REI Strategy Brief

REI Strategy Brief

REI Strategy Brief

Joanna Komvopoulos, Alexander Labinov, Brian Iseri, Daniela Leon, Kristen Trad, & Katya Lopez

REI Strategy Brief

Table of Contents Executive Summary ...................................................................................................................................... 3

Introduction to REI ...................................................................................................................................... 3

Two Issues: Focus and fit trade-off. .............................................................................................................. 4

Analysis ........................................................................................................................................................ 5

Current REI Strategies .............................................................................................................................. 5

REI as a Cooperative ................................................................................................................................ 6

Pros of Co-op ....................................................................................................................................... 6

Cons of Co-op ...................................................................................................................................... 7

Strategy of a Co-op ............................................................................................................................... 7

Co-op’s Sustained Competitive Advantage ............................................................................................ 8

Financial Analysis ...................................................................................................................................... 9

Competitor Analysis and Interfirm Rivalry .............................................................................................. 10

Value Chain and Competitive Analysis continued .................................................................................... 11

Eco-Sensitive, from Label to Program ................................................................................................. 12

Recommendations ...................................................................................................................................... 12

Conclusion .................................................................................................................................................. 14

Appendix A ................................................................................................................................................ 15

Appendix B ................................................................................................................................................. 16

Appendix C ................................................................................................................................................ 18

Value chain segment: Design – Excerpts from REI website .................................................................... 18

Value Chain Segment: Manufacturing & Commitment to stewardship – Excerpts from REI website ....... 18

Value Chain Segment: Marketing ............................................................................................................. 19

Value Chain Segment: Distribution ......................................................................................................... 19

Value Chain Segment: Service to customers ............................................................................................ 19

Appendix D ................................................................................................................................................ 20

Appendix E ................................................................................................................................................ 21

REI Strategy Brief

Executive Summary

Our team created a strategy brief on Recreational Equipment, Inc. (REI) in order to understand how this

organization achieved competitive advantage through the activities of structuring itself as a consumer

cooperative and selling both high quality products and a high value outdoor experience. In these activities, we

discovered REI’s strategic position– creating a high value and high cost brand by catering closely to

membership needs and vision. This unique position has encouraged imitation and increasing competition but

also provided a new kind of fit– an optimization of efforts– potentially through the frame of environmental

stewardship. This fit carries the potential to secure REI’s position by making its products more distinctive

and communicating its strategy uniquely to customers. In the following report, we will outline how REI

reached competitive advantage and explain where it currently stands in achieving sustainable competitive

advantage with its new focus on environmental stewardship.

Introduction to REI

REI operates in the category of outdoor sports and equipment. Its offerings include apparel, gear, and various

services for the physically active consumer. Those services include, but are not limited to, an REI outdoor

school for camp training, expert advice from outdoor enthusiasts, and a complex rental policy allowing

customers to try gear and equipment before purchasing. In general, REI leads the outdoor sports category by

combining various attractive activities: producing high quality products, pioneering a co-op membership

system, building a high-end brand, and developing an innovative environmental stewardship program. Born

from a mountain climbing collective, REI grew from solely supplying gear to climbers to providing a whole

host of products to outdoor enthusiasts before establishing stores countrywide in the 1980’s. With

intensifying competition, REI attempted to make the dive into international retail in 1998 but failed due to

customer price sensitivity in its first international market– Japan. Since then, REI has opened an online

platform for selling its offerings– products and services– and has been ranked by Fortune Magazine as one of

the top 100 companies to work for based on its education fund, healthcare, and employee trainings

programs.1 REI has seen enormous gains as a publicly held, but not publicly traded, company. Unfortunately,

1 Fortune Magazine. "100 Best Companies to Work For 2012: Full List." CNNMoney. Cable News Network, 2012. Web. 25 Nov. 2012. <http://money.cnn.com/magazines/fortune/best-companies/2012/full_list/>.

REI Strategy Brief

intensifying competition has revealed that its core operations are not fully supporting its brand with optimal

fit. In the following section, we will outline REI’s weaknesses, from various strategic model perspectives.

Two Issues: Focus and fit trade-off.

In the process of our analysis, we discovered why REI is currently an industry leader in the category of

outdoor and sporting goods equipment. REI has been deliberate in developing and honing a strategy to

motivate sustained competitive advantage. Its corporate structure promotes loyal patronage. It provides a

range of value-added activities that support the use of and purchase of its products: REI adventures, expert

advice on equipment, rental system, and deep discounts. More importantly, REI has first-mover advantage in

the field of environmental stewardship of creating a 100% environmentally friendly and conscious value

system that it is attempting to develop into an industry standard. While other may follow this approach,

imitation by competitors reinforces REI’s position as the brand leader in environmental sustainability.

