Little Black Stretchy Pants

by Chip Wilson

  Something I didn’t know at the time was that Bob was doing everything he could to accelerate his departure from lululemon. A long, drawn-out search for a suitable replacement would only slow that process down, so Bob was highly motivated to hire Christine for the job as COO. She was slated to join lululemon in January 2008.

  Christine came in as a COO with the idea of taking over the CEO position from Bob. She’d never held the top job before and would need a little time with us to get the lay of the land. Still, it was good that the best candidate to run a female-oriented company was a well-accomplished woman.

  ____________________

  24 Steve Gelsi. “Lululemon Athletica IPO Jumps 50%,” MarketWatch, July 27, 2007, www.marketwatch.com/story/clothing-maker-lululemon-rallies-50-raises-328-mln.

  Chapter 23:

  After Bob

  Coke and Pepsi

  That January, before he left us for good, Bob wanted to remove the first and most prominent branding statement from our Manifesto and our shopping bags.

  “Coke, Pepsi, and all other pops will be known as the cigarettes of the future. Great marketing, terrible product.”

  A typical business person would advise against this branding approach because of the risk of alienating people. Exactly! We didn’t want anyone who was wearing lululemon to be drinking Coke or Pepsi. It was bad for our brand.

  In the seventies, I correlated lung cancer with cigarettes before there was any real data. I did not allow smokers in the Westbeach store. By driving these customers away, my core customers became more fanatical.

  In the eighties, I correlated obesity in the US with Coke and Pepsi. Coke and Pepsi had marketed themselves as the American dream, and I believed it was a primary reason Americans were getting fat. I also knew only a company with absolute integrity could stand up to their massive marketing machines.

  I wanted our Super Girl market to know the lululemon brand was not for soda drinkers. If we were aligned with our iconic health-inspired Super Girl, I knew the rest of the world would follow. After we put our declaration on the Manifesto, Coke and Pepsi threatened to drown lululemon in lawsuits. I had always thought of lululemon as a social experiment. I believed our company could be the driver for social health.

  “We had absolute conviction in what we were saying,” says Deanne Schweitzer. “We had to do a lot of research, due diligence, and legal work to prepare our side of the story and throughout that time we were in the process of going public. I would always follow Chip in focusing on what you believe to be true. In this case, we focused on supporting the claim we had made, and in the end, it was completely supported by facts.”

  Bob made a point that since people were now much more aware of the health risks posed by colas, the item made the Manifesto seem dated. He said we’d already played our part. President Bill Clinton had led efforts to take pop machines out of schools across the US, and I wondered if the lululemon Manifesto had played some part in the President’s ruling—that is, until I attended the Clinton Global Initiative meeting in New York, sponsored by Coca-Cola.

  I never wanted lululemon to appear dated. I deferred to Bob, and the slogan came off our Manifesto.

  A Coverup

  The Manifesto on the side of our shopping bags was such a success that I wanted to take my theories a step further. I couldn’t get the entire Manifesto on the side of the small shoppers, so I started writing a list of short health philosophies I had.

  When the health philosophies were printed on the side of the shoppers in 2008, Bob thought there would be public pushback and unwanted publicity. He ordered the side of the bags to be covered up with something vanilla. There was some online discussion, but social media was still in its infancy, and the whole incident blew over.

  Resetting our Leadership

  The CEO transition plan was for Bob to stay at lululemon until the fall, at which point Christine would take over.

  In early 2008, Christine moved her family to Vancouver and completed the Landmark Forum. She was officially the first externally-hired executive to engage in our newly-formalized cultural onboarding.

  Within a few weeks of Christine’s arrival, Bob was MIA. He was still being paid, but he was absent. After it became clear he wasn’t coming back, my instinct was to fire him. Why were we keeping someone around who wasn’t doing the job for which we were paying him?

  But the Board of Directors didn’t want to fire Bob. As they explained, lululemon had not been public for long. Firing a CEO—even an absent one—would be bad optics. Investor confidence could be affected; analysts and advisors might recommend against buying lululemon shares. It just wouldn’t look good if we fired Bob. The company had to suck it up and pay him because the lululemon Board did not want to release the news to our shareholders. It made me sick.

  We were careful about the public message we released about Bob’s departure, simply saying he would “retire” from his position as CEO of lululemon at the end of June.25 I informally slipped back into the role of CEO, got rid of Bob’s hires, and righted the ship. It was a breath of fresh air. The silver lining of our time with Bob was learning what we didn’t want.

  I still didn’t know why Bob had disappeared. As I thought about it, I was reminded of that private flight that Bob and I had taken with David Mussafer several months earlier. Bob and David had gotten up from their seats and had taken their conversation into the galley for privacy, but their voices carried—especially as things got more heated.

  “I did it,” Bob kept saying. “I did it, I got the stock to X amount for two months, now pay me.”

  Since it was a private conversation, I hadn’t asked any questions at the time, but now I wondered if Bob had worked out a deal with Advent that enabled him to cash out if the stock got to a particular value for two consecutive months. Perhaps there was a public disclosure about such an incentive package, but it was never brought up in a Board meeting to which I was privy. If I had known, I think I would have watched for short-term decision making.

