MEC: How joining the main trail ended up downhill
Mountain Equipment Co-op (MEC), a Canadian institution for the outdoors, recently filed for Creditor Protection and was bought by Kingswood Capital Management.
As a Canadian built business, with roots in almost every corner of the community, this was not just an economic loss, but one of cultural significance in a society often caught up with the hustle and bustle of growth.
The origin story of MEC is one of humble beginnings from the 1970s when a group of Vancouver mountaineers who made cross-border runs to American outdoor equipment retailer REI for gear got stranded on Mount-Baker in a snowstorm. Nobody knows the exact details, but the end product was ratification under the British Columbia Co-operative Associations Act, a constitution, and a blue VW van often found near the Student Union Building of the University of British Columbia (UBC) that quickly became the go-to source for outdoor gear.
Things have changed since then, and in this edition of The Squeeze, I will take a look at some of the reasons why I think MEC took a wrong turn in the back-country and ended up running downhill right into a crevasse.
From Rebrand to Unbrand
“If they don’t want to climb Everest one day, we don’t want them as a customer,” — MEC Employee
Outdoor brands, like MEC, are often viewed as elitist. However, had found a level of mainstream success. The brand was growing as a business, with over $300M in revenue in 2013, but they wanted to appeal to an even broader market.
“The rebrand reflects the reality of the new MEC,” she said from Vancouver. “We’ve grown from six members to 3.5 million members over the last 40 years, many of whom live in urban centres.” — Anne Donohoe
June 2013 marked the first major rebrand for MEC in almost 40 years to bring MEC to the masses. The historic mountain logo was gone, and Mountain Equipment Co-op would now simply be known as MEC.
There is no arguing against the fact that MEC had to find a way to adapt to an increasingly urban population, but the new clean-cut logo was just one example of a facelift that lost track of its roots. The new logo was not representative of an outdoors focused brand, but closer to that of the GAP.
Other outdoor brands such as Patagonia, and REI, the very inspiration for MEC, had also completed major pivots over the years, but their logos still pay homage to where they came from — the outdoors.
The Winds of Competition
We started small: a few young climbers in the mountains who dreamed of gear that wouldn’t let them down at prices they could afford. We’ve grown from a few members to millions, and our interests have grown too. Now we climb, ski, hike, run, paddle and cycle. As we grew from a small business to a big one, we remained a different kind of business. We’re a member-owned co-operative, not focused on making big surpluses, just enough to sustain what we do. — MEC Mission Statement
The MEC expansion out of rock climbing, mountaineering, and hiking to more urban athletics and sports meant that MEC would be competing in a marketplace with well-established players.
On one end, brands such as Sportchek were already entrenched as big-box retail, and on the other end, cheaper (albeit lower quality) outdoor gear from Amazon or Alibaba could be bought online. Also, established niche players such as Lululemon were rapidly expanding into the space of multi-purpose athletic apparel along with MEC.
These market forces created turbulence while suppliers for products already found in MEC stores such as Patagonia, North Face, and Mountain Hardware all began shifting to a direct to consumer (DTC) approach. In simple terms, MEC was trying to expand into a competitive market while the rug was being pulled out from underneath them.
Product Pitfalls
The problem is that a product for everybody is a product for nobody
Along with the new competitive environment, MEC made a misstep by trying to make undifferentiated products with too broad of an appeal.
Qualitatively, numerous conversations started to appear online from 2015 onwards where MEC consumers (including myself) began to notice that updated lines for historical products were noticeably poorer quality. A user on Reddit stated that: “The best MEC items continue to come from the 1980s” — and I agree with that point.
It is important to determine if these anecdotes are just instances or representative of trends. To help answer this question, I reviewed a number of MEC product reviews. Taking a current snapshot of the MEC eCommerce storefront, we see that 25% of the total 795 MEC branded products available on their website have a rating of two stars or lower (on a five-star scale). Ratings are even worse for MEC branded clothing and cycling apparel (where the focus of the expansion was) with over 30% of products with a rating of two or lower.
Putting these two points together, one may be able to surmise that overall quality for existing product lines servicing the original customer base of climbing, hiking, and mountaineering may have been on the decline and that the new product lines intended to acquire new customers also fell short of expectations.
Data……
Product and strategy should be based on data, and data is something that MEC should have had a lot of.
MEC sells exclusively to members. Lifetime membership to MEC is $5 and allows users to purchase and rent gear or even partake in events. Every time a purchase is made, the transaction is stored against a membership ID with demographic data such as location, income, gender, and household data.
This model has built up over 5 million members across Canada and should have given MEC a competitive advantage over other retailers in terms of both product and overall strategy.
But what happened? Why has MEC been unable to capitalize on this data? Outside of nearly double-digit initial year sales growth, top-line revenue numbers have been more or less stagnant over the years.
One potential hint may lie in the 2018–2019 annual report where a focal discussion point was the migration to new ERP (enterprise resource planning), CRM (customer relationship management), and POS (point-of-sale) systems — some of which are nearly 27 years old. Did MEC have all the data, but were they unable to utilize it effectively due to a patchwork series of old and ineffective technology systems?
Glacial Growth
Sears is a retailer that went bankrupt in 2018. Before Sears went bankrupt, a key metric that often surfaces is that reinvestment in Sears locations was falling behind compared to other retailers.
MEC, on the other hand, was spending a lot of money by selling physical real estate assets and then leasing them back to realize the financial gains on the balance sheet (found in the 2019 annual report).
This is common practice, and not unusual, but the result was revenue growth of just 2% in 2019 and a gross margin percentage that remained unchanged. For context, REI, the basis for the creation of MEC, maintained 43% gross margins and revenue growth of nearly 12% in 2019.
Furthermore, inventory turnover, a metric representing how quickly goods are sold, remained low and the total number of items sold decreased over the past three years. For context, inventory turnover rates for sports brands are typically over 4, while MECs hovered between 2.26–2.76.
With all this poor performance, why exactly was MEC spending all this money on expansion and increasing their burn-rate when their overall product strategy was not working?
Without a Compass
Leadership is critical in defining the direction of a business and at the end of the day, all the key decisions that got MEC to where they are today were approved by a group that was primarily retailed focused with minimal MEC specific experience.
There were no clear objectives and the team tried doing everything, as evidenced by the over 16 key metrics in their annual scorecard, but in the end, missed 50% of them.
The situation that MEC is in is unfortunate, but hopefully, this experience serves as a cautionary tale for how important it is for businesses to listen to their customers. MEC did not do this nor did they stay true to the product and vision that made them great in the first place.
