US Performance Apparel – Emerging Upstarts Gaining
Share – 26 August 2021
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Specialist:
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Dustin Laney (DL)
North America Strategy Manager at Nike Inc
Agenda:
1. Sector overview and key trends – pure performance vs lifestyle and athleisure categories
2. Omnichannel and pricing dynamics in light of partnerships such as Lululemon (NASDAQ: LULU) and
Mirror
3. Product differentiation from emerging upstarts, highlighting strengths in communicating comfort and
fashion-orientated attributes vs legacy brands
4. International developments, including D2C operations and third-party marketplaces in China
Contents
Q: Could you give an overview of the performance apparel industry and the emergence of lifestyle brands? 3
Q: Can you clarify how fit and style separates athleisure from performance? A Nike thin workout shirt can be
used across multiple functions, whether it’s pure performance or athleisure. How does athleisure product
creation lead to apparel that customers can relax in and use in all functions?
4
Q: Are there any standouts in inter-category performance within athleisure? Could you elaborate on men’s
vs women’s category offerings? Lululemon stores have a small men’s section vs a huge women’s section,
which I would expect to impact sales volumes. What role does that demographic or gender shift play in these
5
groups?
Q: How does the performance or athleisure apparel market break down? Which players are gaining share?
Performance footwear is consolidated among the big players but how fragmented is performance apparel? 5
Q: Could you discuss some of the challenges in pure performance? Why do you think the category has been
flat? Might any channel impacts be playing a role?
6
Q: Have you seen noticed any success from recent fitness partnerships, such as Lululemon’s July 2020
acquisition of Mirror or similar moves from players such as Tonal and Peloton? Are these just marketing
ploys that aren’t really taking off?
Q: Performance has been stagnant in athleisure and lifestyle. Could you discuss price points and players’
abilities to command a premium? What quality differences exist across emerging start-ups and the fabrics
they use? How does that impact their ability to command price premiums?
Q: Can you expand on the upstarts that have tried to go D2C? How does that help preserve the brand vs a
player such as Under Armour, which is trying to enter every channel it can? What are the pros and cons of
each strategy?
Q: How can legacy brands that are struggling to maintain market share shore up brand equity? It seems to
be a volume play, but many companies have demonstrated that is unsustainable in the long run. The major
brands will continue to do well regardless, but how can other players disrupt brand equity and rebrand to
reconnect with the younger consumer?
7
7
8
8
Q: How do you assess engagement and communications strategies such as the editorial-type content page as
9
a way to consistently re-engage the consumer outside of the store?
Q: Do you think some of the emerging start-ups have the balance sheet or capability to secure athletes and
partnerships, given that’s crucial to their expansion strategies?
Q: How are performance and athleisure trends developing internationally?
Q: Could you discuss the emerging US start-ups entering the footwear category such as Lululemon and
Fabletics?
9
10
10
Q: How do D2C brands operate in China, where much of their business is carried out through a third party?
You said that athleisure is taking off, but it seems there is a wholesale element when buying products.
10
Q: Could you expand on brands’ control in China? You gave the example of Adidas products being moved to
a Nike store when an Adidas store was being refurbished. Do brands have visibility on these physical
aspects? What are your overall thoughts on brand management in China?
11
Q: Could you discuss the sourcing and supply chain aspects? Have you noticed any issues? You mentioned
Nike and highlighted pockets of shortages. How does sustainability factor into where brands source for their
performance, athleisure and lifestyle products? How does that affect how consumers assess the brand?
11
Q: Is there an opportunity for upstarts to build a wholesale presence? Is the risk worth the reward?
Q: Could you discuss the sustainability of the trends we’ve discussed vs those that are likely to be short-
term?
12
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US Performance Apparel – Emerging Upstarts Gaining
Share
Transcription begins at 00:00:03 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview entitled US Performance Apparel – Emerging Upstarts
Gaining Share. I am Nyree Hinton and I will be facilitating today’s Interview with Mr Dustin Laney, North
American Strategy Manager at Nike Inc.
Dustin, 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.
DL: I agree.
NH: Thank you, Dustin. Could you start with a brief introduction to your background?
DL: I’ve been in the apparel industry for about 12 years. Before Nike, I was at a company called Renfro
Corporation, which focused on socks, and did market intelligence work there, looking at competitive
landscape, retail landscape, the rise in digital, strengths and weaknesses, competitive threats, that kind of
thing. From there, went to Nike in 2013 and I have been with Nike from 2013 until about three weeks ago, and
in a variety of different roles from market intelligence to strategy roles, both at the global level as well as
within geography, focused on profits management, looking at what’s coming next, long-term planning and
end-season management.
[00:01:30]
Q: Could you give an overview of the performance apparel industry and the emergence of lifestyle brands?
