If you are not already familiar with the brand name 2XU or, how to pronounce it – FYI it’s “Two Times You” – then you may at the very least be familiar with the branding.
That would be the distinctive silver “X” logo transfer running down the outside leg of those enormously-popular black compression tights that you’ve probably spotted on the running track, yoga mat or even just out and about in the street, particularly on women.
Fifty per cent of 2XU’s A$70million sales turnover hails from its high-tech compression garments that were developed in consultation with RMIT and The Australian Institute of Sport and are now sold in 57 markets, with clients including elite athletes in 43 NBA and NFL teams and the US Marine Corps.
But driving the company’s biggest growth is its more recent expansion into mainstream consumer sportswear, a global market that international market researcher Euromonitor expects will grow to $US300 billion by 2017.
Founded in 2005 by former Australian advertising exec turned mens underwear impresario Clyde Davenport and two New Zealanders, Aidan Clarke and former professional triathlete Jamie Hunt, Melbourne-based 2XU wants to be Australia’s first global sportswear brand, with a A$1billion turnover within the next 10-14 years.
The world’s biggest luxury conglomerate wants to help it reach that goal.
In December, LVMH’s Singapore-based private investment arm L Capital Asia acquired a 40percent stake in 2XU for an estimated A$75million. It was L Capital Asia’s third Australian investment in two years, after having previously taken stakes in R.M. Williams and Jones the Grocer.
The alliance saw a swag of L Capital Asia executives shuffle through the doors of 2XU’s Hawthorn headquarters at the beginning of the year, with co-founders Davenport and Clarke also make a pilgrimage to the LVMH mother ship in Paris at around the same time.
FELLT caught up with 2XU chief executive officer Kevin Roberts shortly afterwards, to hear all about it.
So talk me through the L Capital Asia visit.
So we had the L Capital Asia guys down a month ago for the first workshop post their investment in the business. They’re from various parts of Asia, [some] based in India, Singapore or other parts. We work closely with the L Capital Asia team. Two of our founders, our chairman Clyde Davenport and his co-founder Aidan Clarke travelled to the LVMH headquarters in France just a couple of weeks ago and had a number of working sessions with the most senior executives in the LVMH group and had briefing sessions on some of the key brands and some of the brand and business and management issues that are being pursued in terms of positioning those luxury brands. There’s a lot for us to learn as really the luxury brand of high performance athletic apparel.
What did they take away from these sessions?
I think the key takeout was around passion and alignment across the LVMH group and its brands. The unwavering passion of everyone that they met, be they senior executives, through to sales people on the retail floor. There was a great sense of passion. And there was also a real sense of alignment as to the higher purpose and the mission of those brands and being true to the positioning and the vision around those brands. They were the things that resonated most strongly with Clyde and Aidan, really reinforcing who we are and what we do through the organisation, with great internal communication, so that ultimately, all of our people are brand advocates in the eyes of the consumer, telling the unique story of 2XU to the consumer in an unfiltered and consistent fashion.
So I gather there are three tranches to the 2XU business. What are they exactly?
The three key consumer mindsets that represent our target audience are, firstly, Fit To Win, which is at the tip of the performance pyramid. The key insight there is that that consumer, when they’re involved in an athletic pursuit, clearly they want to win. It’s about beating somebody else. That’s where brands like ourselves generate our performance credentials on the track or on the field, however it’s a small segment of the global athletics industry – it’s about five percent of the global athletics industry in terms of revenue.
So then the next layer down the pyramid, if you like, is Fit To Perform. As the name suggests, the key insight there is around individual performance and for that consumer to be the best that they can be. It’s not so important that they beat someone else. What they want to be is the best they can be individually. And that represents around 15percent of the global market.
Then you have the next segment, which is Fit To Live. The key insight into that mindset is really around the desire to look good and feel great in equal doses. That’s where the fashionability of the garments becomes more important. However, there’s the importance of not compromising on the performance benefits either. So the garments have to perform in an athletic environment, but they also have to be fashionable enough and comfortable enough outside the athletic environment to wear in an everyday situation.
So in essence, 2XU is a brand that was established really focussing on that Fit To Win consumer. That’s why it’s got such a great premium, high performance positioning, as a result of being true to that consumer and their mindset. And then over the years – 2XU was established nine years ago – the founders expanded into the Fit To Perform mindset. That enabled them to start scaling up the business. It’s just very recently that we started to expand the focus to that Fit To Live segment. So in essence, where the brand was started is five percent of the global athletics industry, however we’re now competing at about 45percent of the global athletics industry, which is one of the reasons why we have such a strong platform for growth, as we aspire to build a billion dollar global business.
