A mountain to climb: MEC was struggling before COVID-19. Now the pandemic threatens its survival
|National Post 29 Jun 2020 at 07:05|
In early June, three weeks before MEC’s annual general meeting and hours before scrutineers were set to tally the votes for the new members of the co-op’s board, the organization made a surprise announcement: it was delaying the vote-count and postponing the AGM until December. The rationale, said MEC’s leadership: it needed more time “dealing with the acute challenges stemming from COVID-19.”
While many organizations have deferred their AGMs because of the pandemic, in MEC’s case it means a tense wait for staff and members — its de facto shareholders. The Vancouver-based organization was set to update members on its financial standing following a year punctuated by record losses and mass layoffs never publicly disclosed, and its plan to face a pandemic that threatens the future of retail. “For the same reason they’re saying they want to delay the AGM, it’s really important that we have the meeting,” says Stephen Jones, a longtime MEC member and board candidate.
Less than a month into the coronavirus crisis, the organization had disclosed that it was operating under a “keep the lights on” model. Country-wide lockdowns had forced it to temporarily close its 22 retail stores and lay off more than 1,300 staff. “The net result for MEC is that [the pandemic] has created significant cash pressure,” the company wrote in an April statement.
That pressure, however, has been building for years, putting the organization on what MEC’s new CEO Phil Arrata called an “unsustainable trajectory” in November 2019, well before COVID-19. MEC reached what looked like a tipping point that year, booking a more-than $11-million loss, the steepest recorded deficit in its 49-year history. The record losses followed what sources call a confluence of missteps by the board and management, including a poorly timed expansion of its physical stores, and what six former board members, ex-staff and founding members who spoke to The Logic describe as an erosion of the culture and values on which the co-op was founded.
Arrata declined an interview with The Logic. MEC itself provided limited comment via email. But as COVID-19 tests the resilience of businesses and industries around the world, retail experts and MEC’s members both question whether the iconic Canadian brand will survive the crisis.
The old guard says the co-op’s stumble was in aspiring to be another big-box store. More recent leaders within the group say MEC’s downfall was not growing fast and big enough — conflicting theories that underscore a cultural rift growing inside the organization. Those less attached to the brand’s legacy suggest MEC bungled its chance to innovate and keep pace with a transforming retail sector. “[It] made a strategic error by not focusing on building its online brand [and] investing in efficient and cost-effective fulfillment,” says Brittain Ladd, a veteran retail consultant. “MEC cannot survive.”
Mountain Equipment Co-op — now just MEC — was started by a group of rock climbers in B.C. who were tired of crossing the U.S. border to find gear for their trips. One rainy day, sitting in a tent at the foot of Mount Baker in Washington state, the group, mostly made up of university students, brainstormed ways to start their own equipment outfit.
They started small, in a room at the University of British Columbia student union building, incorporating in 1971 with six founding members. The founders argued over whether to run the organization as a for-profit company. Jim Byers, the member who took the lead on getting MEC off the ground and whom fellow-founder Roland Burton refers to as “Socialist Jim,” was adamant about it being a co-op — owned by its customers, or members, who vote on its leadership. The model would keep the organization accountable to the people it served and ensure members had a say over how MEC developed. It also suited the backcountry camping ethos of the time to which the group ascribed — a culture rooted in thrift and environmentalism, before glamping and SUVs entered the lexicon. “[Jim’s] arguments ultimately prevailed, possibly because he was willing to devote three years of his life to getting the infant co-op up and running,” says Sara Golling, another founding member.
Cash was tight for the first few years, with the co-op operating on $5 membership fees and a modest 20 per cent markup on goods. Rather than holding inventory — most of what they did have was kept at Burton’s mother’s house; the group ran demos out of a van — they would place orders to suppliers as requests and payments came in.
MEC cannot survive
Within three years, the co-op had 700 members and a store in Vancouver’s Kitsilano neighbourhood. It started making its own gear in 1979, and by the end of its first decade, it had amassed 57,000 members and more than doubled that over the next five years. By 1997, membership had grown to a million.
“I think MEC’s original success came from doing things differently from the usual run of retail businesses — being a co-op that was there to serve its members, and [doing] that really well,” says Golling, on a break from planting vegetables at her home in Rossland, B.C. MEC’s co-op status also meant it didn’t have to factor profit margins into its prices — a feature that irked some suppliers and competitors, who said it gave MEC an unfair advantage. Some suppliers refused to sell to the co-op, worried its low prices would erode their brands. In response, MEC developed an in-house label, which made up the bulk of its sales by 2001.
