Athleisure & Intimate Apparel – Category Leaders &
Competitive Dynamics – 1 September 2021
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Specialist:
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Katy Donahue (KD)
VP, Strategy & Operations at Fabletics Co
Agenda:
1. Category shifts across tops and bottoms
2. Competitive overview – Aerie (NYSE: AEO), Lululemon (NASDAQ: LULU), Athleta (NYSE: GAP) and
Alo
3. Industry transition into wellness and player partnerships with fitness devices
4. Supply chain challenges and sustainability risks
Contents
Q: Could you give us an overview of athleisure and intimate apparel and how it has changed over the last few
4
years?
Q: What is the intimate apparel and athleisure opportunity? It seems like some of these athleisure
companies also intersect and offer many of these different types of intimate apparel categories.
Q: How are you assessing the industry growth and sales between athleisure or intimate apparel pre-
coronavirus vs now?
Q: It seems like women are really leading the way within athleisure. Could you discuss how pricing plays a
role into the opportunity for men as well? What are some trends in pricing between the two different
segments?
Q: With this huge shift to athleisure and intimate apparel, could you discuss a few companies you think are
able to take advantage of this shift? Could you discuss the legacy players and their inability to get up to
speed, whether it’s Nike being unable to build a strong presence in this market because of its focus on
performance? What are you noticing from start-ups such as Lululemon and Fabletics?
5
5
5
6
Q: What are your thoughts on the channel strategy and this rise or explosion of D2C brands? What is the
impact of that on the industry as a whole?
7
Q: You made an interesting point on design emphasis vs that functional aspect. Is this evident in the data?
Why do you think design is more of a key factor in what consumers are seeking vs Lululemon, Dri-FIT, the
quality and some of the technology that they use to produce their products to make them much more durable
and longer-lasting for that consumer? Could you discuss that dynamic between which types of consumers
want some of that design focus vs the ones who are coming in for that functional aspect, and can factor price
into that design for it?
7
Q: How would you compare the quality of some of these fabrics and the role it plays into cross-channel
shopping from a consumer? If a consumer goes into Lululemon or Fabletics, they feel the quality, they
acknowledge thatone is superior, and then that drives their decision-making online. Could you discuss that
dynamic? Which players have the highest quality vs the branding, look or appeal where quality is not there? 7
Q: You talked about alluring those younger consumers. Could you discuss the marketing aspect and the
higher costs of marketing now, and the role it’s playing in some of these purely online channel stores or
brands? Could you discuss the costs of marketing as a percentage of total sales, which I think is 12-15%?
Where do you expect that to go in this industry?
8
Q: How do you think some of these athleisure brands approach brand preservation? It seems like every day,
new apparel brand companies are starting up, but who knows if they will be here tomorrow. Could you
discuss the risk or challenge of preserving that brand in an industry where it seems like the young consumers
8
go to five different brands and there’s really no loyalty?
Q: Could you elaborate on the major risks in sustainability and sourcing? Canada Goose has moved away
from using fur in its products altogether. What are some of the risks of some of these upstarts? Are they
giving the allure of being sustainable, but their products are really sourced from non-sustainable parts of the
world or that have different labour issues? Where do you expect some of the risks in some of these small
players to really hold up to this trend of sustainability?
9
Q: A lot of athleisure companies have partnerships with at-home fitness devices to differentiate themselves.
Lululemon has the Mirror. There are other Mirror-type devices such as Tonal. What is the success of some of
10
these devices?
Q: Out of some of those adjacent category opportunities, where do you expect the largest or the most
promising opportunity, given it may not be Mirror?
10
Q: Some of these connected fitness products seem rather expensive. I think a Tonal is USD 3,000-4,000.
Could you speak to the barrier to entry when trying to acquire a new consumer, or is there more of a strategy
to extract more dollar value out of the same consumer?
10
Q: Could you discuss the opportunity for some of these brands to build out some of their men’s categories in-
house, given that before, perhaps these brands thought men don’t wear athleisure or were not willing to pay
for it, but now, with the explosion of Lululemon and Fabletics having some offerings, there is a consumer
here that is willing to pay? How do you think some of these firms or athleisure companies will prioritise the
opportunity there, rather than trying to break into a completely new industry, whether it’s technical,
connected fitness or skincare?
11
Q: Why do you think some of these athleisure companies are having such a hard time with footwear as an
opportunity? Could you discuss that dynamic, where Nike and Adidas and the large players have a strong
hold over the market? If we’re picking comfort over performance, what is the opportunity for some of these
athleisure companies to build a few SKUs in-house that could be competitive?
12
Q: What is the children’s segment as a market share of athleisure apparel?