On the other hand, our team also realized that in order for REI to fend off attack by large low-product-value

competitors (i.e. Target), large high-product-value competitors (i.e. Sports Authority, Dick’s, EMS), and

countless high-product-value specialty shops, REI needs its various activities to mutually support one

another. REI has failed to find fit in the following categories:

-‐ Non-exclusive Consumer Cooperative vs. high-end Brand image

-‐ Leadership position in environmental sustainability education vs. low reach to customers.

-‐ Focusing on environmentally friendly consumer cooperative vs. Focusing on Margin.

-‐ High competition vs. High market commonality locations.

For the purposes of our paper, we will conduct an analysis that will explain how REI became an industry

leader and recommend how it can achieve More Focus and tackle the key problem of trade-off between being

a Consumer Cooperative and having a strong Brand Image. In fact, the latter problem is most important and

urgent to resolve because of the threat of brand dilution. These will be our two primary points of focus aside

from general analysis.

REI Strategy Brief

Analysis

Current REI Strategies

REI is a big player in the category of outdoor sports. It has 122 retail stores in nearly 30 states.2 REI has

nearly 12 million members (stakeholders) of which 4.7 million are active customers primarily through its retail

stores. Supplementing its retail stores is a robust online platform, developed by IBM, which provides often-

unique product lines not sold in any REI store. The online store maintains REI’s brand image and sells

premium goods at higher-than-retail prices. Overall, the online and retail store strategy provides a one-stop

shopping experience for the outdoor enthusiast– they need only to go to REI to cover all their outdoor

needs. Additionally, the retail stores provide various discounts and services to draw in new customers. For

those who are less experienced and may not understand the difference between various outdoor and sports

products, REI offers workshops to help educate the general community– pivoting advice towards their

products, of course. In the same spirit, REI encourages a complex rental system that provides camping and

winter sports equipment to its potential consumers. This “trying out” program accounts for nearly $1.5

million – overall a small and negligible percentage of its sales. Moreover, retail stores allow a return-anytime

refund policy for full reimbursement. Lastly, REI’s most exclusive offering is an adventure world-tour entirely

supported by its equipment.3 These elements all strive to distinguish REI and its offerings, allowing the

consumer to feel both assurance and ease when interacting with the REI brand at all touch points, as the

brand promises and delivers a unique experience.

The profile of REI’s client base tends to be fashionable young people with disposable income that are part of

the middle and upper-middle class. These customers are won over by REI’s environmental stewardship –

including its carbon-neutral travel and green policies. REI has been able to win over this customer segment

by selling its value to one customer at a time through membership recruitment, amounting to $20 for a

lifetime appointment. Furthermore, their marketing tactics and value proposition— mainly their environment

focus– attract that young and affluent demographic. For example, REI stays clear of catalogues and

promotes a minimalist approach to packaging because it believes that it is wasteful and not environmentally

2 "Newsroom." REI Announces 2011 Revenues and New Member Growth. N.p., n.d. Web. 25 Nov. 2012. <http://www.rei.com/about-rei/newsroom/2012/rei-announces-2011-revenues-and-new-member-growth.html>. 3 REI. "Recreation Equipment Inc." REI Profile. N.p., n.d. Web. 25 Nov. 2012. <http://nyjobsource.com/rei.html>.

REI Strategy Brief

friendly. One could easily go to Costco and buy bulk socks that are at least comparable to the REI brand, but

it is the value and the marketing behind the REI socks that are packaged by string, rather than cardboard,

which make them attractive to REI’s target consumer.4 Furthermore, REI has found its environmental

stewardship approach to be aligned with the current shift in consumer purchasing trends, as more and more

consumers are looking to sustainably friendly products and turning to brands that emphasize and promote

natural, organic, and environmentally conscious goods. This shift in consumer behavior has thus further

bolstered REI’s competitive advantage.

REI as a Cooperative

REI incorporated is a consumer cooperative instead of a publicly traded company. Consumer cooperatives

were formed as early as the late nineteenth century, with a focus on quality and service that was seen as not

available in certain industries.5 A consumer cooperative is a business that requires membership in order to

purchase the goods and access the services offered by the business. Similar to stakeholders, members’

interests became REI’s long-term focus. As a marketing tool to build loyal customers, a lifetime membership

comes only from paying $20 that leads to such benefits as dividend paybacks.6

Pros of Co-op

In short, Cooperatives build “assured volume” by outlining specific roles and authority of its members

beyond those ordinarily given to stakeholders or bondholders in publicly traded organizations. Members are

treated and considered as “Partners” of an organization.7 Consumer-members receive voting rights. They

elect the members of the board of directors from a ballot sent to them at the same time as their annual

refund. This gives the consumers more control over the company as a whole.8 Internally, the REI benefits

from a highly active membership base that is involved in picking leadership and the direction of its

environmental sustainability efforts. Consequently, this membership base is intimately aware of REI’s

