First MEC was struggling, then the pandemic hit
FUTURE BLEAK, EXPERTS SAY
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 meeting 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.
As well as sharing information with members on its plan to face a pandemic that threatens the future of retail, the Vancouver- based organization was set to update them on its financial standing following a year punctuated by record losses, and mass layoffs never publicly disclosed.
Less than a month into the coronavirus crisis, the organization had announced 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 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 coop 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, MEC’S members and experts both question the brand’s future. “Investing in efficient and cost- effective fulfilment,” says Brittain Ladd, a veteran retail consultant. “MEC cannot survive.”
Mountain Equipment Coop — now just MEC — was founded by a group of rock climbers in B. C. who were tired of crossing the U. S. border to find gear for their trips.
They started small, incorporating in 1971 with six founding members who 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.
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 that really well,” says Sara Golling, a founding member. 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 by 2001 made up the bulk of its sales.
It 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, the co-op opened six stores over the next seven years, a pace it maintained when Robinson left in 2008 and David Labistour was promoted from chief product officer to CEO.
Labistour — who had consultant and management stints at Aritzia, Adidas and South African retail chain Woolworths — ushered in an era of significant change. 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 backcountry trekking. In 2013, the organization rebranded as MEC, and the “mountain” and the “co-op” both receded from view.
Any problems the changes caused weren’t evident on the surface. 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.
But the shift in strategy 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 … 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 Stephen Jones, a longtime MEC member and board candidate. “And unfortunately, that kind of happened.”
It’s hard to pinpoint exactly what went wrong. After losing $ 11.5 million in its 2018–2019 fiscal year, the organization blamed 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. “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.
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 coop 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 ecommerce growth in a store catchment area.”
But critics argue MEC has not adapted well to ecommerce and the changing realities of retail. “The primary issue with MEC is that the products they sell are increasingly available online from other retailers,” says Ladd.
Following its latest financial report, MEC cited online competition as a 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 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.”
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 retail sales losses on what he characterizes as abysmal supply- chain management. “As frontline staff, many of us see the issue of chronic out-of-stock merchandise as the No. 1 reason that our store loses sales,” he wrote in a report for management and some of MEC’S executives in May 2019. Froehlich 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.”
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 very rough ride.”
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.
Labistour 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?”
For now, members are left to wonder about the damage. When MEC holds its AGM on December 10, it will have been nine months since the pandemic started and 10 months since the end of its 2019–2020 fiscal year, 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. “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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