12
Q: Could you discuss the rise of private label such as Target and Amazon Essentials? What is that pressure
doing to the industry or some of these premium players?
13
Athleisure & Intimate Apparel – Category Leaders &
Competitive Dynamics
Transcription begins at 00:00:06 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview on athleisure and intimate apparel, category leaders and
competitive dynamics. I’m Nyree Hinton and I will be facilitating today’s Interview with Miss Katy Donahue,
VP, Strategy and Operations at Fabletics.
Katy, before we get started with today’s Interview, please state I agree or I disagree to the following statement:
You understand the definition of material non-public information and agree not to disclose any such
information, or any other information which is confidential, during this Interview.
KD: I agree.
NH: Could you start by giving the audience an introduction of your background and various roles you’ve held
in the industry?
KD: I started my career in management consulting at the Boston Consulting Group. After that, I moved over
to TechStyle, which is the parent company of Fabletics. I was Chief of Staff there for a while before moving into
my current role, Head of Strategy and Operations at Fabletics. My team oversees customer insights, data
science, data analytics, general strategy and anything cross-functional, and I call it random projects.
[00:01:17]
Q: Could you give us an overview of athleisure and intimate apparel and how it has changed over the last few
years?
KD: I think traditionally, I would say probably a decade ago, athletic wear was very performance-based. You
had the Lululemons, sorry, you had the Nikes and the Adidases of the world. Lululemon obviously was a big
entrant into this space, really focusing first on creating technical apparel for yoga, spending a lot more R&D
into fabrics. What you’ve seen over the past few years is a shift in how those types of apparel have been
perceived, just in general everyday life. People used to go to the gym in an oversized shirt and some old shorts.
Over time, wellness as a core feature of your identity has obviously exploded, so we’re really seeing customers
care more about what they’re wearing. I think the rise of boutique fitness classes also really helped contribute
to this, that drove a lot of these changes. Customers started seeing those classes as social events, as status
markers, so then you begin to want to have a new cute outfit every week for your ride with your favourite
instructor.
In terms of the internet apparel industry, similar changes in the athletic wear market, where you’re really
seeing the breakdown of the traditional silhouettes and the way that the industry was traditionally thought of
moving more towards a cute, slightly more fashion-forward, different colours and styles, and most
significantly comfort, really starting to see comfort become really key in athleisure and intimate apparel. I
think another big trend that’s really happened is the casualisation of everyday wear, workwear included. You
used to wear athletic apparel for the hour that you were going to the gym. You’d change out of it at the gym
into normal clothes, into jeans. You wouldn’t really want to be seen walking around in your gym clothes.
Obviously, we’ve seen a large shift in the way that people think about that. As the clothes have gotten more
fashion-forward, as they’ve gotten more comfortable, as working out has become more of a social activity, you
really started seeing people wearing those types of clothes for longer, which has further doubled down on the
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need for comfort.
[00:04:10]
Q: What is the intimate apparel and athleisure opportunity? It seems like some of these athleisure companies
also intersect and offer many of these different types of intimate apparel categories.
KD: I think the biggest, in my mind, white space and opportunity is to really nail a bra that is multifunctional.
With people working from home more and more, you’re seeing people working out during the day if they’re
remote. Traditionally, there was a large divide between a traditional bra and a sports bra. I think over time, as
lounge has grown as a category, you’re starting to see the blurring of that a little bit. First, you saw the removal
of underwire in the apparel space, so with the rise of bralettes, and then again, as you saw the athletic space
move more towards cute and comfortable styles, you’ve seen them meet in the middle a little bit. I think the
biggest opportunity is to figure out, her life no longer is divided between work and working out and going out,
so where’s the opportunity to create a bra that really speaks to all of those needs, is comfortable enough to
wear all day long? Plus-sized women have been wearing sports bras as normal bras for a long time, just for the
added support, and we’re starting to see that trend pick up among non-plus customers as well.
Obviously the lounge space is a big crossover between the athleisure and intimate apparel, and you’re
continuing to see that grow in importance. Again, the clothes you used to wear around the house maybe
weren’t as important. We’re seeing people think, “I’m wearing comfortable clothes that I love outside of the
house. As well, that should apply to inside the house.” You’re obviously seeing the rise of the fashionable
sleepwear brands, with Lunya leading the charge, so I think just generally the blurring of all of these categories
and the increasing rise of wanting something that’s cute and Instagram-ready, but also functional and
comfortable.
[00:06:37]
Q: How are you assessing the industry growth and sales between athleisure or intimate apparel pre-
coronavirus vs now?
