The REI Co-op Model: A Different Approach to Outdoor Retail

REI, Recreational Equipment Inc. is an American retail store that specializes in outdoor recreation. It was formerly governed as a consumer cooperative which is an enterprise owned by its consumers and managed democratically that aims to fulfill the needs of its members. But continues to brand itself as such. 

It was founded by Lloyd and Mary Anderson in Seattle in 1938, who had been a part of the mountaineer climbing community for years, which was an inspiration when creating the Co-Op. The goal was to help outdoor enthusiasts gain access to quality gear at reasonable prices. The Andersons believed that a man should never make money from his friends.

The initial cost to join the co-op was $1 in 1938, Lloyd and Mary were issued 1 and 2 followed by 23 of their friends. The initial idea of the co-op became popular during the Depression because it was a way to supply gear at gear prices while returning some profit to some of its members. 

By the end of the year, their members had quadrupled even giving its members dividends. By 1940 they had 200 members with over $3000 in annual sales. Hiring a part-time employee who helped Mary package food and small items in the basement of their home for 75 cents an hour. Mary ran a smooth operation ensuring all orders got sent out with very high standards In 1950 they began the year with over 3000 members and $40000 in annual sales with continued growth in the following years 

In their earliest days, they were nothing more than just a shelf at another company's tent within a farmers market co-op. In 1942 REI moved into its own space on Pike Street in Seattle. Only years later in 1956 did REI hire its first employee Jim Whittaker, who eventually served as the company CEO during the 1960’s

Mary retired from REI in 1968 shortly followed by Lloyd in 1970, but their influence is still felt at REI. Lloyd passed away in 2000 at 98 years old and Mary passed away in 2017 at the ripe age of 107

In the 1970s REI surpassed 200,000 members in two retail stores within Seattle with more than $5 million in sales. In 1975 crowds raced from Seattle to Berkeley, California for the first store opening outside of the Seattle area. 

When the 1980s came around REI decided to venture into unique itineraries that focused on more sustainable, human-powered outdoor adventures—focusing on taking people off the regular path to iconic destinations. In 1996 REI launched its website making at the time it was the largest outdoor gear and apparel store on the internet.

When the 2000s came around REI had over 5 million members, 60 retail stores, and more than $700 million in annual sales. In 2005 REI established a sustainability strategy to pledge ongoing support to related causes. In the following year, they celebrated $1 billion in annual sales by awarding millions of dollars in grants to over 100 national parks

In 2010 REI broke 10 million members, more than 100 stores, and over $1.5 billion in annual sales, expanding its store outreach to a three-level storefront in New York City's famous Soho fashion district. 

In 2015 on Black Friday, REI decided to close its store for the day and halt the process of its online order. Giving all of their employees a paid day off. This was the start of their #OptOutside marketing campaign, the goal was to encourage customers to spend more time outside and touch grass

Through the years REI offered its customers non-retail experiences in 2006 they began to offer “Outdoor Schools” in some markets. Which included mountain biking, outdoor photography, backpacking, kayaking, and more. In 2016 REI launched its podcast ‘Wild Ideas Worth Living’ by Journalist Shelby Stanger and has launched ‘Camp Monsters and Wildfire’ in the years to follow. 

REI found success in the used gear business as well as having a very generous return policy. In 2017 REI opened an online platform for its used and secondhand items, which customers quickly were to support. In its first 10 months, it exceeded all expectations which showed a need and want within the market for highly quality products at reasonable prices. 

REI has been committed to continuing to increase its hourly pay for employees, making its environmental goals while supporting its nonprofit partners. In 2023 they distributed more than $50 million to employee retirements and incentives. 

In 2023 REI reported net sales of $3.76 billion and more than 6 million active members received a million with a total payout of $270 million.  Adding over 1.3 members with a total of over 24 million members.

CEO History

Lloyd Anderson, the co-founder and initial manager of REI, oversaw the cooperative's early operations until his retirement in 1970. Jim Whittaker, a sales manager and the first American to summit Mount Everest, succeeded him and served as REI's manager and CEO until 1979. Following Whittaker, Jerry Horn became REI's third manager and CEO, leading the cooperative through the end of the 1970s.

In 1983, Wally Smith was named REI's fourth president and CEO, guiding the company through a period of significant growth. Dennis Madsen succeeded Smith in 2000 as the fifth president and CEO, bringing REI into the new millennium. Sally Jewell was appointed as the sixth CEO and president in 2005, later leaving in 2013 to serve as the U.S. Secretary of the Interior, after which Jerry Stritzke became the seventh CEO and president.

