Originally created 03/27/06

Outdoor retailer REI blazes a trail



KENT, Wash. - To get people outside, REI brings them in. At stores around the nation, climbing walls and indoor hiking trails mix with racks of backpacks and rows of bicycles. There are snowshoes, camp-sized espresso makers and more synthetic fleece than a flock of polyester sheep.

Recreational Equipment Inc. started as a basement co-op founded in 1938 by Seattle mountain-climbing buddies selling ice axes, sleeping bags and tents. Today it is the toy store for devotees of muscle-powered recreation and people who want to look like them.

"They have everything," said Sunni Rudd, 53, who was shopping for triathlon gear at the Seattle flagship.

With 82 stores in 26 states, REI cleared $1 billion in sales in 2005 for the first time. More stores are planned, and a new East Coast distribution center will be built in Bedford, Pa.

Still, REI is trying to balance its glitzy success against the values forged in that Seattle basement.

They have become the 800-pound gorilla in an industry where hitting the top of a climbing pitch once meant more than hitting profitability.

Not anymore.

"Everything is driven by the bottom line," said Michael Hodgson, co-owner of Specialty News, an outdoor retail trade journal who tracks REI and its thousands of vendors. "I'm not sure you could say that five or six years ago."

He said REI has transformed outdoor retailing from a cottage industry to a real business. REI says 159 million Americans participate in at least one outdoor activity each year, spending $18 billion annually.

"When REI goes into a community more people play outside," said Sally Jewell, 50, a climber, hiker, kayaker, sailor and former banker, who took the helm as REI's CEO last year. "We're not looking to take business from the little guy. When we go into a market we're looking to make that market bigger."

Jewell said the real competition for REI is in the living room.

"Our competitors are television and video games," she said. "If we can get people off the couch and doing something they aspire to do, that also helps keep them in shape and helps them achieve life balance, then we know we're doing things that are all good."

Many in the company and industry credit Jewell's energy, business smarts and leadership as central to REI's recent boom. She joined the company's board a decade ago, and became chief operating officer in 2000, a year in which the company lost money for the first time.

The more recent success is a combination of strategic business practices, luck with good weather and an unusual business model for a big retailer: REI is a member-owned cooperative.

Anyone can shop at REI, but only customers who pay a one-time $15 fee to join the co-op are entitled to a 10 percent annual dividend based on their purchases.

In 2005, the company paid out more than $50 million to 2.8 million active members, up nearly 14 percent from 2004.

But REI's critics - who are hard to find - say the growth has moved the company away from its co-op roots.

"I would argue vehemently that it's not a co-op," said Hodgson. He said limited participation in governance - the company says only 3 percent of members actually vote - means REI is more a corporation that happens to be a co-op, than a co-op run like a corporation.

David Blanke, a history professor at Texas A&M who studies co-ops, said that historically that model is problematic for co-ops.

"Those market forces will overpower the values of a co-op," he said.

Jewell flatly rebuts that argument.

"Others may assume you have to be small and a poorly run business to be a co-op," she said. "People vote with their dollars."

Some manufacturers quietly express fear that REI holds too much sway in the industry. With nearly 100 stores, an order from REI can make or break a company.

"If REI wrote me a 'Dear John,' it wouldn't put us out of business, but we'd have to run a really lean ship to recover," said Mark Day, a spokesman for La Sportiva, a manufacturer of rock climbing shoes and mountaineering boots.

But most REI vendors say they are treated with respect, and they praise the company's expertise.

Fred Hugelmeyer, president of the Outdoor Industry Association, a trade group, said REI helped establish practices for manufacturers that help them avoid using sweatshop labor.

"With their size comes great responsibility," Hugelmeyer said. "They take that very seriously."

For Jewell, being a co-op means being able to focus on long-term objectives and staying true to three core constituencies: members, employees and the community.

Once criticized for not paying well, REI has increased retail salaries by about $4.5 million in the last two years, said Michelle Clements, REI's personnel chief. It has extended an incentive plan to cover the entire company and last year began offering health benefits to part-time employees.

And to maintain the great outdoor playground it equips people to enjoy, REI invests millions in organizations like the National Park Foundation.

Since Jewell came on board, REI has ramped up its giving from less than $900,000 in 2000 to $4 million in 2006.

The money goes to a variety of causes, from maintaining open spaces to providing gear that youth groups can borrow for weekend camping trips.

What concerns Jewell most about the future, she said, is encouraging young people to get outside - and making sure there still is a wilderness to enjoy.

"I don't want the REI of 50 years from now to have to resort to selling outdoor-themed video games because there's no place to play anymore," she said.

On the Net:

http://www.rei.com