4 REI. "Paper Usage & Sustainable Forestry." Paper Usage & Sustainable Forestry at REI. N.p., n.d. Web. 25 Nov. 2012. <http://www.rei.com/stewardship/sustainable-operations/paper-usage-sustainable-forestry.html>. 5 NCBA. "Consumer Cooperatives." National Cooperative Business Association, n.d. Web. 25 Nov. 2012. <http://www.ncba.coop/ncba/about-co-ops/co-op-types/consumer-cooperatives>. 6 REI. "About REI's Business." N.p., n.d. Web. 25 Nov. 2012. <http://www.rei.com/about-rei/business.html>. 7 "American Historical Association." AHA Search. N.p., n.d. Web. 25 Nov. 2012. <http://www.historians.org/projects/ giroundtable/Coops/Coops8.html>. 8 SACBEE. "REI to Outfit Kitsap Peninsula." N.p., 11 May 2012. Web. 25 Nov. 2012. <http://www.sacbee.com/2012/11/05/4962431/rei-to-outfit-kitsap-peninsula.html>.

REI Strategy Brief

activities and does not need to be educated on value-added activities via marketing and advertising expending.

In turn, REI’s membership base also represents its loyal customer base. Externally, this model is useful in

cementing customer loyalty to just one store and guaranteeing repeat patronage. By getting the members

more involved in REI activities, the act of shopping at the store become more than just a purchasing activity

– it is an activity where the members feel part of the REI brand itself. This experience is unique to REI and

hard to replicate by competitors since they would have to change their corporate structure.

Cons of Co-op

The first challenge in running a cooperative is the issue of slow decision-making on an executive level.

Cooperatives tend to limit flexibility and initiative since strategic changes need to be “Okayed” by

membership.9 While the cooperative does not need to make SEC filings, it does need to report to its

membership in a way comparable to SEC filings– this activity demands a whole host of administrative and

technical resources. Financially, the cooperative is limited in how much capital investments it can raise since it

cannot issue stocks; rather, it must wait for new membership buy-in. On the same note, the cooperative is

legally obligated to issue annual funds– similar to dividends– whereas publicly traded companies are not

obligated to issue dividends. Lastly, the cooperative structure is one of the main trade-off points that REI has

yet to fully resolve; a low entry fee of $20 is not representative of its high brand quality (and high cost) and so

the benefits of membership (refunds, discounts, and trips) compete with low cost competitor products.

Strategy of a Co-op

A cooperative model is an extension of strategic positioning- achieving sustainable competitive advantage by

preserving what is distinct about the company. REI produces outdoor sporting equipment like its publicly

traded and privately held competitors but caters to the specific customer niches through a cooperative

membership structure. By doing so, REI is pursuing needs-based positioning. It is serving most or all the

needs of its membership and attempting to draw in new members by promoting a one-stop shop of high

brand quality. By offering discounts and expert camping advice, REI is attempting to lure in price-sensitive

customers through those brand/product support offerings. Renting equipment, outdoor adventures, and

9 AHA. "American Historical Association." AHA Search. N.p., n.d. Web. 25 Nov. 2012. <http://www.historians.org/projects/giroundtable/Coops/ Coops8.htm>.

REI Strategy Brief

deep discounts are how REI is attempting to broaden its loyal customer base. The key trade-off here that REI

has yet to make is between high quality brand offerings and the exclusivity of membership. Since it has a very

low margin, REI’s deep member discounts and low prices for supplementary product support– like expert

advice and rentals– contrast with its brand as a high price, high quality outdoor equipment vendor.

Co-op’s Sustained Competitive Advantage

According to Barney (1991), a sustained competitive advantage occurs when a certain relationship exists

between the heterogeneity and immobility of a firm's resources. In this case, physical capital resources and

human capital resources of REI and other sporting goods store are homogenous, meaning that they are very

similar. Outdoor and sporting goods stores all require similar manufacturers for their goods; however, REI

has been pioneering environmentally friendly sourced materials in order to differentiate its resources.

Organizationally, to have the potential for sustainable competitive advantage, the consumer cooperative

structure must be valuable, rare, imperfectly imitable, and without strategically equivalent substitutes.

Furthermore, the consumer cooperative structure needs to either exploit an opportunity or neutralize threats

from competitors. It can be argued that REI exploits the opportunity to gain loyal consumers in a way that

no other sporting goods company can, by allowing the customers to control the company through

membership. The structure of the cooperative also provides consumers with more incentives to shop at REI

versus its competitors by issuing annual refunds as a percentage of what they spend at the store. REI’s

consumer cooperative organization is exceedingly rare in the sporting goods industry, especially among its

competitors.

