Lululemon Athletica (NASDAQ: LULU) is a famous athleticwear company.
It is based in Vancouver, Canada.
Dennis J Chip Wilson founded Lululemon Athletica Inc in 1998.
In the beginning, Lululemon made and sold yoga apparel for women only.
Later, it expanded its product range to include products for men.
Now, it offers a diverse range of products for both sexes.
It sells products especially designed for athletic pursuits like yoga, running, training, and sports.
The raw material or fabric the company uses for manufacturing products is called Luon.
It depends on external suppliers mainly to produce apparel and accessories.
There is intense competition in the apparel industry.
Lululemon competes with brands like Nike, Adidas, Puma and Columbia Sportswear.
It uses both digital and physical sales channels for sales and promotions.
A Brief Description of Porter’s Five Forces Model:
Michael E Porter (Bishop William Lawrence University Professor), is an economist, author, researcher, adviser and speaker.
His article titled How Competitive Forces Shape Strategy was published in Harvard Business Review in 1979.
He wrote about the five forces that they are collectively the determinants of the profit potential of an industry.
When the forces weaken, the profit potential is higher.
The strength of these forces in an industry, which can range from mild to intense, determines how competitive and profitable an industry is.
Let’s say the bargaining power of suppliers for a brand is weak.
It denotes that the profitability of the business will be higher.
Similarly, if the intensity of competitive rivalry is higher in an industry, it will reduce profitability.
In Porter’s own words,
“Every industry has an underlying structure, or a set of fundamental economic and technical characteristics, that gives rise to these competitive forces. The strategist, wanting to position his or her company to cope best with its industry environment or to influence that environment in the company’s favor, must learn what makes the environment tick.”
Michael E Porter.
Michael E Porter in his HBR article, How Competitive Forces Shape Strategy.
You will study about the impact of these five forces in the sports apparel industry and their effect on Lululemon’s business.
Bargaining Power of Suppliers: Mild
The bargaining power of suppliers is an important force that affects the profitability of businesses in an industry.
How much bargaining power suppliers hold affects a firm’s profitability.
If the bargaining power of suppliers is higher, it will lead to lower profits and lower profit margins for the firm.
In the case of Lululemon, the bargaining power of suppliers is lower.
Lower bargaining power of suppliers means higher profitability and higher profit margins for Lululemon.
Lululemon depends on external suppliers only for raw materials and production.
In 2020, 65 raw material suppliers supplied raw materials to the company.
Around 40 external vendors manufactured products for the company.
This model has enabled higher cost savings for the company.
The suppliers are mostly smaller firms and do not hold significant financial strength.
It reduces the threat of forward integration from suppliers.
Overall, the bargaining power of Lululemon suppliers is low.
Bargaining power of buyers:
The bargaining power of buyers is another important factor that determines the profitability of businesses in any industry.
When the bargaining power of buyers is lower, the profitability of a firm is higher.
In the 21st century, the bargaining power of customers has grown higher due to several factors.
The proliferation of digital technology, which makes information dissemination easier, has increased the bargaining power of customers.
However, brand image, popularity and other factors help control the bargaining power of customers.
As in the case of Lululemon, the bargaining power of its buyers is moderate.
Lululemon sells high quality products at premium prices.
Its brand image, excellent product quality, and marketing have helped the company moderate its customers’ buying power.
The company uses several channels to engage customers and grow its customer base.
It has maintained a premium pricing strategy and does not offer heavy discounts like most of its rivals.
Threat of substitutes:
The threat of substitutes in the fashion and sports apparel industry is high.
The main threat of substitutes for Lululemon comes from rival brands like Nike, Under Armour, Adidas, Puma, Columbia sports, and others.
There are several rivals of Lululemon in the market which intensifies the threat from substitute products.
Some factors that reduce the threat from substitutes include brand image, product quality, marketing and customer engagement.
Lululemon has maintained a strong focus on maintaining its brand image.
It is an innovative brand that invests in quality and customer experience.
All these factors drive higher profits and customer loyalty which in turn helps moderate the customers’ bargaining power and threat from substitutes.
Threat of new entrants:
The threat of new entrants in the sports apparel industry is moderate.
There are no large entry barriers in the activewear industry.
Brands that have sufficient capital and other resources can enter the industry.
However, there are many factors that moderate the threat from new players.
One of them is the high level of competition in the industry.
The incumbent players in the industry do their best to protect market share and market position from rivals and new entrants.
Any new player will need to invest in infrastructure, marketing, production, human resources and other things to achieve a strong market position.
These things take time.
Achieving brand loyalty also requires a heavy focus on brand image, product quality and innovation.
So, new players face several challenges while trying to enter the industry.
Overall, the threat of new entrants is moderate for Lululemon.
Intensity of competitive rivalry:
The intensity of competitive rivalry in the sports apparel industry is high.
It is because the number of players in this industry has grown.
There are several international and market leading players competing with Lululemon.
Some of the leading rivals of Lululemon include Nike, Adidas, Puma, Columbia Sportswear, and Under Armour.
The increased number of international and local players in the industry has increased the intensity of competitive rivalry in the industry.
Each player invests heavily in marketing, innovation, human resources and other areas to improve its competitive position.
The overall intensity of competitive rivalry in the sports apparel industry is high.
However, there are a few strong factors that moderate the threat from rival players for Lululemon.
One of those factors is its focus on product quality.
Its differentiated business model and brand image also strengthen its market position and competitive advantage against rivals.