MEC doesn’t need to be sold, especially to foreign company
Outdoor retailer built too many stores too quickly, but it could easily change course
This week, yet another iconic Canadian enterprise was sold to an offshore buyer.
At the time of the sale announcement Monday, MEC, the former Mountain Equipment Co-op, was Canada’s biggest retailer of outdoor clothing and recreation gear.
It was Canada’s largest co-operative, with about five million members. MEC was among the best-known Canadian brand names, up there with Tim Hortons and Canadian Tire Corp. Ltd.
And MEC was reported to have lost $11.5 million in fiscal 2018-19, the chief stated reason for the planned sale of MEC to a U.S. investment firm, in a deal that is to close in this year’s fourth quarter. Actually, that loss was a modest one, on revenues of $462 million. It was also the first loss in MEC’s 49-year history. It is not at all clear why MEC needs to be sold to Kingswood Capital Management
LP, an obscure, seven-year-old Los Angeles investment house with a paltry $1 million in revenues and five employees. MEC might be a tarnished gem. But it would seem to deserve a better fate than being handed to a new owner with scant if any expertise in retailing, Canadian consumer sentiment, or the B.C. outdoor-adventure ethos that is t the beating heart of the MEC franchise.
Offshore ownership has not been a blessing for Tim Hortons, Hudson’s Bay Co. or the Postmedia newspaper chain (National Post, Vancouver Sun, Ottawa Citizen, et al). There’s an attractive alternative to putting MEC in foreign hands. More on that later.
But first let’s look at MEC’s woes, which are hardly insurmountable.
In a nutshell, MEC is suffering from overexpansion. In recent years, MEC has built too many stores too quickly — one of the most common mistakes in business.
Aproliferation of stores begets more problems, beyond the obvious expense of building, stocking and staffing the expanded network of outlets.
For instance, the cost of new stores has strained MEC’s balance sheet.
While not unmanageable, MEC’s current $92.4-million debt load frightened MEC’s board into a doomsday mindset when MEC’s pandemic-shuttered stores stopped providing cash flow to service that debt.
Against that debt, MEC had assets of $372 million in 2018-19. That figure has not been updated, because MEC has inexplicably not released its 2019-20 financial results to its millions of owner-members.
Never mind that by late spring, MEC had reopened most of its stores and the business was recovering. A MEC board that scared too easily started looking for buyers.
True, the new overabundance of stores had MEC management struggling to understand new regional markets, catering to the different needs of c customers in mid-sized Kitchener and big-city Montreal.
Obliged to serve MEC’s much larger customer base, management also began offering too much assortment of
products. And it expanded into products outside its core competence.
Those included jean jackets, running shoes, pet supplies and yoga wear.
Suddenly, MEC, which for decades had a near-monopoly on its outdoor-adventure gear, found itself competing with Nike superstores, big-box pet supply outlets and Lululemon Athletica Inc., all of them able to underprice MEC and offer a wider assortment of goods in which they specialized.
And a MEC trying to serve too many different types of customers lost its once-focused brand image.
An online commentator this week reported that her local MEC outlet featured $7,500 MEC brand bicycles prominently inside the store entrance.
“Who is their (MEC’s) market: rich, image-conscious urbanites, or economy-minded down-to-Earth outdoors people? MEC was lost.”
Those factors plus the pandemic could be mistaken for a perfect storm. But no. Early this year, MEC’s recently recruited CEO, Phil Arrata, unveiled a common-sense turnaround plan. And despite the pandemic, the former chief financial officer of Best Buy Canada achieved a lot of progress with it.
Arrata halted MEC’s aggressive store expansion. He began editing out product offerings that didn’t jibe with MEC’s image as the go-to source for backwoods camping, winter sports and climbing gear.
Arrata sharply reduced operating expenses by cutting jobs by 38 per cent, to the current approximately 1,500 employees. And he reduced store deliveries to once a week, reducing shipping expenses.
Arrata was building on major investments already made by MEC, notably in information technology that has improved product turnover and enhanced financial efficiencies.
MEC is expected to continue with Arrata’s turnaround strategy. Jodi Richardson, the MEC chair who sold the company and thus ended Arrata’s MEC tenure, has acknowledged that Arrata and his team “were executing, and executing well, on that turnaround strategy.”
Which gets back to the question of why MEC needs to be sold. It doesn’t. And this is to weep. Richardson’s sole explanation for picking Kingswood is that, among the half dozen or so bids for MEC that her board looked at, Kingswood’s promised to keep the largest number of MEC stores.
Yes, that is where we came in — too many stores. The credulous MEC board actually believes Kingswood will keep a promised minimum of 17 of MEC’s 22 stores. No matter how sincere such pledges are when first made, they generally come to reside in the Museum of Broken Dreams.
And the store count needs to be cut, not preserved. MEC would best be assured a prosperous future with no more than a dozen first-rate stores in Canada’s biggest markets.
It is to MEC’s advantage that its outlets are “destination stores,” so compelling in their attractive layouts, must-have products and personal service that customers come from great distances to shop there.
And with its new e-commerce prowess, MEC can still appeal to a national clientele.
Now, about that alternative to selling MEC to a foreign owner. It might be an exaggeration to say that MEC’s long-time success prior to recent years derives from the spirit of the six original members who founded Mountain Equipment Co-op in Vancouver in 1971.
But it’s a fair bet that local ownership would better assure MEC’s prosperous future than outsiders who will take a long time to get up to speed on the MEC mystique. An ideal MEC ownership mix would consist of existing MEC owner-members, whose guidance to management has been invaluable. And Vancouverbased Lululemon; Vancouver City Savings Credit Union, a member-owned financialservices giant with $23 billion in assets; or local industrial baron Jimmy Pattison could step in with a cash injection in exchange for equity.
As it stands, Kingswood is poised to cash in on one of the easiest turnarounds going. A streamlined MEC is going to make someone a fortune. Why not the locals?
The current proposed deal, for which the financial terms were not disclosed, looks like the handiwork of a MEC board lacking merger and acquisition smarts.
It looks, in other words, like they are giving away the store.