Rei Gears Up -- Co-Op Faces A Challenge - Itself

THE QUESTION for the Kent-based organization is whether a company that now mails about 8.5 million catalogs a year and employs 4,800 people can stay focused on the basics - customer service and reasonably priced, quality merchandise - which established its reputation over the first 58 years. ----------------------------------------------------------------- In the shadow of Interstate 5, the Northwest institution known simply as REI is quietly building its catbird seat.

The new flagship store for Kent-based Recreational Equipment Inc., under construction at Eastlake Avenue East and John Street, symbolizes the robust success and continued expansion of the nation's largest consumer cooperative - a company that now operates 44 stores in 20 states and has elevated the sale of kayaks and carabiners to a $448 million business that's still growing.

Look closer, and the new project symbolizes still more.

Behind the steel superstructure, there are rustic wooden beams and an enormous stone fireplace. In the midst of the kind of heady growth that has been known to spoil other companies, these touches point to a conscious effort to preserve REI's rough-hewn soul and its simple, homespun ethic of customer service and quality gear at a fair price.

The challenge REI faces in remaining true to its roots is at the crux of a current debate over how much REI's board of directors should be paid. At issue is not just money but whether REI's

continued success will alter the formula that has made it so popular.

Climb to success

REI has come a long way since that first day of summer in 1938, when six mountain climbers, including founders Lloyd and Mary Anderson, tossed $1 each into a kitty to purchase climbing equipment.

The group formed a cooperative, which used the one-time membership fee (now $15) to purchase equipment in bulk. At year's end, any money remaining was returned to the members - a process that continues today in the form of a dividend based on each member's annual purchases. In 1995, the company returned $25.8 million to its members in dividends.

That kind of loyalty to customers has spurred loyalties of its own. Though anyone can shop at REI, members account for about 85 percent of sales. And as an employer, REI experiences only about 25 percent turnover. The company has been noted twice in the book "The 100 Best Companies to Work for in America."

Though REI's growth came well before the boom in outdoor recreation that began in the 1990s, the company benefited greatly from the surge in popularity that suddenly made the sale of hiking boots, mountain bikes and other "human-powered" recreational equipment a $10 billion business, according to figures from the Outdoor Recreation Coalition of America (ORCA), an industry trade association.

As a result, 1992 to 1994 "were record years for REI," said Wally Smith, REI's 48-year-old president, chief executive officer and an REI "lifer" who worked his way up from the mail room. Sales climbed 15 percent to 17 percent a year during that period.

That type of success made REI the nation's sixth-largest sporting-goods and sports-apparel retailer in 1994, behind the likes of Foot Locker, L.L. Bean and Eddie Bauer, according to Sportstyle, an industry trade magazine.

Last year, REI added 272,000 members for a total of almost 1.4 million worldwide. About 30,000 live in Japan and take advantage of the company's thriving mail-order business, which was named one of the top-five mail-order businesses in the nation by Consumer Reports in 1995.

Plans continue for adding retail outlets this year - a second store in Phoenix and one in Houston.

And then there's the flagship store. The two-floor, 100,000-square-foot building, slated to open in September, will be twice the size of the former car-dealership building that REI has occupied on Capitol Hill since 1962. It will include a 65-foot climbing wall, a 250-person auditorium, a 100-seat cafe and a parking garage. Though company officials won't say how much the project will cost, the city has issued construction permits totaling about $13 million.

A slowdown in '95

The string of successes is not to say that REI escaped the downturn in retail sales that plagued most of the industry in 1995.

Sales for the co-op and its four manufacturing subsidiaries grew just 3 percent last year, after an almost 18 percent increase the previous year.

A number of factors contributed to the growth-rate decline, including a national drop in consumer spending and a market flooded with cheap sporting goods - small and "big box" sporting-goods retailers were liquidating merchandise to stay afloat.

Some say the overall market for outdoor recreational clothing and equipment may have plateaued, or at least stabilized.

Judy Leand, managing editor for Sportstyle, forecast moderate growth of "about 3 (percent) or 4 percent" for the industry as a whole in 1996. But Smith said he's confident REI can return to "the usual goal" of 11 percent to 15 percent growth.