The consumer cooperative structure within the sporting goods industry may be imperfectly imitable. On one

hand, other companies could attempt to duplicate it, but would likely find it difficult to maintain competition

with REI. Consumers may not want more than one membership, or they may be so loyal to REI that they

will not change to a different sporting goods store. Another company could determine that they would be a

more attractive sporting goods membership if they provided additional annual refunds to members, but this

would detract from the capital they receive. They may even decide that it is simply not worth their time and

effort to change the way that they run. A privately held company may not see any significant difference

between a consumer cooperative and issuing an initial public offering. On the other hand, other companies

REI Strategy Brief

could follow REI’s model closely enough, and win over consumers that might prefer a membership company

other than REI.

Financial Analysis

In terms of its financials, REI is a relatively healthy company. REI obtains most of its income from the sale

of outdoor recreation gear, as well as sporting goods, clothing and other equipment through retail stores,

catalogs or through their website. Currently the biggest revenue drivers are family-oriented items such as

strollers, kids’ clothing and footwear, and family tents, as well as helmet-mounted cameras. Sally Jewell, the

CEO, has stated that 80% of REI’s revenue still comes from sales from their physical stores.

REI also offers a multitude of discounts to its members: a 10% dividend that can be either paid or used to

purchase REI products at a discount. Additionally, REI offers excursions to exotic locations such as the

Appalachians or other places where their inventory can be used via a robust rental policy. REI is the third

largest retailer, second to only Wal-Mart and LL Bean. REI does have a first mover advantage in that they are

the only retailer to exclusively sell outdoor sporting goods. This focused differentiation along with a loyal

following and a strong online presence has helped keep REI afloat. REI also offers credit cards to its

customers via Visa – a key partner, expert outdoor advice, much the same way that Best Buy offers the Geek

Squad and free shipping on orders over $50.

REI’s financial statements reveal that, in 2011, it’s sales revenue amounted to almost $1.8 billion up from $1.6

billion from 2010. In 2011, REI’s posted a profit margin of 42%, slightly less than from a profit margin of

43% just a year ago. However, through various expenses such as payroll expenses, administrative expenses

and occupancy expenses in addition to taxes, REI came out with a small net profit of $30,168,000, which was

down from 2010’s number of $30,230,000. This is a consequence of using environmentally friendly and

expensive materials, good locations, and providing high quality customer service through high quality

employee training. In comparison, Under Armour, one of REI’s competitors in the sports apparel sector, has

a 49% profit margin, which is substantially higher and their net revenue was higher at $1.4 billion. Wal-Mart,

another competitor, posted much lower profit margins at 25% but a much higher net income in general at

$15.7 billion, although the products they offer are much more diverse and of less quality. Dick’s Sporting

REI Strategy Brief

Goods, one of REI’s chief competitors, has a profit margin of 30%, which is substantially lower than REI’s

margin of 42%, although Dick’s revenue is almost triple that of REI’s at $5.2 billion. Dick’s net income was

$263 million, which is exponentially more than REI’s. While REI positions itself as a high-level brand, its

market share is smaller but more focused; it cannot compete with its competitor’s deep market share and

control.

Competitor Analysis and Interfirm Rivalry

REI has developed and maintained a unique positioning strategy with its emphasis on focused product

differentiation, social responsibility, and an all-encompassing devotion to environmental sustainability. The

company has positioned itself as an industry leader through a clear differentiation strategy, embedding the

REI brand name in the high-quality rank, allowing the company to charge premium prices. The company’s

unique strategy has made it the largest consumer cooperative in the United States. The company’s success

stems from its intense customer loyalty and passionate employees, which help foster brand awareness and

build brand equity. The company’s unique positioning strategy has allowed it to grow, but this strategy is also

easily subject to mimicry. As other retailers copy REI’s strategies, they threaten the company’s market share

within the sporting goods industry.

REI has high market commonality with its competitors, but does not have resource commonality, since REI

focuses on socially conscious products while its competitors do not make this differentiation. While the

products are not common between competitors, competitors’ products in terms of form, function, and utility

can substitute REI products. What REI offers that is truly unique, is the value proposition behind each

product, mainly the socially conscious impact that each product has on the environment, and the ability for

the consumer to know his/her environmental footprint when choosing REI products. REI uses the core

competency model. From its inception, REI realized that it needed to differentiate itself from other retailers.

