History & Overview:
Recreational Equipment Incorporated (REI) dedicates its mission to inspiring, educating and outfitting its members and the community for a lifetime of outdoor adventure and stewardship. They do this by offering their own line of gear and apparel as well as products from the top brands for camping, climbing, cycling, fitness, hiking, paddling, snow sports and travel (REI, n.d.). In 1936 Lloyd Anderson created the foundation for REI by sourcing high quality affordable ice axes from Austria (REI, n.d.). “On July 21, 1938, the first 23 members joined the co-op with the cost of a lifetime membership at $1 per person” (REI, n.d). Now, REI has over 6 million active members, making them the nation’s largest co-op, sharing a record of $185.3 million with members through annual dividends and credit card rebates in 2015 (REI, n.d). Their membership has turned customers into owners and created a lifelong sense of loyalty to REI. Their vision is to be a strong business for their members and employees so that they can advocate for the outdoor community far into the future (REI, n.d.).
REI has been a leader in sustainable business efforts. Their stewardship reports detail how they have bettered the environment and communities through their business practices as well as outreach efforts. “In 2015, more than $8.5 million went back to nonprofits, including large grants for the National Parks’ centennial and to increase women’s leadership in the outdoor industry” (REI, n.d.). With the rise of Corporate Social Responsibility, customers want to know that they are supporting a business that cares (Daft, 2016). REI is successful at demonstrating how they have made a positive impact.
REI has a divisional structure, which means their operations are divided by organizational output such as their private brands or supply chain. This divisional structure allows for adaptation among regions by decentralizing the decision making to regional heads (Daft, 2016). REI has a high horizontal differentiation with over five subunits of the company including Marketing, HR, Finance, Retail, Supply Chain, Merchandising, REI Private Brands, Public Relations, and Creative (The Official Board, n.d.). With over 150 stores in 36 states, REI’s sectors are organized by region as well as by task (REI, n.d.). To add to the complexity, REI has 76 international factories (REI, 2015). REI has a high vertical differentiation with over five levels of hierarchy from front line employees such as Retail Associate to the CEO (The Official Board, n.d.).
One thing that makes REI different from its competition is that they are a cooperative. Jerry Stritzke, REI’s current CEO, says “… it’s a compelling competitive advantage, and as we look to the future, I think that idea of having a community organized around a shared passion—in this case a love of a life lived outside—is really important” (Lam, 2017). This distinction has created a shared passion among customers and employees alike; a common ground among strangers. The shared purpose of enjoying the outdoors exemplifies a mission culture. In mission culture, there is an emphasis on the clear vision of the organization’s purpose (Daft, 2016). FORTUNE magazine has named REI one of the “100 Best Companies to Work for in America” for 19 consecutive years (REI, n.d.). Their benefits are compelling. Benefits include an Employee Discount Program, Yay Day, Challenge Grants, professional growth and development, and tuition reimbursement (REI, n.d.). These benefits emphasize the importance of the outdoors and reinforce their mission culture.
REI is a part of the Outdoor Equipment Industry. Related industries include Retail, Sporting Goods, Internet and Mail-Order Retail (Hoovers, n.d.). With the success of Amazon, many have said the Retail Armageddon is upon us (Siegel, 2017). “All of this doom-and-gloom is driven by dramatic shifts in consumer behavior. Americans are increasingly shunning the mall in favor of Amazon and other sites to get their shopping done. At the same time, the stores that have survived are having a very hard time competing with fast fashion brands like Zara and H&M” (Matt, 2017). The retail industry is on the cusp of major change (Soergel, 2016). The business models that sustained brick-and-mortar stores are no longer successful. Just in the first half of 2017, 19 major retailers have filed for Chapter 11 bankruptcy protection, already surpassing the number of filings (18) for 2016 (Anders, 2017). Interestingly, REI’s sales have not been effected by the retail industry’s turmoil. As showed in Chart 1, their sales continued the upward trend that they have been maintaining for the past ten years (REI, n.d.). REI’s 2016 Financial Statements reported the following information which shows REI to be in good condition (REI, n.d.).