DL: I’ll actually start at a more macro level. I think apparel, in general, has been relatively soft over the last
probably five or six years, and when we click into athletic, what I’m going to call athletic is performance and
lifestyle performance together, and athletic has actually been growing. It’s been propping up the losses in
fashion and casual apparel for quite some time. Then, when you peel the layer back even further and you look
at performance vs athletic lifestyle products, you see a very similar story where lifestyle athletic product has
been growing by 10-15x the overall athletic market and really covering up the softness in performance, pure
performance apparel, and that’s looking at it from a scanner data perspective, so that’s POS data. That’s a
manufacturer saying, “This is a performance top,” or, “This is a lifestyle bottom,” so it’s pretty accurate data.
Where it’s interesting is when you begin to look at consumer information and how the consumer is actually
defining these particular classifications, and you’re seeing that lifestyle is growing even further, even stronger,
from a consumer perspective, because many consumers are buying performance apparel and never touching
the pitch or touching a treadmill in that apparel. They’re buying leggings, they’re buying running shirts with
performance attributes, such as different types of innovations built in for comfort and for fit, but they’re not
actually working out in that.
All in all, the athleisure, as we call it, is no longer a fad. It’s definitely a longer-term trend. What’s interesting is
you’re seeing a lot of traditional performance brands really beginning to go heavy into sportswear or athleisure
and, in many cases, half or more than half of their business becoming lifestyle product. Many of the big
players, like Adidas and Under Armour and Nike, some of the traditional players, are seeing a large percentage
of their business and their growth actually coming from lifestyle product and not in performance product.
Private and confidential 3
Even one specific example is Under Armour, where for many years they started in training and compression
wear for training, and now they have gone heavily into sportswear, especially with their expansion into Kohl’s.
Most of that offering in Kohl’s is sportswear. We all know how many doors Kohl’s has and how much business
that could mean for Under Armour, so they’re heading in a sportswear direction, and same is true with Adi
and Nike.
What’s interesting from the bigger players is that’s where they’re headed and where their business is beginning
to become imbalanced between performance and non-performance, but where we’re seeing growth in
performance in pockets, despite the overall performance market being quite soft, is with these upstart or
boutique brands. A couple of those that come to mind for me are Athleta, Alo Yoga, Lulu, you could consider
still a boutique brand, but they’ve scaled to almost USD 3bn in sales, and then Fabletics. Those are just a
couple of brands, off the top of my head, that are really seeing significant growth within share of wallet. Their
market shares are still pretty small because they’re relatively small brands. If you think about the multibillion-
dollar brands like Adi, Under Armour, Puma and Nike, it’s a very concentrated market at the top, but the long
tail is beginning to gain some steam, especially from those brands.
Then the final thing I will say around brands that are up and coming is private label brands that people,
brands are, seems to me, not really paying a lot of attention, but we should be. Two that come to mind for me
that have been performing incredibly well against the market are Amazon Essentials. Let’s face it, 85% of all
product searches in the United States start on Amazon. They’re pushing their private label and they’ve made
quite a few acquisitions in the apparel space, specifically in performance and lifestyle, but their Amazon
Essentials offering is really good. It’s good products, right price point, targeted for her and doing very well.
Then the other one would be at Target, All in Motion, which, I don’t know if you guys are aware, but C9 used to
be the private label at Target, which was by Champion. Target took Champion and C9 out of their stores to
replace it with their own in-house brand of All in Motion. Their target for that is about a USD 2bn brand in the
first two years, which is incredible. It took Lulu about 10 years to get to USD 2bn, just for point of reference.
To wrap it up, I would say the big brands are shifting more into lifestyle, the boutique brands are taking
market share and performance at the bottom, beginning to gain more and more traction and moving their way
up that proverbial ladder. Then I think you have to keep your eye on private label brands specifically on the
Amazon platform and then the All in Motion at Target.
[00:06:59]
Q: Can you clarify how fit and style separates athleisure from performance? A Nike thin workout shirt can be
used across multiple functions, whether it’s pure performance or athleisure. How does athleisure product
creation lead to apparel that customers can relax in and use in all functions?
DL: I think that just from a pure product perspective, something that companies like Nike and Adidas have
done well over the last 10 years or so is incorporating innovation in those products, such as Dri-Fit, into their
products and calling out the attributes of why this product is performance vs lifestyle. I think lifestyle is more
based on comfort. It’s combed cotton, it’s softer materials and materialisations, more fashion-oriented, where
you could wear it to lounge around, you could also throw on a pair of sneaks and jeans and still have that
fashion element to it.