REI’s competitive edge would be selling an experience along with a product. REI’s ability to innovate

sporting goods retail by creating an interactive store experience, a fun and comfortable environment in which

consumers could test out the products and speak to outdoor enthusiasts, was at the foundation of the

company’s success and differentiation strategy. The company’s greatest strengths are grounded in its desire

REI Strategy Brief

to connect with customers and share a passion for the outdoors that is difficult for other retailers to replicate

without appearing to be inauthentic. Hence, REI sells more than products, it sells a lifestyle.10

While other major retailers have slowly replicated its business model, the brand equity of REI and its

differentiation strategy as an environmentally and socially conscious retailer– by virtue of first mover

advantage– helped establish an enduring reputation. REI’s value extends past its products and services,

providing customers with an experience and a lifestyle. While larger retailers can compete in terms of product

quantity and many smaller or specialty retailers can compete with REI in terms of quality, neither has been

able to truly compete on both fronts. Nevertheless, the combination of the two does pose a threat to REI’s

sustained competitive advantage especially since REI– by virtue of high COGS– receives very low margin

despite its size and brand pricing. Consequently, as in most industries, industry leaders should always prepare

for attacks and assess the market for competitor opportunities to infiltrate REI weaknesses. This is especially

true since REI’s retain stores experience high overlap with the location of its competitors’ stores. See

Appendix D for geographic distribution of competitor stores.

Lastly, most of REI's environmental and social impact stems from the clothing and gear REI sells. REI

collaborates with retailers and manufacturers such as the Outdoor Industry Association Eco Working Group

and the Sustainable Apparel Coalition to create standardized tools for assessing our products' impacts.

Additionally, REI has a history of Fair Labor practices;11 gear is sourced from responsible distributors and

clothing vendors. Lastly, it’s treatment of its employees is a kind of competitive parity position– that while

easily imitable– provides a workplace atmosphere named by Fortune Magazine as one of the 100 places to

work. This dimension of REI counters the high employee turnover rate common to retail stores (See

Appendix B for a continued explanation of employee treatment in REI).

Value Chain and Competitive Analysis continued

REI’s value chain, and specifically its environmentally conscious strategy, has evolved alongside with the

company, since 1938. Due to the nature of the co-op, its original source of differentiation was in the service 10 "REI: Taking Design to New Heights." The Seattle Times. N.p., n.d. Web. 25 Nov. 2012. <http://seattletimes.com/html/businesstechnology/ 2012425725_rei25.html>. 11 "Product Impact at REI." Product Impact at REI. N.p., n.d. Web. 25 Nov. 2012. <http://www.rei.com/stewardship/sustainable-operations/product-impact.html>.

REI Strategy Brief

segment of the value chain. REI offered cost-effective solutions to outdoor enthusiasts and adventure seekers

that sign up for a lifetime membership to receive reduced price items and deals, in addition to a portion of the

cooperative’s profits at the end of each year. As REI evolved to a full-service retailer in the continental U.S., it

faced increased competition and shifted its value proposition to make environmentally aware designs and

sustainable manufacturing processes its key sources of differentiation.

Eco-Sensitive, from Label to Program

The ecoSensitive Program reflects REI's long-term commitment to brands that are designed in

environmentally conscious ways from start to finish. These brands are unique to REI; they are designed,

developed, and sourced by the cooperative.

In 2005, REI made a valuable discovery that explains why it currently and intensely focuses on

environmentally friendly sourced products. The environmental positive impact from consciously sourced

products is far greater than the operational footprint of all of its retails stores, distribution centers and

headquarters. As a result, REI created the ecoSensitive label as a vehicle for product stewardship. This eco-

label became a signaling mechanism to consumers that materials were recycled or renewable.

The ecoSensitive program is a kind of pre-competitive collaboration essential to REI’s sustained competitive

advantage– it is positioning itself as a leader of environmentally friendly sourced products. Not only is REI a

first-mover in this category, but it is also positioning itself as a “standard”– to be mimicked and used a

measure of success. 12 By measuring product sustainability and educating consumers, REI is attempting to

become an industry authority thereby cementing its position as a high value and environmentally friendly

brand. While counter-intuitive, imitability translates publicly to the fact that REI is the brand to follow. To

see specific value chain innovations, go to Appendix C.

Recommendations

As mentioned, our team pivoted our analysis to the misfit of REI’s activities (lack of focus) and the tension

between the consumer cooperative and the brand image (lack of exclusivity versus exclusive brand product).

12 REI. "Stewardship Program." EcoSensitive Program. N.p., n.d. Web. 25 Nov. 2012. <http://www.rei.com/stewardship/sustainable-operations/ ecosensitive.html>.

REI Strategy Brief

From our analysis of REI’s strategies, corporate structure, and financials, we have come to understand how

REI reached its current strategic position and will offer up steps to help support that position.