- $1,559,513 in total assets
- $2,557,543 in net sales
- $1,097,110 in gross profit
- $38,275 in net income
Chart 1: REI Sales 2005-2016
REI has a strong online store as well as brick-and-mortar store presence. “REI is committed to offering you the best prices on the quality gear you need” (REI, n.d.). They carry top brands including their own at the standard MSRP price. Their brands’ prices are typically lower than the top brands price. REI’s outlet store, REI Garage, offers manufacturers’ closeouts, overstocks, special buys and seconds (REI, n.d). This helps them compete with discount online stores such as Campsaver, Steep and Cheap and Amazon.com. According to Hoovers, their three top overall competitors are LL Bean, Sports Authority, and Patagonia (Hoovers, n.d.). Major online gear store competitors include Backcountry.com, Moosejaw, Sierra Trading Post, Backcountry Edge, Campsaver, Steep and Cheap and Mountain Equipment Co-op (Backpackers.com, n.d.). Amazon should be included in this list as well due to its overall influence in the retail industry.
Among these turbulent economic times in the retail industry, REI continues to increase their sales and add stores and distribution centers. To preserve this trend of growth and prosperity during this difficult period in the retail industry, REI must be nimble and innovative. “Retailing’s troubles run far deeper, largely because of three big, self-inflicted problems… retailing’s bare-bones pay habits, a chronic in-ability to innovate and an ill-timed rush into the high-debt world of private equity ownership” (Anders, 2017). Even though REI maintains growth, these problems are still areas REI needs to address to continue to be successful in this environment and not turn into a dinosaur of the industry.
Population-ecology assumes that individual organizations suffer from structural inertia and find it difficult to adapt to environmental changes (Daft, 2016). Thus, when rapid change occurs, old organizations are likely to fail and new organizations emerge that are better suited to the needs of the environment. Another way to think of this is using Darwin’s survival of the fittest theory and applying it to businesses. REI does not want to be the dinosaur that gets left behind. To survive in the current economy, what must REI do to survive? How do they adapt to be prepared for the changing environment? They don’t want to get edged out by a start-up.
Looking at REI’s sales growth, shown in Chart 1, the company has been steadily growing for over 10 years. But their historical net income shown in Chart 2 tells a different story: it reflects the difficult times in the economy including the 2008 recession, displaying that REI is not immune to economic factors and that the environment effects their outcomes.
Chart 2: REI Net Income 2005-2016
At a large organization like REI, opportunities for a ground-level employee to make changes or suggest improvements are sparse. REI’s size makes it difficult to create a culture of innovation. Innovation is one reason that start-ups are nimble by design; they are able to shift behaviors and structures as needed to be successful (Daft, 2016). With their symmetric organizational complexity, REI does not have this luxury. Their high vertical and horizontal differentiation creates barriers for rapid change (Daft, 2016). They must be intentional and proactive to remain at the top of their industry.
Given REI’s position in a turbulent environment, their analyzer-without-innovation strategy, and ability to be efficient and effective, REI is wise to employ a symmetric organizational complexity. But REI’s divisional structure does not align with this condition, strategy and attribute (Daft, 2016). As an analyzer without innovation, REI’s has a strong focus on exploitation and weak focus on exploration (Daft, 2016). For example, REI looks at what other firms are doing to be successful and imitates them especially in product development. REI is the department store of outdoor equipment; they are efficient and effective by having everything you need to start a new activity.
Recently, REI employees have been criticizing REI’s spending by saying that they spend too much money on expansion and philanthropy, but not enough on fair compensation (Hamlin, 2016). For example, REI only increased wages to the state minimum wage increases, but in 2015 they gave back more than $8.5 million to non-profits (REI, n.d.). These minimum wage increases across the country have caused REI to cut hours of employees. Speaking about Seattle stores, Hamlin (2016) notes that “REI may have bucked their principles as a co-op for a large corporate trend: expansion at the expense of its workers.” If employees cannot make ends meet with their current pay then the they will go looking for jobs elsewhere. REI’s compensation matches with other retailers around the country (REI, n.d.). But it is the retail wage across the country that needs reevaluated. At $15 per hour a retail salesperson makes 55% of the average U.S. wage, which is down from 62% in 2001 (Anders, 2017). With the unemployment rate bouncing back after the recession, retailers could lose their workforce if they do not reevaluate the retail wage.
