According to Laurent Potdevin, chief executive officer of Lululemon, whose products are sold on Alibaba’s Tmall, the Chinese marketplace platform is in the “early stages” of exploring what the retail makeup could look like in a physical setting. He confirmed that he’s had preliminary discussions with Alibaba executives, including founder and executive chairman Jack Ma. They took place in Canada during the last week in September while Ma was the keynote speaker at Gateway Canada, a program aimed at helping brands and small businesses either sell directly to China’s consumers or through distributors.
“What does a physical marketplace look like and how will it benefit consumers?” Potdevin said are some questions raised as the Chinese firm explores options with its Canadian marketplace partners on a possible go-forward strategy. Besides Lululemon, Ma said during his keynote address that Canada Goose is also sold on one of Alibaba’s sites.
While Potdevin indicated there’s no conclusion yet on what the final physical format could entail, he said a huge venue similar to the Mall of America might be a good starting point.
But Potdevin, who also believes that there’s no longer a distinction between off-line and online, said a series of shops as most malls are now configured isn’t the answer. Instead, he spoke about huge spaces dedicated solely to experiences and services. In Lululemon’s case, the dedicated area would most likely incorporate space for yoga classes. That fits in with the brand’s history of how it has built its network of loyalists via local, grassroots yoga groups, one community at a time.
“People still crave human connection, especially in the active sector,” Potdevin said, adding that the connection and discussions around yoga have evolved the brand to represent an “athletic and mindful lifestyle.”
Alibaba has been vocal about its efforts to create a new infrastructure for retail in China that it calls “New Retail.” A spokesman declined comment on the conversation between Potdevin and Ma, but noted that with just 18 percent of retail consumption in China occurring online and the balance in traditional brick-and-mortar stores, “there is an even more interesting opportunity to help traditional brick-and-mortar brands and retailers leverage the technology and consumer insights Alibaba can provide to transform how they engage consumers and give consumers new, more digitally integrated ways to shop. We call this drive our ‘New Retail’ strategy.
“Imagine a store where you can pick items from the shelf, and at the same time, purchase other items not from the shelf, but from your mobile phone while you are standing in the store. And then you tell the store to send everything you just bought to your home because you need to go catch a movie. This is already a reality in China today through Alibaba,” the spokesman said.
One individual close to Alibaba said the thesis behind “New Retail” is centered on “eliminating the distinction between physical and online.” And while there’s been speculation about a complex that is being built in Hangzhou across the street from company headquarters — and how it might be the future home of an Alibaba mall — this individual said the site “is not one of the malls we’re invested in.”
According to Potdevin, the brand’s sales in China grew in part by the outperformance of new store productivity and via its TMall business, which rose 175 percent. Lululemon’s growing presence in China could help the athletic performance and yoga brand grow its international business to $1 billion by 2020.
International is one component of the overall business that Lululemon has said could grow to $4 billion in annual volume by 2020. The other three areas — all projected to grow to $1 billion each — that will help Lululemon reach its target are digital commerce, North America and men’s.
Wells Fargo Securities analyst Tom Nikic last month cautioned about a possible slowdown in the athletic apparel/footwear space, noting the success in recent years of the category and how consumers have filled their closets with activewear over the past six to seven years as a possible cause for the sector “to take a breather for now.”
Potdevin considers the term “ath-leisure” both a “curse and a blessing.” While the term has helped the company grow and attract some brand followers, he insisted it has been “wrongly articulated” in the footwear and wholesale distribution channels. The ceo considers those channels “uninspiring, particularly with the shift to Amazon.” Potdevin also seeks to distinguish Lululemon from firms such as Under Armour and Nike, brands that sell into the wholesale channel and are often considered by Wall Street to be competitors because they all sell similar products. Potdevin said the problem with wholesale is that it forces brands to be defensive since “wholesale is a race to the bottom.”
“We do the local markets and communities. We have 2,500 brand ambassadors around the world who have their finger on the pulse. In Australia, triathlon is huge. In China, boxing is on the rise. In Hong Kong, it is spinning that is growing. We tailor our product line to the local marketplace. It is a unique opportunity for us to listen and be curious [about what consumers want],” the ceo explained. He added that the listening component allows the company to gain better traffic and a higher conversion rate due to the engagement with its studio partners.
The company is taking some of the learnings from the women’s business to men’s, which is about 20 percent of the overall business. Men’s as a category is about $500 million in annual volume and became a focus for growth 24 months ago.
Lululemon has different signage in its stores as design cues to differentiate product for men and women, although there’s a bit of cross over on the tech side for both lines.
“Ten years ago, it was more about fashion and now it is more about performance. In women’s, it was then more about fashion and nontechnical, and for men’s it has become more about style and fashion. Today he expects both, fashion and technology,” Potdevin said, adding that its competitors who “sell into the wholesale channel have to work within certain lead times that make it harder for them to focus on style.”
Wall Street seems to be giving Lululemon the benefit of the doubt. Matthew McClintock at Barclays Research has an “overweight” rating on shares of the company. He said, “We remain bullish on the Lululemon story as [the company’s second-quarter] results clearly demonstrate isolation from the pressures facing the broader athletic industry.”
The company last month said profits in the second quarter slipped 10 percent to $48.7 million, on a 13 percent gain in net revenues to $581.1 million. Comparable sales, including digital, rose 7 percent.
Earlier this month, Dana Telsey at Telsey Advisory Group said both near-term catalysts and long-range outlook can support an upside in the stock price. She also has an “outperform” rating on the shares. “We see strength of the brand, the control of distribution and the ongoing appeal of its specific category as allowing it to stand somewhat aside from the overall broader channel.”