Case Scenario: LOST IN PATAGONIA
At Patagonia, a visitor's first impression blurs myth and reality. Tucked behind the company's main building like a well-preserved shrine stands a corrugated-tin shed, in which Yvon Chouinard began, back in 1957, forging mountain-climbing hardware for his friends. It is thus a bit of a jolt to step from the imagined smoke and heat of the shed into the tastefully appointed adjacent retail store and realize that Patagonia no longer makes hardware of any kind. Chouinard Equipment declared Chapter 11 three years ago, when its liability premiums went through the roof, and was subsequently sold to a group of former Patagonia employees. Patagonia today designs and sells expensive clothing, much of it the kind you'd wear to a weekend barbecue in the backyard, not atop the Matterhorn at 20 below.
Image is a word that is liberally bandied about at Patagonia, and the concept serves as a key cog in the company's strategy. The Patagonian knack for building and burnishing image has created a business whose sales have soared from roughly $3 million in 1979 to $117 million in the latest fiscal year. Patagonia's catalog, the envy of the industry for its mix of lush layout and high production values, drives a thriving mail-order operation, while nine company stores and 1,200 dealers on three continents retail the company's products, which have become the apotheosis of outdoor chic.
Behind those big numbers stands Yvon Chouinard, Patagonia's founder. A mountain climber by calling and an entrepreneur, it appears, by accident, Chouinard has made building a company look easy. With Patagonia's sales as much as doubling yearly in the 1980s, Chouinard, you'd think, was a driven man with a shrewdly devised business plan. Not to hear him tell it. "I'm a craftsman who had a better idea of how to make things," he says. "It so happened people wanted them."
To Yvon Chouinard, business seems an afterthought; saving the world has become his primary mission. For him Patagonia exists to serve as a model for corporate responsibility. A company tour leads from the expansive day-care facility to the subsidized cafeteria, where employees, fresh from a noontime game of volleyball, load up on gourmet pizza, salad, and yogurt. Recently, the company conducted an audit of its raw materials and processes in an effort to be environmentally sound. And Chouinard has gone so far as to state that with traditional institutions faltering, organizations like Patagonia can inject meaning, purpose, and a sense of community into people's lives.
That notion dovetails with Chouinard's deeper aim -- to forge his company into a tool for social change. Patagonia began tithing in 1984, distributing 10% of pretax profits (now 1% of sales) to various causes. Chouinard labels the practice "our earth tax," adding that no one can wait for the government to impose a levy, because by then the planet will be beyond repair.
Chouinard's activism has earned the company reams of favorable press and turned its founder into a cult hero. But then last year reality intruded as sales fell flat, profit fell off a cliff, and the bank clamped down on the company's line of credit. Patagonia, expecting another fat year -- and continued immunity from the recession -- let inventory pile up, and eventually it had to be dumped below cost. Bodies followed. In July 1991 Patagonia, always known for "taking care of its own," laid off 120 people, or roughly 20% of its work force, sowing plenty of rancor in the disbelieving ranks.
In the wake of the disaster, Chouinard remains upbeat, saying the crisis forced the company to reduce its bloat, slow its growth, and return to its cultural roots. "We were on a suicide course," he says. "We were exceeding our limits, financially and mentally." In the future, Chouinard asserts, he will increase profit, even if sales are flat. He will limit supply, selling to those dealers "who get their preseason orders in first." Patagonia will use more local suppliers to pare costs, and it will tighten up on accounts receivable. The company will eschew environmentally blasphemous direct mail in favor of advertising to engender requests for its catalog.
But beyond Chouinard's optimistic assessment of Patagonia's future, one thing is clear about the company's past. Patagonia, like many companies steeped in image and a cult of personality, caught a big wave in the '80s, when easily smitten consumers had cash to throw at the latest trend. Growth came easy, but now Chouinard must engage in the rigor of steering a once-high-growth company through lean times. He must be a businessman as well as an environmentalist.
"Most people don't understand how very personal the nature of this business is to Chouinard, who is an outdoorsman and an activist," says Wayne Badovinus, president of Eddie Bauer, the Redmond, Wash., outdoor-clothing and -gear maker. "Now all of a sudden he finds himself dealing with hard issues relating to manufacturing and distribution that have nothing to do with the environment." Badovinus believes the '80s have ended for business. Protecting niches will replace the rush of top-line growth. Disciplined management will supplant what Badovinus labels "tribal rituals."
Patagonia, to be sure, is a culture rich in ritual, from management retreats into the wilderness to ponder long-term strategy, to surfing lunch breaks, to a stifling eco-orthodoxy that permeates the organization. Adds Badovinus: "A lot of people assume that these tribal rituals make a business better. But in the final analysis, clear measures of your progress -- sales and profits -- help guide you a lot more."
