Rei's globalization

SEATTLE AND REI have grown together, from small-town to world-class players. Now the outdoor-gear retailer has come face to face with what it means to be a big business.

In 1988, a free-lance reporter for this newspaper's Sunday magazine made this observation on the 50th anniversary of Recreation Equipment Inc., noting how perfectly the outdoor-equipment cooperative reflected this region's priorities.

"In the Northwest, unlike the aggressive East or the common-sense Midwest or the flaky frontier of Southern California, people are defined more by what they do after work than what they do on the job. There is no `power city' here - where the Type A can run amok. . . ."

My, how we have changed.

REI has changed, too.

It is still a buyer's co-op - a throwback to the Great Depression-era suspicion that corporate America and the stock market were greedy and evil. And yes, the folks who run REI continue to prefer flannel, Gore-Tex and a day pack over a tailored gray suit, shirt and tie and briefcase.

But Chief Executive Officer Dennis Madsen's back hurts so much he stands at his desk and computer, an affliction aggravated by recent plane rides to Tokyo and Denver, where REI opened flagship megastores that Lloyd and Mary Anderson, REI's founders, couldn't have imagined 62 years ago when she was stitching tents in their West Seattle house.

REI has become a big business, with bank loans and 1.7 million active members who scream bloody murder when their year-end dividend doesn't exceed the 10 percent-plus of their purchases they've come to expect.

Close your eyes and you could be listening to Starbucks CEO Howard Schultz when Madsen waxes eloquent about the importance of "branding" REI's good name throughout the world.

Throughout its growth as an outdoor retailing giant, REI has tried to retain its culture, good public image and ties to Seattle. But now, REI is about to act like the big company it is.

Late this year it will close Thaw, its Seattle-based subsidiary that for 33 years produced much of the outdoor equipment and clothing REI's customers came to depend on.

When the deed is done, probably in November, most of Thaw's remaining 200 employees will have left to look for jobs in a garment industry on its last legs in this country.

Next year, Thaw's mainstay, fleece clothing items, will be made in Mexico. Much of it is expected to be produced south of Mexico City and in the Yucatan, which as recently as 1993 was marketing its workers to the world by promising labor costs that averaged less than $1 a day per worker.

In January of this year, the average daily wage paid to a production worker in the Yucatan was $5.03 - about half what human-rights organizations estimate a Mexican family needs to get by. Real wages in Mexico are down 26 percent since 1981.

Madsen and Jim Cross, president and CEO of Thaw, say REI is committed to making Thaw's closure as painless as possible. Thaw's workers, many of them Chinese, Korean and Vietnamese women, will be paid a monthly bonus to remain on the job until the fall production run ends in November. Those who stay that long will receive a severance bonus. After that, REI will use its own money and federal funds to offer retraining, continued health care and extended unemployment compensation.

No sweatshops, REI says

Cross and Madsen also say REI is determined to make sure the garments the company sells are of equal quality and produced in factories that pay a livable wage and offer humane working conditions. The factory REI plans to contract with in Moralas, south of Mexico City, pays workers about $50 a week, Cross says.

Yet there is no question that low wages in undeveloped countries like Mexico are the chief attraction. Madsen estimates his company can reduce the cost of producing fleece goods by 20 percent.

"Low labor costs remain the determining factor in assembling most soft-goods products," notes Kurt Salmon Associates, which tracks the industry. "The downside of globalization for U.S. manufacturers has been abandoned plants and displaced workers."

The North American Free Trade Agreement (NAFTA) eliminated restrictions and tariffs on trade between Mexico, Canada and the United States. Since its adoption in 1993, this country's share of the garment industry has dropped from 49 percent to 12.4 percent last year.

According to government statistics, the U.S. garment and textile industry lost 450,000 jobs between January 1995 and this April. The Department of Labor estimates 58 percent of the workers who lost their jobs between 1995 and the end of 1997 failed to find full-time jobs. Of the 32 percent who went back to work full time, the average wage dropped by 20 percent.

"It's pretty bleak," says Scott Littlehale, an economist with the Union of Needletrades, Industrial and Textile Employees based in New York City. "The chances of those people (at Thaw) finding work ain't good."

At Thaw's warehouse in Kent, workers seem both resigned and angry at the decision to close the company.