I think from a pure product perspective, those are the two differentiators, but what I will say is that if we go
back to the brands that I’ve mentioned, these boutique brands, Athleta, Alo Yoga, Lulu and Fabletics, what
they have done an incredible job of, and where they’re beginning to really gain traction with the consumer, is
that they communicate those attributes very clearly at the point of sale and on their website and via their
digital channels, whereas some of the bigger brands don’t do that. If you go into an Adidas store or
Adidas.com, you don’t see a ton of really quality information about that product. It’s kind of a copy, paste, if
you will, from other products in a similar category, whereas if you go on an AloYoga.com or you go in a Lulu
store, you’re going to see a lot of information about that product, the innovation that’s in there, why it’s
important for that particular performance, whether it’s a yoga top or it’s a running tight. They’re going to call
out the attributes and they’re going to communicate those clearly. I think that’s where these brands have done
Private and confidential 4
a really good job of communicating that to the consumer and giving them a reason to consider them as a
performance brand when they’re in that zone.
I think secondarily, if we want to continue the thread of the private label, similar to that is around value and
experience, as well as efficiency. You go on Amazon, you can have your Amazon Essentials running top at your
front door in a day, and not to mention they have a really incredible fitting guide on Amazon which they’ve
stood up. Many brands don’t have that and their fitting guides are all over the place. Sizing is not universal.
You can go from a running top, an Adidas running top to an Adidas sportswear top and the sizing will be
completely different, as an example. I think some of these smaller brands are picking off some of the lower-
hanging fruit within the athletic apparel zone, where it’s communicating attributes, it’s getting the size
consistency right and it’s offering, basically, the innovation and calling it out as simple as on the hang tags or
on the website, or in their digital channels.
[00:10:43]
Q: Are there any standouts in inter-category performance within athleisure? Could you elaborate on men’s vs
women’s category offerings? Lululemon stores have a small men’s section vs a huge women’s section, which I
would expect to impact sales volumes. What role does that demographic or gender shift play in these groups?
DL: Yes, of course, that’s a great call-out. I think that from a category perspective, the established brands like
Nike, Adidas and Under Armour are more balanced towards him, meaning that their gender mix or category,
whatever you want to call it, is shifted more towards him. They lead with men and then take down to women’s
and kids. Where I think that strategy has worked in the past, I don’t think it’s going to work in the future and I
think that is where, when you walked into a Lulu store five years ago, of course, you had five square feet of
men’s in the back left corner, perhaps in the dressing room, and the rest would be targeted at her. What they
have done is they’ve shifted that strategy, and so they actually started with her and now they’re bringing him
in. You’ll see that, if you look at their 10-Ks and their strategy plan, they’re going heavily in men’s and are
making investments to bring him along on this journey. Used to be men, you couldn’t catch men in a Lulu
store, because it was a women’s store, but a little secret around some of the professional sports teams is a lot of
the professional athletes really love the Lulu tights and Lulu undergarments for fit and for performance. That
kind of started this whole, “We might have something here.” Just from speaking to athletes, we’ve seen this
growth in their business to men’s and they’ve made that a strategic pillar of their business. It’s digital,
international and men’s are the three strategies for Lulu over the next 3-5 years.
I think you’re going to see a lot of these brands that I’ve mentioned, like Athleta and Alo and Fabletics that
started with her, are going to begin to get more involved with him and I think that’s the strategy of the future
because she controls so much of the spend when it comes to life stages. Whether it’s kids in the household or
there’s a partner involved, I think that she still controls a lot of that budgeting and a lot of that spend, and I
think brands like Nike, Adidas and Under Armour are still playing catch-up and trying to figure that out, like,
“How do we win with her?” You don’t win with her by shrinking it and pinking it and putting it in Dick’s
Sporting Goods because that’s not where she is, so I think these other brands that have started with her and
have their direct business stood up and could really begin to serve her on where she is, I think will benefit.
Again, to wrap it up, I think the traditional brands are still very much a men’s-led offence, with more than 50%
of their business coming from him, and I think these up-and-coming brands are the reverse of that and leading
with her but will be able to bring men along in their future offerings to gain exponential growth in the market.
[00:14:13]
Q: How does the performance or athleisure apparel market break down? Which players are gaining share?
Performance footwear is consolidated among the big players but how fragmented is performance apparel?
DL: I think again, I’d like to bifurcate that market. I’m calling the athletic apparel market and then there’s
performance and athleisure within that, those are the two components. I think performance today is probably
Private and confidential 5
40% of athletic apparel and lifestyle and athleisure is the 60%. I think it is a majority of that market and it’s
the growing pie. 40% is performance, and it’s flat to down, and then the 60% of the athletic market is lifestyle,
and it’s growing high single digits at very least. Within those two zones, I would say on the performance side
it’s very much like footwear, where you have 3-4 key players that make up a vast majority of the market.
