July 17 (Bloomberg) -- Last month Lululemon Athletica Inc. opened a store in Durham, North Carolina. Three weeks later Athleta, Gap Inc.’s answer to Lululemon, opened its own location in the same mall.
The pattern -- Lululemon store opens, Athleta shop pops up nearby -- is happening across the U.S. as Gap mounts the most potent threat so far to the Vancouver-based yoga powerhouse.
Besides stalking Lululemon across the landscape, Gap’s Athleta is borrowing from its rival’s playbook, then undercutting the chain on price. Like Lululemon, Athleta is hooking up with local yoga instructors and sponsoring classes such as Mommy & Me Yoga. Like Lululemon, Athleta trains staff to make garment recommendations tailored to customers’ pursuits -- a half-marathon, say, or paddle boarding. Gap’s yoga upstart is making inroads. Exhibit A: Lululemon “brand ambassadors” are buying Athleta clothes.
“Athleta is opening stores close to Lulu locations so I’d say they’re turning into the biggest threat,” said Paul Lejuez, an analyst at Nomura Securities International Inc. in New York. “Gap looks at what Lulu has established and says, ‘Well, why not play off the traffic they attract and if we offer our product at a slightly lower price, we’ll get share.’”
It’s easy to see why Gap is keen to cash in on women’s active wear. The $14.3 billion U.S. market is growing twice as fast as women’s apparel overall, according to NPD Group, a market research firm based in Port Washington, New York. Stylish yoga gear also commands higher prices and margins than other athletic apparel. As more women pursue sports, many are willing to “trade up” to fabrics that wick away perspiration and reduce odors, says Tess Roering, Athleta’s head of marketing.
In Lululemon, Gap faces a formidable brand. With a canny blend of fashion and lifestyle marketing, the Canadian chain has built a cult-like following since moving into the U.S. in 2003. Lululemon generated a record $1 billion in sales last year with 112 U.S. locations. It boasts the fourth-highest sales per square foot among North American retailers after Apple Inc., Tiffany & Co. and Coach Inc. The shares have advanced 19 percent this year, closing yesterday at $55.42.
Still, Athleta is leveraging the expertise and financial resources of America’s biggest retail chain. Gap has more than doubled Lululemon’s stock gain this year with a 51 percent rally to $27.97. It had $1.97 billion in cash and equivalents at the end of April, dwarfing Lululemon’s $424.3 million.
Gap bought Petaluma, California-based Athleta in 2008 for $150 million to extend its position in women’s premium sports-clothing and active-wear beyond its Gap Body division. Founded in 1998, Athleta had a built-in following and sold products through catalogs and its website. Gap is using its expertise operating more than 3,000 stores to turn Athleta into a brick-and-mortar retailer.
Of Athleta’s 22 locations, 13 are about a mile or less away from a Lululemon, based on the addresses listed on both company’s websites. Athleta is opening seven more stores this summer and fall from Seattle to Boston, and all but one will be a 12-minute walk or closer to a Lululemon. Gap plans to have 50 Athleta locations by the end of next year.
The geographic proximity to Lululemon locations is a coincidence, and Athleta is simply opening stores where, according to a “heat map,” online customers buy the most, said Toby Lenk, head of Gap’s online operations.
“There are locations where we’re not anywhere near that particular competitor,” he said in a telephone interview.
Yet the similarities between the two chains are hard to ignore. In an echo of Lululemon’s personalized service, Athleta staff write customers’ names on whiteboards outside fitting rooms. The boards allow salespeople to address the customer by name while they are trying on clothes and helps them put a name to the face if they come back.
Offering yoga classes is another Lululemon innovation Athleta has borrowed. While the Canadian retailer typically offers them offsite, Athleta holds classes in its stores -- the racks are on wheels and can be rolled aside -- and tailors them to local affinities, whether it’s Pilates, yoga or running, Roering said.
“They both make quite an effort to create a community,” said Annie Foster, a 27-year-old yoga instructor and blogger in New York, who attended an Athleta marketing event and received free pants and a top for her trouble. “I don’t think I had really heard of them before, and it was a really cool way to lay the groundwork before they set up shop here.”
Where Lululemon offers a 15 percent in-store discount for certified fitness instructors in exchange for feedback on garments, Athleta offers 30 percent. That’s for all fitness professionals, no input required.
Foster said that while she loves both brands, Athleta’s discount makes it more affordable.
Garment after garment, Athleta is undercutting Lululemon on price. Cropped padded cycling pants sell for $88 online at Lululemon, while similar shorts cost $64 at Athleta’s website. Yoga pants are $15 more at Lululemon.
Lori Burgwyn, a 47-year-old brand ambassador for Lululemon in Chapel Hill, North Carolina, said she buys athletic jackets, skirts and dresses at Athleta. Garments at the two brands hold up after multiple washes and uses, making them her two favorites for the gear, she said.
Approached by Lululemon months before it opened its store, Burgwyn said an Athleta store manager recently took a class at her studio and left cards with teachers highlighting the 30 percent discount.
Lululemon professes confidence in its staying power, saying in January that while Athleta and VF Corp.’s Lucy active-wear chain may take “a sliver” of its market, their impact isn’t significant.
For now, Gap’s yoga business is relatively small. The company reports sales from Athleta and its Piperlime Web store together. At $301 million in the year ended Jan. 28, their combined revenue is less than a third the size of Lululemon’s. Still, Athleta is a sufficiently important part of the business for Gap Chief Executive Officer Glenn Murphy to tell investors and analysts last month at a Jefferies & Co. conference in Nantucket, Massachusetts, to “watch out” for the brand.
“The stores are doing very well so far,” he said. It’s a “big play going on.”
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