The following, in order of importance and urgency, are what REI needs to do in order to re-establish focus

and resolve the conflict leading to brand dilution:

1. Raise Membership Fee and Make value-added activities (REI adventures, rental system, expert

advice, and discounts) exclusive to members.

a. Memberships should be built as tranches where the lowest-level only guarantees a certain

level of access to value-added activities and the highest-level guarantees access to activities.

b. Membership fees should be yearly allowing members to choose what value-added activities

they prefer. This will allow REI to better plan how to distribute its resources rather than

constantly flooding all activities with the same level of resources and support.

c. Membership tranches also confer varying levels of control. Only the highest-level tranche

should be allowed voting rights.

d. Yearly Membership fees should start at $50 and confer discounts towards REI adventures,

rental systems, and discounts as tranches go up from there.

2. Its outward facing activities should be entirely focused on its environmental stewardship. Inward

facing activities should be entirely focused on cementing customer loyalty and educating that same

base on the differences between its products and its competitors’ products.

a. Retail Stores and all online platforms should have an educational kiosk or dashboard,

respectively, for customers to learn about how REI stands out as an industry leader and

standard in environmental stewardship. Like Bloomberg, REI should grade its competitors

on this environmental sustainability rubric in order to become an industry standard and

differentiate itself from its competition.

b. REI adventures, REI rental systems, and REI expert advice camps should be avenues to

deepen member and customer loyalty that involve a full explanation of how REI brands–

especially those that REI is now producing on its own– differ from competitor brands.

REI Strategy Brief

Since REI is beginning to produce its own products, then it should use these educational

channels to roll those same products out.

3. Leverage Brand image to differentiate offerings

a. REI should start rolling out its own products and selling a variety of environmentally

acceptable products that pass its rigorous standards. By doing so, REI will appeal to

segments similar to its core consumer but tend to purchase other equipment or items, such

as: food, general clothing, general footwear, professional wear, home décor, travel agencies,

general travel gear, and other categories. By using its environmental stewardship rubric, REI

can differentiate its offerings through a robust grading system and become a first-mover in a

100% environmentally friendly value system in new categories. This way, it can attack its

competitors’ positions without lowering its prices and motivating imitation that simply

reinforces its role as an industry standard.

Conclusion

Through careful analysis, we realized that REI’s initial strategy to gain competitive advantage was to build up

its brand as a high quality and high price purveyor of outdoor and sporting equipment. Over time, REI

shifted its approach and began pioneering a new focus demanded by its membership: the 100%

environmentally sustainable value system and value chain. While REI has sustainable competitive advantage

in its brand, this shift to a new strategy cannot achieve sustainable competitive advantage unless REI’s

existing activities begin to support this new focus. In short, our team has come to appreciate how a shift in

strategy requires an adjustment on all levels to reflect the necessary pursuit of sustainable competitive

advantage – a process that requires constant iteration and evolution. In doing so, we believe REI will be

learning a great deal and refining its position to fend of large purveyors of cheaper products and countless

specialty stores promoting high quality brands.

REI Strategy Brief

Appendix A

Product Sourcing

80% of REI sold products, are made by other brands. REI focuses on its commitment to environmental

sustainability when choosing its partnerships. Partners include: Outdoor Industry Association (OIA) Eco

Working Group, Sustainable Apparel Coalition, and bluesign® technologies ag13

13 REI. "Product Impact." Product Impact at REI. N.p., n.d. Web. 25 Nov. 2012. <http://www.rei.com/stewardship/sustainable-operations/product-impact.html>.

REI Strategy Brief

Appendix B

How are employees treated? – Excerpts from REI website

REI has been on Fortune’s top 100 Best Companies to Work For list since 1998. In 2012, REI became the

#8 company on the Fortune list.14 REI’s Culture: It is all about the outdoors; sharing it, enjoying it, and

expressing enthusiasm for it, while selling gear to help others to enjoy it while also maintaining a socially and

environmentally conscious attitude and giving back time and money to preserve and protect the environment.

REI core purpose statement says it all: "We inspire, educate and outfit for a lifetime of outdoor adventure."15

Employees must be a strong fit for REI customer as well as REI team. Every level of REI allows for learning

opportunities, trainings, and development—“At every level of REI, someone is there to help you be

successful”.16 At the very core of the REI culture is the belief that, given the opportunity, motivated people

will make the most of their careers and contribute to the success of the company. We support them in their

efforts by offering professional training and development classes and creating a culture where growth and

internal promotion are encouraged.17

REI strongly focuses on work/life balance for its employees and seeks to reward strong performance and

initiative through generous compensation, profit-sharing programs, tuition reimbursements, paid leave, and

other various incentives. “To help find balance between work and home, employees can use the REI