You’ve got Nike and Adidas and Under Armour coming in, and Lulu starting to make their way up to that top-
four spot. Then you’ve got fragmentation that’s happening underneath and that’s where you begin to see some
of these brands that are up and coming, like the Alos and the Fabletics and the Athletas of the world are still
around 2%, maybe 1-3% market share, but starting to tick up. On the athleisure side of that market, it’s very
much different where you have a lot more fragmentation. You don’t have that clear leader of the pack, if you
will. I think the big three, Nike, Adidas, Under Armour, are still the top three, but there’s a lot less separation
between them and those other brands below. I think some of that has to do with the fact that these start-up
brands have done a really good job of coming in with both performance and lifestyle offerings, whereas if you
think about the traditional performance apparel brands, they’ve grounded themselves in sport and now they’re
trying to spin off sportswear apparel.
[00:16:28]
Q: Could you discuss some of the challenges in pure performance? Why do you think the category has been
flat? Might any channel impacts be playing a role?
DL: I think performance has been struggling because when you look at sports participation in general, less
people are working out. The pandemic, I think, started to revitalise some of that, where early on in the
pandemic we saw at-home workouts increasing, app engagement increasing. As we think about platforms like
MapMyFitness and Nike Run Club or whatever Under Armour platform of today. We saw an uptick early, but
then we saw it die off. It was a quick die, almost like a New Year’s resolution die-off. Overall participation has
been slipping for quite some time in your core performance categories such as running and training. We’re
seeing a little bit of a trade-off within things like yoga and HIIT, or boutique fitness, but they took a huge hit
during COVID because you can’t go to an Orangetheory or a SoulCycle during the middle of the pandemic. I
think that those continue to shrink and it’s really around participation. That’s overall. Where we’re seeing the
biggest drop-off of participation is with girls. The ages between 12 and 18, which are some of the key zones of
an adolescent’s sports or athletic life, we’re seeing a lot of drop-off, tremendous drop-off after the age of 10
actually, which is quite sad to see but she is going onto doing other things and not returning to sport until a
different life stage. We’re seeing a bit of an uptick once she is 25-34 and coming back to things like yoga and
running and training, but I think the performance market has been hindered quite significantly by this drop-
off in just pure participation of some of your traditional individual sports, and team sports is a whole other
conversation but very similar in nature.
With that said, I think that the future of sports will be changed. I think boutique fitness will come back, and
when I say boutique fitness, I mean Orangetheory, Barre, SoulCycle, (inaudible 19.00) and so on. I think that
they will see a resurgence because people are ready to get out of their homes, if they haven’t already, and get
back in the gyms, and I don’t think they’re looking for big-footprint gyms. I think they’re looking for more
boutique, very specific, as close to one-to-one training as you can get, with a little bit of that community feel. I
think that will help the performance space, but I think it’s only going to help those brands that begin to see
that opportunity to potentially partner with some of these start-ups. I see companies already doing it with
Mirror and Lulu partnering. I think that could be material for them over time. It’ll be interesting to see how
the consumer reacts to staying in the home with their training and their fitness vs outside the home with their
training and their fitness. Then Peloton and Adidas also with a partnership there. I think you’re going to see
more and more of that, where brands will see the necessity to partner with those footprints that offer that type
of performance lifestyle in sport to help booster or bolster the performance apparel side of their business. I
think lifestyle will be fine. I don’t think lifestyle needs an injection of any sort, but I think that the performance
side will definitely need that partnership with those boutique fitness and the future of digital sport.
Private and confidential 6
[00:20:23]
Q: Have you seen noticed any success from recent fitness partnerships, such as Lululemon’s July 2020
acquisition of Mirror or similar moves from players such as Tonal and Peloton? Are these just marketing ploys
that aren’t really taking off?
DL: My thoughts right now, I think it’s too early to tell. These companies have kept the performance of these
partnerships pretty tight. Trust me, I’ve tried to peel them apart. I think it’s still a little bit in the infantile
stages of these partnerships to see truly how that will come to life. I do tend to think that it is a little bit of a
brand-heavy play to begin with, but I think that you’ll begin to see with Adi and Peloton, Adi is making
products for Peloton users, which is a very different partnership than Lulu acquiring the Mirror. That’s a bit of
a different one and, again, that’s one that I’m keeping an eye on, is they’re actually making physical product to
help the Peloton user specifically in their performance while they’re on bike, so I think that could be very
material as we see more of specific apparel creation for those fitness types.
Another one that comes to mind is Nike had a partnership with Orangetheory last year, I believe, and I don’t
know that they made specific product, but, again, it was a product base, where if you go into an Orangetheory,
you used to see their American brands, or even some Lulu in there, and so that partnership went one-branded.
I think you’re going to begin to see more of that in terms of companies making products or branding the
fitness product specifically. It’ll be interesting to see from a hardware perspective, as you think about Mirror or
even an actual Peloton bike, how that plays out. I don’t have any rumblings of partnerships on the equipment
side, but historically apparel brands have not been really great at building their own hardware and software, so
I think it’ll be a partnership play for sure, but, again, I would keep my eyes peeled on the companies that are
actually making specific products for those specific zones.