REI's Business Structure

Business Structure

REI is structured as a consumer cooperative, meaning it is owned by its members. This ownership model is a major aspect of the brand's identity and influences its operations and priorities. Despite them being cooperative they still operate like most retail corporations with a CEO, board members, and departments that help run and handle the day-to-day operations

REI maintains a very mission-driven operation allowing its stewards to prioritize its mission of promoting outdoor recreation and environmental causes. Without the pressure of quarterly earnings to publish shareholders, REI can zoom out and take a long-term view of its operations and goals

Because of the Co-op REI is very incentivized to maximize their customer experience and satisfaction over short-term profits. This has also led to high levels of transparency about its corporate operations and financial performances over the years. A significant portion of profits are reinvested into the business.

Membership System

The current membership is a single lifetime fee of $30, granting all members lifetime benefits of the cooperative. These benefits include access to sales and discounts on rentals and services. Eligibility for the annual dividend, which provides a share of the cooperative's profits. As well as additional perks like free and discounted outdoor classes, events, and special offers. 

Profit Sharing and Dividends

All REI members are eligible for dividend payments depending on their yearly spending with REI. typically around 10% of the member's purchases from the previous year. Not all purchases are eligible for “dividend points” but the dividend can be taken as store credit, cashed out, or reinvested into the co-op. The percentage of the dividend can vary each year depending on financial performance and economic conditions 

Governance 

REI is governed by its board of directors, a majority of whom are elected by its members. They oversee the co-op’s strategic direction to ensure value stays aligned with member interests. Members vote annually to ensure leadership maintains accountability to its members. 

The Board members appoint a CEO and other top executives who manage day-to-day operations and are in charge of the implementation of the strategy laid about by the co-op. Significant strategic decisions may be put to a member vote, especially when it comes to the fundamental direction of REI. The cooperative structure is a key part of REI's brand identity, influencing its marketing, customer relations, and public image.

REI is known to take public stances on environmental issues in which it aligns with its member-owners. The cooperative emphasizes environmental stewardship and outdoor recreation. Although REI is not a worker-owner it still offers its employees profit-sharing opportunities. This gives the REI employees a strong voice in the shape of the company's culture and how its operations are run. 

Retail / Marketing Strategy

Marketing Approach

REI’s marketing strategies have routinely focused on building a strong sense of community among outdoor enthusiasts. Their campaigns emphasize a shared sense of outdoor experiences and their commitment to sustainability.  

REI has been known to form partnerships with organizations that share its values and mission. Partnerships often promote sustainability, outdoor education, and community engagement with profitability taking a back seat when it comes to partnerships. 

REI’s brand ethos has become a central part of their brand identity. Influencing their daily marketing, customer relations, and public image, emphasizing community, sustainability, and commitment to the outdoors. Their marketing efforts continue to advocate for clean public lands. 

Store & Online Experience

REI has chosen its store locations based on their proximity to popular recreational areas rather than highly trafficked areas. Aligning with their mission of promoting outdoor activities. The store's design philosophy is based on its local environment and culture. They use sustainable materials and feature items that engage customers like the infamous climbing wall or gear-testing areas

The website of REI offers a wide selection of gear and apparel, providing customers with detailed information, customer reviews, and expert advice. REI’s goal is to make the website experience an extension of the in-store experience. REI engages its customers through several digital channels including email newsletters and a robust social content strategy with blogs, videos, and expert advice. 

Product Selection and Decision-Making Process

The REI product selection is highly influenced by their members' preferences and feedback. With the main focus on offering high-quality, durable outdoor gear and apparel, that support a wide variety of activities. 

REI has developed its private line of products under its REI Co-Op label which is very well known for their quality, durability, and made from sustainable materials. Their goal with these products is to fill the gaps in the market where REI thinks there can be room for improvement at a better value with better performance. 

REI actively seeks feedback from its members through surveys and other social channels. This feedback helps their selection when it comes to products, how they foster the community, corporate initiatives, and more. The Co-Op regularly hosts member-only events, and sales to foster a sense of community within the brand adding even more value to the members. Members vote annually to elect the board of directors ensuring the leadership is held accountable. 

Corporate Culture and Values

REI’s Main values and support mission are focused on their continued stewardship of the outdoor activity community through membership engagement and a community focus. With the continued goal of inspiring, educating, and gearing up the adventurous. 