KD: The industry obviously went through a large, large uptick in COVID. I think that some of that, I would say
that in terms of sustainability of that, it’s probably half and half. I think there were definitely some stock-up
effects, I’m sure. As the world has opened up, customers have shifted a little bit of their spend back towards
outside-the-house clothes, but again, the line between those is increasingly blurring. I think that there are
some trends that were already happening and COVID really accelerated, that will continue to see growth in the
athleisure and intimate apparel space. An increasing casualisation of the workplace, it’s becoming more
acceptable to wear leggings maybe to work, if you work in a casual environment. Certainly, wearing leggings to
go run errands is becoming much more accepted. Then, I think also the move to hybrid work models, people
want to be really comfortable when they’re working at home. Even if we see a big return to the office, I think
overall, the way I call it is activewear as a share of what you’re wearing during your waking hours I think will
see a sustained shift, post-COVID. It’s certainly seen an obviously large shift in the pandemic, but I expect to
see at least some of that continue, post-COVID.
[00:08:29]
Q: It seems like women are really leading the way within athleisure. Could you discuss how pricing plays a role
into the opportunity for men as well? What are some trends in pricing between the two different segments?
KD: Women and men consumers are very different in terms of how they think about pricing. Most women
would consider themselves some sort of a deal seeker. It just depends on how strict they are to that. If they see
Private and confidential 5
something that they love that’s full price, will they buy it, or are they someone who needs to wait for a sale?
Men just tend to not have that dynamic. Women tend to view price as a game for them to figure out, so, “How
can I get the lowest possible price for this product,” really trying to optimise for value, for price. We really see
men see price as an indicator of quality, so to them, it’s a little bit more straightforward. A higher-priced item
must be higher quality. They’re obviously still optimising for value, for price in some ways, but definitely much
more willing to pay full price for things that they like, also just because they tend to shop slightly less
frequently and in more stock-up moments. Their needs are driven a little bit more by stock-up or replacement,
so it’s a little bit more, “I need it right now. I need this specific thing to replace something else,” whereas with
women, it’s a lot more driven by emotion, so, “There’s a sale. That’s exciting. What can I get,” or, “This new
pattern came out. I don’t really need another legging, but I love this. I need to buy it.”
[00:10:26]
Q: With this huge shift to athleisure and intimate apparel, could you discuss a few companies you think are
able to take advantage of this shift? Could you discuss the legacy players and their inability to get up to speed,
whether it’s Nike being unable to build a strong presence in this market because of its focus on performance?
What are you noticing from start-ups such as Lululemon and Fabletics?
KD: I think you’re seeing a couple of things. First of all, everything that we just talked about, the crossover is
not just about performance. It’s about all of these other things as well. I think Nike, Under Armour, the more
performance-focused brands just have not been able to perform as well there. They traditionally haven’t been
super design-forward. They have done some collaborations to try and improve that, but I would say their
design- and fashion-forwardness is much more concentrated in the sneaker area, rather than the apparel area.
I think they’ve just been a little bit slow to adapt to the rise of taking a picture of yourself at a boutique fitness
class and posting it on Instagram. I think one player who’s really accelerated that trend has been Alo. I think
they’ve done a great job at seizing on the opportunity to have matching sets, sets with cute details that are a
little bit more design-forward rather than functional, and I think they’re doing a great job there.
Lululemon doesn’t traditionally play, I would say they really played in the comfort space. Again, fashion is not
really their forte, but I think they’ve done a good job at making fabrics that people want to sit in all day. The
logo, obviously the brand power is really, really strong, so even though they don’t have quite that same
fashion-forwardness and virality, I think they’ve done a good job capitalising on those opportunities. Another
player that I recently see really picking up steam is Ari. They’ve built out their own activewear line within the
Ari brand, so a sub-brand within a sub-brand, but since Ari is already a destination for lounge apparel,
intimate, the customers have a lot of credibility with them, and also, their low price points have been a draw to
younger consumers who can’t afford more like an Alo, but want some of a similar look.
Some other trends that have been going on, sustainability has been obviously a big push in the industry. I
think Girlfriend Collective has done a great job at really starting a brand that’s inclusivity, sorry, that’s
sustainability first, rather than having to retrofit their existing fabrics like a lot of the legacy players are doing.
They started out higher-priced so they can absorb the cost of the higher yarn. Other players are struggling to
keep upright while keeping margins in mind. I think another trend that we’ve seen is inclusivity. Again, I think
some of the smaller newer players have an advantage here of being able to go out with a brand that does stand
for inclusivity vs having to retrofit it later. Some winners I think about here, Ari has done a great job. I would
say they’ve really, in the apparel industry, led the forefront of truly inclusive marketing. I think customers
recognise that. They’re a younger brand and younger customers tend to care more about inclusivity, so I think
they’ve done a good job winning in that space. I think Girlfriend Collective is another one that has done well in
the inclusivity space, and you’re really seeing some of the middle legacy players, not quite the Nikes and them,
but you’re seeing the Lululemons and Athletas really trying to catch up there. Obviously, Lululemon has a
story and history with that topic, so I think a lot of plus customers are reticent to shop there, but that’s another
big trend that’s happening in the industry right now.