Over those two decades, the MEC brand slowly seeped into the Canadian consciousness. The co-op took a measured approach to expansion, opening just four stores from 1977 to 1998, starting with Calgary, then moving into Toronto, Ottawa and Edmonton. When Peter Robinson — a former park ranger and BC Housing CEO — took the helm in 2000, he warned that unbridled expansion could erode MEC’s core values, rooted in democratic governance and respect for the environment. Nevertheless, growth took off under Robinson. The co-op opened six stores over the next seven years, a pace it maintained when Robinson left to become CEO of the David Suzuki Foundation and David Labistour was promoted in 2008 from chief product officer to CEO.
David Labistour in MEC’s Toronto flagship store in 2008. Aaron Lynett/National Post files
Labistour — who had consultant and management stints at Aritzia, Adidas and South African retail chain Woolworths — ushered in an era of significant change at the co-op. To keep up with its ongoing physical expansion, MEC began aggressively marketing to mainstream consumers. In 2011, Labistour shifted focus to “hurdle activities” like walking, cycling and fitness — what he described as the easiest way to get people interested in the outdoors. The stores began stocking yoga mats, commuter bikes, and Levi’s jeans — products more suited to urban living than back-country trekking. In 2013, the organization rebranded as MEC, and the “mountain” and the “co-op” both receded from view.
The new direction and pace of growth coincided with a gradual chipping away of members’ powers. In 2013, MEC updated its nomination process, allowing it to reject candidates for directors’ seats who don’t meet specific criteria, including having “professional leadership experience” or having served on another board or as senior management in a “complex organization.” That year, the board also passed a rule requiring members to get 500 member signatures — up from just five the year before — to propose a special resolution for a vote. After amassing enough signatures, the board could reject the resolution if two-thirds of directors voted against it; if it does pass, the resolution wouldn’t necessarily be binding.
“I think the board took advantage of the fact that the majority of members tend to vote for whatever the board recommends without giving it too much thought — and proceeded to get that majority of members to agree to give up their power to do anything but agree with the board,” says Golling, who served 15 years on the board, between 1991 and 2011.
MEC was becoming indistinguishable from any big-box department store, say critics of the new model; it was morphing from a co-operative to a corporation. The organization’s chief purpose, stated in its co-operative bylaws, is to serve members in their pursuit of “self-propelled wilderness oriented recreational activities.”
MEC was morphing from a co-operative to a corporation
“I felt that the management team and the board were starting to deviate from what those core purposes were and they were instead optimizing for a different set of metrics, which was an increase in year-over-year sales growth,” says Jones, the would-be board candidate.
The shift drove a wedge between the organization’s present leadership and members nostalgic for the early days, when the co-op appealed to a more niche customer base. According to former employees who spoke to The Logic, it wasn’t the fading exclusivity that bothered them; rather, they worried the business would suffer as it moved further from its original vision. “My concern a number of years ago was, if we keep going down this path where it’s harder for members to engage democratically with the co-op and where the leadership is pursuing a different agenda than what we captured in our purpose, the organization might end up in a position where we’re selling a lot of things, but we’re financially weak and we’re not doing what we set out to do,” says Jones. “And unfortunately, that kind of happened.”
Certainly, any problems within MEC weren’t evident on the surface. MEC continued racking up accolades, projecting an outward appearance that it was thriving. It was named the most trusted brand in Canada by the University of Victoria’s Gustavson School of Business in 2019 and 2020. Forbes magazine ranked it among Canada’s best employers in 2018. Business in Vancouver named David Labistour top CEO in 2017, and the co-op topped Canadian Business’s list of best brands in both 2016 and 2017.
It’s hard to pinpoint exactly what went wrong at MEC. After losing $11.5 million in its 2018–2019 fiscal year, the organization blamed the tough year on soft sales amid increased competition. But sales were actually slightly higher than the year before, so that didn’t explain the nearly 200 per cent drop in earnings. In media interviews and public statements, the co-op’s leadership and board, including Arrata, a former Best Buy executive who was then the incoming CEO, glossed over the $8.5 million in restructuring fees, nearly $7.3 million of which was earmarked for payouts to employees. According to a source familiar with MEC’s restructuring, which took place in fiscal year 2018–19, most of those costs were for severance packages paid to former staff whose layoffs and departures were never publicly disclosed. “[The staff cutbacks] came from pressure from the banks to manage their cash or have their lines of credit pulled,” says the source, whom The Logic agreed not to name because they were not authorized to speak on the record. When asked, MEC did not say how many employees it let go; nor did Labistour, who was CEO at the time. “It has been a while. I do not have this at hand,” he says in an email to The Logic.