Their main five values are; Authenticity, Commitment to being genuine in its mission and interactions. Stewardship, Focus on taking care of the outdoors and encouraging others to do the same. Inclusivity, Strives to make outdoor recreation welcoming to all. Quality, Ensures high-quality outdoor gear and experiences. Innovation, Encourages new ideas in product development and business practices.

Employee Policies and Benefits

REI is very well known for the excellent treatment of its employees, winning the Best Place to Work many times throughout its history. They are known for their #OptOutside campaign, where REI closed all of their stores on Black Friday and still paid their employees for the day's work, encouraging them to spend the day outside.

Employees are eligible for profit-sharing bonuses based on the company's performance. Encouraging a work-life balance with excellent discounts to employees so they can enjoy the outdoors. Also offering training courses and career advanced opportunities with health and benefits that include mental health support. 

Sustainability Initiatives

REI has continued to set goals to become more sustainable, aiming to become carbon neutral in its operations. They have focused on sustainable products, from developing new gear to creating programs for gear repair/rental and using sales to reduce waste. 

REI invests in renewable energy for all of its facilities. They also focus on minimizing waste within their supply chains with as much packaging reduction as possible. They also maintain ethically sourced animal products like wool and down materials. 

Outdoor Advocacy and Community Engagement

REI actively advocates and lobbies for environmentalist protection of outdoor parks and recreation access.  They regularly provide financial support to various land conservation projects across the United States through their REI Fund. These initiatives focus on outdoor access to make recreational activities more accessible to diverse communities   

REI regularly offers outdoor classes to its members to give them new skills and improve their current skills. Also sponsoring volunteer programs to do activities like trail maintainers and conservation. In recent years they have contended to grant and partner with local and national communities with hopes to lower the barrier to all outdoor recreational activities. 

Financial Performance

Revenue and Growth Trends 

Over the past 5 years, REI has seen continued growth from $3 Billion in revenue in 2019 to over $4 billion in 2023, they did take a hit in 2020 with revenue of $2.75 billion a decrease but it was followed by a strong year in 2021 of over $3.75 billion in revenue.

In 2019 they reported strong profits of $21 million while paying out over $200 million in dividends with continued growth over the years raking in over $180 million in profits in 2022 paying out over $265 million to employees and members

In 2020 REI saw their online sales grow over 47% year over year. Since then they have continued to invest in their online channels and strategies. With a long-term focus because of the Co-op, allowing them to focus on long-term stability over short-term profit maxi. 

Comparison with Traditional Retailers

In 2022 REI reported 178 stores with plans for continued expansion, in their early years they tested a location in Japan but it closed a year later. REI has often seen stronger growth rates than its ‘competitors’, many of which are sold within REI. This is because of their niche market base and loyal customers/members. 

REI operates at a much smaller scale than the Dicks Sporting Goods and Academy Sports + Outdoors. Despite being several times smaller in terms of revenues REI has continued to show strong growth in year-over-year numbers like membership growth, profitability, dividend payouts, revenue, and grants. 

A key difference in how REI operates is its Cooperative model, this structure allows them to have longer-term outlooks on aspects of the business where their competitors may have a short-term outlook. REI’s exclusive focus on outdoor gear has given them a stronger reputation in the market to help with membership engagement and feedback which may be less seen in other brands.

Challenges and Criticisms

Balancing Profit with Co-Op Values

REI has faced many challenges when it comes to running the business because of the Cooperative model, the goal of the Co-op since its founding has been to pay its members back through dividends and give back to the community. However, this can sometimes hinder their ability to reach profitability and reinvest in their business growth. Some note that paying dividends to its members can interfere with their ability to reinvest in the business and hurt long-term growth and competitiveness.  

REI operates in a large pond with lots of for-profit retailers requiring them to be competitive with pricing and high-quality products. Some have criticized REI for having higher prices compared to its competitors and have questions if the co-op model justifies a premium when it comes to pricing.

With all these challenges REI has committed to sustainability within all aspects of its supply chain. Some of these involve higher-cost sourcing and materials, which impact profit margins and can hinder their ability to compete on price. 

Competition from Online Retailers 

REI is a very niche retailer compared to most of its competitors like Dicks Sporting Goods or Amazon who may have hundreds of options at cheaper prices. This narrow niche may limit REIs' growth possibilities compared to the competition which may operate in a wide variety of outdoor markets. REI has continued to invest in its e-commerce platforms with seamless offerings that may be offered by other retail giants. 

REI has a different strategy when it comes to store location than many of its competitors. They choose to put stores near outdoor recreational areas that may have lower foot traffic than the traditional high-traffic urban centers where some of their competitors are parked. This may hurt their ability to attract new customers who are less aware of the brand. 

