The resurrection of MEC: Inside the beleaguered retailer’s bid for a comeback

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Two of MEC’s new executives were rooting around in their distribution centre in Surrey, B.C., one day this past January when they struck gold.

There, tucked away in a musty 53-foot container, was a pile of snowshoes – a precious resource for an outdoor goods retailer in the middle of a pandemic winter. With cooped-up Canadians flocking to the country’s wide-open spaces, setting eyes on a bunch of unsold snowshoes was like finding Sasquatch.

President and chief operating officer Jay Taylor and chief financial officer Peter Hlynsky loaded the loot into a truck and a Jeep, alongside a few other finds – downhill and cross-country skis, boots and poles – and headed for MEC’s North Vancouver store. Within a day, everything was sold out.

But the snowshoes were a symptom of a larger problem: After years of mismanagement and losing money, the retail chain’s operations were plagued with inefficiencies, at a time when it should have been capitalizing on a surge in demand for its products.

Almost any retailer could find some unaccounted-for stock buried in a distribution centre. But MEC was sitting on a $4-million product backlog. For years, rather than running clearance sales, MEC stores had been packing up unsold goods at the end of each season and shipping them back to the warehouse. There, if they didn’t get lost in storage, they were either sold off online or eventually shipped back to stores – in both cases, racking up labour and shipping costs that eroded profits.

“It was like throwing 100-dollar bills in the river and watching them float away,” Mr. Taylor says.

Six months after joining MEC, he and three other new executives – including Mr. Hlynsky and chief executive officer Eric Claus – are in the midst of a turnaround plan. It is not the first one attempted at the beleaguered retailer.

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In 2020, after years of mounting losses, and saddled with more than $70-million in debt, MEC’s balance sheet was in no shape to withstand the body blow of COVID-19. Even spiking e-commerce sales couldn’t make up for losses from mandated store closures and lockdowns. The crisis led to the biggest drop in retail sales in Canada since the 2009 financial crisis, and pushed more than a dozen domestic chains into creditor protection last year. With MEC already operating on a razor’s edge, its very survival was at stake.

In September, the co-op announced it was entering creditor protection in order to sell the chain to California-based private equity firm Kingswood Capital Management. It was a controversial deal, not only because MEC was such a well-known Canadian brand, but because the sale would put an end to its co-operative structure, in which members felt a sense of ownership. Some of those members fought the sale, arguing they should have been consulted first.

With stronger financial backing, the managers of what is now known as Mountain Equipment Company have to do more than just fix ailing operations. They also have to salvage a 50-year-old Canadian brand with an uncommonly opinionated customer base and woo back those who’ve become disillusioned. And all this while a global pandemic continues to rage.

“It’s like you’re in a fire, because you’re in the middle of COVID,” Mr. Claus says. “So while we’re all running around with fire hoses, at the same time we still step back and talk about strategy ... so we can deal with the future.”

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Just over a year ago – or an eternity, in COVID times – MEC’s former CEO, Phil Arrata, was also thinking about the future.

“We’re on a transformation journey,” Mr. Arrata said in an interview in January, 2020. By then, MEC was already in crisis. In the decades since the co-op was founded by a group of rock climbers in British Columbia, MEC had expanded into a nationwide retailer. But it had lost touch with its roots, stocking items such as pet accessories and denim that didn’t fit with its brand. MEC had also spent heavily on new stores and an expensive head office in Vancouver. When it began losing money, “patronage returns” – a share of profits distributed to members – flatlined. Alienated members began to complain management had grown too corporate and out of touch.

Mr. Arrata’s plan to stem the losses included finding cheaper head office space; smoothing out its logistics; and streamlining MEC’s scattered product assortment.

“At that time, the executive team hit the ground running and put together some really solid plans to support moving this company through this financial situation we were in,” says chief human resources officer Deb Paulsen, who has been with MEC since September, 2019.

But then COVID hit, and long-term strategy took a back seat to short-term survival.