[00:23:03]
Q: Performance has been stagnant in athleisure and lifestyle. Could you discuss price points and players’
abilities to command a premium? What quality differences exist across emerging start-ups and the fabrics they
use? How does that impact their ability to command price premiums?
DL: I think that the traditional players have relied on, I wouldn’t call it outdated but they’ve relied on some
historical innovations. Nike Dri-Fit, Adizero and Under Armour Baselayer are some of the more traditional
innovations, or they were innovations 10 years ago, but they haven’t really changed that much. I think that
what you’re seeing with some of these upstarts is that they’re experimenting with different product attributes
and different fabrications in terms of bringing less of the cottons, more of the polys and the poly blends, and it
helps with a couple of things, and nylon obviously, but it helps with shape. If you think about when you go buy
a shirt, work out in it, you wash it, you dry it, you hang it, whatever you do, typically it doesn’t hold shape very
well. I think these brands are catching onto the fact that the consumer is willing to pay a premium amount for
performance apparel classification, whether it’s a top or a bottom, but they’re not willing to do that if they
know that they’re going to wear it once, wash it and it’s going to be faded and it’s going to be misshapen. I
think that holding shape is a huge one that Lulu is really great at.
Then I think the second component is fit. It’s being consistent with fit and that’s where Alo Yoga, it’s gone
through some consumer feedback there. That’s where these brands have caught some low-hanging fruit from
brands like Adidas and Nike, where the companies are so large and they have so many classifications, they’re
trying to serve everybody at the same time, they’re not able to hyper-focus on things like fit, and so they’ve
offered consistent fit across their offering and I think that’s huge. A consumer, again, is willing to pay if he or
she knows that when they walk into an Alo store or a Lulu store, that’s their size and no matter what
classification it is or, within that, what style it is, it’s going to be the same fit across the product offering. I
think that’s a big piece of it. I think when you’re thinking about those brands, that’s where they are standing
out and doing things a bit different and are way, I would say, inelastic in terms of the consumer’s willingness
to pay as long as they can have that consistency as you think about the quality of the product and the life cycle
of that product.
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I think where you get a little more elasticity is within those private label brands, but they’re offering them at
such a low price point that it’s a bit of a different consumer. It’s the consumer that maybe runs once or twice a
week, maybe goes to a hot yoga class, maybe rides their bike on the weekends and just wants a shirt she can
sweat in, so, “Let’s go spend USD 10 at Target and get an All in Motion shirt.” It’s got moisture-wicking, it’s
not cotton, it’s a polyester that beats sweat and it’s soft and it doesn’t hug her body, and it offers some of those
basic features at a low price point. I think there’s a bifurcated market. You’ve got these inelastic brands, these
upstarts that are really hyper-focused on things like fit and quality and consistency, and then you’ve got some
of these private label brands that are a little more elastic but they’re bringing customers in because of the low
price point. They are the two zones that I would poke on.
[00:27:10]
Q: Can you expand on the upstarts that have tried to go D2C? How does that help preserve the brand vs a
player such as Under Armour, which is trying to enter every channel it can? What are the pros and cons of
each strategy?
DL: I think the pros of these direct businesses are that you control your entire supply chain. I think it’s also a
con that you can control your whole supply chain, but they are digital natives in many cases, where they
started online and then built their stores out. I think the pros of that are, being a digital-first company, you’re
able to move faster and more nimble and making quick decisions and shifting with the consumer at a faster
pace, and you’re seeing that. You’re seeing that in their growth. Is it material yet? Not quite. It’s not like
they’re 10-15% market share yet, because the players at the top are so big, but I think they’ll get there. I think
the cons of that are that they lack distribution from a footprint perspective because they are direct. They don’t
have the 20,000 Kohl’s doors or Macy’s or Nordstrom doors that they have distribution in, or Dick’s Sporting
Goods.
I think from the other side of the spectrum where you have your traditional wholesale brands, like the Under
Armours and Adidas and Nikes of the world, I think that they are quickly seeing the opportunity that these
upstart brands have presented and are shifting to more direct business models. There’s no way those brands
will ever be 100% direct, but I think you’ll get to some point where there’s some type of a balanced wholesale-
to-direct business for those bigger brands. I think it’ll take some time to get there, but what they have in terms
of pros is they have that distribution already built in with the wholesale side of their business, so now they’re
just layering on potential incremental opportunities with their direct stores and their dot-com business. It’ll
take them some time and I think that’s the con, is that they’re so big and they’re so relationship-driven
historically, with these wholesale partners, that they’re going to have to strike a balance, and a very careful
balance, between their direct and their wholesale business. As you think about, if I’m Foot Locker, I’m a little
nervous about Adi and Nike going heavily in direct. What does that mean for the Foot business? The same
with DSG, “How can I stand out and continue to offer a product offering that’s differentiated than what you’re
doing on your dot-com or in your direct business?” Whereas these start-ups or upstart brands that are digital
natives and have their own footprint, they don’t have to worry about that legacy, they can just continue to grow
their footprints.
