The few startups that grow rapidly to over $1 billion in revenue are almost never in retail, they’re usually in technology or other industries. Retailers that grow so fast are normally unsustainable, I try not to even comment about them.
Except for this one. I can’t recall ever seeing anything like it. It has grown so fast and so high that it’s worth looking at. Growth like this has to have tapped into an underlying need that most other industry people didn’t see. If you want to understand consumers and you find companies like this, it’s worth looking at more closely because there’s probably a trend or a need they’re serving that’s not otherwise apparent. It’s not easy to figure out what that kind of growth reveals, sales growth numbers on their own don’t explain why consumers do what they do. It means consumers are up to something different and it’s up to the observer to figure out what that is.
Here Are The Facts
The Company is called LuLaRoe. They sell ladies clothes along with some men’s and children’s in colorful styles. There’s nothing so unusual about that, in fact right now that’s a fairly unattractive business to be in. That’s what makes this company so intriguing. There are a few other unusual things about LuLaRoe, even aside from the growth it’s experienced.
LuLaRoe does not have stores and does not sell direct-to-consumers on its website or any other way. It sells through a network of individual representatives it calls Independent Fashion Retailers (I’ll call them IFRs). IFRs buy from LuLaRoe at 50% of the suggested retail price and sell to their friends and contacts, pocketing the difference. The IFRs do not pick out the patterns they want, IFRs specify the styles and sizes they want in their order and how much of it they’ll buy. LuLaRoe picks out the patterns and ships it to the IFRs. The Company makes no more than 5,000 units of any one item so the market is never flooded with a particular style. LuLaRoe has over 80,000 IFRs. None of them receive the exact same assortment of products in any shipments.
LuLaRoe clothes are made for real women, not stick-thin models who are really 16 years old. They are comfortable, roomy and forgiving. That message is emphasized in all its imaging. You can see from the photos that they respect the way women are in real life.
LuLaRoe requires its IFRs to buy at least $5,000 worth of product to start. That’s a meaningful investment for a lot of people and not everyone succeeds at it. You have to have a lot of entrepreneurial derring-do to make that leap and sell product directly to contacts, friends and relatives. If you Google LuLaRoe you can certainly find stories about failures, as well as descriptions of other multi-level marketing companies that have taken advantage of their customers.
One of the concerns you normally find in a company with this structure is that people are paid just to recruit other sellers. Those companies wind up being a pyramid where very few people are doing the real selling and others are free-riding on their work. The FTC has a study on its website that says that less than 1% of participants in multi-level marketing companies make a profit.
What about LuLaRoe? It certainly pitches recruits on the potential to earn money by signing up other sellers. The company says it reserves up to 13% of its own margin to encourage IFRs to recruit, coach and mentor other IFRs. No IFR can receive any of that 13% bonus pool without selling, at the lowest tier, at least 75 items for a total of at least $2,250 every month, so no one can be just a recruiter — you have to sell product to customers to make any money.
Most LuLaRoe IFRs aren’t getting much if any money from this bonus pool. LuLaRoe’s income disclosure statement shows that just 27.37% of its IFRs in 2016 received any money from developing their own network of sellers, with the average amount being $2,118. It doesn’t disclose how much its IFRs make from their direct sales, so it’s unclear how many turn a profit.
LuLaRoe trains its IFRs to sell outside their direct network so they’re not limited to just their own friends and families. The goal is to give consumers a personalized shopping experience using a combination of in-home pop-ups and live, video presentations on social media like Facebook Live and Periscope. Remarkably, half the Company’s sales are coming from social media. IFRs post product images and sales messages online to reach far-flung customers outside their immediate circle. Since IFRs all have different assortments, consumers connect to different LuLaRoe IFRs to find what they want. There are no exclusive territories, just unique assortments among IFRs.
So far, the inventory turns at LuLaRoe have been extraordinarily high. That may not mean anything to you if you’re not an accountant but it implies that the time it takes for the Company to sell its products through to consumers is very short.
LuLaRoe has not raised outside capital but a company selling ladies clothes needs an enormous amount of money to grow this fast because it has to keep buying increasing amounts of inventory to support the growth. That tells us that LuLaroe likely has very attractive profit margins, that its manufacturing costs are under control and so is its overhead. That’s the only way it could have enough cash to support the inventory costs for this kind of growth.
LuLaRoe has very few customers in traditional, big city fashion locations like New York and Los Angeles. That tells us that they have tapped into a need in other areas that was previously unserved.
What Can Go Wrong
A lot can go wrong when a company is growing this fast. Let’s think of a few things:
- Supply chain. LuLaRoe hasn’t been doing this a long time and its supply chain and logistics can’t be well established. Unreliable suppliers or uneven quality can hurt the Company’s reputation at an early stage in its life. It’s hard to control things when you’re growing so fast. You can read online about quality problems they’ve had with leggings already, including lawsuits filed. Product problems can’t keep happening in a successful company. When a company grows this fast, they can’t do everything right and clearly LuLaRoe has done some things wrong. They have to fix those problems immediately to maintain loyalty and continue to develop the business.
- Fashion miss. In an effort to continue to grow, LuLaRoe may try to design product that doesn’t meet its customers’ tastes as well as in the recent past. Also, fashion can change and LuLaRoe may miss the change.
- Too many IFRs. Success stories of some of its many IFRs have led other people to sign up. The market can get oversaturated and then be too competitive, leading to price competition among IFRs. Success breeds success, until it doesn’t. At least some IFRs have complained that this is already happening.
- Update: After the publication of this article, we heard from a number of unhappy former IFRs who say that they are in a standoff with LuLaRoe trying to get refunds for unsold merchandise. A class-action lawsuit has been filed stating that LuLaRoe had previously promised full refunds and free shipping on returns, but that the company changed its policy in September and no longer provides free shipping or 100% refunds.
- If the Company runs into more headwinds, it will need more than its profits to support its growth and it could get squeezed for capital it doesn’t have.
- Sometimes consumers just want something new. When the last new thing feels old, they stop wanting it.
What Can Go Right
LuLaRoe has obviously tapped into a need that no one else found. Knowing that its customers are in certain areas and not in others, it would be interesting to look at a map of its consumers and overlay different templates on things like:
- Political affiliation
Knowing those characteristics can lead to discovering other products that can be sold to the existing customer base as well as being a predictor of the kinds of apparel products that customers want. If the Company is savvy about its expansion, there could be unlimited upside to developing a broader business on their existing base.
What LuLaRoe Means
For most companies right now, fashion is a lousy business. And yet, here’s LuLaRoe practically defying gravity. I keep finding that even when things are tough, creative people can find niches that are highly profitable. In LuLaroe’s case, that includes:
- Above all, the product is right.
- Customers aren’t in the major fashion-focused cities like New York and Los Angeles.
- There are no retail stores.
- Social media is an important component.
- Everyone in the supply chain is heavily incentivized.
- Prices are all well under $100.
- There’s a certain amount of treasure hunt required for customers to find products they like.
- The founders are real people, with a personal story, not an anonymous corporation.
- They enable entrepreneurs which can also include people that have fallen out of corporate America or who just want more discretion over their time and work/life balance.