Work/Life program. This employee assistance program offers access to services, referrals, three in-person

visits and support to help us all in our quest to live and work well”18

Employees are given the opportunity to live the life that they promote through generous leave/sabbatical

time and other benefits which allow them to further embrace the REI lifestyle, and in turn be more

productive and passionate about what they do which they then convey to customers and increase REI’s brand

14 "Newsroom." REI Ranks Number Eight on FORTUNE 100 Best Companies to Work For List. N.p., n.d. Web. 25 Nov. 2012. <http://www.rei.com/about-rei/newsroom/2012/fortune12.html>. 15 REI. "Pay and Benefits." Pay and Benefits. N.p., n.d. Web. 25 Nov. 2012. <http://www.rei.com/jobs/pay-benefits.html>. 16 "Want to Work at REI? Gear Up!" CNNMoney. Cable News Network, n.d. Web. 25 Nov. 2012. <http://money.cnn.com/video/news/2012/01/18 /n-rei-bestcos.cnnmoney/?iid=HP_LN]> 17 Idem 15 18 Idem 15

REI Strategy Brief

equity. REI offers what they call Mega Prodeals, discounted trips exclusively for employees that are provided

on a first-come, first-serve.19

REI also offers unique employee benefits, such as healthcare options for full- and part-time employees,

substantial retirement plan contributions, product discounts, gear grants, free equipment rentals, a public

transit subsidy, adoption assistance and paid sabbaticals after 15 years of service.20

Employee Benefits:2122

• A retirement plan that doesn't require individual contributions

• Health-care benefits for all, including part-time employees

• Gear discounts and free gear rentals—30% employee discount, and 50% discount for REI brand

products

• Encouragement of work/life balance

• Outdoor-focused culture that encourages outdoor activity as an extension of our business

• Camaraderie, open communication and opportunity for advancement

• Gear grants to take on personal outdoor challenges

• Community involvement and support for outdoor-focused clubs and non-profit organizations.

o Incentive pay program

19 "'I Work for One of the 10 Best Companies'" CNNMoney. Cable News Network, n.d. Web. 25 Nov. 2012. <http://money.cnn.com /galleries/2012/pf/jobs/1201/gallery.best-companies-employees.fortune/8.html>. 20 REI. "Newsroom." REI Ranks Number Eight on FORTUNEâ��s â��100 Best Companies to Work For List. N.p., n.d. Web. 25 Nov. 2012. <http:// www.rei.com/about-rei/newsroom/2012/fortune12.html>. 21 REI. "REI Ranked One of the Country's "100 Best"" REI on Annual List of 100 Best Companies to Work For. N.p., n.d. Web. 25 Nov. 2012. <http:// www.rei.com/about-rei/100-best-companies.html>. 22 REI. "Pay and Benefits." Pay and Benefits. N.p., n.d. Web. 25 Nov. 2012. <http://www.rei.com/jobs/pay-benefits.html>.

REI Strategy Brief

Appendix C

Value chain segment: Design – Excerpts from REI website

“Chemicals are used in the manufacturing of most consumer products, including the

waterproof, breathable materials we use in many of our high-performing outdoor products.

REI cares about the health and wellbeing of those who use our products, and the impact they

have on the environment. That’s why we are working closely with many companies in the

Outdoor Industry Association to research, understand, reduce and eliminate all chemicals of

concern used in the manufacturing of our products. The process to know and understand the

impacts of the chemicals found in products we sell is complex and will take time. However, we

are committed to finding attainable solutions and providing accurate information so our

customers can make informed decisions about the products they buy.”23

Value Chain Segment: Manufacturing & Commitment to stewardship – Excerpts from REI website

“Most of REI's environmental and social impact stems from the clothing and gear we sell.

Take a cotton T-shirt, for example. Each stage of the shirt's existence—from raw cotton fiber

to fabric dyes to the sewing process to the shirt's end of life—creates a separate impact. And

that's just a "simple" cotton shirt. Product stewardship gets considerably more complex when

we look at technical gear such as high-performance clothing, backpacks, tents and more”24

REI sells brand-named merchandise from other companies, and private-label products –such as REI and

Novara- that follow a sustainable manufacturing process. Minimalistic packaging has also become part of the

REI brand.

“The inclusion of stewardship in REI’s core purpose statement is deliberate and intentional.

