China's economy struggles, but Lululemon is having a shopping Fiesta!

A data-driven review of Lululemon’s expansion strategy

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China's economy is struggling, with consumers preferring to save and leaning towards frugality and cost-effective alternatives. However, an unexpected brand is bucking the trend. Lululemon, known globally for its high-end athletic wear and corresponding price tags, is seeing a surge in sales in China.

In Q1 2023, Lululemon disclosed its China revenue breakdown for the first time in its 10Q filing and reported a 79% year-on-year increase in revenue from China in the first quarter. By Q1 2023, China had become one of the top three geographic regions with the highest revenue, contributing 12.5% of Lululemon's total revenue, following Canada (12.7%) and the US (65.7%).

Lulu's leadership also demonstrated confidence in expanding the Chinese market and building brand awareness during the earnings call.

"I had a chance to visit Shanghai in mid-April for the first time in three years, and it was great to see how much our brand has grown in the city…We expanded channels. We have .cn. We have Tmall. We added JD…We have a leader in CN that is based in Mainland China, in Shanghai. We have a specific SSE office where we have talent and resources that are specifically focused on driving these initiatives and building the business in Greater China and Mainland China." Calvin McDonald (CEO)

“Our new store openings in 2023 will include 30 to 35 stores in our international markets with the majority of these being planned for China.” Meghan Frank (CFO)

We believe that Lululemon is likely to maintain its momentum into the second quarter of 2023. On Tmall and JD (where Lululemon operates its official online stores in China), Lulu's total sales jumped 26% year-on-year in Q1 2023 and 110% year-on-year in Q2 in the sports and health product category. The significant increase in Q2 could be partly due to the Covid lockdown in Shanghai during April-May 2022 creating a low base. However, the increase still surpasses the overall Sports and Health category growth and Lulu's major competitors such as Nike, Descente, and Fila.

Additionally, we see a well-balanced increase across all product categories. Online sales of Lulu's flagship yoga and dance products increased by 70% year-on-year, and sales of other sportswear increased by 172%, now contributing to almost half of Lulu's sales.

Despite the decelerating economic conditions, affluent consumers did not seem to slow down their consumption, especially in the sports and outdoor categories. This is a trend we have previously observed in both fashion consumption and luxury shopping.

While Lulu's current growth in China is impressive, there's skepticism within investor circles about its long-term potential. A primary concern is the brand's steep pricing. For context, Lulu's signature Yoga Align pants come with a price tag of around ~1,000 CNY — nearly 10% of the monthly salary for a beginner role in finance or IT in China's major cities. As consumers increasingly seek out more affordable alternatives amid economic hardship, the sustainability of Lulu's sales surge is under scrutiny. Further, there's apprehension regarding Lulu's heavy reliance on its iconic yoga pants; such product concentration might pose challenges in sustaining future growth momentum.

During Lulu’s 2023 Q2 earnings call, Lulu’s leadership addressed their core strategies to mitigate these concerns, which include:

• Increasing brand awareness by “launching market-specific activation campaigns, investing in traditional brand marketing, and leveraging digital channels such as WeChat and WeCom in China”.

• Product innovation: “bring innovation via new fabric technologies, create styles and silhouettes that solve for unmet needs…continuing to build out our golf and tennis collections with versatile styles that can be worn both on and off the course and court.”

• “Maintain balanced growth across all markets, categories, and genders”

In today's article, we'll delve into our online sales data from Tmall & JD—Lululemon's official online storefronts in China—as well as consumer sentiment insights from platforms like WeChat, Douyin, and Xiaohongshu, where Lululemon enjoys significant brand visibility. Our aim? To address pivotal questions and evaluate the effectiveness of Lulu's expansion strategies in the Chinese market. Dive into our latest insights to gauge Lulu's potential for success in expanding its footprint in China, as we discuss:

• Consumer Profile: Delve into the demographics of Lulu enthusiasts – who are they, where are they located, and what product features resonate most with them.

• Product Strategy: Discover the top-selling products, Lulu's potential for future growth, and the brand's foray into male-centric items and a broader range of wearing occasions.

Who’s buying Lulu’s infamously expensive yoga pants?

One man's trash is another man's treasure.

Many Chinese consumers dub Lululemon's 1,000 CNY yoga pants as "IQ Tax" or "智商税," a term implying that one is paying unnecessarily high premiums when cost-effective alternatives exist. A significant portion of consumers are gravitating towards more affordable options like Descente and the local brand Maia Active. Others are exploring high-quality replicas on 1688.com, a domestic B2B platform known for its vast assortment of economically priced products.

However, Lululemon's loyal fans, say things like "There is absolutely no substitute for the fabric and workmanship." They call themselves "Lemon People" and have a strong sense of belonging to the community. This is not exclusive to the high-income community, as many consumers are also saying they would like to save and cut spending elsewhere to buy Lululemon.

So, they are two distinct groups of consumers, and it is clear that Lululemon is targeting a specific customer profile by charging a premium for delivering high-quality products that cater to its target customer base. Lulu's CEO even reemphasized the company's premium pricing strategy.

“…we enter markets with our similar premium positioning of the brand with the intent to sell at full price with markdowns being used only as a means to exit through seasonal shifts in product and not leverage promotional discounting in order to fuel and create demand.”

Data from Xiaohongshu, China’s premier lifestyle social media platform, reveals that typical Lululemon enthusiasts also favor other premium brands, such as Nike, Chanel, Arc'teryx, and Dior. Notably, Nike emerges as the most frequently co-mentioned brand alongside Lululemon.

Keywords commonly associated with Lululemon posts include fashion, outfitting, and OOTD (outfit-of-the-day). Following closely are terms like fitness and sports. This suggests that Lululemon's appeal isn't merely functional; aficionados appreciate its “athleisure” style and design.

Post-Covid in 2023, Lululemon's social media footprint has expanded dramatically, marked by an upsurge in mentions on platforms like Xiaohongshu and Douyin. As of July 2023, among Lululemon's Chinese admirers on Xiaohongshu, the largest group is from Shanghai, where Lulu has made significant investments, at 28%. This is followed by Beijing at 12%, Guangdong at 9.4%, Zhejiang at 7.9%, Sichuan at 2.9%, and Chinese residents in the U.S. at 3.06%. This shows that Lululemon's plan to increase online presence and brand awareness is coming along nicely.

What are they buying: Align™ still dominates

Tmall and JD's online sales show that Lululemon's iconic Align™ line still dominates sales and maintains robust year-on-year and quarter-on-quarter growth in Q2 2023 compared to other flagship product lines such as Define, Wunder, Scuba, and Groove.

Align™ represents more than just a cash cow for the company. Its charm largely stems from Nulu™, Lulu’s signature fabric used in every Align™ product. This material has endeared itself to consumers, particularly because of its "buttery-soft" texture.

Lululemon Align pants 24", top selling item on Tmall in 2023 Q2

On Chinese social media platforms, consumers list their primary reasons for purchasing a Lululemon item. Among these reasons, the most prominent ones are the "soft, lightweight fabric" that gives the sensation of feeling "naked," and the slimming cut that elongates the legs. While there are consumers who doubt the fabric's "technology", suggesting it's merely an "IQ tax" and can be easily replaced with cheaper alternatives, our e-commerce data suggests otherwise.

Sales of products made from Nulu™ fabric (excluding the Align series, which exclusively uses Nulu™) have seen a remarkable upward trend in recent years.