[00:30:15]
Q: How can legacy brands that are struggling to maintain market share shore up brand equity? It seems to be
a volume play, but many companies have demonstrated that is unsustainable in the long run. The major
brands will continue to do well regardless, but how can other players disrupt brand equity and rebrand to
reconnect with the younger consumer?
DL: It’s a great question. I think that there are two things. I think one is they really need to maniacally focus
on here and focus on women. I think that’s the future of performance. I think it’s the future growth
opportunity for these brands. As I said earlier, she controls a lot of the spend and a lot of the brand equity that
happens in households across different life stages. I think that the ignorance of her will lead to continued
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declines, as she will move onto brands that are speaking to her and are where she is. I think that’s one aspect
of it.
I think the second aspect is around experiences and ecosystems. I think it’s no longer enough to just throw a T-
shirt on a rack and some marketing behind it and then hope that someone comes and picks it up and buys it. I
think that the consumer, especially coming out of COVID, is looking for more. I think they’re looking for
experience-based consumption, where Alo is doing a great job, as an example. They have, I think, what they
call their sanctuaries or studios, it’s, basically, a yoga studio in their stores. She can come in, grab a tea, relax,
go into their sanctuary, have a yoga class and then shop, and then browse the brand. Another example of that
is Lulu has done a similar thing, where they’ve got these café-type pilots that they’re launching, where it’s a
holistic experience when she comes in. It comes off as less of tchotchke and more of trying to actually engage
with you as a consumer. Nike has been doing that for quite some time and has gotten quite good at it as well,
as you think about their ecosystems and Nike Training Club and Nike Run Club. There are some aspects of
that that are driving deeper engagement.
I think the brands that are recognising that there is a need for this ecosystem, and when I say ecosystem, I
think it goes beyond just performance, it goes beyond just a run club or a yoga club, I think it’s nutrition,
recovery, sleep. There are a lot of things within the sports ecosystem that are important for athletes to do in
order to maintain their performance levels and I think that educating the average consumer, the average
athlete on those things, it could be very material for brands that do that, and brands that don’t, and just
continue to try to sell you more T-shirts, are probably going to continue to soften.
[00:33:52]
Q: How do you assess engagement and communications strategies such as the editorial-type content page as a
way to consistently re-engage the consumer outside of the store?
DL: I think a lot of it, it goes down to influencers, and whether that be a TikTok or Instagram or whatever
platform of the day it is, I think it’s brands that are active in those spaces and are active on the streets with
those grassroots influencers, it’s going to be tremendous. I also think the bigger brands are going to fare well if
they see the incredible assets that they have in sports marketing, or athletes, if you will, so the LeBron Jameses
of the world, the elite athletes. So many of them had them. Look what Steph Curry did for Under Armour.
Under Armour would have never made an ounce of progress in basketball without Steph Curry. Three years of
the SC 3 and they were the second-largest basketball shoe brand in the country not so long ago, and actually
became that over Jordan, which was quite interesting, because for the longest time Nike and Jordan have just
dominated basketball, as we all know. It’s the leveraging of the elite athlete for some of these bigger brands is
going to be tremendously helpful to re-engage with that younger consumer and really inspire them to go faster
and go harder. Then I think it’s both sides of the funnel, it’s making sure that you’re connecting in a grassroots
way as well, and I think that that’s where these up-and-coming brands are a bit stronger, is really creating
more of that community feel and influencing things from the street. I think the big brands have the
opportunity to do both and I think that they do both, then they’ll continue to win.
[00:36:06]
Q: Do you think some of the emerging start-ups have the balance sheet or capability to secure athletes and
partnerships, given that’s crucial to their expansion strategies?
DL: Yes, you’re already seeing it. Simone Biles went to Athleta. Aaron Rodgers, he’s bounced off ship from
Adidas. Trying to think, there are a few others. I think Simone is probably the biggest one that’s happened
recently. That’s a multigenerational global athlete that left a very prominent brand and went to Athleta, and
very publicly stated it was because Athleta allows her to be her. I think that you’re going to see more and more
of that, and I don’t think that you’ll see it from the tier 1 athletes. When I say tier 1, I’m not going to mention
names, but you can use your imagination, I don’t think tier 1 athletes are going anywhere. I think when you
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think about tier 2 and tier 3, and I would put Simone in a tier 1.5, maybe a tier 2, just because gymnastics
doesn’t have that tremendous reach and volume creation that a basketball player or a football player does, but
I think that you’ll see a lot of those tier 2 and tier 3, a lot of mix-ups, a lot of mix and matching happening
there for sure.
