Why Lululemon is The Perfect Buy For Nike

Lululemon is an athletic-wear brand with a primary focus on yoga apparel.  Having captured the attention of young women, Lulu has become quite popular across the globe.  Lulu has been apparent in my own life because of my active mother and because of the [unfortunate] leggings trend that has nestled its way into the hearts of seemingly every woman.  Lulu has been so successful because of the balance it has struck, making it’s clothing sensible and stylish while still maintaining it’s athletic roots.

Over the past year, however, Lulu has seen a slight fall from grace.  In 2013, the company was under fire due to a recall for a line of yoga pants that were too sheer.  In response, the founder of Lululemon Athletica, Chip Wilson, stated that customer’s fat thighs were to blame for the yoga pants being see-through.  As a result, Wilson relinquished his chairman’s seat and Lulu’s CEO, Christine Day, stepped down.  The company has since wilted.  Considering Lululemon’s status in pop-culture and their current lack of direction, it is primed for acquisition by none other than the world’s leading athletic-wear brand, Nike.

Nike is no stranger to acquiring other brands, as it owns Converse and skateboarding company, Hurley (Nike also purchased Cole Haan in 1998 for $95 million and sold it in 2012 for $570 million).  Right now, Lulu lacks a sense of direction.  New CEO, Laurent Potdevin, has filled the holes with empty remarks on reclaiming the company’s creative destruction in the market, but the truth is Lulu is floundering.  Through Nike’s experience in operations and marketing, it would be able to right this ship.  Lulu would gain access to some of the best manufacturing plants and Nike’s rebranding of the company would bring back the positive image it lost hold of.

Financially, this purchase would make sense as well.  Lululemon is a direct competitor of Nike.  Buying the company would give The Swoosh increased market control and better pricing power.  Moreover, Lulu is trading at a relatively inexpensive share price.  In 2013, before the company ran into turmoil, Lulu was trading as high as $82 per share.  If Nike attempted to buy the brand at this time, it would not have been feasible, as Lulu’s valuation would have been way too high.  Since the debacle, though, Lulu is trading around $44 per share, making their valuation much more affordable.

As bad as Lululemon’s situation may seem, their immediate value to Nike would be tremendous.  In terms of revenue, Lulu has gone from annual sales of about $453 million in 2010 to $1.6 billion for 2014.  This indicates that Lulu is still growing and that it is still relatively popular.  Lastly, while Nike does a fantastic job of marketing their clothes for both athletic an street-wear use, there are just certain styles that other clothing company’s manufacture or market more effectively.  For example, on campus I never see girls wearing Nike leggings, but I always see them rocking Lululemon’s, recall or not.  Its not that Nike’s yoga pants are poor quality, its that Lulu’s ability to be trendy and different has made their yoga pants more attractive.  Adding their product to Nike’s line would only make Nike that much more profitable.

Maxwell

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Apple to Remove Headphone Jack…For What?

Rumors have surfaced that Apple plans to abandon the ubiquitous 3.5mm headphone jack.  This story developed when Apple blog, 9to5mac, discovered that Apple submitted a design specification to its licensing program which would connect headphones using the Lightning port.

For Apple, this is a smart move.  By removing the classic headphone port, Apple makes all previously designed headphones obsolete.  This wipes out products of competitors, and maybe most importantly, it sheds more light on the significance of the $3 billion Beats Electronics acquisition.  Rather than collaborating with Beats Electronics to create headphones with Lightning port accessibility, Apple now has the ability to earn exponentially more money from license fees and adaptor sales.  The fact that such headphones would probably retain the iconic Beats logo only adds to Apple’s gain, as both brands are synonymous with current popular culture.

Moreover, this innovation, or business ploy, should instigate new technology developments from other competitors, only making Apple diverse and exclusive.  Without a headphone jack, Apple perpetuates its own longevity by locking consumers in to purchasing more Apple products.

Sometimes the wellbeing of the customer is not considered at all.  With this move, we stand to lose big time.  Now that our beloved headphones are obsolete, we must either purchase bulky adaptors or new headphones all together.  Those Beats Studio headphones you just bought? Yea, those are no longer functional, which means shelling out another $200+ to listen to music.

Its funny how the simplest changes result in huge revenues for a company.  I can’t say I’m upset with the Beats acquisition or this news because its kind of ingenious.  For a full read on this recent development, check out the article on Forbes.

Maxwell

eBay x Economics: Part II

From the following, you’ll see how eBay is both analogous and divergent to economics.

Consumer and Producer Surplus

These are very basic economic terms that ring true all throughout the world market, and for eBay, they are as applicable as ever.  Consumer surplus is the difference between the total amount that consumers are willing and able to pay for a good or service (this is how the demand curve is formed).  Essentially, consumers and buyers on eBay have a predetermined price in mind that they are willing to pay for a certain item.  They place a bid or select the ‘Buy It Now’ option if the actual sale price is less than or equal to their desired price.  The surplus comes if the price the buyer actually paid is less than the predetermined price they originally desired before the transaction.  Whether you are aware of this phenomenon is a different conversation, but no one ever pays for something at a price they do not want or cannot afford, alluding to the notion that all consumers are rational.