What are the sales currently?
We’re just about to hit A$70million in annual revenue [fiscal 2014]. That’s almost double what it was this time twelve months ago. We don’t anticipate that growth slowing any time soon. I would anticipate that we will hit A$100million in revenue by the end of the next financial year, so June 2015. But clearly rather than that being our finish line, if you like, that’s just a milestone en route to building a billion dollar global brand.
What’s the time frame for the billion dollar target?
Obviously it’s longer term. We see ourselves breaking through the A$150million barrier clearly within the next there years. And we would hope to eclipse the billion dollar target in the longer term. It’s difficult to put a precise time frame on it but what we are inspired by is what Under Armour and Lululemon were able to achieve in terms of their rapid growth, from startup to exceeding US$1billion revenue over the course of about fifteen years. We would anticipate that within perhaps 10-13 or 14 years from now, we’d be in that zone. If not earlier.
It’s interesting that 2XU had global aspirations from the beginning.
I think one of the distinguishing factors of this brand is that the founders established 2XU as a global brand from day one. So 2XU wasn’t a brand that was developed in Australia, purely for Australia. It was established with a desire to be a global brand and it appointed a number of international distributors from day one. I think that’s a differentiated approach versus most other Australian businesses, which tended to, over the years, maximise their penetration of the Australian market and then look further afield for growth. When you establish yourselves as a global brand from day one, clearly that guides your frame of reference and the way you develop your brand and business.
I joined the founders last year, having run a US$9billion global division of the Adidas group. So in addition to the founders’ focus from day one on building a global brand and successfully doing so, I’ve obviously led businesses of a larger scale. Together with the founders, we have a nice set of complimentary skills and a healthy level of experience on the global playing field, rather than just the domestic playing field.
Where were you based when you worked for Adidas?
Ultimately Germany. I was initially managing director of Adidas Australia, then Australia and New Zealand and then ran what they call their Sport Performance Division across the Asia Pacific region. I then led the Sport Performance Division across all markets globally, based out of Germany.
Do you think there’s a lack of competitiveness, ambition and/or global skill sets within Australian retail generally?
To be honest, I think the founders of 2XU are a great example for other Australian entrepreneurs. In the sense that they haven’t held on to unsustainable business models. They haven’t held onto manufacturing locally for the sake of it. What they’ve done is what we always read about in any publications around innovation or the future of manufacturing or the future of global brands, as it relates to business in the Australian economy. It’s a case of determining where you can add value and set about adding it. So if the founders had set about trying to manufacture locally, then they wouldn’t have had the success that they’ve had. However, they focussed on design and development of product locally and development of the brand locally, in a country that punches above its weight in terms of sport. And used that as the value-adding competitive advantage. So it’s exactly the type of model that you read about in innovation publications that encourage Australian businesses and entrepreneurs to understand where they can add value in the value chain, rather than fighting in parts of the value chain that are not sustainable.
Do you think many people in the Australian apparel sector are risk averse?
I’m not sure that they’re risk averse, however the one thing that I do know is, there can’t be a great future in travelling to the northern hemisphere and using the six month difference in seasons between the northern and southern hemisphere and just replicating what they see in the northern hemisphere for the southern hemisphere six months later. I don’t really see how that’s adding value for the Australian consumer.
You’re talking about the retailers who copy?
Exactly. In the fashion market specifically. That’s a model that is well past its use-by date. However it’s still being employed in wide sections of the Australian fashion business.
And it seems a little counter-productive, surely, when you now not only ahve the original designer and luxury brands operating in the Australian market, but also the fast fashion giants, who can knock off their ideas faster and cheaper than the Australians can.
What you’ve got in the fashion industry is a group of local competitors who found themselves competing in a global market, partly because of the disruptive innovation associated with the internet. So they find themselves competing with players who are either bigger and therefore have economies of scale, or who are faster. They need to determine how and where they are going to play. They won’t be able to beat the global players on scale, so therefore they have to beat them on speed or other factors and add value. Because it’s hard to imagine a local fashion player out Zara-ing Zara.
But even issues such as store design and visual merchandising remain lacklustre here, generally speaking. There are points that international visitors frequently comment on.
I’d have to say the one major area where I do empathise with these fashion players in Australia is around retail occupancy costs. They are exorbitant, relative to other parts of the world. And it could well be argued that the cost of retail occupancy has drained capital out of businesses and limited their ability to innovate. It will take time to unwind the fixed costs of that retail occupancy. There needs to be a correction in the longer term and it’s not going to happen quickly.