That may not be as difficult as it sounds, given what many describe as REI's unique "niche" in the industry. As a large company that focuses on only five sports - camping, climbing, cycling, paddling and skiing - REI is able to combine the economies inherent to the big-box retailers, with the unique equipment and know-how of specialty stores.

As a result, said Smith, while the company may vie for customers with category-busters such as Wal-Mart, specialty stores such as Seattle's Swallows' Nest and even mail-order companies such as L.L. Bean and Campmor, "In a sense we don't think we have any nationwide direct competitors."

Instead, observers such as Dave Secunda, ORCA's executive director, suggest that the real challenge REI faces is itself: whether a company that now mails some 8.5 million catalogs a year and employs 4,800 people can stay focused on the basics - customer service and reasonably priced, quality merchandise - which established its reputation over the first 58 years.

Paying directors

The ongoing discussion about growth and its impact on REI has taken shape most recently in a membership vote on how much REI's board of directors should be paid. The results will be announced at REI's annual meeting tomorrow.

Under the proposal, REI's 13 board members would receive half of the amount paid to their peers at comparably sized companies such as Starbucks and Williams-Sonoma. They also would receive compensation for each of about 12 board meetings per year, for a total of about $16,500 a year. REI directors now make $3,832 annually.

David Thompson, one of two REI board members not renominated this spring for another three-year term, opposes the increase. In a letter to REI members, Thompson said, "The strength of REI should continue to be the volunteer ethos of its board members. The board in general wants to attract more corporate types to serve on the board," Thompson said. That policy, he argued, distances the co-op from its members and its roots.

Dennis Madsen, REI's executive vice president, chief operating officer and another REI "lifer," disagreed, saying that the issue is simply a practical one.

Today's directors "have a lot more responsibility attached to them," he said. "You want people with the background and the experience to make good decisions," and those people should be compensated for their time and money, he said.

Larger issue is growth

But the larger issue is growth and its potential to alter the character of an institution that many do not want to see change.

"Growth has been a much talked-about topic at REI since as long as I can remember," said Madsen, who, like Smith, also began his career sorting mail orders. Controlled, managed growth is a guiding tenet of the REI philosophy and "is a very central part of our success," Madsen said. Without it, the company long ago would have stagnated and lost its best and most ambitious employees, he said.

Smith, too, said he feels "no conflict" in the way REI is operating. "From day one, we've been a business that's organized as a co-op, and that's where we are today," he said. "It's driven by members, it's driven by their equipment needs, and that hasn't changed."

At the same time, both Smith and Madsen said REI has been careful about its expansion because the company recognizes that "too much growth would cause (the company's trademark) service value to be lost," Madsen said.

Hence, the evident ties to REI's rustic past in the new flagship store, from the ramps that will replace stairs, to the wooden beams and the large fireplace.

"We were very sensitive to how this new store would be received," Madsen said. "We wanted it to be as comfortable to our old-time customers as our Capitol Hill store is."

Not all changes are cosmetic. Specialized service will be a major component of the new store. Customers will be able to test-ride mountain bikes in an outdoor, 21,000-square-foot landscaped area, try out hiking boots on the store's indoor trail or take a climbing lesson on the 65-foot free-standing indoor climbing wall. Inside the store, there will be repair shops, an adventure-travel service and demonstration areas for items such as water purifiers.

As for the increasing cost of outdoor gear, "I'm not going to stand here and say that our product is as cheap as 25 years ago," Madsen said. "But it isn't our size that's created that; it's our customers' needs and wants," he said, citing the preference for items made of high-tech fabrics such as Gore-Tex. Nonetheless, Madsen said members can expect "a shift more and more to a medium-priced, more affordable product."

Like Madsen, Smith agreed the same hard work will keep REI close to its members and on top of the retail heap. "To the extent that we're able to hustle and earn our members' business, REI's going to prosper," he said. ----------------------------------------------------------------- REI's annual meeting

REI's annual membership meeting is at 7 p.m. tomorrow at REI's administrative headquarters, 6750 S. 228th St., in Kent.