On the contrary, producer surplus is the difference between what producers (eBay sellers) are willing and able to supply a good for and the price they actually receive (this is what shapes the supply curve).  As a seller, I certainly wanted to turn a profit, so the price I set was based on the retail price I, myself paid for the good, the research, and the fees that were incurred after each transaction.  From these criterion, I set a price that aligned with consumer preference and producer preference.  Surplus occured if the item sold went for more than had originally been intended, which is always a good sign!

Technology

The change in technology is also a cornerstone of economics.  New developments in technology generally lead to increased production levels, which generates more transactions and cash flow.  For example, Henry Ford’s implementation of the assembly line allowed for an increase in sheer volume of automobiles manufactured.  At first, our eBay business was antiquated: we went to the post office to buy postages, which meant standing in long lines; we did not have an up to date inventory list; and our funds for purchasing goods were not liquidable, as my brother and I often debated over who would buy what.  Not only does this create a messy operation, but its also not efficient.  To fix this, to alter the technology and processes used, we implemented an organized inventory via Excel that calculated the fees we would incur after each transaction, the profit margins, and the quantity of goods remaining.  Moreover, we began to use eBay’s automated shipping service.  This saved us countless trips to the post office and it made the postages much cheaper.  Lastly, and one of the most significant changes in technology, was our utilization of PayPal’s debit card.  Instead of using our own bank accounts to purchase goods, we used PayPal, which was tied to our eBay account, to buy the shoes, Starbucks mugs, etc.  This made the quick trips to stores much easier and it made our funds more liquidable.

For any enterprise, an increase in technology is vital.  Technology is what enables production to increase and its what fuels the increasing demand in our society.

Maxwell

Los Angeles Clippers Sold to Former Microsoft CEO

Donald Sterling, and the Sterling Family in general, has been the topic of discussion across all media outlets over this past month.  Hopefully, we are nearing the end of this freight train, as the sale of the Los Angeles Clippers by Donald and Rochelle Sterling to former Microsoft CEO, Steve Ballmer, was approved by the NBA last Friday.  The deal, which will oust the most infamous man in the NBA is worth a whopping $2 billion, making this sale the largest for any NBA franchise.  While many are pleased to see Sterling officially out of the league, the price tag for such a removal has caused much conversation.

Prior to the sale of the Clippers, the acquisition of the Milwaukee Bucks by New York investors, Marc Lasry and Wesley Edens, was the largest in the history of the NBA at $550 million.  For those non-sports fans, the Milwaukee Bucks have been notoriously irrelevant.  Why? Well, Milwaukee is a very small NBA market (Quiz Question: What state is Milwaukee in? bet you thought about it for longer than you should have), they lack superstar athletes and for the last four seasons they have failed to achieve a winning record.  Now, take a Clippers team that has been the annoying little brother to the Los Angeles Lakers and laughing stock of the entire NBA for the past thirty years and you can understand why a bid almost four times that of an acquisition that took place just a couple of weeks ago seems a bit excessive.

Mind you, Mr. Ballmer has been trying to purchase an NBA team for some time and, according to Forbes, he has an estimated net worth of $21 billion, so to him this deal neither hurts his pocket nor loses its luster.  Here’s why:  Ownership of any major sports team is a very exclusive club.  Out of the 92 franchises (comprised of the NFL, MLB, and NBA), only a spoonful have gone up for sale over the last decade.  A sports team is analogous to that of a bluechip stock; you usually hang on to them for an extended period of time, which is why we have these legendary families, like the Rooney’s and Buss’, who have owned franchises for decades.  Therefore, when a team is on the market, much attention and interest is drawn from the richest in the world.  I believe this situation with the Clippers drew much more appeal because of the given circumstances.  The Clippers are located in the massive, star-studded LA market, which brings tremendous upside.  Furthermore, the new owner (Ballmer) would be replacing not only the most hated man in the country but also an absolutely terrible owner.  Steve Ballmer immediately becomes the savior of a headless organization and his business acumen from running Microsoft is sure to point the Clippers in a more progressive direction.

Many people have criticized this acquisition because of how poorly structured some of the contracts within the Clippers organization are.  For example, the Clippers are merely tenants in the Staples Center, meaning they receive $0 for non-basketball revenue.  I, however, still perceive this as a smart move.  First and foremost, the Clippers were worth as much as anyone was willing to pay for them–more power to ya, Steve.  No one complained when Magic Johnson and company purchased a struggling Dodgers team for $2.3 billion, now look where they are.  Moreover, the Clippers local TV deal is set to expire after the 2015-2016 season.  Given the market and recent success the team has seen, I would expect this new deal to be more than double the previous, only adding more cash to Ballmer’s pocket.  Lastly, the real estate that the Clippers own could be redeveloped for better, more profitable commercial spaces.

I see this venture as a long-term one.  Of course Ballmer will have to break even, but think about the future valuation of the Clippers in thirty years.  If some of the more high profile sports property is sold in the mean time, such as the Lakers, Ballmer would definitely see an appreciation in his team’s value.  Besides, when do you really see the value of a team decline?

Maxwell