MEC had lost roughly $80-million between 2017 to 2020 (excluding gains from real estate transactions), and the pandemic only made things worse. In the first seven months of its most recent fiscal year (which began in late February, 2020), MEC lost another $20.9-million.

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It had also been through a sweeping round of staff cuts – not all of them temporary layoffs because of COVID. From January, 2020, to early September, the work force shrank by 37 per cent, from roughly 2,400 people to 1,516.

Still, the $150-million deal to sell MEC to Kingswood came as a surprise to both co-op members and employees.

In MEC’s Ottawa store, morning meetings included a new ritual. On a flip chart, manager Chris Chapman drew a curve with the Kubler-Ross stages of grief – from shock, to denial, all the way to acceptance – and invited staff to use sticky dots to indicate where they were on the spectrum. “There was a high level of uncertainty,” Mr. Chapman says. “You saw the public’s reaction [to the sale]. Imagine working for them.” On the day he told workers they wouldn’t lose their benefits under the new ownership, he says it was as though the air in the room became lighter, and eventually, the dots moved beyond “the pit of despair.”

Mr. Chapman – who has spent a decade at MEC – saw the cracks appearing as far back as 2013. Employees had already lived through turnarounds and uncertainty. “Working for a co-op was incredible,” he says. “But better we’re here and successful than not at all.”

The deal kept 21 out of 22 stores open. Still, the fight over the future of the retailer dealt a blow to MEC’s brand. The co-op structure meant members had the right to vote on its leadership. Some of them – already dissatisfied with the chain’s management team – were upset to see the co-op dissolved altogether. Others bristled at an independent Canadian business handed over to American ownership.

“The reaction – which was pretty dramatic – we think is a testament to how strongly people feel about the brand and the desire for the brand to continue,” says Alex Wolf, Kingswood’s founder and managing partner, in his first interview since buying MEC. “We believe our plan – probably more than other potential outcomes – preserves this in a big way.”

At a companywide town hall held via Microsoft Teams in February, Mr. Claus – Kingswood’s chosen successor to Mr. Arrata – acknowledged it was “sad” to lose the co-op. Speaking against a virtual background depicting sparkling blue water surrounded by lush evergreens and snow-capped mountains, his message was that MEC’s roots as a destination for outdoor enthusiasts would be preserved.

“Kingswood and the private equity world got a bad rap,” Mr. Claus, a former grocery executive who had consulted for Kingswood on other potential retail deals, said during his presentation. “Private equity in many ways deserves that, in many businesses that they go into. But in this particular case ... our investors really understand, and they believe in supporting a business that is based on good values, good ethics and a view to something more than making money.”

With financial backing, the new management had more room to breathe. But there were costs that needed cutting right away.

When the new team took over at the end of October, they walked into a head office Mr. Claus calls the “Taj Mahal,” too large for its head count. With almost everyone working from home, the place seemed frozen in time: glasses abandoned on desks and papers lying where they had been since March. By moving into more modest digs a block away, the company saved more than $4-million in annual lease costs. MEC also renegotiated many of its store leases with landlords.

There were more difficult cuts, including laying off roughly 100 head-office staff. Some other employees, whose jobs were cut while MEC was still in creditor protection, have filed claims with the monitor overseeing the process, saying the severance offered to them is less than what they are due.

“I was extremely loyal to the co-op,” says Placido Cerce, who worked at MEC for nearly three decades, most recently at its Toronto store, before he was fired via e-mail last October. Mr. Cerce did not contest his settlement. “There’s a tendency for that last painful bit to stick out to me. But I have to remind myself there were 28 years before that that were all really great.”

MEC also hired more staff in the retail network. It had 1,284 employees at the time of the sale, and now has 1,332. That number will continue to change; roughly 60 positions will be cut next month when MEC closes its distribution centre in Brampton, Ont., outsourcing to a third-party logistics provider.

During creditor protection in September, MEC reported it was burning through roughly $1.6-million in cash every week. The company is now cash-positive, according to executives.