[00:37:33]
Q: How are performance and athleisure trends developing internationally?
DL: I would say China is just on fire from an athleisure perspective and if you look at the global market overall
and then you begin to tease it out by key countries, the United States is still the largest market, followed
closely by China, Korea, Japan, and even some of your South American countries are beginning to emerge,
such as Brazil. I think that you’re seeing a very similar trend and it’s actually being more accelerated as you
think about some of these countries not having the access to sport like the United States has. If you go to
China, you’re lucky to see a soccer pitch or a basketball court. I think sport culture is big there, but actually
playing sport and being part of your daily routine is not nearly as accessible as it is in the United States. I think
that that’s where athleisure begins to tip way over the scales in some of these emerging countries. Japan is a
little different. Japan is pretty maniacal in terms of their focus on sport and access to sport, and similar for
Korea, and some of your South American countries are so heavily influenced by football, by global football that
you’re seeing that influence there. I think overall, it’s a very similar trend as what you’re seeing in the United
States, but I think it differs by pockets based on access to sport in some of these emerging countries.
[00:39:04]
Q: Could you discuss the emerging US start-ups entering the footwear category such as Lululemon and
Fabletics?
DL: Lulu has just recently gotten into footwear and, if memory serves me correctly, it’s mainly around the
sport leisure piece. It’s not performance footwear. I think you might continue to see some of that in piloting
phase. I don’t think they’re going to have much success, because the footwear side of the industry is just so
baked and the consumer is so trained on certain brands within especially performance. I think performance is
pretty solid. I think there’s some opportunity in sportswear, but I don’t think it’ll be material. I just think that
these brands like Nike and Adi and Puma, and even Timberland and Sperry and some of these other, and Ugg,
that are in that lifestyle zone, I think are just so entrenched with the consumers and have such a strong brand
equity, it’s going to be a really steep uphill and expensive battle that I don’t think they’re going to be willing to
fight.
[00:40:22]
Q: How do D2C brands operate in China, where much of their business is carried out through a third party?
You said that athleisure is taking off, but it seems there is a wholesale element when buying products.
DL: A lot of it actually, it’s not necessarily wholesale, it’s more of brands outsourcing their direct business to
third-party partners. 3P is 90% of that market. They’ll have to make a choice and some of the bigger brands
have already made that choice, where they partner with some of the larger third-party partners to run their
direct business, but I can tell you that you lose a lot of control, obviously, and still a little bit of a wild Wild
West, in which you can potentially lose a lot of brand credibility and structure around your brand. As an
example, I was in Shanghai about a year ago, or before the pandemic, so I guess two years ago, and in
Shanghai there was an Adidas store that was being renovated so they just moved the Adidas product over to
the Nike store. You see a lot of that, where, because they’re run by third parties, there’s not that consistency or
that structure in place, and that’s some of the lower-tier cities, and even in Shanghai, we consider a tier 0 city,
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it still happens. I think on some of the higher streets it’s not going to happen, but it’s a little confusing for the
consumer.
I think the biggest think to call out around China specifically is the rise of localism and the rise of local brands
like Anta and Li-Ning and 361 Degrees’. They have seen a considerable growth and a resurgence, if you will,
over the last 3-4 years, especially around if you think about some of the geopolitical tensions that were in place
when other folks were in the White House. It caused a ripple effect and there was a lot of backlash from the
Chinese government around US brands, and the consumer followed suit, not like they had a choice but they
followed suit and there was a lot of backlash towards US brands. I think that tension has subsided a bit, but
the local brands there definitely took advantage of that and you’re seeing their growth continuing to expand
and in a very similar way, where you’re seeing they traditionally were in that performance space but now
they’re shifting to more of that lifestyle. They’re also signing American athletes to their brands. I think Dwyane
Wade was one of the first big ones that went over to Li-Ning and others will follow.
[00:43:27]
Q: Could you expand on brands’ control in China? You gave the example of Adidas products being moved to a
Nike store when an Adidas store was being refurbished. Do brands have visibility on these physical aspects?
What are your overall thoughts on brand management in China?
DL: It’s very difficult. Yes, they do have visibility to what is happening at a macro level, but you definitely have
to have a pretty substantial boots-on-the-ground presence to keep a hold on your brand and I think that’s
where Lulu has begun to expand somewhat there, but it’s very slow. I think that’s why you see that. I think
they are really being cautious because they want to control that brand as much as they can, and they’re finding
roadblocks to being able to do that in that marketplace, whereas brands that are established there, American
brands that are established there have developed partnerships over the decades with these third-party vendors
but are still running into issues, not at scale but in pockets.