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[00:14:53]
Q: What are your thoughts on the channel strategy and this rise or explosion of D2C brands? What is the
impact of that on the industry as a whole?
KD: I think it’s inevitable, happening in a lot of different industries. I think that you have seen players like
Nike, who have traditionally relied more on a wholesale strategy, try to pull back on that and right-size it,
pulling out of retailers, figuring that out. Lululemon, I would say I think they’ve done a good job at executing
their D2C strategy. I think one of the challenges is that their secret sauce really is their in-store experience, so
their store associates are, I would say, probably one of the best trained in terms of product knowledge, and
they’ve really spent a ton of time and energy on their in-store experience. While I think that they have
executed D2C obviously pretty well, I think the more that they rely on that, the more that they risk losing their
secret sauce, because again, they’re not really the most fashion-forward player. They don’t have the strongest
brand from a traditional marketing perspective. Their brand really is the product and the features and the
functionality and what it does for you. I think they definitely have some risk there as they’ve transitioned to
online, trying to preserve some of their competitive advantages, which is a little bit harder to do online than in
store.
I think what sells well online is a little bit different than what sells in a retail store. Again, to the Lululemon
point, you see players like Alo, who they do have stores but who are really e-comm first, nail those designs that
really catch the customer’s eye, whether that’s while they’re shopping on Instagram and they see an ad, or
online. More things like higher contrast, colour blocking, which Outdoor Voices really rebirthed in the
industry, the details that it’s not quite about the fit and the feel anymore, which is really what Lululemon
focuses on, and it’s more about how it looks. Can it grab the customer’s eye? Is it visually interesting enough to
jump off a grid when you’re shopping?
[00:17:23]
Q: You made an interesting point on design emphasis vs that functional aspect. Is this evident in the data?
Why do you think design is more of a key factor in what consumers are seeking vs Lululemon, Dri-FIT, the
quality and some of the technology that they use to produce their products to make them much more durable
and longer-lasting for that consumer? Could you discuss that dynamic between which types of consumers
want some of that design focus vs the ones who are coming in for that functional aspect, and can factor price
into that design for it?
KD: If I had to pick groups of consumers, I would say probably younger, more fashion-forward consumers
prefer the more fashion and others prefer the performance. I think it’s not that there are specific
demographics that prefer either, I think just more about what consumers prefer when shopping in different
channels. Activewear, if you think of a legging hanging, let’s say that it has a cut-out detail and it’s hanging in a
store, you don’t really get credit for that detail when it’s hanging on a hanger. You really need to see it on body
to see that type of detail. That might pop in an ad or pop if you’re taking a picture for Instagram, but doesn’t
look as great in stores. I think if I had to say, I would probably say younger customers, because of the
Instagram phenomenon, probably prefer the design, but I think more so what customers are looking for, or
not necessarily what they’re looking for but probably what plays a greater role in their decision probably
differs by the channel that they’re shopping in. A Lululemon legging might be super, super soft if I can feel it in
person, but if I don’t know about the fabric or I don’t know what it feels like, I might not convert on that
online, just because I don’t understand what it feels like and how superior the fabric is and all of that.
[00:19:47]
Q: How would you compare the quality of some of these fabrics and the role it plays into cross-channel
shopping from a consumer? If a consumer goes into Lululemon or Fabletics, they feel the quality, they
acknowledge thatone is superior, and then that drives their decision-making online. Could you discuss that
Private and confidential 7
dynamic? Which players have the highest quality vs the branding, look or appeal where quality is not there?
KD: I think Lululemon is probably up there in terms of quality, just in terms of what they do to develop their
own fabrics, and their rigorous product testing. Athleta is definitely getting there, I would say, not quite at the
same level. I think Alo Yoga is someone who commands a higher price point, and has I would say still a great
level of quality, but just doesn’t have quite the same, I would say that’s not their core competitive advantage. I
think you see a lot of players like a Gymshark that are super appealing visually, but are actually lower quality,
and they do appeal to a younger, very specific demographic, and have a little bit more of a limited range of
styles. They really focus on seamless styles, which are cheaper to make but harder to make for larger sizes, and
can sometimes just be slightly, I don’t want to say lower quality, because it’s just in a different type of fabric
really, but just a different experience than a Lululemon, one of their flagship leggings.
