U.S. cannot be ignored.

With rising competition, shifting consumer preferences, and the threat of lower-cost alternatives, Lululemon must innovate quickly to maintain its market position and develop even strong operational efficiencies if they want to be able to move more items through their supply chain with a higher value.

The last thing they need is for more of their product to be hitting the outlet locations, where in the US, it’s common to find items 50-70% off.

Can Brian Niccol Fix Starbuck’s Mobile Ordering Nightmare?

Starbucks has doubled down on mobile ordering, aiming to connect with customers on the go.

The idea is simple.

Order through the app, skip the line, and pick up your drink in no time.

But, what was meant to be a streamlined (and advantageous) experience has turned into a nightmare for employees and customers alike.

Here’s the reality.

Mobile orders are a huge problem.

What people never realized when implementing these systems is that they fundamentally changed order dynamics (and the processes in place to properly time and execute orders).

Imagine a situation where 20 (or 30, or 40, or 50) customers can place an order at the exact same time via the app.

This flood of orders a huge spike for store operations while also creating negative in-store experience (how many times have you been waiting in line to place an order, only to have the staff dominated by mobile and drive-through orders?).

Everyone knows you can use convenience to sell more stuff.

While convenience is a draw for customers, it places a HUGE burden on the baristas who prepare orders.

What’s worse, is that surge in orders easily overwhelms the number of staff at the store.

Starbucks, like many other QSRs, make their money on peaks. For them, morning is #1, then lunch. Evenings are slow.

When you go to staff the store, you need to balance your peak needs with the realities of the remainder of the sales day.

Having too many orders come in, and too few people to handle the surge is an all too common experience at cafes these days.

The result?

A backlog of orders, frustrated customers, and stressed employees.

Starbucks locations worldwide are struggling with this issue.

It’s so bad that a lot of other coffee shops have started to turn off in-store kiosk ordering during peaks (to try to help slow down overall order volume).

Like EVERY other business right now, the company is attempting to balance “operational efficiency” (costs) by reducing staff labour hours.

Many Starbucks employees are reporting that weekly hours have dropped from 30-40 hours last year to just 20-30 hours this year, despite the stores operating similar hours.

Despite the company’s sophisticated staffing algorithms and the introduction of the Siren Craft System (a streamlined process designed to reduce the time it takes to make drinks) the problem continues.

Even former Starbucks CEO Laxman Narasimhan acknowledged the issue (this is probably one of the major issues that led to him being replaced).

In an earnings call earlier this year, he noted that many app users abandon their carts due to long wait times or unavailable products.

Production changes alone won't solve the underlying issues.

The real challenge sits in managing the influx of orders without compromising service quality or employee well-being.

Cafe operations and in-store customer experience are two of the biggest ares of focus for incoming CEO Brian Niccol (will he be able to earn that $116M salary?).

Innovation like dedicated pick-up windows, dedicated “dark store” production sites or a cut down menu offering could potentially ease the strain on in-store operations.

However, a lot of these changes require significant investment and Starbucks has been struggling with YoY same store sales and market relevance.

I think that they are a good example of where business may need to start shifting offers based on how you interact with them.

This could be dynamic menus that support certain types of mobile orders during peak, versus a broader menu selection at other times.

It could mean having a section of the “kitchen” for in-store or walk-in patrons only.

Maybe you redesign a lot of your locations and remove a drive-through component.

While some of those sound like terrible ideas, my point is that everything has to stay on the table.

If your orders no longer support your capacity, you either need to limit your orders or make changes to your stores / facilities to increase capacity (more people, more equipment, longer operating hours, etc).

Don’t Be Fooled, Technology Can Never Make Up For Poor Density Or A Bad Quality Of Revenue

One of my biggest pet-peeves is seeing software being sold as the solution to all of your problems.

eCommerce and the SaaS industry has let people believe that all you need is the right platform, and all of your troubles will fade away.

I see it all the time when it comes to last mile parcel delivery.

Technology provides and small regional start-ups all believe that they can dramatically improve last mile costs and efficiency with a better algorithm.

While better tools always, help, there is NO algorithm that is THAT much better than everyone else’s in the market.

Small tweaks and gains, but almost never monumental shifts.

So you can imagine my reaction when I saw this article: 3PL Tech Innovation Revolutionizing Beer Distribution in BC

Here’s the TLDR.

Alright, so they are using a WMS/TMS for their operations.

Cool.

I’m sure that does improve THEIR operations. But so would any WMS or TMS if you aren’t using a system from the start.

There’s nothing that this platform (or anyone’s) will do to actually solve MODEL challenges however.

The biggest issue that the craft beer market faces is order density.

Since there are many different players, who are all making different offers to their customers, you struggle to get enough volume going out at the same time to the right areas.

The real service VIDD is providing is consolidation. By getting more of these small manufacturers under one roof, and leveraging the benefits of a shared distribution network (this is how Amazon wins btw), they are able to create more value for those small brands.

This I support 100%.

But that has nothing to do with the WMS or TMS that they are using.

This same type of activity could be done with a spreadsheet (although I wouldn’t recommend it LOL).

The real key to being able to streamline operations and create more value for the craft beer market will actually come from aligning offers and service patterns across MANY small craft beer players.

By limiting offers or changing how your offers are structured, you will then be able to create better density and in turn, operate more effectively.

Understanding what parts of the customer offer to change, to know what makes sense in different geographies and to be dialed in on your daily operating costs are the REAL foundation of what you need to do.

All that being said, this is operations and logistics 101, and it’s sad that in a world dominated by app-first thinking, that this is seen as revolutionary.

That’s it for this week. Thanks for being here.