The co-op’s early catalogues emphasized climbing gear and its own products. In the last decade, MEC’s focus has shifted to “hurdle activities” like walking, cycling and fitness. Handout/MEC
That cash crunch, says the source, was a consequence of MEC’s expansion. In 2016, the co-op sold a building it owned on King Street West in downtown Toronto for just shy of $50 million. The cash helped finance moves and expansions of two locations in Toronto and Vancouver, as well as new stores in Calgary and Saskatoon whose openings were slated for later this year — the co-op has since postponed its Saskatoon opening; when asked by The Logic, it did not say whether its Calgary store will open as planned. “All of that is a huge fixed cost,” says the source. “MEC has an enormous cost base before you sell a single piece of polar fleece. And we made it worse with the decisions we made in 2015 onwards.”
Labistour maintains the expansion was a good idea. “Even with hindsight I do not think physical expansion was a mistake. If anything… I believe we should have been more aggressive with our short term store openings,” he says in an email to The Logic. “Why? We have long had the data that supports the fact that a physical store drives e-commerce growth in a store catchment area.”
Indeed, the precise reasons for MEC’s financial turmoil are mired in various, sometimes contradicting theories on everything from mainstreaming its product line to growing its online presence to maintaining its co-op ethos amid mass growth. Several sources familiar with MEC’s recent strategy shifts say disagreement over what the organization should and should not be has weakened the brand — which is now part niche outdoors shop, part suburban outlet store and part online retailer competing with the likes of Amazon — potentially diluting its value proposition for customers.
Amid its identity struggle, critics argue, MEC was not adapting well to the changing realities of retail. The past decade has seen sales of everything from mattresses to groceries shift online — and that was before the pandemic, when a robust online presence went from competitive edge to the only way for many businesses to operate. “The primary issue with MEC is that the products they sell are increasingly available online from other retailers,” says Ladd, the retail consultant, who’s worked on supply-chain management for firms including Amazon, Dell and Michaels.
Following its latest financial report, MEC cited online competition as a main headwind, despite its e-commerce sales growing from 12 to 24 per cent during Labistour’s tenure, according to Labistour himself. Ladd might shrug at that. “Having 24 per cent [online] sales isn’t unusual for a brand like MEC. The question is: what was their average profit margin for every order they fulfilled online?” he says, suggesting the co-op may well have lost money on those sales after factoring in unwieldy operating and logistics costs. “It costs a fortune to ship big bulky items.”
A former employee who worked on the e-commerce team contends that MEC’s e-commerce business consistently fell short of its targets. “There was almost no prioritization of e-commerce at the company,” says the former staffer, who in March was permanently laid off from the firm’s e-commerce division — which was only about 20 people to begin with. “They talk about competition as a big reason why the company isn’t doing well, but there’s also conflicting opinions around whether they are focusing on the right competition,” says the former staff member. “For a while they were like, ‘Amazon, Amazon.’ I think they were missing the point that Amazon is a tech company and logistics company; there’s no way that an outdoor retailer is going to compete with that.”
At the same time, more obvious competitors have been gaining market share in Canada, including Bass Pro Shops subsidiary Cabela’s and Canadian Tire’s Atmosphere. And the more MEC approached its business like a tech company, the more challenging it became to find top talent for the team, says the source, who estimates he could have earned 20 per cent more doing the same job at a tech company.
A Cabela’s store in Edmonton. David Bloom/Edmonton Sun/QMI Agency files
MEC’s issues may not have been limited to the e-commerce side. Niv Froehlich, who worked part-time as an adviser at MEC’s downtown Toronto location, blames what he characterizes as abysmal supply-chain management for sales losses; that, he says, affected the retail locations, too. “As frontline staff, many of us see the issue of chronic out-of-stock merchandise as the number one reason that our store loses sales,” he wrote in a report for management and some of MEC’s executives in May 2019. Froehlich — a former IT manager who worked part time at MEC to support his paddle-boarding and camping habits — tells The Logic it was common for one store to have low or no stock of popular items while another store in a nearby city was overstocked on the same merchandise. “There were products in the chain that just weren’t making it to the shelf,” he says.
Froehlich says neither the store management nor the executive team took his recommendations for how to improve the supply-chain kinks. He says the response he got confirmed his sense that MEC’s leadership had lost touch with frontline staff and the members they served. He expressed his frustration in his resignation letter in November 2019: “My primary reason for leaving MEC is that our leadership plainly and clearly do not espouse the values of our co-op,” he wrote.