With the initial cost-cutting completed, more fundamental changes to MEC’s operations are now on the docket.

“The last thing we want to do is turn this into some big-box American type of chain,” Mr. Claus says. “We want to build on what was built over 50 years.”

clean-up on aisle six....

Years of financial struggles left MEC unprepared

for the body blow of COVID-19 in 2020.

$500

400

300

SALES

NET EARNINGS

200

NORMALIZED LOSSES**

In millions of dollars

100

0

-100

2016-

2017

2017-

2018

2018-

2019

2019-

2020

2014*

2015

*MEC’s fiscal year used to end in December; in 2016, the co-op

changed it to February.

 

**Excludes gains from real estate transactions in 2017 and 2018.

THE GLOBE AND MAIL, SOURCE: mec

clean-up on aisle six....

Years of financial-struggles left MEC unprepared for the body blow

of COVID-19 in 2020.

$500

400

300

SALES

NET EARNINGS

200

NORMALIZED LOSSES**

In millions of dollars

100

0

-100

2014*

2015

2016-17

2017-18

2018-19

2019-20

*MEC’s fiscal year used to end in December; in 2016, the co-op changed

it to February.

 

**Excludes gains from real estate transactions in 2017 and 2018.

THE GLOBE AND MAIL, SOURCE: mec

clean-up on aisle six....

Years of financial struggles left MEC unprepared for the body blow of COVID-19 in 2020.

$500

400

300

SALES

NET EARNINGS

200

NORMALIZED LOSSES**

In millions of dollars

100

0

-100

2014*

2015

2016-17

2017-18

2018-19

2019-20

*MEC’s fiscal year used to end in December; in 2016, the co-op changed it to February.

 

**Excludes gains from real estate transactions in 2017 and 2018.

THE GLOBE AND MAIL, SOURCE: mec

By 10:45 on the morning of March 2, the lineup for MEC’s liquidation sale at its West Broadway store in Vancouver already stretched down the street, and it wasn’t even open to the public yet – just staff and their families. The sale was a potpourri of excess inventory: old gym equipment, dog leashes, bathing suits, some items priced as low as $1. A $10,000 kayak was going for $3,000. It was all perfectly serviceable merchandise, but for MEC, it was functionally obsolete – either too many seasons out of date, or in numbers or sizes too irregular to be properly allocated to stores.

“For a retailer our size to have this much product hanging around is a tad embarrassing,” Mr. Taylor says.

Over the years, MEC had also moved into categories that did not fit with its overall mission of selling outdoor gear. Under the new merchandising strategy, led by chief product officer Adam Ketcheson, it’s starting to pare back the number of brands it sells, as well as the number of products. (You only need so many types of water bottle.) Buying a narrower assortment, but going deeper on the items the team believes shoppers will want, will be a big shift in strategy. The trick is to buy items that either fit hardcore, gear-obsessed customers, or those who are brand new to pursuits such as camping, climbing and canoeing.

“If you design for the extremes, you almost always catch the middle,” Mr. Ketcheson says.

Before the company could revamp its merchandising, however, it had to convince product vendors the new MEC was credit-worthy, after a year in which product orders had been abruptly cancelled because of COVID, and the retailer had gone through creditor protection. Executives spent hours working the phone lines with suppliers, and suppliers’ insurers, to re-establish credit necessary to place orders.

In a typical creditor-protection situation, suppliers “get stuck” with only part of what they’re owed, says John Condon, president of Wolverine Worldwide Canada, which sells the Merrell and Saucony brands to MEC. “We walked away [from the first phone call] going, ‘Hoo, that went differently than we thought,’ ” he says. “We got paid in full, which is almost unheard of.”

Then there’s MEC’s own private label, which makes up about one-third of the business, but has been losing money in recent years.

A symbol of the inefficiency is the Toaster Suit. MEC sells 8,000 to 10,000 of these one-piece kids’ snowsuits each year, but the mark-up has been extremely narrow because of how it’s made and shipped. The cuff alone is a quagmire: MEC buys this piece from a company in Italy, which makes it in Turkey and ships it to El Salvador to get it sewn onto the rest of the suit. That’s about to change.