[00:21:41]
Q: You talked about alluring those younger consumers. Could you discuss the marketing aspect and the higher
costs of marketing now, and the role it’s playing in some of these purely online channel stores or brands?
Could you discuss the costs of marketing as a percentage of total sales, which I think is 12-15%? Where do you
expect that to go in this industry?
KD: I don’t have a percent off the top of my head. I think it really depends on the brand. It can be very, very
wildly variable. Lululemon famously doesn’t really spend any money on marketing. I would say they’re starting
to change that, but I would say their investment in testing products and educating retail employees is their
marketing. Obviously we’re in the midst of a transition in terms of the iOS 14 update and the data that
advertisers are able to see, so I think that’s really the biggest thing that’s going to have an impact on marketing
cost go-forward. I feel like we’re still in the early stages, as an industry, of figuring that out. The pandemic
caused a lot of brands to wake up to the potential of online advertising, so I think everyone in the industry is
seeing rates increase due to that.
I think the biggest challenge with marketing, especially to the younger generations, is just the unpredictability
of it. There were the viral TikTok leggings from Amazon. Ari had a pair of leggings that went viral. They
immediately sold out. That doesn’t cost anything, but it’s something that’s hard to manufacture, and younger
consumers, especially Gen Z, understand the ins and outs of marketing probably better than any other
generation, and so are a little bit harder to reach through traditional ways, and increasingly want to be reached
through ways that feel slightly more authentic. I think you’ve seen (audio distorts 23.58) of influencers. People
want to hear about products from people that they like, and opt into following, rather than some generic
advertisement that’s maybe targeted towards a broader group. I care a lot about travel, so I follow travel
influencers, so I would be better served with an ad talking about how great these leggings are for on the plane,
something like that. We’re just seeing a little bit more of that hyper-targeted marketing.
Again, obviously people have woken up to the effectiveness of that strategy, so there’s a lot of competition for
influencers, and measurement is still a challenge across the industry, so figuring out who performs well. We’re
still in the early days of that strategy as well, but assuming that the measurement aspect can be figured out,
that would bring costs down. I think that going and trying to figure that out is also a little bit of a daunting task
for each individual brand, so I think that the more that we continue to see agencies come in as an
intermediary, that will also obviously increase cost.
[00:25:18]
Q: How do you think some of these athleisure brands approach brand preservation? It seems like every day,
new apparel brand companies are starting up, but who knows if they will be here tomorrow. Could you discuss
the risk or challenge of preserving that brand in an industry where it seems like the young consumers go to
five different brands and there’s really no loyalty?
Private and confidential 8
KD: I think that overall in the apparel space, there’s always a lot of room for fragmentation. The number of
brands that any person has in their closet is large. I actually think that loyalty is slightly stronger for athletic
wear vs traditional apparel, and jeans probably I wouldn’t count in when I say traditional apparel, customers
do tend to be more loyal there, but if you see a cute top on Instagram and you don’t know the brand, usually
it’s so cute that you’ll make a purchase and maybe it works, maybe it doesn’t. With comfort and fit being so key
in activewear, especially for categories like bras, I think customers are a little bit more loyal. Once they know a
brand and trust the quality, they’ll usually be happy to go back to that brand, as long as they had a positive
experience, and not to say that customers only shop at one brand. Obviously, we see people shop across a wide
variety of customers, of brands, but I do think they are slightly more sticky in the athletic wear space than in
the traditional apparel space.
I think that the more brands, the merrier. The benefits in terms of economies of scale, I think, are real. The
sustainability is a large push right now, and the sourcing recycled yarns is a real challenge right now, because
everyone is trying to do it. I think there are always going to be new entrants, the same way that there are
always new entrants of apparel brands. I think the competitive advantages that a lot of the large players have
established will remain in some way, providing that they’re able to continue adapting to the time.
[00:27:46]
Q: Could you elaborate on the major risks in sustainability and sourcing? Canada Goose has moved away from
using fur in its products altogether. What are some of the risks of some of these upstarts? Are they giving the
allure of being sustainable, but their products are really sourced from non-sustainable parts of the world or
that have different labour issues? Where do you expect some of the risks in some of these small players to
really hold up to this trend of sustainability?
KD: A lot of the things that you can do to provide some flexibility in your supply chain are very hard to do
when you’re too small, so buying fabric in bulk, even just having stronger relationships with vendors. I think
that there are obviously economies of scale. This is present in any industry, but you’re starting out, you’re not
going to be able to get the same costings. You’re either going to have to take a tighter margin or you’re going to
be going out there with a product that is priced higher, maybe you’re priced the same price as Lululemon but
your quality is just not there. The number of factories able to produce this stuff is growing, but there is also a
subset of factories that do this.