Stewardship is how we act on our love for the outdoors. Our employees enthusiastically

“inspire, educate and outfit” others for a lifetime of outdoor adventure and they embrace the

co-op’s stewardship ethos as the way we do business. Our commitment includes a wide range

of efforts across REI, including working with nonprofit partners in the communities where we do 23 REI. "Product Impact." Product Impact at REI. N.p., n.d. Web. 25 Nov. 2012. <http://www.rei.com/stewardship/sustainable-operations/product-impact.html>. 24 Idem 23

REI Strategy Brief

business, collaborating with our industry peers to address the environmental footprint of our

products, and using the lens of social and environmental responsibility in running our

business.”25

“In 2010 we developed a product stewardship vision and included it as a key initiative in our

five-year strategic plan. This vision is to understand, disclose and actively address the

environmental and social impacts of products at all phases of the product life cycle. The

ecoSensitive Program embodies this commitment within our REI and Novara brands. These

brands are unique to REI—designed, developed, and sourced by our cooperative. We have

embraced an ambitious strategy to reduce the environmental impacts of our brands. As part of

this effort, we are collaborating with other companies to foster continuous improvement

across the outdoor industry.”26

Value Chain Segment: Marketing Integrated Marketing Communication with minimalistic approach, sustainable alternatives to packaging and

“green” solutions to outdoors enthusiasts.

Value Chain Segment: Distribution REI has limited distribution capacity when compared to competitors; even the online distribution has a free-

delivery to nearby stores to incentivize purchases from customers and minimize distribution fees.

REI has 122 retail stores in 32 states around the country. In comparison, Dick’s has 451 stores

in 42 states and LL Bean has 115 stores in 10 states and in Japan. REI as well as all of its

competitors offer shipping to the entire continental US with various shipping rates.27

Value Chain Segment: Service to customers REI’s list of products and services found on its online website: www.rei.com

25 REI. "2011 Stewardship Report." 2011 REI Stewardship Report. N.p., n.d. Web. 25 Nov. 2012. <http://www.rei.com/stewardship/ report/2011.html>. 26 REI. "Product Impact." Product Impact at REI. N.p., n.d. Web. 25 Nov. 2012. <http://www.rei.com/stewardship/sustainable-operations/product-impact.html>.

REI Strategy Brief

Appendix D REI has 122 retail stores in 32 states around the country. In comparison, Dick’s has 451 stores in 42 states

and LL Bean has 115 stores in 10 states and in Japan. REI as well as all of its competitors offer shipping to

the entire continental US with various shipping rates. 28

REI’s Locations: EMS’ Locations:

Sports Authority’s Locations: Dick’s Locations:

28 Source: Google Maps search for associated competitors

REI Strategy Brief

Appendix E Background on SWOT Analysis: Our team carried out a SWOT analysis, which we boiled down into pros

and cons of a cooperative. The following is the theoretical background on SWOT in order to inform the

reader how we were using the SWOT tool.

A SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis aids in determining whether REI has

more competitive advantages or disadvantages within the company and as compared to the competing firms.

The strengths and weaknesses portion of the analysis takes into account the internal attributes of the firm,

including resources and organizational structure. Within the analysis, a firm's resources lend to the strengths -

or weaknesses - of the firm in conceiving and implementing strategies, and can be categorized into three

major types: physical capital resources, human capital resources, and organizational capital resources. (Barney,

1991). Opportunities and threats are the external analysis, or the analysis of how the firm fits into the market.

This portion of the SWOT analysis incorporates the potential competitive and sustained competitive

advantages of the firm. Where a firm implements a value-creating strategy not employed by competitors,

then the firm has a competitive advantage. When a competitor cannot duplicate that strategy, the firm has a

sustained competitive advantage.

Strengths

• REI involves its members in the board of directors elections - much like shareholders of publicly-

traded companies

• REI provides annual dividends of 10% to members, also like the shareholders of publicly-traded

companies

• Members demand high quality, giving the firm a reputation for quality in products and services

• They do not need to disclose financial statements

• Maintain a constant loyal consumer base through membership

REI Strategy Brief

Weaknesses

• Monetary capital investments are limited to private investors and membership dues, since the

company cannot simply issue more stock just to raise capital

• Being accountable to members means that they likely do need to disclose financial statements, like

publicly traded companies, though they aren't required to do so

• Too many people potentially involved in the company

• They must give an annual refund to members, whereas publicly traded companies do not need to

always give dividends

• Difficult to maintain a loyal consumer base outside of members if consumers only look for the best

deals

Opportunities

• First of the sporting goods stores to operate through a consumer cooperative, rendering it difficult

for competitors to transition to such an organizational structure (consumers are likely not going to

maintain more than one membership to a sporting goods store unless they are avid sporting people)

• Leverage the relationship with consumers to make them more involved than the competitor firms

can

Threats

• Limited financial capital resources by not being public or even fully private; would be more difficult

to transition from a consumer cooperative to a publicly-traded organizational structure than it is for a

privately-held company to transition to a publicly-traded status, making it easier for its competitors to

gain in the financial capital resources

REI Strategy Brief

Business

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