Remote Control:
Patagonia is a classic entrepreneurial company in the sense that the founder's persona shapes his creation. As the reclusive founder of a very visible company, Chouinard is nothing if not a paradox. Reflecting on the impression Chouinard often created, Patrick O'Donnell, Patagonia's chief executive from 1987 to 1991, calls him "an absolute mute." Another former manager at the company recalls, "I worked with the guy for three years, and I still have no idea who he is." As elusive as a snow leopard, Chouinard spends up to eight months of each year away from the company, ostensibly testing gear in various exotic locations. Behind him, he leaves a staff fiercely protective of his image and ideals. None is more loyal than the current CEO, Kris McDivitt, who started at Patagonia in 1969 in shipping.
Asked if Chouinard's absences affect morale, McDivitt replies sourly: "People are so myopic about work. Are you saying he's not working because he's not here sitting at a desk beating the shit out of people? When Yvon's gone, he's working. He's got product with him, and he always comes home with new ideas. That question drives me nuts."
McDivitt launches into a sermonette on how her boss's global trekking has resulted in reforestation projects in Chile and includes relationship-cementing ski trips with dealers in Japan, and chance encounters with mountain climbers offering valuable feedback on equipment. "Do you know what that's worth? It's like gold," she says. "It's all about how you form relationships with people."
At Patagonia, where business always seems to boil down to relationships, not sales, profit, markets, or strategy, there has grown up around Chouinard an unshakable culture composed of so-called dirt bags, or Patagoniacs. They are employees who share Chouinard's passion for the environment -- and his thinly disguised contempt for conventional business. In a recent speech before 1,200 marketing executives, Chouinard related a conversation with a consultant who had asked him why he was in business: "Well, I told him the history of the company and how I never really considered myself a businessman and in fact thought most businessmen were greaseballs. I considered myself a craftsman-blacksmith." The zeal for doing business the Patagonia way has created over the years a schism at the company -- a division between the faithful and the alleged nonbelievers, who might, on occasion, hew to more conventional business practices. It has created not-so-subtle pressure for employees to contribute time and money to Chouinard's causes and to look upon their employment at Patagonia as a calling, not just a job. Kevin Sweeney, the company's former director of public affairs, lauds Chouinard as a wonderful teacher but says, "He can be pretty rigorous if you don't meet the standard. He'll come back at you." Adds Sweeney, "It was frustrating to the Chouinards that people would think they were good environmentalists just because they worked at Patagonia."
In the Patagonia culture, which espouses egalitarianism, true power, in fact, devolves to a small elite: Chouinard, his wife, Malinda, and McDivitt. Patagonia, privately owned, has just two shareholders, Yvon and Malinda, and no outside directors. Over the years, professional managers have come to manage the growth -- and left, often exasperated. Chouinard has hit the road and returned. The dirt bags have stayed behind, keeping the ideological fires burning.
Hating Your Left Arm
Alison May is one of the latest in the line of Patagonia's professional managers, having become its chief financial officer last December. May, whose background is in banking, sees her main task as "tying the financial part of the company more to the business strategy. The philosophy before was that finance was a separate part of the company." In fact, notes May, until recently, Patagonia's finance department was physically separate from the rest of the corporate offices, in a building two blocks away from the main office.
Over the years, May's position has been the most unstable one in the upper reaches of Patagonia, even though it appears to have been filled by capable and dedicated people, like Steve Peterson, one of May's early predecessors. He started working at Patagonia in 1978, when sales stood at around $2 million. Peterson, in effect, stepped into a vacuum, as Patagonia had few financial controls in place. Money tended to flow into Patagonia, where it pooled and commingled. Peterson began by breaking the business down into product lines and profit centers to figure out what items and what segments of the company were actually making money and how much.
But he soon found that the culture frowned on such tendencies. "Yvon has no respect for banking and accounting people -- people who wear coats and ties," says Peterson. "It's almost a loathing. But that stuff is part of business. It's almost like hating your left arm." Peterson says Chouinard even had an expression for his contempt of the money-handling side of the business. "He called it 'getting doo-doo on your hands.' " That, argues Peterson, typified the culture's denial that it was in business to begin with, and making fat profits to boot.
The struggle boiled down to symbols. "Our rapid growth demanded that we build a large warehouse in Ventura," says Peterson. "Ideologically, they could never accept that." (One of Chouinard's causes was no growth in Ventura.) Peterson repeatedly pushed for the warehouse, and management repeatedly dragged its feet.
Patagonia could tolerate such contradictions because it was so closely held, so insular. True debate in effect did not exist. Peterson lobbied to open up the culture. "The last two to three years I was there, I pushed to bring in outside directors," he says. "A true board of directors needs people from larger companies."
