Retail Stocks Imitate Technology: lululemon is to Apple as Gap, Much to its Regret, is to Microsoft
The latest BusinessWeek goes inside an escalating retail battle. Gap (GPS) is taking on Lululemon (LULU), the seemingly unstoppable sushi-eating, fashion-embracing, yoga-practicing hipster shop where you can pick up a $108 hoodie or $78 pair of shorts between workouts.
But Gap has been in the retail game for longer, has plenty of stores and experience. It also has a high-end athletic wear chain, Athleta. So could Gap end Lululemon’s streak of sun salutations?
1) It got a late start
The tablet computer debuted in 2010 and was an immediate runaway success. Apple sold 32 million iPads last year for $20 billion. Yet Microsoft didn’t introduce a competing product until last month, and even then its product doesn’t come out until this fall.
Similarly, Lululemon’s founder started in 1998 and grew to $149 million sales in 2007 before Gap took notice. Only after Lululemon went public, Gap spent $148 million in September 2008 to buy California-based Athleta, a store and catalog business, to create competition in the high-end women’s gear space. And at the start of last year, Gap had managed to open just one Athleta store.
You can see some similarity in the companies' revenue trajectories.
2) It doesn’t understand what its customers want
Lululemon understood from the start that its store was not just yoga gear. It was, like Whole Foods (WFM), a hub for people embracing a healthy lifestyle. And it, like Apple, created showrooms where shoppers could interact with people who passionately embraced its products.
The main selling point of Gap’s Athleta, by contrast, is a lower price point. Microsoft tried in vain with its “I’m a PC” ads to make affordable stuff cooler. But consumers who flock to Lululemon could get workout gear at Target if they wanted. Price is not the point. But profits are:
3) It’s just a bad knock-off of the cooler version
Lululemon, besides being a lifestyle store, is high end. It’s known for personalized service. Athleta tries to mimic that using, among other things, whiteboards by customers' dressing rooms -- but it doesn't succeed. On Yelp (YELP), some Lululemon stores get an average of four and five stars from reviewers while Athleta stores get three and four stars. And people who want to vent have taken to epinions.com, where Athleta gets 2.5 stars. Some of the complaints: products are out of stock, merchandise doesn’t justify the price, and bad customer service.
Microsoft, similarly, is just another company knocking off Apple’s forward-thinking designs. When its Surface came out, pundits applauded some clever new elements, but they weren’t left dying to buy one. It’s more of a product consumers will settle for if they can’t get their hands on an iPad.
4) What’s Athleta? What’s Bing?
Four years after Gap purchased Athleta to get big in the yoga business, you’d be hard-pressed to find a customer who’s even heard the name. As for sales, those seem lackluster. Gap said that Piperlime and Athleta had combined sales of $301 million last year, which compares to Lululemon’s $1 billion for 2011.
This July, Microsoft posted a loss when it took a $6.19 billion charge for its online division. That includes Bing, the search engine no-one uses, and MSN, the portal no-one uses. When it made the write-down that essentially erased its purchase of aQuantive, an analyst told the New York Times that “the industry has evolved beyond where aQuantive was when Microsoft bought it.”
Gap can find out the hard way, or just read up on Microsoft. When you try to get into a business that you don’t understand but others do, you’re setting yourself up for a big, fat, expensive failure.