This weekend, September 26-27, 2020, is important for the Canadian retailer, MEC (formerly the Mountain Equipment Cooperative). A British Columbian court will decide if MEC should be sold to a private equity firm [1]. A grassroots group, SaveMEC, has raised funds and support to oppose the sale. It hopes to send 10,000 letters to the creditors to convince them to delay the sale for a fortnight while alternatives are sought. This blog is 1/10,000 of this support – and some thoughts on alternatives.

A Caveat Before Discussion

But first, a caveat.  For those who follow my blogs closely (hello, anyone?), you know that I have a passion for organizational design from an accounting perspective.  Although I am a professional accountant (CPA/CMA), corporate treasury, bankruptcy, mergers or acquisitions are NOT my field. 

This blog was purposefully written before I reviewed any financial information related to MEC. The existing MEC members, board, creditors and others should not rely on this blog for anything other than this member’s perspectives. 

Dear MEC Creditors from a Member

I was a latecomer to join MEC. While most of my Calgary camping friends had memberships, I did not get mine until 1983. It is with sadness then that this Canadian institution failed and was placed in bankruptcy protection. Another retailer who did not make it in the age of Amazon and the stresses of COVID.

Members as Customers – Customers as Members

… but this retailer has something that others do not have, members who are its customers. As it turned out this was also its weakness. Membership is cheap ($5) and conferred for life. This model, a bit like democracy itself, leads to complacency. For example, I stopped voting a few years back – too many other life distractions.

Still, the membership is the greatest asset for this organization. The fact that tens of thousands have signed an online petition and others have taken money out of their pocket to pay into a defense fund is ample evidence of this passion – and an underlying asset that you as creditors should consider before agreeing to the sale of the organization.

Good Reasons to Sell MEC Immediately

The retail business has always been tough and technology has made it more challenging. While Amazon has created billionaires – and extraordinary convenience for its customers – malls are being shuttered. In this context, it is understandable if you want your money repaid back as soon as possible.

Beyond the larger macro-economic perspectives, MEC made some very strange choices as a retailer. It built beautiful stores that are a pleasure to shop in with a wide range of inventory ready to be purchased. These beautiful and well staffed stores sure made it easier to order online from a competitor.

MEC has good brand recognition. Members may continue to shop at MEC out of rote behaviour, for a few years anyway…

Better Reasons to Give Save MEC a Bit of Time

Which brings us to why, dear creditors, you should agree to an extension next week:

• Governance and How We Got Here
• True Future Value of MEC
• Leveraging Brand Recognition to Help Your Business
• The Risks and Benefits of Doing Business with the Grassroots

Governance and How We Got Here

The membership structure of MEC was its greatest strength and a fundamental weakness. The same $5 that bought a membership in 1971 could buy a membership today [2]. Fast forward nearly 50 years and MEC has 5+ million members… but really, how many are active? In retrospect, this was a governance problem that should have been addressed. Membership should not have been easy and voting should have been a privilege rather than a minor inconvenience best ignored.

Looking at the current board and executives of MEC I am impressed with their biographies. They appear to be highly qualified and capable individuals. As a result, I have to assume that they are people acting in good faith during very trying and difficult times.

Nevertheless, the fact that thousands of members are disagreeing with the board should give you, the creditors, pause. As a cooperative, the first place the board should have turned to is its members. For example, the board could have asked its members for a special cash-call (e.g. $100 each). Such methods would have purged the membership rolls of ‘tourist-members’, re-affirmed the support for the cooperative or demonstrated that it truly needs to be sold to private interests due to member apathy. The point is that this opportunity was not presented to members as an alternative to the sale of the organization. [3]

The Past as a Measure of the True Future Value of MEC

The 1970’s were a heyday for the cooperative movement. Food, housing and financial cooperatives were established both with government support (e.g. for housing cooperatives) or by interested citizens (e.g. food cooperatives to obtain organic food) [4].

Cooperatives are created as a means of addressing a power imbalance. 100 or so years ago, here in the prairie provinces, cooperatives were a method of protecting farmers from the power of eastern food corporations, the monopoly of the railroad and the indifference of an Eastern Canadian focused federal government. Fast forward 100 years, and the players have changed but the underlying challenges remain – how to rebalance power structures for producers, consumers and citizens in the face of disorientating macro-social-economic changes. Since then, many of these organizations have disappeared. Like many communal activities, the efforts of the few are often exploited by the indifference of the many. Nevertheless, the underlying value MEC is its members not its stores.

MEC was started by a few outdoor enthusiasts in Vancouver who wanted to be able to buy gear at a good price so as to support a particular lifestyle. Walk through Vancouver, Banff or Jasper and you can see a ‘faux-outdoor’ lifestyle in a myriad of shops. Packaged and cookie-cut for immediate consumption. If one of these shops closed, it would be replaced with the next fashion trend. While such creative-destruction represents the power of a market economy, the true future value of MEC is more than changing fashion.

MEC is an enduring and sustainable commitment to allow Canadians to enjoy the outdoors to the extent of their inclinations and abilities. The gear, clothing and consumables are the means to this experience and are not the end. Recognizing this difference between wearing clothes to demonstrate a faux-lifestyle and enabling individuals to truly embrace that lifestyle is the difference between the shop on Banff Avenue and the cooperative movement.