  In February 2008, MarketWatch summarized the situation like this: “All [Meers] had to do was to be on the job when lululemon’s LULU, +0.04% share price hit a certain level and its private-equity investors sold a slug of shares… this puts management’s interests in line with private equity, not necessarily with public shareholders.”26 The same analysis described the inherent dangers of these kinds of deals because they “[align] management’s interest with the wrong group of shareholders—those who are cashing out.”27

  I realized that Bob had done everything in his power to get the share value to where it needed to be to trigger his exit, and that he was likely incentivized to maximize that share price. The easiest way for him to do this was to open new stores carelessly.

  I realized then that it had never been Bob’s intention to set lululemon on a course to sustained, long-term growth. He was incentivized for short-term results, also to PE’s benefit because they both maximized their share value and cashed out.

  In Darrell Kopke’s words: “I was with lululemon during the IPO process. Bob Meers seemingly wanted to protect himself during this process, so he brought in his own people. I felt that there was a pure, selfish manipulation of the market for their own benefit. It changed the company from one with a legacy on the health of its community to one that cared only about getting stock prices up to maximize options. I learned about revenue smoothing and presenting one’s self on an earnings call to make the stock look good.”

  In the end, Bob made around $30 million on stock appreciation. Instead of announcing that he was no longer the CEO, he simply walked away. As a result, Christine’s rise to CEO was expedited, and her development under Bob was truncated.

  There was a lot for me to learn from the Bob Meers era. It was also my introduction to the art of looking good to maximize short-term gains.

  Christine Becomes CEO

  Lululemon’s shareholders’ annual general meeting (AGM) was held in June 2008, and Christine Day was publicly appointed
as CEO. It was a boon to investor confidence, with magazines like Forbes describing it as a breath of new life for the company.28

  Unsurprisingly, the US side of the business was struggling, and stores were not hitting their projections.

  The first thing we did was coach Christine on our fundamentals. Christine had solid real estate experience from her time at Starbucks, and she knew what a good deal looked like. She reset deal terms, brought the economics back in line, and looked to the streets and the lifestyle centers to complement the mall stores. We also hired store staff from the local communities and invested in their training.

  Just like Bob had done with the Coke and Pepsi slogan, the first thing Christine wanted to do as CEO was to eliminate another of our Manifesto slogans: “Children are the orgasm of life. Just like you did not know what an orgasm was before you had one, nature does not let you know how great children are until you actually have them.” We thought she was joking as that particular statement and the greater Manifesto were the number one reasons people said they applied to work for lululemon. After we realized she was serious, we took it as a good moment to coach Christine on how tipping point branding worked.

  Using different cultural tools, we had learned ways to be authentic about being inauthentic; we’d found new ways of being open and undefended about who we are and how we protect ourselves. This understanding and training allowed us to coach each other in moments where we reverted to being inauthentic.

  Christine had received one call about the slogan, from one offended person. Her direction to remove the quote was a response based in reaction and not in choice. She may have been new to our culture, but Christine had completed our executive onboarding. With coaching, she quickly came around and withdrew her directive.

  The Great Recession

  The 2008 economic downturn, now known as the Great Recession, began only a few months after Christine became CEO. This major event—considered the worst stock market plunge since the Depression in the 1920s—had been building since the American subprime mortgage crisis in 2007.

  Things only got worse from there, culminating in the Lehman Brothers investment bank collapse in September. Despite massive government bailouts, the damage was done, and everyone was hit hard. The DOW fell 500 points, and there was a massive sell-off of stocks on Wall Street.

  It was scary to watch our stocks drop from $45 to $5, almost overnight (especially after we’d gone public at $18). All at once, nearly every company could be bought for cents on the dollar, and everything we felt we’d achieved by going public was suddenly underwater. Nobody knew if anyone, anywhere in the world, would be working the next day.

  Times were tough for several months. We didn’t have to lay off much staff but hiring slowed substantially. We closed our stores in Japan, and we saw a much slower holiday season.

  However, overall, lululemon weathered the storm. Through the worst of the recession, the fundamentals of lululemon seemed to be as strong as ever, and we didn’t have to sell our soul as so many other companies did. As we came to the end of 2008, we didn’t have to focus our efforts on merely staying alive.

  It occurred to me that in past downturns, people had been known to turn to gambling and drugs, but in the new world, people were managing stress with athletic endorphin hits. My theory seemed to be verified as our sales continued to soar.

  E-Commerce Revisited and the Lab Concept

  The excess inventory triggered by the Recession drove us to invest in e-commerce, and our platform launched in April 2009. To supplement it, we sent out widespread email blasts to our customer base whenever we had a new product. E-commerce was very successful for us; even with a limited product line available, we were quickly selling inventory almost as fast as we could stock it. I saw e-commerce as a critical part of the full vertical model I had always wanted.

