RETAIL IS NOT DEAD. ONLY BAD RETAIL IS DEAD.
What does Lululemon’s acquisition of MIRROR really mean for fitness and retail? To simply call Lululemon an activewear brand is to underestimate Lululemon’s vision. Lululemon began with a yoga-centric focus, and now has broadened its apparel collection to become an aspirational lifestyle brand…and anything aspirational justifies its premium market standing. With an estimated $40 billion market cap valuation, Wall Street and Main Street certainly seem to agree.
Lululemon has done more than just capitalize on the growing athleisure market. It was an early investor in high-tech fitness startup MIRROR well before Covid-19 made at home fitness a necessity. For those of you who don’t know - and haven’t seen the MIRROR ads in the NYC subways (remember when we rode the subway?) - MIRROR provides individuals with a sleek interactive 52” by 22” mirror that when turned ‘on’ displays a variety of LCD quality virtual instructor led fitness classes. Comparable to the remarkable rise of Peloton during the pandemic, MIRROR has similarly seen a sales boost. While both target home fitness with a monthly subscription model, MIRROR’s upfront cost and space requirement is by far lower. Peloton’s bike or treadmill costs anywhere from $2,500-4,500 while the interactive MIRROR is at a much more reasonable $1,500 price point. Furthermore, now that everyone and their dog is spending more time at home, a MIRROR’s floor print can be non-existent with the wall mount option.
While some may have questioned Lululemon’s early pre-pandemic investment in MIRROR late 2019, its more recent all cash acquisition announcement of MIRROR for $500M seems entirely reasonable given the state of the fitness and retail industry. Yes, with only $45M in sales last year, the purchase price is more than 10x sales, but as part of the Lululemon family, MIRROR can certainly expand its market, leading to a forward earning basis with much higher annual growth projections; sales will more than make up for the acquisition cost in just a few years’ time. For comparison, Peloton stock is currently trading at a similar 10x sales valuation. Lululemon’s stock price has reacted quite positively to the acquisition news, up 5% shortly after the announcement, indicating that investors indeed see the long-term value.
WHY $500M? MIRROR launched in Sep 2018, subsequentially raised $70M at a $300M valuation, leading some to think Lululemon overpaid at $500M. There are a few reasons why Lululemon may have had a different perspective. Because Lululemon was involved in that early investment round, they were privy to the financials. My estimation is that Lululemon saw the growth trajectory as similar to Peloton’s, and perhaps saw that there were other suitors in this acquisition (Google with its Fitbit play or Apple’s exploration into healthcare make perfect, perhaps more, sense) and knew that they had to act quickly. The Lululemon executive board had previously announced its market disruption growth strategy parlayed into three brackets:
1. Product innovation
2. Omni guest experiences
3. Market expansion
The Lulu/MIRROR partnership checks all these boxes.
PERFECT MARRIAGE Let’s explore why this acquisition really makes sense for both MIRROR and Lululemon. First of all, even as a standalone private company, MIRROR has benefitted from folks being stuck at home looking for more innovative ways to stay in shape. Despite some gyms and fitness studios reopening, many have not and, more importantly, many people are opting to not return to their pre-pandemic fitness studios if they reopen given the fact that gyms and fitness studios have a higher risk of spreading Covid-19 given all the heavy breathing that accompanies intense exercise. Couple MIRROR’s success during the pandemic, with the backing of established brand Lululemon, MIRROR is positioning itself to expand its market share exponentially. The acquisition merges two complementary demographics as well. Lululemon’s goal, since a 2018 statement, was to grow the male consumer base 5% from 20% to 25% ($1B sales) by the end of 2020. MIRROR has a fairly even male/female split, so the acquisition fits right in line with meeting those target demographics.
Traditional retail is certainly changing and should Lululemon need to scale down its physical retail locations (the closing down of malls may not give it much choice), being able to expand their online marketing presence with MIRROR is a smart move. Another smart move? Adding the subscription revenue - a nice recurring revenue stream core to the MIRROR business model. For MIRROR users, once you pay the large upfront cost of the interactive MIRROR, it then becomes more about the content a la Netflix which also means there is room to offer various subscription tiers. Don’t forget that Lululemon has its own built-in hardcore community with the Sweat Collective and Lululemon Collective which essentially act as mini-Lululemon influencers and ambassadors made up of fitness experts and athletes – this could be a great way to cultivate in-house content and/or explore new co-marketing initiatives.
THE NUMBERS Lululemon currently enjoys 50% margins (compared to NIKE/Under Armor at 40%). The Peloton model is the best-case scenario for the Lululemon/MIRROR marriage – fitness equipment revenues growing 100% YOY to a $16B valuation. The Venn diagram of Lululemon loyalists and MIRROR direct to consumer products with the subscription model at hyper growth scale offers an opportunity for MIRROR to be the larger of these two companies eventually. Lululemon could eventually offer various tiers of subscription combinations: 1. Current stand-alone option of fitness courses ($40/month) 2. Combination: $100-150/month includes (1) plus product discounts or branded accessories. 3. Events, events, events – when feasible.
LULULEMON'S BIGGER AND BETTER MIRROR WORLD MIRROR, like the Amazon Echo, is a trendy piece of real estate in people's home with function beyond its primary use, offering a true omni channel experience with tremendous market opportunity. It currently incurs heavy advertising costs typical during early brand building period, but under Lululemon’s umbrella, this cost will be spread across many existing channels. MIRROR operations are physically lean, with only 2-3 physical locations, with most sales online via its direct-to-consumer model.
Now they can provide a much broader experience by installing MIRRORS throughout Lululemon stores, gaining access to a premium clientele of Lululemon loyalists who can stand in the MIRROR with a pair of crimson yoga pants on, and with a swipe, have the MIRROR display forest green or pink yoga pants on their body. This entire process can be replicated at home as well, purchased, and delivered within a few days. In Store opportunities: 1. Test MIRROR via demonstrations (by appointment now, larger classes post-Covid) 2. Be served advertisement for MIRROR subscriptions and relatable brands 3. Instagram the entire experience to their millions of followers
There are also consolidation opportunities in the back office now that there will be some redundancy with the acquisition. MIRROR probably has other products in the pipeline, including advancements to current heart rate monitors, resistance bands, as well as partnerships with leading brands willing to pay fees to have their products integrated in the omnichannel opportunities (i.e. Bowflex pays a fee to provide equipment prominently featured in on/offline classes). While they are already providing yoga, Pilates, barre, cardio, and HIIT classes via its subscription, with a few tweaks and key partnerships, they can easily extend these offerings into a holistic health and wellness experience. Lifesize virtual physical therapy and chiropractor visits, telemedicine/Teledoc visits (full body vs small smartphone screens), personal training to correct form – the possibilities are endless.
There is tremendous opportunity here to make this marriage a long and very fruitful one…with just a little bit of sweat and hard work!
My colleague Ingrid helped prepare this article.