You can get around that by producing domestically, for example. There are certainly a number of activewear
brands that produce in LA, but you’re not really going to be able to get the costing there. You’ve definitely seen
brands be able to do it, but I think that the more that recycled yarns become table stakes, which I think we’re
going to continue seeing that happening over the next couple of years, the large companies are going to be first
in line. Obviously, they need a lot, so that’s the drawback to them, but these companies have been working
with different mills for a long time. They’re going to have first dibs, and the more that this becomes table
stakes, I think the greater the demand is going to be for recycled yarns, for different types of production, like
seamless, that don’t have as much waste.
I think the costs might go a little bit up for the major players, but they’ll be able to absorb it, negotiate better. I
think the proliferation of small activewear brands right now, it’s a little bit of a boom. It’s the newest hot thing.
Every apparel brand is launching an activewear line, and so I think we’ll probably go back to a slightly more
consolidated competitor space, not saying that there won’t always be upstarts, but I think there’s not as much
diversity in terms of design with activewear as there is with something like dresses or everyday apparel. I also
think the niche that you’re able to carve out for yourself, the kind of scope of how different you can be is a little
bit smaller than a traditional brand, probably closer to a jeans brand, maybe somewhere in the middle.
Private and confidential 9
[00:31:13]
Q: A lot of athleisure companies have partnerships with at-home fitness devices to differentiate themselves.
Lululemon has the Mirror. There are other Mirror-type devices such as Tonal. What is the success of some of
these devices?
KD: The Lulu and Mirror stuff, I never really know what to call it. The financial benefit has not been proven
out yet. I think what’s happening more macro is that a lot of these companies, Lulu and Alo at the forefront,
are trying to transform themselves from an activewear company into a more holistic wellness company. Alo
was the first mover with Alo Moves, their yoga app. Alo and Lulu have both launched skincare lines, so I think
the Mirror and the connected fitness play right now, the financials aren’t proving themselves out. I’m
personally sceptical, but I think that we’ll see how this plays out. A lot of players are doing it after the Mirror
play. I do think that it’s a little bit more about transforming this brand into your overall wellness go-to, the
same way that Amazon has transformed themselves into your go-to spot for everything, and things like Prime
Video. I think a lot of companies are seeing the opportunity to more become your trusted wellness partner
across all channels, and really positioning themselves as, “We’re the company that’s going to help you feel
good across all of these channels,” whether that’s making sure your skincare is all natural, whether that’s
providing you opportunities to work out at home, and then obviously outfitting you while you’re doing that.
[00:33:28]
Q: Out of some of those adjacent category opportunities, where do you expect the largest or the most
promising opportunity, given it may not be Mirror?
KD: To be honest, outside of the apparel space, I actually still think there are a lot of adjacencies within the
apparel space for an athletic wear company. A lot of companies have dabbled in that. In terms of outside of
that, the skincare one is interesting. I think that we’re also in a little bit of a boom in that category. Obviously,
it’s an attractive play for athletic wear companies, because the margins are so rich. I think the challenge is
gaining consumer trust. Lulu has seen some traction in that, but I would say skincare is something that
consumers tend to be a little bit more sticky or loyal on than athletic wear. I don’t know that you’re going to
convert a whole ton of new customers to the brand with your Lulu or Alo skincare line, but it is a great way to
get additional margin from existing customers who know you and trust you and love you. I don’t think it’s
going to be an entry point category, though, for the brand.
The connected fitness stuff, I think it’s a little too early to tell. I think one of the challenges will be how does
this continue, post-COVID? I’ve seen all types of survey data on what consumers expect, but until we’re back
to a little bit of a new normal, it’s hard to know how much this shift to working out at home will stay. It’s hard
to know how will boutique fitness classes return, which I would see as cannibalising some of the in-home
devices. I think there are some other adjacencies into shoes. Again, I think there are reasons why shoes are
decently hard to crack, but I think some players are working on that. I don’t see any of them, honestly, as a
total slam dunk. I think it’s all about how they’re positioned and what the expectations are. Again, I don’t
know that any of them are really going to be a way to bring new customers in. You’re not going to buy
Lululemon shoes if you’re not really a Lululemon apparel purchaser, and they’re more for the hardcore
customers. The connected fitness is probably the only one that might work the other way around, but it’s hard
to imagine that if you are spending that much money on Mirror, that you’re not already someone who’s
purchased Lululemon, just by virtue of the price.
[00:36:08]
Q: Some of these connected fitness products seem rather expensive. I think a Tonal is USD 3,000-4,000.