There is another much larger Australian compressionwear company called Skins, based in Switzerland.
Skins is specific to the compression apparel segment. Compression apparel is a key segment for 2XU, however we are a multicategory athletic brand with roots in triathlon. Compression is a key segment, running is vitally important and we also play in various other categories. So Skins, yes, is one of our key competitors in the compression segment of our business.
So you think it’s the dominant sports culture here that has led to the development of these great local sports apparel brands?
Partly, yes. The areas of the world that lead in terms of early adoption of athletic technology are the Scandinavian markets, New Zealand and Australia. They have been renowned for many years. Norway, for example, has the highest sales in the athletic market per capita of any country globally and other Scandinavian countries are not too far behind. And similarly, the early adoption of athletic technology has always been very, very strong in New Zealand and Australia as well. Then there’s the opportunity to scale up in other markets, such as north America, which is about 41percent of the global athletic market. Part of the reason for the emergence of [these] brands out of Australia is the fact that we are such early adopters of athletic technology. There are other high performance brands in other categories, such as Helly Hansen from Norway for example [established 1877]. So it’s no surprise to see brands coming out of that part of the world as well in other segments.
And yet it’s interesting that for a country in which sport is such a dominant force, it has taken until now for globally-focused sportswear brands to emerge.
Knowing the athletic industry as I do, I don’t know anyone who has had the aspiration previously. Various things in business can happen by accident. However, it would be rare for an Australian business to become a global brand by accident. It’s something that really needs to be a firm intent on behalf of its owners and managers from day one. Despite having spent over 20 years in the athletic industry in retail and wholesale and team wear, I’m not aware of others who have had that strong global aspiration until now.
In relation to land sports, perhaps, we should clarify. Because vis-à-vis water sports, of course, numerous brands have launched from Australia and gone on to dominate the global market. Speedo, Quiksilver, Billabong, Rip Curl… in the case of Speedo and Quiksilver obviously at the hands of their later offshore owners. Just getting back to fashion for a moment, I think any young, innovative Australian designer these days now wants to be a global player. That’s why they go over to New York and London Fashion Weeks etc. whereas for most others, there is enough of a domestic market here that it’s a tempation to just look inwardly to Australia
It’s just so critical that, along with that aspiration to be a global brand, there is a global mindset around the brand and product development as well. This historical model in the fashion game of going to the northern hemisphere and essentially replicating those ranges in the southern hemisphere six months later doesn’t represent a global point of view that’s going to help you develop a global brand.
Do you think a lot of Australian companies are still doing that?
Absolutely, in the fashion world, yes.
Small designers or big retailers?
I think it’s probably your more well established players. Designers as you say, with younger and fresher and more global mindsets, who are somewhat more tech-savvy, clearly understand better the global nature of the market that they’re playing in. Versus the other domestic players who have found themselves operating in a global market without actually intending to.
So which companies are the worst offenders?
I would struggle to name those that aren’t doing that.
What plans will the L Capital Asia cash injection fast track in particular?
We had a strategic plan in place out to 2017 just prior to the L Capital investment. That will certainly assist us in realising the objectives around the global strategy. However, it’s worth noting that we’re a strong cash-generative business and certainly would have had the capital to pursue our global objectives without an initial investment. But what really excited everyone was the access to the resources of the LVMH group to make it happen more quickly. And as L Capital would say – the capital that they inject into their investments is almost the last thing that they want to talk about. What they want to talk about is the value that they can add, if you like, as consultants to the business.
It would be great to see more capital investment within Australia – and more partnerships with international players.
Absolutely and I think if you’re clear on your own value proposition and you’re secure enough in that, then you can open your mind to partnering with someone of a larger global scale. But If you’re not clear as to where you can add value in that equation, then you might be more concerned about being swallowed up. Which is perhaps the situation that others have found themselves in. Not so in this case.
You went outside Australia to secure investment. Could you have accessed that capital within Australia?
We certainly could have. And the capital came looking for 2XU to be frank. We received very frequent requests from prospective investors to invest in the 2XU brand, because in the post GFC period, high growth assets like 2XU are more difficult for fund managers to come by. So that increases the demand from those fund managers to invest in brands and businesses like 2XU. So we were blessed by the fact that we didn’t court any prospective investors. We were approached by investors looking to invest in what they saw as a high growth asset which was, more importantly, a premium global branded business.