Nike Acquisition of Lululemon Case Study Example

Lululemon Company Overview

Lululemon Athletica Inc. is a Canadian company which makes athletic apparel (Dalavagas, 2016). The Lululemon core competencies include yoga-inspired clothes. It is also a designer and retail seller of technical athletic clothing. Answering the question where is Lululemon based, the company which produces a clothing line has its basis in Vancouver, Canada where it runs its clothing stores located worldwide (Dalavagas, 2016). The company makes various types of clothes including performance shorts, shirts, and pants. Additionally, according to Dalavagas (2016), LULU, as Lululemon is referred to on NASDAQ, makes yoga accessories and lifestyle apparel. Over the years, the company's image has been masked with controversies such as product recalls, overpriced merchandise, coming up with misleading statements to artificially increase the price of its stock (Dalavagas, 2016). Others include excluding overweight customers through their marketing efforts, shareholders' accusations of fraud, contentious statements by one of its founding members, false advertising, and issues relating to the quality of products. The following essay describes strengths and weaknesses associated with Nikes proposed acquisition of Lululemon and determines the viability of the move by Nike.

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One of the Lululemon company strengths is that the company has a strong customer base, which mainly consists of higher-income women. The company which initially based its proposition statement on yoga apparel branched out to include in its products casual wear (Dalavagas, 2016). One of the reasons why Lululemon is so successful is that the emergence of a casual culture in the US has led to many individuals wearing casual clothes almost everywhere. As such, the firm may have a stronger customer backing in years to come. However, as the brand is mostly affiliated with women's apparel, which is Lululemon target market, it has been unable to fully penetrate the men's casual wear market, evidenced by a 16% sales arising from men's clothes (Dalavagas, 2016). Though it is projected to grow, the firm may face issues as it tries to rebrand itself, not only to make profitable sales from higher-income women, but other groups of people to boost its market share.

Positively, LULU has the potential for international expansion. The firm's sales have been fixed on North America, evidenced by 93% of its sales coming from Canada and the U.S (Dalavagas, 2016). The company's management claims that Lululemon company objectives is to expand its business to Europe and Asia, increasing its number of stores to 22 from the current 11 company-operated units by 2015. LULU's management has indicated the company's goal to increase international sales, to account for about 25% of the firm's total sales by 2020 (Dalavagas, 2016). Moreover, the company has the plan to expand its operations in North America, by opening stores in underserved markets. As such, it is clear that the firm hopes to increase its sales to double its current status by the end of the decade.

Additionally, Lululemon wishes to expand its current success in women apparel to include new products. Moreover, the company wants to increase its sales in the men's category, where sales have been weak. To expand its market, LULU will focus on training, running and yoga in its diversification of products (Dalavagas, 2016).

However, Lululemon faces stiff competition from other firms such as Under Armour, The Gap, and Nike. In the highly competitive apparel market, LULU competes directly against larger brands which are wholesalers and direct retailers. Moreover, makers of traditional athletic apparel also serve as competition for the brand (Dalavagas, 2016). The firm is disadvantaged in this situation as competitors of Lululemon are not new, which gives them a strong market presence. Additionally, such competitors have larger operating budgets than LULU.

Nike Lululemon Acquisition

As in the case of divesting Cole Haan due to their being a distraction to the core business of Nike, Lululemon bought by Nike would prevent the company from focusing on its brand. Acquisition of LULU would be the same as Umbro's case, where Nike soccer could offer anything the firm provided and more (La Monica, 2015). Acquiring Lululemon is irrelevant as Nike's women's business should gain momentum over time. Moreover, with the company's market share, it would get more customers easier than LULU which has to deal with changing its image branding before it can get more people to buy its products.

Additionally, Nike has invested millions of dollars in its women apparel business. Therefore, taking over LULU does not favor the company's objectives since it cannot be a substitute for creating a branded women clothing business. Nike's goal to become a global athletic brand cannot come to fruition without building its branded women's apparel business (La Monica, 2015).

Nike is inherently a wholesale brand while Lululemon is a vertical retail brand. Though the products sold by LULU and Nike have some similar attributes, Nike's business is integrally distinctive from that of LULU. Nike has the potential to get higher margins from its retail business as it is integrally a wholesale firm. Since LULU sells its goods as a retailer, its conversion to a platform where it prices its products as a wholesaler is not feasible owing to pressured margins (Dalavagas, 2016). Furthermore, Lululemon owned by Nike would have to increase its retail prices which would lead to a decline in the company's market share.

Conclusion

In conclusion, Nike is focused on building its brand. The addition of LULU to the firm's operations could prove distracting. Moreover, though the shareholders of Lululemon would benefit from the acquisition, the move would put Nike, as a Lululemon parent company, shareholders at a disadvantage. As such, the purchase of LULU by Nike is not advantageous for the company.

References

Dalavagas, I. (2016, April 12). SWOT Analysis: Lululemon Athletica Inc. Value Line. Retrieved June 11, 2016, from http://www.valueline.com/Stocks/Highlights/SWOT_Analysis__lululemon_athletica_inc_.aspx#.V1uyQkcSeqa.

La Monica, P.R. (2015, November 23). Lululemon surges on takeover talk. CNN Money. Retrieved June 11, 2016, from http://money.cnn.com/2015/11/23/investing/lululemon-nike-under-armour-takeover-rumors/.