MEC loses $11M as new CEO braces against storm of competition

Mountain Equipment Co-op, Canada's largest outdoor gear retailer, is losing money, says its new CEO Philippe Arrata — a lot of it.

The outdoor recreation gear and clothing retailer lost $11.487 million last year on sales of $462 million, according to financial statements audited by KPMG and posted on MEC's website.

Arrata, the former CFO of Best Buy, says the co-op is at a turning point, facing slow sales, inventory backups, supply chain problems and ever-increasing online competition.

"The sales growth hasn't materialized, as we've seen increased competition by traditional big-box players and emerging e-commerce players," Arrata said in a statement Tuesday about the recreation equipment giant's financial challenges.

The audit also revealed MEC had $8 million in restructuring and reorganization costs in 2018-19. The co-op reported $7.2 million of that was paid out to staff.

Since its founding in Vancouver in 1971, MEC has expanded to 20 cities across Canada with 2,700 employees, and today bills itself as Canada's largest supplier of outdoor clothing and recreation gear with a reputation for a commitment to environmental protection.

But some longtime MEC members say the 22-store co-op has lost money by spending too much on stores in Toronto and Vancouver and racking up more debt while inventory piled up and sales slowed because of stiff competition from online retailers like Amazon.

Steve Jones said he is glad to see MEC's leader acknowledging the seriousness of the situation.

The software executive ran unsuccessfully for MEC's board in 2018. He's long been critical of "aggressive expansion" and is calling for transparency around financial details such as the CEO's salary.

Jones said some members think MEC has strayed in recent years from its founding retail goals, which focused on selling gear for outdoor pursuits such as climbing, cross-country skiing, canoeing and kayaking.

"I don't think that the membership ever really formally gave the board or the leadership the mandate to pursue that type of growth," said Jones.

"When you think about backcountry tents or snowshoes, we are in a very strong position. I worry that [we are] trying to compete in other categories such as jean jackets and running shoes," he said.

Jones and other longtime MEC members questioned the co-op removing the word "co-op" from the chain's logo in 2013 and then, this spring, replacing the 1% for the Planet program — which donated to environmental causes — with an internal program called MEC All Out.

Meanwhile, the co-op's balance sheets show no cash assets or any dividends paid to members last year.

Costs grew at 2½ times the rate of sales

Arrata said sales grew 1.7 per cent, but costs grew faster — up 4.4 per cent.

"Every day and every waking moment I'm thinking about how can we improve — actually, even during sleeping moments," said Arrata in an interview Tuesday.

Arrata took over in July and launched an internal rallying cry warning of the financial crunch. He says his new team will turn around an "unsustainable trajectory." 

Compounding his challenge is the unionization this year of two MEC outlets in B.C., creating the potential for higher labour costs.

University of British Columbia accounting professor Kin Lo, who studied MEC's financials, confirmed the co-op's finances do show strain. But he sees Arrata's experience as a past Best Buy exec as a plus.

"I think Arrata has a good shot," said Lo, who also believes MEC's physical stores — where buyers can touch and try products — are a key asset.

With Amazon, you have to go by what is shown on screen "and just roll the dice sometimes," he said.

Arrata acknowledged the financial headwinds in staff memos over the past few months. He says he also sought advice from another co-op that faced similar struggles in the past.

Recreational equipment retailer REI Co-op turned around its troubles and in 2018 listed $570 million in cash assets and $129 million in member dividends.

'Retail is always tough'

Arrata said MEC will offer up its price matching, product guarantees and passionate staff to cement its bond as "part of Canadian DNA."

The Montreal-born retailer recalled how his own Egyptian immigrant father loved to take the family on outdoor adventures.

He said he recently noticed a Syrian mother talking to staff at the MEC in Kitchener, Ont. She had bought a tent and told them about her family's first backyard tenting experience in the rain.

It struck Arrata how MEC makes emotional connections with people who come to buy gear in the stores. That is something online retailers can't do, and he says he hopes experiences like this will help MEC weather this financial storm.

"Retail is always tough. Ten years ago there were different retailers that kept us up at night, and 10 years later there are a different set of retailers that keep us up at night, because the sands always shift in retail."

The retail co-op is governed by a board of directors that is elected by members. Lifetime membership in MEC is $5.

The nominations for the next election are coming up in January.