“They identified how to take $4 out of the suit by changing the lining to a recycled material, “ says Mr. Taylor, “but couldn’t get the go-ahead because it’s the Toaster Suit – we can’t screw it up.”

Another example: Even while the apparel industry changed dramatically, MEC continued buying its own fabric, accepting the liability for any leftovers, rather than offloading that risk to its factory partners. Making MEC label more efficient by fixing these kinds of problems is a priority. So is renegotiating minimum mandatory purchases from factories, to more closely align with the amount of product MEC can actually sell.

No matter how tight the merchandising strategy, every retailer ends up with excess stock. This was another area where MEC got into trouble.

In the past, a store manager’s bonus relied partly on their location’s contribution to the co-op’s gross margins. Because clearance sales cut into margins, managers were incentivized to pack up end-of-season product and ship it to warehouses, rather than selling it at a discount.

That meant that MEC was paying to ship items back and forth between stores and distribution centres – and again to customers, if clearance items were sold online – along with the labour to pack and unpack that inventory multiple times.

On a video call at the end of March, the merchandising team discussed how to make changes. The idea now is to keep as much product in stores as possible, making managers responsible for selling off expiring stock. But store displays flip from snow sports to water sports when the seasons change, and with limited storage at each location, those products have to go somewhere.

“This is a legacy MEC problem,” says Brodie Wallace, MEC’s director of hard goods.

Another major change to MEC’s logistics will be buying products specifically for e-commerce, with a separate pool of inventory allocated to stores. Roughly half of MEC’s e-commerce orders shipped from stores as of November. By this fall, the goal is 20 per cent.

Stores have already begun to see some movement. On a regular morning store managers’ call in early February – after Montreal-based manager Benoit Perrier played summery music to offset the snow falling outside his window – assistant inventory manager Sylvain Robba explained that with e-commerce purchases still higher than usual, MEC would be holding more inventory dedicated to web orders at the distribution centres.

“It should reduce the ship-from-store situations, and reduce our shipping costs,” he said. “It will also benefit our members, as it should be less parcels that you can receive for one order.”

All these strategic changes are happening while the merchandising team is also grappling with a global supply chain that has been thrown completely out of whack by COVID. At the end of March, MEC was still $15-million light on inventory going into the summer season. Trying to source bicycles? Good luck. Bike-parts manufacturers are quoting 600-day lead times for orders, compared with an industry norm of 60 to 90 days in the before times. The largest cross-country ski factory in the world burned down in November – because 2020. Shipping delays are rampant.

On another video meeting in mid-March, the team discussed the possibility of shipping tents by air rather than by boat, just to ensure they’d have stock in time for camping season. One problem: The additional cost would eat up most of the margin on those items.

“It’s whether you want market share or whether you want market dollars, at the end of the day,” Mr. Wallace told his colleagues. They decided to fly in roughly 3,000 tents.

As Canadians approach another summer of vacation-planning around restricted international travel, sales in MEC’s camping department have already doubled year-to-date compared to 2020. It will be a scramble to keep up.

“I’ve got a couple of used tents in my basement,” Mr. Taylor joked. “You want to sell those, Brodie?”

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At MEC, there are some stories that have become legend. Among them is the tale of the Love Boat.

Many years back, a couple bought a top-of-the-line canoe to use at their wedding. After the festivities, they brought it back, saying they weren’t satisfied with the product – which in the meantime, had been spray-painted with the words “Love Boat” in fluorescent pink on the side of the canoe. No problem. Refund granted.

For decades, MEC’s “Rock Solid Guarantee” has been one of the most liberal return policies in the business. The vast majority of returns are legit, but there are a small number of brazen folk who abuse the laxity, returning a hiking boot with a melted sole from being propped up too close to a campfire, for example, or a set of skis used for an entire season. Other retailers have already scaled back. L.L. Bean, which famously had a 100-per-cent satisfaction guarantee for more than a century, announced in 2018 it was imposing some limits, citing abuse.

