REI: Equipped to Endure

REI sells outdoor equipment in a manner that creates consumer trust. With a business and operating model that align like peanut butter and jelly, they are a successful company with a bright future.

Overview

Recreational Equipment, Inc. or REI has grown dramatically from the small Washington co-op founded in 1938. From 23 original members (including the two founders) to over 5.5 million members today, REI has grown to be the largest US consumer co-op with 138 locations and plans to open more in 2016. REI sells its own line of gear and apparel as well as products from top brands for camping, climbing, cycling, fitness, hiking, paddling, snow sports, and travel. With sales of $2.2B in 2014, REI proves that aligning their business and operating models is not only lucrative, but more importantly gives them the ability to pursue a triple-bottom line focused on conservation efforts (see the below growth compared to the S&P 500).

-REI Performance

(Click image to enlarge)

Business Model

REI is an outdoor retail cooperative (co-op) providing equipment, education, and inspiration to its customers. While sales from products make up the majority of REI revenue, income also comes from memberships. While anyone can shop at REI, consumers can opt to pay a onetime fee of $20 to join the co-op and receive a portion of REI’s profits based on a percentage of their annual purchases. Membership also provides access to special discounts, sales, and even classes to learn more about the hobbies customers are shopping for when they visit REI. Receiving a dividend and these various promotions help create value for REI members, but it is only the start of why customers return to their doors.

Many REI locations have built in courses or areas to test products including footwear, bikes, and climbing gear. Combined with unparalleled customer service that helps educate customers on the best products for their needs, the REI shopping experience ensures that shoppers find the best items. If for some reason the process goes haywire, REI offers a 100% satisfaction guarantee for an entire year. Altogether, this makes customers prefer the REI experience over competitors and buy products with confidence. Ultimately, sales make money for REI and that is the meat of what defines a business model.

Operating Model

As a retailer, customer service is a large part of REI’s value offering. REI typically hires salespeople who are extremely knowledgeable about the products they sell and passionate about the sports and activities that can be done using the items. REI retains employees by treating them with respect, creating an environment that allows them to live their passions, promoting from within, and providing benefits such as a 401K. Few retailers go this far for their employees and it shows. Since its creation in 1998, REI has been on FORTUNE magazine’s best 100 places to work. Considering employees don’t work for commissions or tips, this is no small feat!

Great employees that love their job and aren’t working to simply move products creates an environment that fosters customer trust. Anyone who has shopped at an REI and was helped by one (or more) of their great employees has increased motivation to return for repeat purchases and a solid customer experience.

This trust is reinforced by REI’s decision to measure their success on a triple bottom line, or a metric that looks beyond financial gains and also tries to maximize social and environmental benefits. REI commits to promoting environmental stewardship and access to outdoor recreation. Activities range from recycling and low-waste packaging to volunteer service projects and donations to non-profits that protect and restore the environment. The intertwining of all aspects that make up REI truly creates self-supporting cycle of trust (as opposed to a death spiral we all too often see) within the outdoor enthusiast community that creates values across all members. The below figure depicts this cycle and provides additional metrics for each area of REI.

REI_Infographic_Final

(Click image to enlarge)

Support and Alignment

Knowing a bit about the business and operating models, the alignment and following synergies is fairly obvious: REI makes money by selling products and attracts customers to make purchases by being a trusted retailer. The trust in products has even convinced a growing number of customers to use REI for services beyond retail in the form of a travel agent through REI Adventures.  REI Adventures provides full-service outfitting for trips across all seven continents. Members can travel with professional instructors to backpack, hike, climb, cycle, or even kayak. These trips are an example of how the lifetime value of customers can be expanded by slightly tweaking the business model while maintaining the alignment to the operating model. In fact, members who go on these trips are often described as REI’s best customers. As long as the connection remains in place, REI continues to enjoy success as a retailer that many outdoor enthusiast prefer.

Conclusion

Overall, REI has top-notch agreement with its business and operating model and as a result has not only been successful at achieving goals on all three fronts of their triple bottom line metrics, but also in being the preferred retailer of this author for anything remotely connected to being outside.  Thank you REI!

Works Cited:

Kalkan, Melek, and Ayhan Demir. “Https://www.dropbox.com/s/ba4mqotv09tjimp/Eel 2015_Proceedings_Paper_3.pdf?dl=0.” 5th Annual International Conference on Education & E-Learning (EeL 2015), 2015.

“REI Overview.” REI Company Overview. Accessed December 7, 2015. http://www.rei.com/about-rei/business.html.

“REI’s Co-op Business Model Produces Record Results.” Triple Pundit People Planet Profit. April 14, 2015. Accessed December 7, 2015. http://www.triplepundit.com/2015/04/reis-co-op-business-model-produces-record-results/.

“REI’s Crunchy Business Model Is Crushing Retail Competitors.” Bloomberg.com. Accessed December 7, 2015. http://www.bloomberg.com/news/articles/2015-03-27/rei-s-crunchy-business-model-is-crushing-retail-competitors.

 

 

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2 thoughts on “REI: Equipped to Endure

  1. Great to know a fellow REI enthusiast! Very clear and articulate analysis on the business and operating models. I found the chart of sales growth for REI vs. the S&P Retail index very interesting–do you think REI’s ability to outperform the rest of its industry in the Great Recession is related to the demographic and socioeconomic profile of the customers segments that they target?

  2. Doug, so glad to see that someone from our section covered REI!

    Reading your post, and reflecting on my own experience with REI, I can’t agree more with you in how well-aligned their operating model is with their business models. I once took a rock-climbing class with a few REI employees. One of them said that he used to work as a patent attorney, and now manages one of the local REI stores. He said he loved his job because he was very passionate about the outdoors, so he decided to join a group where his coworkers would share the same passion.

    Although, one thing that always bothered me about REI as a business is their extremely generous return policy. You may recall that REI was once known as “Return Every Item”. That prompted them to limit their return timeline to one year, but even that is too generous in my opinion, particularly because the items can be used heavily and worn down. Still, the fact that they have maintained strong sales despite this policy shows that they have really “clicked” with their customer, and the customers have rewarded them with loyal service.

    Finally, I think the one reason why REI beats out their main competitor, EMS, is because of REI’s coop-membership model. Even though I can find the same items, at similar price levels, and with the same type of outdoors-enthusiastic employees at EMS, I still prefer REI because I feel like I’m a more integral part of their company as a member.

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