  I was always concerned a pure e-commerce play could undermine lululemon just as the vertical model I developed had done to wholesalers. The Board was very keen on e-commerce because they could see it working in other companies for which they were also directors. At the time, if I had a choice of e-commerce or owning our own manufacturing, I would have picked manufacturing. But at that moment, manufacturing would not have helped our excess inventory position created by the financial crisis.

  In retrospect, the recession may have been the best thing that ever happened to lululemon. We stopped growing, got our processes in place and reset our foundation for growth. We had nothing else to do. Even during the recession, our stores made their way up to sales of $1,000 per square foot in the US while maintaining about $3,000 per square foot in Canada (the average retailer does about $650 per square foot).

  I had always wanted to recreate the laboratory inside the store like we had in our original Kitsilano location. We had an unused lease in Vancouver, and we had a million dollars in excess fabrics, zippers, and trims. We had an internal “quick turn” pod to turn this excess inventory into cash, but I wanted a fishbowl in which to test new designers.

  We hired new designers and turned them over every three months. We let them loose on samples and excess fabric in the floor space of the new building to create street clothing from technical fabrics. With creative freedom, these new designers brought a great dynamic into the brand in a highly uncertain time.

  My experience told me we had to go through fifteen designers to find one amazing designer like my wife Shannon, or like Shannon Savage (another incredible designer). A designer who could consistently create multiple new ideas, four times a year. I knew finding a Shannon-Wilson- or Shannon-Savage-type creative was more valuable to the bottom line than our CEO or CFO.

  We would open more labs in New York City’s Soho and eventually a new one in Gastown in Vancouver. It was one more innovation that helped get us through very uncertain times and develop local athletic design talent unavailable anywhere else in the world.

  Effects of the Recession

  Christine did a fantastic job with real estate deals, resetting our strategies to a fundamental successful formula, investing in e-commerce, and working with the back-end public details and financials. We came out of the Recession with increased cash flow and a massive surplus of money.

  On March 9, 2009, lululemon’s share price was hovering just under $2.25, far less than what it had been just after we’d gone public in 2007. From there, however, our share price began a rise that would continue steadily until 2013.

  Analysts at Thomson Reuters were impressed with our performance and the uniqueness of lululemon’s position in the market. “Few Canadian retailers have found this kind of success expanding south of the border,” Reuters said.29

  Christine hit the ground running and the next two years were golden.

  We didn’t have a brand or marketing team because our brand spend was hidden in people development, quality processes, store locations, and anything else “off the cuff” I wanted to do in response to social changes in the world. Everything we did seemed to strengthen the brand.

  I kept my desk in the middle of the design area, and we produced our best innovations and looks ever. My wife and I hired a dancewear designer named Antonia Iamartino to bring femininity to the functional yoga look. This idea put us four years ahead of anyone even thinking of competing with us.

  From an innovation end, we set the goal to become the best athletic bra manufacturer in the world by 2013. We contracted the University of Manchester to study breast movement. We produced radio wave bonding seams, laser venting, and cell phone pockets on every garment. I brought silver threads into our garments to kill bacteria and to end stink.

  A “home run design” (a design that drives company profits) was the Scuba Hoodie. From my years in the surf, skate, and snowboard business, I knew the hoodie was an iconic garment and my wife Shannon had made a test version of it in 2001. I wanted to make the best hoodie in the world. The absolute beauty of vertical retailing was that it allowed us to make what no one else could afford. With my friend Elky Hon, we de
veloped a super-soft cotton fabric, thicker than any hoodie ever made. When we combined the fabric with a scuba neck and a 2-inch-wide hem at the hood, we had reinvented a classic item. Finally, by inserting the logo on the front seams, we realized that the Scuba Hoodie would account for up to 20 percent of sales at Christmas in 2009.

  The Oprah Effect

  Around that time, we got a call from Oprah Winfrey’s people, in preparation for her “Oprah’s favorite things” episode. Shannon and I flew to Chicago to be in the audience and give out pants. Our share price instantly jumped by $10. We had seventy-five stores in the US, but with Oprah’s boost, suddenly millions of Americans heard about lululemon for the first time.

  To be honest, I was torn about Oprah’s endorsement. I’d become more and more aware of the increasing influence of celebrities on many facets of life. The excitement over what a celebrity was wearing was something I just didn’t understand. I also felt it was fake because I thought most celebrities were being paid to wear stuff, just like the Nike endorsements. That’s not what we ever wanted to do.

  When a celebrity would walk into one of our stores in California, our staff would automatically want to give them clothing for free—a practice which I opposed.

  Ultimately, we did well in the US because we got back to basics. Instead of opening poorly located stores to push the stock price, we built more studio pop-ups, we developed the local markets, we developed our people, and we focused on education. It took time, but the community was ready for us when we came in, and that was, by far, the most important thing.

  We found ourselves in a good position at the end of 2009.

  Defining Who I Am

  The great years at lululemon, 2008-2010, were an expansive time for me personally because I got to focus on my love of innovation.

  To understand me, you would have to know I am an extremely finicky person. Everything about clothing bothers me. If I could spend the rest of my life in a Speedo, I probably would. Every fibre, seam, fit, and colour on most garments irritates me. I’m annoyed by anything un-functional.