The sentiment was echoed by some of his colleagues out West, who were embroiled in a union-organizing drive in an effort to negotiate better wages and job security. The Victoria store’s staff had lodged an unfair labour practice complaint against MEC, alleging that management used “scare tactics” against organizers by using its precarious financial standing to discourage them from unionizing, after staff in Vancouver voted to organize months earlier. “We shared major financial information [with the union’s bargaining committee] which even our banks have not seen yet because we felt the information was important in understanding the seriousness of our situation in B.C. and across the Co-op,” the company wrote in a memo to employees.
After what sources describe to The Logic as an “aggressive” campaign to thwart their efforts, Victoria workers successfully unionized in November 2019. In response, MEC issued wage hikes across the organization and made permanent some 950 casual positions across the country — which some staff saw as a way to placate non-unionized workers, according to sources. For many of its 2,400 employees, their time with MEC came to an end in early January, as the stock market was cresting and just before a pandemic wreaked further havoc on MEC’s business.
No event in recent history has delivered as swift and powerful a blow to the economy as COVID-19. GDP in Canada is expected to contract 25 per cent in the second quarter by one estimate, by far the largest drop in the past 60 years. In a survey of 12,600 Canadian businesses, nearly a third of respondents said their revenues for the first quarter of 2020 were down at least 40 per cent compared to the same quarter last year. Businesses in recreation and retail trade spaces were particularly hard hit, thanks to low customer demand.
For businesses already on shaky financial footing, the economic fallout of the pandemic could be fatal. “There will be a lot of retail insolvencies,” says David Filice, a partner at accounting firm Fuller Landau, who focuses on corporate restructuring. “Retailers, if they’re predominantly bricks and mortar and don’t have a strong digital presence, they’ve been struggling with that over a number of years. If their bankers were nervous before the pandemic,” he says, “it’s going to be a rough ride — it’s going to be a very rough ride.”
For businesses already on shaky financial footing, the economic fallout of the pandemic could be fatal. Justin Tallis/AFP via Getty Images files
Filice calls this period the quiet before what he expects will be a storm of insolvencies. Bankruptcies and proposals were down 41.5 per cent and 37.2 per cent, respectively, in April compared to a month earlier, but there are early signs of what’s to come. Sail Outdoors, a Laval, Que.-based competitor of MEC’s, filed for bankruptcy protection in early June, a consequence of the pandemic.
“There is no question that post-COVID operations will mean that financial metrics will look different but those who figure it out will win,” says Labistour. He rejects the argument that MEC’s financial challenges are the result of scope creep, its store buildout or its changing values. If anything, he says, the co-op’s mistake was not changing enough. “The organization has, in spite of its difficulties, been an innovator in many areas,” he tells The Logic via LinkedIn. “The question is…..have they moved fast enough?”
Many Canadians know Beaver Canoe as the diamond-framed logo stitched into Roots apparel. But it used to be a beloved brand of actual boats built by canoe enthusiast and camp founder Omer Stringer. Roots co-founders Michael Budman and Don Green linked up with Stringer in the early 1980s, helping him ramp up production of the canoes. But as Roots’s clothing business took off, Budman and Green wound down the canoe production, leaving Beaver Canoe to exist in name only — a logo on Roots shirts and sweaters. Stringer died five years later. In more recent iterations, the logo has been stamped on bargain-bin T-shirts at now-shuttered Target Canada stores and on bandanas, toys and collars sold for dogs. “This is what Beaver Canoe has become: it’s a nostalgic label on a t-shirt or a nice quality cotton hoodie,” says Froehlich. “That will be the story of MEC.”
For now, members are left to wonder about the damage done by COVID-19. They could be waiting a while. By the time MEC holds its AGM on December 10, it will be nine months since the pandemic started and 10 months since the end of its 2019–2020 fiscal, which, having ended just before the pandemic, won’t capture its impact on the business. “I really think they owe the members a lot more information,” says Jones, who objects to MEC taking the full six-month extension on holding AGMs that the B.C. government is allowing co-ops during the pandemic. “Can’t we have the interim financial statements? Can we make sure those election results are at least counted and tabulated?”
For Golling, the opacity around the process is another example of the co-op creating distance from the members it serves, and from its heyday. “I hope MEC can survive and rethink its approach, and return to being a true co-operative, and find a way to thrive without the need for unsustainable growth,” says Golling. “It still represents a Canadian retail co-op that was highly successful for over 45 years. I’d like to have been able to say 50 years, but we’re not quite there yet, are we?”
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