Could you speak to the barrier to entry when trying to acquire a new consumer, or is there more of a strategy
to extract more dollar value out of the same consumer?
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KD: I think the challenge is, again, not a unique dynamic to the athletic wear market, but if you want to grow
your customer base you either have to, at some point you’re going to have to broaden who you appeal to. I
think Lululemon has done a good job at that so far. They used to be a very yoga-focused brand, very women-
focused. They have been able to successfully expand into other categories, but at some point, they’re going to
tap out in terms of the people who are able to afford that, even with geographical expansion and all of that.
They’ll face a question of lowering prices and making stuff more affordable. You also could do that through a
lower-priced line, Nike, I think, has done a decent job of executing that strategy, or you will have to figure out
some other category to grow in some other adjacencies. Even a player like Gymshark, I feel, has started to
encounter some of that. They were really created, definitely, for a very young, very Instagram-forward
consumer, a gym rat consumer a little bit. All their stuff is very tight, a lot of crop tops, very young-focused.
They’re starting to expand more into studio and yoga, which is pretty opposite of the original focus of the
brand, but needing to acquire that new customer from their narrow beginnings, I think, is obviously one way
that they’ll continue to gain share.
I think that the challenge is a little bit figuring out how to appeal to a broader set of consumers without being
everything to everyone, and without losing the special sauce that makes you unique. As an example in another
industry, I think you’ve seen that happen a lot with boutique fitness classes. SoulCycle, a couple of years ago,
used to only be in New York and LA. Going to a SoulCycle class was a status symbol. You’d sit next to
celebrities. It was considered very expensive, very premium. They expanded a lot into different cities, and it
lost its sheen. Obviously, boutique fitness classes are definitely susceptible to a lot more cyclicality in trends
than athletic wear apparel, but expanded too fast and a class you could take anywhere, no longer such a special
experience, and stopped having its packed classes. Then, you see the rise of the new player. I think Barry’s has
really been that player, but again, now they’re expanding into tier 2 cities and this cycle will continue.
It’s hard to continue growing while maintaining the exclusivity that draws your original customers to the
brand. I think you’ve even seen that a little bit with Lulu, as Lululemon proved the idea that people will pay a
lot of money for workout clothes. You certainly see players that are more expensive than them, and they’ve
probably lost a little bit of their customers to those even higher-priced brands, so you’re always going to see a
little bit of that. I think that tension is going to continue. I do think a lot of the athletic wear space still has a
ton of global runway, so you probably will not need to run into that problem for a long time, as you’re able to
expand into other countries. Those countries hop on the trend that America has definitely been on for the last
few years of increasing acceptance of athletic wear outside of the gym, so it’s not the most immediate need, but
I think it will happen at some point as you bump up against that.
[00:40:32]
Q: Could you discuss the opportunity for some of these brands to build out some of their men’s categories in-
house, given that before, perhaps these brands thought men don’t wear athleisure or were not willing to pay
for it, but now, with the explosion of Lululemon and Fabletics having some offerings, there is a consumer here
that is willing to pay? How do you think some of these firms or athleisure companies will prioritise the
opportunity there, rather than trying to break into a completely new industry, whether it’s technical,
connected fitness or skincare?
KD: I think the big opportunity there is cracking the gifting. I remember the time when Lululemon was a girly
name. No guy would wear it. If you saw a guy wearing Lululemon, it was like, “Why are you wearing
Lululemon? You should be wearing Nike.” I think they’ve really cracked it through, initially obviously, now
they have a very, very large men’s segment, but leveraging women to give that stuff as gifts, getting the guy
more comfortable with spending that much on athletic wear, buying a USD 70 pair of shorts rather than his
gym shorts that he’s had since high school. I think cracking the female angle is really key. You need to be able
to get the women to help incentivise trial and purchase, I think, because if they’re not on board, you’re never
going to be able to acquire a guy off the street. I think there’s probably a little bit of almost a flywheel effect
here, as I’ve just seen. A couple of years ago, the number of guys wearing premium activewear was very small.
The more that that’s become the norm, again, the more of the guys are open to it, open to seeing new products,
open to spending that much and open to exploring new brands, I think it’s certainly possible to start a brand
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that’s men first. I think it’s probably a little bit harder, because you’re not able to leverage women who are
already very comfortable with paying this price for activewear, understand the benefits that you get from
higher quality and better technical apparel, but I think that’s how probably a lot of brands are thinking about it
now. I think the challenge is also does the brand, does the core DNA of the brand appeal to men? Alo, I think,
is a brand that I’ve heard, just in research and a lot of men saying it still feels a little too girly, and so I think
that’s another challenge. They’ve definitely had success growing their men’s brand, but where is your starting
point, and how appealing is that to the other gender? Depending on that, brands might make different
prioritisation decisions if they have to go a little bit further to evolve the brand to meet men where they’re at.