In broken English, one Chinese-born worker, who has been at Thaw for more than 20 years, shakes his head and says he doesn't understand why REI would close a company at a time when the cooperative is making more money than ever before.

Another worker responds, "We can't make it in the States and keep the price competitive. People say they want American-made, but they won't pay for it."

Mexico has been the primary beneficiary of the shift of jobs in the garment industry. Before passage of NAFTA, Mexico produced 9.9 percent of the world's soft goods. Last year, that number rose to 36.4 percent.

Along with everything else, NAFTA lifted the tariff on imported fleece. Removal of that barrier eliminated any economic advantage Thaw had. And that provided REI executives with an excuse for getting out of a business they didn't want to be in.

"It's never been one of our missions to be a manufacturer," says Madsen, who made the ultimate decision to close the Thaw factory.

In fact, Thaw has been firmly rooted in REI's culture for over three decades. The company was founded in 1967 by Anderson; mountain-climbing legend Jim Whittaker, REI's first CEO; John Hartsfield and George Trager. The company was named using the first letter of each of their last names.

Its mission, back then, was to produce the quality tents, packs, sleeping bags and clothing items REI couldn't find anywhere else. REI purchased Thaw outright in 1973 and for a time produced just about every stitched item REI sold.

That began to change in the early 1980s as other manufacturers geared up to meet the growing demand for outdoor, muscle-powered equipment. First to go was skiwear, which REI began manufacturing in Asia. Gore-Tex, sleeping bags and other sewn items followed, and finally tents.

By 1994, fleece items were all that were being manufactured by Thaw. However, fleece was growing in popularity; that year, employment reached an all-time high of 325 workers.

But even as Thaw's production plant on First Avenue - on the site of what is now Safeco Field - was churning out thousands of vests, jackets and pants, events were beginning to unfold that would lead to the company's demise.

NAFTA was the defining change. By the end of 1995, the potential impact the trade agreement would have on the garment industry was already being felt. That year, textile-industry jobs began to move to Mexico, and REI executives began questioning Thaw's future.

"It was a gradual conversation that got louder and louder as time went on," Cross says. "NAFTA played a role. The skill level of workers in Mexico played a role. I think we began to question whether we were subsidizing our domestic operation with other parts of the business."

If there were ever any doubt, another chain of events sealed the deal. The decision to locate Safeco Field south of the Kingdome forced Thaw to move. It relocated to a manufacturing plant wedged on the hillside between Boeing Field and Interstate 5.

The most direct way to get there is from Airport Way South, which involves driving up a very steep incline and over a busy set of railroad tracks that come as a complete surprise as you crest the hill. The crossing is uncontrolled, dangerous and will become more so in September when Sound Transit begins running high-speed commuter trains on those tracks. There is a proposal to close the crossing and that's expected to occur later this year.

`Decision clear'

In the end, the choice came down to China or Mexico, and Mexico won out for two reasons. There is still a tariff on imported fleece from China. And fleece products are relatively easy for unskilled workers to make.

"I think the business decision was clear," says Cross. "If anything, we probably held out a little longer than we should have. How do you compete with a factory in Mexico? The consumer is shopping the world and looking for the best bargains. In some ways, this is a nonevent. When I tell acquaintances about what we're doing they say, `Well, duh, it's about time.' "

Closure, though, means the loss of a significant number of well-paying jobs in an industry not known for its generosity.

At Thaw's facilities in South Seattle, Kent and Wenatchee, which was closed in March, production workers made between $8 and $10 an hour plus health insurance and a retirement plan.

And the move won't affect just workers here. The mills in the Northeast that supply the polyester fleece to REI are expected to follow the co-op to Mexico.

Importing items that it sells is nothing new for REI. Lloyd Anderson started the co-op in 1938 when he couldn't find the quality climbing gear he needed for a fair price at local stores. The first items Anderson brought into the country were ice axes imported from Austria.

Over the years, though, REI came to be known as a company where you could buy well-made, home-grown gear at a competitive price. The quality side of that slipped for a time in the 1980s, when REI seemed to chase companies like Eddie Bauer and Lands End into the leisure-clothing business.

But the detour was brief. Since then, REI has found its niche in the retail world, offering knowledgeable service and selling a broad enough variety of outdoor gear and wear to avoid the kind of downturn in a particular industry - ski equipment - that drove Olympic Sports into bankruptcy and out of business.

