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TORONTO • Financial analysts may not be thrilled with Lululemon’s ability to control the quality of its pricey yoga pants, but getting in front of a potential crisis fast is likely the best long-term brand strategy for the company to maintain its brand reputation and customer loyalty, industry experts say.
The Taiwanese supplier behind the recalled yoga pants said today it followed design specifications and the Canadian retailer had merely misjudged customer tastes.
The Vancouver-based retailer saw its shares fall as much as 8% on Tuesday after it announced a recall of about 17% of its pants from retail outlets and warehouses. Store managers had “expressed concern over the sheerness of some of our women’s black Luon bottoms,” in early March, the company said. Shares regained momentum throughout the day, closing down 2.6% in the wake of the mishap.
“When a crisis is hitting — think of the classic example Maple Leaf Foods [and the listeria outbreak in 2008] — it is often best to get the message out early, talk about what happened, and talk about what you are doing to fix it,” said Ken Wong, marketing professor at Queen’s University’s School of Business.
“The shares will recover, but at the end of the day, the Lululemon brand is all about technical performance and putting the customer first. This is consistent with that.”
It is hard to staunch a flood of consumer complaints once it begins in earnest, he added. When Procter & Gamble reformulated its DryMax diapers in 2010 to a more environmentally friendly and efficient product without first telling customers, the consumer products giant ran into a full blown public relations storm in social media over allegations the new product caused diaper rash. It took the aid of a crisis PR expert and many months to turn around the damage and quell consumer fears.
In the case of Lululemon, beset by industry competitors who are selling similar designs at a lower price point, such as Joe Fresh, Roots, Old Navy and Gap’s new Athleta division in the United States, the quality of its proprietary fabric is critical to its image and to the maintenance of its industry-high sales per square footage. On Tuesday, Lululemon was also named the top retail brand in Canada by the global brand consulting firm Interbrand, ahead of Shoppers Drug Mart, Canadian Tire, Winners and Future Shop.
The Lululemon brand is all about technical performance and putting the customer first. This is consistent with that
“We will accept nothing less than the very highest quality we are known for,” chief executive Christine Day said in a statement issued after the manufacturing problem came to light.
When a corporate mistake threatens people’s health, it is critical to react fast, but a sense of urgency better ensures a company’s long-term survival in the highly fickle world of fashion retail, said Toronto-based apparel expert Kaileen Millard-Ruff, director of retailing at Pop-Up Retail.
“Lululemon realizes that word-of-mouth is a very powerful tool,” she said. With an estimated 55% of yoga apparel bought worn for casual wear, multiple non-sport apparel brands carry yoga lines, she said, and could pose a threat to Lululemon if consumers begin to believe the goods are all the same. The retailer is offering a full refund or exchange to customers who bought black Luon pants after March 1 and believe their pants are too sheer.
The act of pulling products from store shelves before many complaints were put forward by consumers also subtly underscores a key message that Lululemon wants and needs to promote, Mr. Wong said: that it has uniquely high product standards that set it apart from competitors, and cares deeply about the quality of its merchandise. The company made a similar move last fall when it sued Calvin Klein and its apparel manufacturer for allegedly violating three pants design patents. The parties settled out of court.
A good follow-up PR strategy in coming weeks will be offering a more detailed explanation that will satisfy investors about how the error occurred, and what the company will do to avoid it in the future. “Hopefully more is still to come,” Mr. Wong said.
In the meantime, analysts have become skeptical about the brand’s ability to control the quality of its pants, which retail for $80 to $100. In its 2012 annual report, Lululemon said it was at risk of relying too heavily on a limited number of suppliers and at the time noted Luon, the patented fabric at the heart of this week’s recall, was supplied by a single manufacturer in Taiwan.
“With the black Luon pant recall, Lululemon has now had its fourth quality control issue in the last year,” Credit Suisse analyst Christian Buss wrote in a note to clients. “We see some potential that Lulu risks alienating its core customer base should quality control issues persist.”
Sam Lee, an analyst at International Strategy and Investment Group, said Lululemon needs to “more aggressively invest in and exercise greater control over its supply chain given the importance of quality and consistent fit to the Lululemon brand promise.”
Ms. Millard-Ruff said retailers who source garments oversee perform regular quality control checks, but mistakes can happen, particularly when quality control is outsourced to a third party.
With the black Luon pant recall, Lululemon has now had its fourth quality control issue in the last year
Lululemon’s classic black pants “are a very high-volume item and with something like that you do not check every pair, you check every fifth pair or every 20th,” she said. “Sometimes the mistake can be as silly as a shipping container didn’t get checked.”
Lululemon said it had used the same manufacturing partner for key fabrics since 2004. “We are working closely with them to understand what happened during the period this fabric was made,” said the company, which is scheduled to report fourth-quarter earnings on March 21.
It said revenue in the current quarter will be as much as US$343-million, down from a previous estimate of as much as US$355-million.
Same-store sales, a key industry metric tallying volume at stores open for more than a year, will rise as much as 8%, compared with an earlier forecast of 11%.