Operational / Internal Challenges

In recent years there have been several efforts by employees to form a Union citing concerns about working conditions and benefits for its part-time employees. The company initially brought backlash to its initial response to the efforts because of its ethos. Some have proposed partnerships with larger corporations that can bring additional resources and exposure to the brand

There have been questions when it comes to REI’s membership model, questioning the value of it and if the dividend is considered fair. However, it has been proven that the REI membership has created a strong community with the brand that helps constantly build customer loyalty. Dividends and exclusives offer tangible value to members that investors in a stock may not even get. 

Some of the political stances that REI takes may alienate certain customers but the end goal with REI is to promote diversity in the outdoor recreational community. The REI fund continues to fund all sorts of outdoor activities across the United States. 

Future Outlook

Future Plans

REI’s future will be shaped by its members, they hope to continue to be recognized as an outdoor lifestyle brand that companies produce exceptional products with excellent experiences, educational opportunities, customer experiences, and green advocacy.  They have set ambitious goals to become net zero in the years to come with focuses on sustainable products. 

They hope in the years to come to enhance the value of its membership with more personalized benefits, to strengthen loyalty and engagement. Offering more outdoor education and recreational activities that promote the outdoors. 

Expansion Plans

REI hopes to continue its plans for physical and digital expansions within strategic growth markets that fit the company's values and missions. The Company has been experimenting with several store formats, some smaller than others that may cater directly to the local needs. 

They hope to continue to develop exclusive brand partnerships with companies that share similar values to them. This will help them increase the brand awareness of REI. While REI has primarily focused on the US market there is lots of potential for international expansion in the future. 

Adaptation Plans

REI has been investing heavily in its digital infrastructure and integration into its members' buying experience and journey. They hope to create seamless transitions between the in-store experience and the online experience. REI has integrated many digital tools into the shopper's online digital to give the shoppers a comprehensive and educational buying experience 

REI has always been looking for ways to innovate with new technology gear for its customers as well as introducing new methods for customers to acquire gear like their rental and used programs that customers flocked to upon release. 

The company has been able to stay economically strong despite its unconventional business model. REI has been able to keep a strong balance sheet through the times because of its Co-op’s aligned goals with an outlook on long-term incentives instead of short-term market share goals and profit goals. They have developed robust strategies for navigating economic downturns.

Conclusion

REI is an American treasure when it comes to outdoor recreation retailers. Since its founding in 1938 by Mary and Lloyd Anderson, REI has grown to a small cooperative supplying quality and affordable gear to the local Seattle residents. To a new leading outdoor lifestyle brand with over 24 million members and billions in annual revenue. 

REI has always been dedicated to its members paying out hundreds of millions of dollars and their local environmental projects, enhancing the entire community. They have continued to follow the original mission of their founders by taking the long road that prioritizes the outdoor community rather than short-term profits.

Recreational Equipment Inc. has no plans on slowing down. With continued investments in its digital and physical locations, REI is here to fulfill its community's outdoor needs. They have done an excellent job at balancing profit while keeping to the founding values, they have continued to work with employees to profit the best conditions for them as well as profit-sharing abilities. While doing this they maintain their grants towards local communities and projects that would help increase recreational opportunities.  

REI has been able to continuously add members by providing them constant value, many of the programs, exclusive sales and events, customer loyalty, and their engagement with the brand make them a favorite among the competitors. 

REI continues to adapt to customers' needs and wants most recently with their rental and used programs, they exceeded all expectations within the company. They have been able to push the industry towards new sustainable standards with benchmarks and encourage others to adopt eco-friendly practices and policies.

REI has a very strong brand image and identity with a very loyal customer base that has been constantly growing over the past 85 years. Each member pays a time fee of $30 and then they are entered into the world of all the REI benefits. They have been able to stick to their long-term missions and values without getting lost in short-term goals. 

The company has been able to follow its main mission from its founder Lloyd Anderson “that a man should never make money from his friends”. This growth has shown REI’s dedication to its members and long-term visions that prioritize community and sustainability. 

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Sources

REI History

The Power of the People: The History of REI, Explained

REI Fund

REI Co-op launches first sponsored "Opt Outside Steps Challenge" on Strava

How to Understand Clothing and Gear Sustainability Features

Recreational Equipment Incorporated (REI): A Responsible Retail Cooperative

REI Co-op Revolutionized Outdoor Retail

How REI’s Co-op Retail Model Helps Its Bottom Line

REI Governance