MEC is now mulling whether to institute some limits as well, though this would be a delicate dance between ensuring its policies are responsible and protecting its brand.

Some members who opposed MEC’s were outspoken enough to make news. And this had an impact on public perceptions of the retailer. Store staff are still fielding queries from some shoppers who think MEC is bankrupt, wondering when they’re closing down for good.

MEC is about to step up its marketing efforts to tell a different story. It’s also launching a loyalty program, trying to give shoppers who paid $5 for an ownership stake in the co-op a sense of ongoing value for their membership. MEC is also continuing its support of causes such as the Canadian Parks and Wilderness Society, and public safety programs through Avalanche Canada, in a bid to show customers its community engagement is not being gutted. It has launched new sustainability targets. And it is reinstating wilderness outing programs – a past practice that both boosted morale and ensured sales staff were knowledgeable about products needed for excursions – that fell by the wayside during MEC’s financial troubles.

With the retailer’s finances shored up, basic things such as store repairs that were delayed in the past are now happening: At the North Vancouver store, the roof is fixed, and the heating and cooling system is back to working properly.

“We see change happen faster,” says store manager Caitlin Brown. “When we provide feedback, [stores] get action quicker.”

Steven Jones, a members who vocally opposed the sale, has not shopped at MEC lately. Like many people, he has been trying to support smaller, local businesses during the pandemic. But he’s not boycotting the chain, he says. He’ll be watching to see whether the new owners continue supporting both national causes and community initiatives, like trail building and advocacy groups. He believes the retailer has a strong future, in part because of the number of people who’ve embraced the outdoors over the past year.

“A lot of people who have been introduced to these activities during the pandemic will keep doing it, because it’s awesome,” he says. “The business is great. That’s why I wanted to save it. … As a former member, it was sad to see we couldn’t find a solution that would have retained the organization as a co-op.”

There are the days when planning for the future takes a back seat to the present crisis.

On a video meeting on Feb. 16, regional manager Glenda Rowley took a moment to congratulate Ontario stores that were reopening that day following COVID-related shutdowns, and the Toronto locations set to open the following week. Managers on the call responded with a flurry of GIFs -- such as Jennifer Lopez standing up to applaud -- over the Microsoft Teams chat function.

Just seven weeks later, retailers received news of renewed lockdowns in Ontario, which would mean another round of temporary layoffs.

“All our plans today – everything got cancelled,” Mr. Claus said on April 7. Instead of another round of strategy meetings, the firehoses were out again. The company had to reassure employees that despite the short-term pain, MEC wasn’t going anywhere. “They’ve been through this before. … But we have the cash flow. We have the balance sheet. We can get through this.”

While MEC closed one store while in creditor protection, and cancelled leases on some stores that were yet to open, Kingswood’s Mr. Wolf says he believes there’s room to grow, and potentially open more locations.

Private-equity investors often look for exit opportunities to make their money within three to five years. Mr. Wolf says Kingswood typically looks at five-year holds on average, but has flexibility to go on longer if needed.

“I believe if our team executes, as we expect that they will, there will certainly be interested parties, if and when we look to exit,” he says.

MEC’s financial health has been improving. In November, just after the sale was completed, revenue was down by a percentage in the mid-30s compared with the year before, according to CFO Mr. Hlynsky. By March, the drop in sales had shrunk to the mid-single-digits compared with March, 2019 – and that’s with roughly 30 per cent less inventory.

For the first time in years, MEC has money and time to implement a new strategy. But until it’s on the other side of the biggest crisis to hit retail in decades, developing a clear picture of the long-term health of the business will be difficult. Amid the most recent wave, eight stores have been forced to close and roughly 60 employees sent home. Even still, Mr. Claus is confident.

“In every single month [since the sale], we’ve made money,” he says, adding that was true even in the traditionally slow months from January to March. “It’s going to be a good business.”