By selling MEC to a private investor, the stores will likely become more efficient and profitable – but they will also become just ‘another’ place to buy the “fashion”. Maintaining MEC as a cooperative (or variations thereof, see the discussion below), MEC can enable Canadians to live at least partially a true outdoor lifestyle.

Leveraging Brand Recognition to Help Your Business

And now back to you, dear creditors and your money. The Royal Bank of Canada, the Toronto Dominion Bank and the Canadian Imperial Bank of Commerce are listed as the main creditors [5]. These banks are Canadian institutions in their own right. Every year, you spend millions in advertising for the hearts, minds and mortgages of Canadians. Undoubtedly many of the 5 million MEC members are part of your target demographic and customer base. Given that the place MEC has in the Canadian market, you now have two choices. The first is to make a sound business decision to approve the sale of MEC to a US investment company and recoup some or all of your loans.

The second possibility is to recognize an opportunity to support Canada’s largest retail cooperative [6] and the underlying passion Canadians have for the outdoors. If successful, the banks can become associated with a Canadian success story of recovery. If not, then you can at least point to the effort as an example of understanding the Canadian market place and sensibilities. Specific actions you, the creditors, can take include:

1. Member-Funded Recapitalization. Support a member funded re-capitalization of MEC. Details to follow but likely this would be a combination of a change to the membership structure and/or a cash call from members.
2. Accept Failure, Support Success. Accept that if a member funded capitalization fails, MEC as a cooperative should be wound down and it will join the legions of failed utopic organizations that preceded it.
3. Help MEC rethink its focus. Flagship stores are pretty but private businesses can do marketing and merchandising better than MEC. Perhaps a return to slightly grubby stores in basements serving real customers with the best gear possible.
4. Diversity at the Board Table. Encourage the participation of both the creditors and possibly the private equity firm in the governance of MEC during its recovery phase. The MEC board needs the discipline of the market place to return to profitability [7] in ADDITION to the heart and soul of the cooperative and environmental sensibilities of MEC’s membership.
5. Cooperatives a New Old Idea. The consolidation and centralization of economic power in our world (think Amazon) may cause a resurgence in cooperatives. The creditors have an opportunity to invest in this possible future trend early rather than supporting the forces of economic consolidation.
6. Creditors: Little Downside, Good Upside. MEC owes the banks about $92 million and needs another $90 million to transition to profitability [8]. This is not chump-change but is not the biggest bad debt on the banks’ ledger either. If the creditors allow for the members to re-capitalize the organization, they can be part of a success story. If the members don’t come through, all that is lost is a few months.
7. Investor: Some Downside, Good Upside: The private equity firm should support such a delay and an attempt for members to recapitalize. It is quite possible that MEC will still need an equity investment and the guidance of the firm albeit as a minority shareholder. The investor is not the ‘bad-guy’. Instead they are trying to make a good return on an investment. This could be accomplished through something like a preferred share offering or bonds with a favorable interest rate. There has been sufficient ill-will generated in recent weeks that the customers the investor is counting on to return MEC to profitability may shop elsewhere.
8. Be Careful What You Agree to Sell. Finally, what exactly is being sold? If it is MEC’s physical assets (buildings, inventory, fixtures, etc.), that is one thing. If the details of the 5 million members are being sold, then you have a problem. I have agreed to share my purchase history, home address, etc. with a cooperative. I have not agreed to share this information with anyone else, in particular an American retailer. The reason this is your problem is the expected duty of care you have to protect the information of Canadians. If you agree to the sale of MEC’s membership details, what does that say about your willingness to sell personal information you collect when I bank with you.

The Risks and Benefits of Doing Business with the Grassroots

As a closing thought, if I were the creditors and/or the investor, I would be reticent to go into business with a grassroots organization. The politics and motivations can be murky and a lack of a central authority may mean doing business with factions rather than a partner.

Alternatively, a business is seldom about buildings, inventory or even customer service. A successful business is based on trust between the parties to the economic exchange. Considerable passion, interest and even money has been raised by disgruntled MEC members who have felt shut out of the decision process for THEIR cooperative. The board, creditors and investors have an opportunity to hear these members and ask them to ‘put their money where their passion is’. The result may be the same, another failed cooperative. The result may also be a renewed MEC and a business opportunity of a lifetime!

Notes and Reference

1. Help us buy some time to Save MEC, Change.org.
2. MEC website: “A lifetime membership is $5, the same since 1971.” mec.ca/en/explore/about-mec. Technically, membership should cost about $32 in 2020 adjusting for Bank of Canada inflation rates.
3. It is likely the board is making the correct decision when considering all factors. Apparently it considered an appeal to members but rejected it for fear of the impact this would have on landlords, suppliers, etc. This point is now moot – the cat is out of the bag. MEC considered an appeal to members for a bailout before it agreed to a private equity deal.
4. There are many interesting reads on the cooperative movement in Canada. Status of Cooperatives in Canada was a Parliamentary Special report issued in 2012. It provides a good snap shot of cooperatives at that point in time.
5. See [1] above: “RBC, along with its partners TD and CIBC, are MEC’s main creditors.”
6. See [4], p. 12.
7. On the Facebook group, SaveMEC, there are a lot of disparaging comments about the private business and their profits. MEC’s trouble exists because of its lack of profits and failure to plan for ‘Black Swan’ events such as COVID.
8. Noting that I have actively avoided reviewing the financial statements of MEC (see the Caveat section above), I am using publicly available information, in this case Yahoo Finance: ‘Worst case scenario:’ Backlash grows over proposed MEC deal.