Peterson came to feel like an outcast, a condition compounded by the fact that he didn't live in the same neighborhood or socialize with company insiders. "I liked my work, but my personal life was separate," he recalls. "There was a lot of pressure to be a Patagoniac. I hated that term, and I hated the concept." By early 1987 Steve Peterson, long since out of the loop at Patagonia, had left the company and moved to Hawaii.
Too Many People
Galliano Mondin succeeded Steve Peterson as CFO at Patagonia in December 1986. Mondin had extensive experience in the sporting-goods and garment industries in both operations and finance. Mondin, who considers himself "strong in strategic planning," set about picking up where Peterson had left off. "My first task was to straighten out the financial records. It took me six months. My biggest mission was to work on the systems so we could get to where we were going, given the growth we were experiencing."
In Mondin's two years at Patagonia annual sales would rocket from $24 million to $96 million. Interpreting that growth for Patagonia's bankers, who had been reduced to taking a lot of the company's numbers on faith, fell to Mondin. "Before I got there, financial statements were late to the bank. The bank did not know where it stood with Patagonia." When Mondin told the company's bankers he'd have good numbers to them in six months, they laughed. No one had generated timely and accurate figures out of Patagonia.
Mondin had previously worked with two companies that had gone through bankruptcy. That made him cautious, especially when it came to hiring. "I wanted to make sure Patagonia was run efficiently, so that we would never have to lay off a lot of people," says Mondin. Chouinard, on the other hand, was notorious for hiring people on impulse -- people he met surfing or fishing, people he believed could bring an unfettered, intuitive feel to the company. Mondin recalls the month that annual payroll costs suddenly shot up by $300,000. "I was livid," he recalls. "I wanted to know where all these people were coming from. I could never get at why these people were hired. Some guy would come in. They'd give him a psychological test and say, 'Yeah, he's the right person for Patagonia,' but that person had no business being there. Yvon is a very creative person, but there are certain things he should have let his professionals run."
After two years Mondin returned to Seattle and another job. "Our banker was not happy when he learned I was leaving," Mondin recalls. "He said, 'Do you want me to go to Yvon and tell him to pay you more?' "
Ramping Up and Siphoning Off
It's convenient to think of the excesses of the '80s as afflictions peculiar to such noted sinkholes of greed as Wall Street and the savings-and-loan industry. But by the late '80s, even Patagonia was hearing the decade's siren song. "The number we kept hearing was $250 million," says a former officer at the company, referring to a revenue figure Chouinard wanted to reach on the theory that the more money the company made, the more it could give away under its tithing program. Chouinard subsequently hired three managers with more traditional business backgrounds to ramp up the company's growth. Pat O'Donnell, the president of Keystone, a large ski resort owned by Ralston Purina, became CEO in 1988. O'Donnell, in turn, hired Bill Bussiere from Gotcha, a $200-million West Coast apparel company, as the new CFO. Mark Eubanks came from Marshall Field to run the catalog operation.
But then Chouinard, with his penchant for hiring gifted people on the spur of the moment, brought in top designers and set them up in separate -- and competing -- product lines. There was even talk of giving these designers their own separate labels -- in effect, creating stand-alone businesses under the magical Patagonia umbrella.
Chouinard's blank check force-fed a lot of already healthy egos. "Pretty soon these designers had built their own fiefdoms," says O'Donnell. "They would come in and say, 'I need a car; I've got to have a secretary. I've got to fly to Hong Kong tomorrow.' And everyone would say, 'No problem. That guy's going to go out and build huge sales for us.' So pretty soon we had 12 little companies inside Patagonia, and they were all in a ramp-up phase. Ramp up was the big phrase around there then. We would sit there in management meetings and cringe each time a new designer was hired."
Like Mondin before them, O'Donnell and Bussiere urged Chouinard to stop hiring -- to no avail. Between March 1989 and March 1991 the payroll grew by 40%. Patagonia had become, says O'Donnell, "a very incestuous organization. Friends of friends were hired. People said, 'This guy's a Patagonia person. We can't let this dirt bag go. Otherwise, the competition will get him.' "
"A lot of people who were hired had surfed with Yvon, or they were friends of his wife," adds Bill Bussiere. "We were dealing with people who had absolutely no business being there." He recalls proposing a hiring freeze in September 1990. "That was thrown right out the window. I was told, 'That's not how we do things at Patagonia.' "
The Mantra of Quality
The urge to hire the best designers mirrors a strong Chouinard bias and speaks to the essential Patagonia ethic. Randy Harward, the company's director of product quality, says that ever since Chouinard started making climbing equipment, back in the late '50s, cost wasn't much of an issue. "Yvon figured if he made good tools, people would pay for them. That's what made him successful." The company has continued to embrace that notion over the years, always holding out quality as the Patagonia mantra.