[00:44:41]
Q: Could you discuss the sourcing and supply chain aspects? Have you noticed any issues? You mentioned
Nike and highlighted pockets of shortages. How does sustainability factor into where brands source for their
performance, athleisure and lifestyle products? How does that affect how consumers assess the brand?
DL: It’s a great question and I think there are maybe two parts to my answer. I’ll start with the direct answer
around sustainability in general, and eco-friendly. I think it’s huge. My personal opinion and something that I
know was taking very serious at my time at Nike was being a sustainable brand and sustainable sourcing and
manufacturing. It takes time to do that. It takes a long time to convince consumers to pay an extra few bucks
for a piece of apparel or footwear just because it’s sustainable or zero waste, but I think that brands that will
continue to push that envelope will see greater engagement with the consumers, especially with Generation Z
and Generation Alpha, because that’s one of their biggest concerns. One of their biggest concerns is, “The
planet is on fire and no one gives a shit and you should,” and I think brands that take a stand and continue to
push that in the right way will do great things. I think that as I think about the big brands, they all have their
initiatives. I would say Nike has got a pretty public one. Adidas, with their using ocean waste and plastics to
make the latest Adi shoe, I think that was great. Under Armour, not so much. Then as I go back to Alo Yoga,
one of the biggest pushes for them is that they’re 100% sweatshop-free, they’re dedicated to social and
environmental issues and they run a humane and ethical business. That’s their calling card. They call it Air,
Land and Ocean, is one of their call-outs in their mission statement. I think brands that are doing that, that
are making that a priority will connect even deeper with, like I said, the generation of folks that are beginning
to expand their wallet capacity.
Then going back to your other question around supply chain constraints, it’s tremendous right now and it will
continue to be. It has been for about a year. There are shortages, shelves are empty, supply chains are drying
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up. Weeks of supply are incredibly lean and that’s across the marketplace. I think that you’re going to continue
to see these constraints probably until Q1 or Q2 of next year. I mean Q1, Q2 as calendar quarters. I would say
late spring, early summer of next year, you might see some of that relinquish, depending on what this Delta
variant becomes, but just know that every brand that is manufactured in Vietnam or India or China is going
through the exact same thing. It’s just how much inventory can they get their hands on to stock up will be the
telltale sign of whether they can actually be in stock and what that looks like.
[00:48:31]
Q: Is there an opportunity for upstarts to build a wholesale presence? Is the risk worth the reward?
DL: Honestly, I don’t even know if the risk is worth the reward. I don’t think they need to do that. Of course,
the increased distribution would be great, but I couldn’t manage a Lululemon partnering with a Nordstrom
just because I think it would dilute their brand and I don’t think it would be a brand-right play for them. It’s
like where do they go? It’s one of those. Wholesale right now is in a shambles. You’ve got clear winners and
clear losers across the value chain and I just think that these vertical brands, I think they’ll stay put. I think
they’ll continue to grow their footprint, grow their digital presence, increase engagement with their consumers
and I think you’ll see a little bit of that too with the larger brands pulling away from some of their traditional
partners and reinvesting into their direct business. I think you’ll see a consolidation 2.0 coming out of COVID,
as more and more wholesale businesses begin to shift and potentially falter.
[00:49:56]
Q: Could you discuss the sustainability of the trends we’ve discussed vs those that are likely to be short-term?
DL: I think digital is not a fad. I think it’s for sure a long-lasting trend coming out of COVID and I don’t think
the consumer is going to go back. I think the brands that invest in capabilities like BOPUS and ship from store
and kerbside pickup and partnering with on-the-ground companies like Postmates or Instacart, I think those
brands will definitely reap the rewards of that, as the consumer continues to shift to more, “Give me
convenience. Give me speed.” We can thank Amazon for that. I think that will not slow up. I don’t think that’s
a post-COVID whiplash. I think sustainability is here to stay and I think that I’m hopeful that the next two
generations will continue to push us there. I think that overall, the third one I would say that’s probably
something that’s going to stick is the overall honesty and communication to the consumer about the attributes,
the features and benefits of performance apparel. I think companies that do those three things, I think that
companies that really take digital to the next level and invest in those capabilities, companies that take
sustainability serious and really make a play to be zero waste, and then companies that keep their pulse on the
product and innovation and communicating those features and benefits very clearly to the consumer in a
consistent way, I think those three big trends will continue to play out.
[00:51:57]
NH: Dustin, I think that is a great place to conclude. Thank you very much for your time and insights. Thank
you, clients, for joining Third Bridge Forum’s Interview. If anyone would like to speak with Dustin in a private
call or meeting, please let your relationship manager know. Dustin, thanks again. Have a good one.
DL: You bet. Thanks.
Transcription ends at 00:52:09 of the recorded material
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