[00:43:59]
Q: Why do you think some of these athleisure companies are having such a hard time with footwear as an
opportunity? Could you discuss that dynamic, where Nike and Adidas and the large players have a strong hold
over the market? If we’re picking comfort over performance, what is the opportunity for some of these
athleisure companies to build a few SKUs in-house that could be competitive?
KD: It’s hard. The footwear industry is a lot more concentrated, a lot less fragmented, and good reason for it.
If you think about the number of leggings that the average woman has in her closet vs the number of workout
shoes, you’re definitely talking dividing (audio distorts 44.49), not even subtracting. The barrier to purchase
for new shoes is just much higher, because if you buy a legging and maybe you don’t love it, it’s like, “Okay,
that’s alright. It’s in my rotation. It’s not that important.” It’s not as important to rotate shoes. You don’t need
to wash them. It’s not as important to not wear the same one over and over again, so the number of pairs per
closet is so much lower, so the barrier to purchasing is high. The same way that, this is obviously an extreme
example, but the barrier for a new car brand to break in is very high. It’s a one-time purchase. A lot of factors
about that make it really important. It’s hard to trust a new brand. I think some of those dynamics are in play
in the shoe market as well.
Shoes are just a lot more technical, a real lot more technical than apparel. Just the number of steps that it
takes, the number of components that it takes and the years that someone like Nike has spent really refining
that, it’s really hard to match that R&D from the start. I think all of those factors make it a little bit trickier to
make that leap, not to say that people won’t do it, but I think it’s telling that in the sneaker space, you’ve seen
new entrants, new shoe-specific entrants, much more frequently than you see apparel brands successfully
getting into shoes. I think it’s for all the reasons that I’ve stated above.
[00:46:29]
Q: What is the children’s segment as a market share of athleisure apparel?
KD: The challenge with children’s is just that people’s willingness to pay is so much lower. Across all apparel
categories, you’ll frequently find customers who will buy designer apparel for themselves but buy Old Navy
stuff for their kids, and I think the willingness to pay there is lower because of how frequently you have to
replace items, and also honestly just it not being for yourself. I think that’s the challenge. They’re the same
amount of work required to produce a legging, regardless of the size. Fabric obviously is variable, so you do get
some cost savings from that, but I think people’s ability to pay vs a product that companies are able to put out
at that price is challenging. You see a lot more volume of kids’ stuff happening at lower-price players, like Old
Navy crushes it in the kids’ activewear space, so I think that’s the biggest challenge for retailers.
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[00:47:41]
Q: Could you discuss the rise of private label such as Target and Amazon Essentials? What is that pressure
doing to the industry or some of these premium players?
KD: They tend to serve different consumers and needs. Old Navy has a pretty great activewear line. I would
say, again, more of a basket builder while you’re there than a reason why you’re going, although I think they’re
slowly with Target. I think the type of purchase is a little bit different, and the more basic stuff, obviously
you’re going to go to private label brands. I think obviously it provides some cost pressure on the industry, and
it forces brands that are higher-priced to really make sure that their product is worth the extra price tag on top
of a Target private label or an Old Navy, but I actually think overall it’s probably helping the market.
Wearing nice activewear, wearing activewear in general, working out used to be something that was much
more concentrated in the upper classes, and so I think the explosion of activewear as something that anyone
can wear, helping people feel good at the gym, and they only have to spend USD 40 at Old Navy to do so, I
think generally helps advance the category overall and helps advance wellness as a core part of people’s lives,
no matter what. Maybe some of those people will move up and end up purchasing higher-priced athletic wear.
I think you do see that a lot, so I think overall, it’s probably a good thing for the industry. Obviously, there’s
always, “This design looks a lot like this one,” but the quality is different and the price is different too, so
usually a decently different consumer, not that there isn’t always some crossover. Some people might find a
bra at Old Navy that they love and that’s their bra, but they go to Lululemon for leggings. That’s probably a
rare consumer, but it certainly exists. I think there’s probably room, what I’m saying is I think there’s room for
everyone here.
[00:50:08]
NH: We’re just about out of time. Let me close by saying thank you to Katy for your time today. We were able
to cover a lot, and thank you, clients, for joining Third Bridge Forum’s Interview. Clients, if you wish to speak
with our specialist in a private call or meeting then please let your relationship manager know. Have a good
one.
KD: Great, thank you so much.
Transcription ends at 00:50:20 of the recorded material
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