Assumptions are treacherous – just ask Lululemon about Mirror

In high uncertainty situations, one can obviously make decisions that turn out not to be so great. But seriously, do you want to be the CEO featured in a headline “How A Ballerina Outmaneuvered you”?

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Here’s a story about a global pandemic, companies trying to make business sense out of an unprecedented behavioral shift and the sense of urgency that can sometimes cloud decision-making.  

The next iPhone – the gateway drug to your future fitness

Mirror was very much of the moment – a virtual, programmable interface that was just a wall-hung mirror when not in use but turned into a programmable magical window when turned on. Mirror itself had a bit of a buzzy past. Brynn Putnam, the charismatic founder of the business had a big, big vision.

As Medium writer Maya Kosoff recounts, “We always said that we believe we’re building the next iPhone,” she had told Fast Company late last year.

Fitness, in other words, was only the gateway drug for the Mirror to become the content delivery system for anything else virtual. “We’re building the third screen in your life,” she said. The possibilities were endless — telemedicine, fashion, therapy. Putnam had raised $74.8 million from VCs, along with celebrity customers including Alicia Keys, Reese Witherspoon, Gwyneth Paltrow, and Kate Hudson, earning the four-year-old startup a $300 million valuation, and a lot of buzz.

Back then, nobody knew whether – or when – people would feel safe sweating and breathing heavily in close proximity to other people. The gym industry, with companies like Equinox and Soul Cycle taking a huge hit, looked troubled. Nobody knew whether at-home fitness would stick. And consumers, with more cash on hand due to normal expenditures being cut off, seemed prepared to take the plunge and invest thousands in home gym equipment they may normally not have considered.  

So there we were – massive uncertainty, everyone is at home, gyms are closed, Peloton is growing like crazy, and your brand – exercise clothes that epitomize ‘athleisure’ – might be either at serious risk or poised for a great opportunity.

So it’s a great opportunity – a moment to seize – a chance to consolidate your legacy!

But, um, as a headline from Yahoo Finance puts it …

Lululemon buying Mirror could become a case study in everything you shouldn't do when acquiring another business.

Lululemon Athletica Inc., a popular athletic apparel company, announced its acquisition of Mirror in June 2020. Mirror is a fitness technology company that offers an interactive workout experience through a mirror-like device that streams live and on-demand fitness classes. It costs $39.95 for the classes, and an initial setup for the hardware that is $1,495, going up to a family version for $2,045 with a $250 setup cost if you’re not handy with hardware.

Lululemon's acquisition of Mirror was driven by its strategic goal of expanding beyond traditional apparel and establishing a presence in the rapidly growing digital fitness industry. By acquiring Mirror, Lululemon aimed to leverage the company's innovative technology and digital platform to enhance its customers' fitness experiences.

The move aligned with Lululemon's broader strategy of becoming a lifestyle brand by offering its customers a more comprehensive range of products and services related to health and wellness. By integrating Mirror's at-home fitness technology with Lululemon's existing products and brand, the company sought to strengthen its customer engagement and capture a larger share of the rapidly growing home fitness market.

At the time, CEO Calvin MacDonald said that the acquisition would be a way to bolster revenue while also providing another avenue to market its products.

He was quoted as saying, “the prospect of owning Mirror became more attractive as consumers quit going to stores and gyms amid the pandemic, while shopping online and shifting to virtual workouts. “The opportunity of Covid is that it’s brought the future closer to the present,” he said.

As he said in another interview, "We want everybody sweating on a Mirror to be in Lululemon and we want everybody sweating with Lululemon to be engaging and using a Mirror.”

And still more: “The acquisition and the positioning of Mirror was all about strengthening our community relationship with our guests,” he said during Yahoo Finance's All Markets Summit.

“The more that they engage and sweat with us, the more they spend. And it drives the overall loyalty. And that vision hasn't changed.”

Hmmm….

So what went wrong?

Firstly, a crowded space. Just as Casper, the mattress people, learned, if you don’t have some kind of barriers to entry, anybody can jump into your market. The at-home fitness business enjoyed a ton of new entrants since the disruptions of 2020, and lots of competitors came out of the woodwork. Peloton and Tonal are only the most visible of the new competitors.

Secondly, the two companies have different business models. An example of what can go wrong happened in 2005 when Quiksilver Inc. acquired Rossignol Group for $325 million. The surf and ski wear apparel brand thought merging its love of the outdoors with the French ski gear business made great sense. “We share the same passion for outdoor sports, and we have the same commitment to developing outstanding products,” Quiksilver President Bernard Mariette said in March 2005. By August 2008, Quiksilver agreed to sell Rossignol for $147 million, less than half what it had paid three years earlier. By 2015, Quiksilver had entered Chapter 11 bankruptcy protection. Lululemon, in contrast, has healthy cash flow and looks to be doing well.

Next, we have culture mismatch. The culture of a soft goods company focused on retail and a hardware firm that apparently had significant issues don’t often gel.

What questions a board should be asking

Don’t get me wrong – Lululemon is a great company, and its strategy seems to be working. The wonder I have is how the short-term pressures of a major shift in uncertainty can warp a whole set of people into making poor-quality, destiny defining decisions. In particular, I wonder what the Board wanted to know before giving this purchase the green light.

As a board, my suggestion is that you ask the following questions:

What assumptions are we making about future demand? What is the evidence that these are warranted?

How will the two companies truly integrate? What are the customer touchpoints that will be valuable for both?

How do we make the customer jobs-to-be-done better?

And of course, what evidence do we have that there really is synergy between the two operations, so that owning both adds up to more than the cost of making the deal?

Being more discovery driven

I really like that the company (Lululemon) was willing to take a risk with a known downside. But if you did a little harder questioning, would you have let yourself get pulled into a crisis-of-the-moment acquisition?

At Valize, we ask those kinds of questions. And with luck, your company doesn’t end up being a case study (in the wrong sense of the word) for a Thought Sparks!