REI continues to produce some of its own camping and climbing gear domestically, and Madsen says there are no plans to close Mountain Safety Research, the wholly owned subsidiary that makes those goods.

That assurance provides little solace to critics of REI's decision to close Thaw. They argue that over the years, REI has moved away from its populist, buyer's co-op roots to become more of a big business. They are especially appalled the company decided to close the manufacturing plant and move the jobs to Mexico just months after rioters and demonstrators disrupted the World Trade Organization meetings here in Seattle.

But change at REI has never come easy. Beginning with its decision in 1975 to expand outside Seattle and open a second store in California, virtually every change has been met with at least some resistance, most of it coming from Seattle co-op members who for years were the heart and soul of the organization.

At times, they have gotten their way. The cooperative's members and its employees here were two reasons why REI didn't relocate its distribution plant to another, more centralized state in the late 1980s.

REI limits the amount of apparel it offers because the company knows that's not what co-op members want.

And when REI set out to build its new flagship store in Seattle, it polled 30,000 local members to find out what features they wanted included in the building. Members responded, saying the building should be resource-efficient and environmentally responsible. Both were built into the structure.

"We were building a building, a playhouse, for our members, and we wanted to make sure it included the things our members cared about," says REI spokesman Michael Collins.

A few griped, anyway.

But today, Seattle-area card holders represent less than 12 percent of the co-op's 1.7 million active members.

Expansion continues

In the 25 years since expansion began, REI has become a $621-million-a-year business that is growing at a rate of 8 percent to 10 percent annually. Last year, it paid members $31.5 million in dividends. It has long-term debts of $50.6 million, operates 55 stores worldwide and has set a goal of opening three to five new retail outlets a year.

The board that oversees REI has changed, too. Though prospective members aren't considered unless they have an active interest in the environment and the outdoors (preferably mountain climbing), many of today's directors have a decidedly corporate background.

The board's chairman is Thomas Harville, the retired chairman and CEO of the The Bon Marche. He is quick to point out that one of the first things he did when he moved to Seattle in the 1970s was join REI. In 1993, he climbed Mount Rainier with Whittaker, the closest thing REI has to a living icon.

"There are differences and similarities between running The Bon and REI," he says. "REI is a co-op, but it must compete in the business world. We have a unique tie to our members, but we must adapt to changing conditions. Most consumer cooperatives end up being tied to one small area. If we hadn't decided to open a store outside Puget Sound, in Berkeley, we probably wouldn't be in existence today."

Co-op wouldn't work today

Both Harville and Madsen believe REI couldn't be started as a co-op today. And, indeed, unlike the early days of mountain climbing and skiing in the Northwest, today there is no shortage of places to buy quality outdoor equipment, from high-priced to cheap.

What REI hopes to continue to add to that mix is the one thing that hasn't changed about the company: service. Continuing a long tradition, it is Madsen's goal is to see that customers walk out of an REI having bought no more or no less than what they need to safely hike, camp, mountain-climb or ski.

But knowledgeable, unpressured service may be one of the few things that is sacrosanct at REI. Today, the company offers a vast array of what Madsen calls "outdoor gear on steroids," and he gives every indication REI will continue to be an aggressive retailer and survivor in the business world.

In both the Denver and Tokyo stores, it is in partnership with another Seattle-based company, Starbucks, which - unlike REI - has been the target of protests against unfettered trade, foreign working conditions and the globalization of U.S. companies.

Madsen doesn't rule anything out in keeping the company healthy and growing, including restructuring REI's financial underpinnings and taking the company public if that's what's necessary for it to survive and prosper.

"We're always looking at ways to fund ourselves," he says. "I do not want to change the basic fabric of this organization. We don't have any purposeful plan at this point. But we need to do what it takes to be competitive in the marketplace."

When the Andersons founded REI in 1938, the cooperative reflected Seattle. In 1988, on REI's 50th anniversary, it reflected the city, too. Bill Gates and a generation of high-tech wizards were just getting started, and Seattle was still a sleepy backwater defined not by money but by what people could do on three-day weekends.

Not anymore. Today, we are known for our stock options and the hardball, capitalistic companies we export round the world. In that way, REI is right in step.

Robert T. Nelson's phone message number is 206-464-2996. His e-mail address is