Despite these challenges, REI started a movement with their #optoutside campaign. “Clearly these efforts worked, as REI saw participation numbers jump from 1.4 million in 2015, to 6 million in 2016” (Mainwaring, 2017). Customers liked the sentiment that instead of buying more stuff, we should make ourselves better by being outside for the day. It was a shocking concept to come from a retail company, but the idea worked. Through the #optoutside campaign REI recognized the importance of social media with connecting to customers and building a community. They have a great base for continuing their social media effort. This is an opportunity to grow millennials’ interest in the outdoors. REI has the chance to be at the forefront of the outdoor industry’s social community.
Recommendation 1: Increase innovation
REI focuses its innovation efforts on sustainability, putting them at the forefront of business sustainability. Their focus needs to shift to products, service, and culture innovation, especially through incorporating technology into their stores and developing their online store capabilities (Daft, 2016). Companies like Amazon are rapidly changing the landscape of the retail industry. Amazon’s technological innovations are redefining what it means to be a customer and what is means to be a store. Amazon has been awarded almost 5,000 patents for their new technology, which is far above the next closest retailer, Target, with about 1,100 patents filed (Anders, 2017). Amazon has worked its way into all industries by selling a wide variety of products from bubble gum to backpacks to audiobooks. Without innovation REI will quickly become outdated and out of touch with what customers expect from a retailer.
Recommendation 2: Bridge in-store & online
REI has an in-store experience and an online experience, so why not merge them? REI should create not only a brand that is cohesive but an experience that is pervasive throughout all their platforms. Companies that are able to use both in-store and online stores to their advantage will be the ones to thrive in the coming years. Many experts thought brick-and-mortar stores were phasing out, and this is true in the traditional sense (Lam, 2016). But recently, Amazon has created their own physical stores, proving that even the online giant sees the importance of a physical store (Associated Press, 2017). Some important qualities of physical stores are in-person customer service, in-person product exploration, and the instant gratification of purchase. These are areas REI can focus on bridging their two experiences: in-store and online.
Recommendation 3: Develop new pay structure
REI needs to think outside the box for how to pay employees. If in-person customer service is going to be a cornerstone of a physical store, why not get the best employees by offering more than other retailers? This will help keep employees by giving them a living wage, not just minimum wage. In a study done by Just Capital, they found that “between 71% and 96% of the time, depending on the sector, retail workers failed to earn a living wage” (Anders, 2017). REI has a reputation for caring about their employees (benefits include Employee Discount Program, Yay Day, Challenge Grants, and tuition reimbursement) (REI, n.d.). As the unemployment rate decreases there will be scarce labor resources. It will be important for REI to demonstrate it cares about its 12,000 employees. One simple way to do this is to increase their compensation. REI is spending millions creating sustainable warehouses while stores are cutting employees’ hours to make their payroll budgets (REI, n.d.). And although most employees appreciate REI’s sustainability efforts, those employees who are having financial trouble may find it hard to agree with REI’s priorities, however sustainable (Lam, 2017). Developing a new pay structure that emphasizes the importance of the employees is necessary to remain successful.
Implications and managerial application:
The recommendations above will help REI continue to be successful and avoid becoming a dinosaur. To increasing innovation, REI could create a single mobile app that combines all experiences of their company (shopping, outdoor programs, and learning tools) and connects to your virtual community to share your adventures. To bridge the gap between in-store and online experiences, REI can start thinking about their stores in “experience per square foot” instead of “dollars per square foot”. One way to do this is creating a personalized experience using technology to link the customer’s in-store and online worlds. To help develop a new pay structure, REI should consider a new training program for employees that, once completed, offers a pay increase. This places importance on having quality and knowledgeable employees. Also, there can be leeway given to managers’ payroll budgets in order to encourage these programs. It will be important throughout this progress for REI to continue to stay true to its mission culture: “a national outdoor retail co-op dedicated to inspiring, educating and outfitting its members and the community for a lifetime of outdoor adventure and stewardship” (REI, n.d.). These are the principles that have created the nation’s largest co-op of 6 million members and made the outdoors accessible to so many.
Appendix A: Organizational Chart
*This organizational chart was developed with information from REI’s website and The Official Board website.
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