Three Reasons REI’s Sales Climbed Amidst Hike in Retail Bankruptcies
As with the trend of so many other retailers, Sports Authority’s bankruptcy almost a year ago came at no surprise. The irony of it is that while market analysts have touted the decline of sporting goods retailing, quiet competitor REI, has climbed into former retail locations across the country — a defiance of market analysis claiming that brick and mortar retail is dead. It’s crunchy business model has crushed traditional retail giants (e.g. Macy’s, JCPenny’s, Wal-Mart, Target)with 5.5 percent revenue growth and a record $2.56 billion sales in 2016. In 2016, their gross margins rose to 42.9 percent, digital sales up by 18 percent and their balance sheet shows that the retailer still has no debt or lines of credit.
So what went wrong and how is REI succeeding in the face of a retail apocalypse?
Call it a bubble if you wish — akin to the housing market — due to excessive retail square footage added in the 90’s and early 00’s when shopping malls were growing at an exponential rate and in-person sales was the only vehicle of purchasing goods. Department stores propped up the base of America’s heartland shopping malls that were popping up left and right. With the rise of Amazon, eCommerce and mobile sales, department stores failed to adjust to changes in customer expectations, succumbing to the old way of thinking (pushing products on the shelf through flash sales).
While the warning signs were there, much like the subprime mortgage crisis, the retail bubble was hardly built on lending to high-risk borrowers at unsustainable levels. No one would have speculated the bankruptcy of 94-year-old retailer, Radio Shack whose downfall was precipitated by the very industry that it ushered in — in 1983 Radio Shack introduced America to Bill Gates’ first personal computer and in 1988, handheld cell phones.
The retail apocalypse is so much more of a shifting paradigm in the way a millennial generation shops and in its valuation of brand identity. Department stores could have taken stock in the fact that mall visits declined 50 percent between 2010 and 2013. They could have focused on distinguishing themselves from competitors (e.g. Nordstrom’s customer service engine), but most failed to innovate.
Unlike the housing crisis, the retail industry remains strong — it didn’t come in the midst of a crippling recession and high unemployment — in fact, consumer spending is up.
Here’s what happened to employment within general retail and Ecommerce from 2007–2016:
By contrast, here’s what happened to the retail sector as a whole according to the Bureau of Labor Statistics:
The Ecommerce sector added 355,000 jobs from 2007–2016 while 51,000 jobs were lost in the direct-to-consumer retail (i.e. brick and mortar). Retail as a whole has risen above pre-Recession levels to almost 16,000 workers with consumer spending up 5.3% as of November 2016.
1. Narrowing in on Customer Base
A few years ago, I had never heard of REI until I heard from friends about how amazing REI Garage sales were. REI’s co-op model has a cult following in the outdoor activity space. Their products are expensive and almost never discounted more than 10%. The company casts a narrowed target audience by relying heavily on the cohort of its co-op network to advertise, rather than barraging would-be customers with rock bottom flash sales. The brands they sell are niche outdoor brands like Patagonia, Merrill, Arcteryx, Black Diamond and Osprey that have an equal cult following from outdoor enthusiasts on social media who’ve made the brands a part of their lifestyle.
REI creates its own brands as well, but refrains from any form of self promotion and places them equally on shelf with competing products. By placing their own products next to products that speak loud in their own right, REI shows that they are less about competing with a counteroffer and more about showing the customer that their loyalties are understood. They look at a customer and say, “Love Patagonia? So do we, and here’s a hiking story at Crater Lake.” They uniquely understand that customers know what they want so the challenge is more about creating an original relationship with them even though they can buy the product elsewhere.
One way they do so is by having one of the most generous return policies, ever. Decide you didn’t like your $300 pair of hiking boots after a 10 hour hike? Return them, no questions asked. REI also rewards members by hosting quarterly member exclusive “garage sales” which are like flash sales of gently used/returned products . By doing so, REI has managed to appeal to people from every economic background within its customer base while simultaneously producing exceptional customer loyalty.
2. Quality Products and Employee Buy-In
REI’s staff is extremely knowledgeable about the products they sell. I’d never met someone who knew so much about hiking boots last spring when I shelled out $250 for a new pair. I considered asking if the sales rep was getting commission because I received so much one-on-one attention.
Beyond that, REI treats its employees as its greatest asset through its Black Friday decision to close all 12,000 stores for the day to give employees a day to spend with family. Employees are inspired by the company’s commitment to give back. In 2016, when employees complained about low pay, REI responded by raising wages by 10%. Their staff is also paid above other retailers at an average of $15 an hour and the co-op has made good on its commitment to sustainability by contributing $9.3 million to 300 nonprofits.
3. REI Has an Insanely Effective Marketing Strategy
While other retailers have fallen flat, REI has been extremely successful on Instagram and other social media channels through its #OptOutside campaign in 2016 and its recent #ForceofNature campaign. The #OptOutside campaign grew out of REI’s industry defying decision to close its doors on Black Friday to encourage people to get outside. It was a simple idea that spread like wildfire on social media — if you search on Instagram, you’ll see 3.733 million posts using the hashtag.
REI flips traditional retail on its head, by focusing on empathizing with the values of its base and creating a culture. Not sure where to go on your next camping trip? That’s okay, just don’t forget the s’mores.
REI goes beyond storytelling by delivering on superior customer experiences — whether it be by installing a climbing wall in store or by reposting pictures of customers that embody the culture of their brand.
REI is the anomaly — pushing product on a shelf isn’t enough. Innovate or die slowly. Amazon’s famously-cited “Day 1” philosophy is the sort of mantra retailers need to hold on to. Hold on to “Day 1” as long as possible. Fight the idea that “Day 2” has arrived. “Day 2 is stasis. Followed by irrelevance, Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1.”