But to observers like Mondin, such a strong focus on quality ignores other business considerations. "I remember when we'd get shirts back with the buttons fallen off. Yvon would be ripped. You wouldn't want to be around him when those shirts came in," recalls Mondin. "He's a tyrant on that stuff -- to the point of saying, 'I don't care what it costs, as long as the buttons don't fall off,' even if that meant sales went from 10,000 to 5,000 units. What was important to him was that the 5,000 units out there be fantastic."
Bob Woodward, who publishes "Specialty News," a newsletter that covers the outdoor-apparel industry, sees Patagonia's reputation for quality as linked to another company focus -- building its image. "Patagonia's reputation for quality is to some extent a myth," says Woodward. "There are better manufacturers who charge lower prices." He recalls going to a recent industry trade show and seeing a certain Patagonia shirt selling at wholesale for $27. A competitor's, at least equal in quality and design, cost $15.
Woodward's observation touches on a common refrain about Patagonia's products: They may be good, but they sure are expensive. And with consumers facing some lean years ahead, price and value have become strong marketing considerations. In that context, Chouinard's "quality at all costs" tenet seems out of sync with the times. That dichotomy is best expressed by Patagonia's artful catalog of premium-priced clothing, set off by plenty of nonrevenue-producing editorial copy and white space.
Listen to Eddie Bauer's Wayne Badovinus, who says: "I'd love to do a catalog in which I don't have to worry about the productivity of each page, but in the current economy there's no opportunity to do that. The consumer is just too tough."
Or listen to Gary Snook, the founder of Performance Bicycle Shops, a $50-million discounter of quality cycling equipment and apparel, who rigorously tracks the selling power of each item in his catalog. "Price is important in the '90s. People are more and more value conscious all the time. Patagonia's stuff is beautiful -- and it's expensive."
Chouinard remains unfazed. Supply and demand is a nonissue; margins will not erode. Rather, he foresees an era when people "will consume less but consume better." They will come to Patagonia, "where we build clothes where the buttons don't fall off." Competition, as well, is beside the point; Patagonia has no pressing need to grow. "We don't have to worry about getting bigger. If I wanted to be a Nike someday, I'd be worried, but as it is, I have no clue what our competition is doing."
Well, what about his customers? Does Chouinard worry they might desert in a value-conscious time? In fact, Chouin ard wishes his best customers would go away. The reality behind the rugged Patagonia image is that the company's core market is affluent and urban, people who spend their days in high-rise buildings, not on the sides of mountains. Lamenting the company's direction in recent years, Chouinard says: "We outgrew our loyal customer base and increasingly were selling to yuppies, posers, and wanna-bes. These people don't need this shit to get in their Jeep Cherokees and drive to Connecticut for the weekend."
Mixed Signals
A number of people interviewed for this story can recall times when Chouinard actually wanted everyone to wear Patagonia products. The vacillation between an elitist and a populist approach to clothing the ecobrigade jibes with one former manager's observation that Chouinard is given to mercurial shifts in thinking, often revealed at the last moment. "One thing that frustrated me about the company was its lack of constancy of purpose," the manager says. "One day we'd be learning how to do business the Japanese way; six months later we'd be on to something entirely different. It ended up confusing the employees."
Compounding the confusion, Chouinard was gone for at least half of each year. And yet, as Galliano Mondin notes, "he was still just a phone call away." Rarely, if ever, did designs escape Chouinard's approval, despite his intermittent presence in Ventura. "Yvon got so much respect in the company that people would listen to him over the professional managers."
In 1990 Patagonia began ramping up production in pursuit of $250 million in sales -- as the founder's thinking took yet another shift. Chouinard now says that a couple of years ago he began to read widely on the subject of Deep Ecology, an ideology that ascribes rights to all living things and demands that human activity be ordered around that principle. It is the philosophy that has driven his company since then.
Chouinard may have embraced Deep Ecology, yet he had, nonetheless, set in motion a process that was promoting deep consumption. He had set up a competitive, byzantine internal system that was beginning to produce a lot of similar product lines that would simply end up bloating the catalog and cannibalizing one another's sales. By 1991 the Patagonia catalog would feature 375 different styles, many of them "sport specific," rather than "multifunctional." One of the more frivolous examples, Chouinard now admits, was volleyball shorts. "Who needs those to play volleyball?"
Chouinard's private doubts about Patagonia's direction led him in early 1990 on a pilgrimage to Florida, where he met with Michael Kami, a former head of strategic planning for IBM. Kami put a lot of direct questions to Chouinard, the most basic being: Did Chouinard really want to be in business to begin with? And, if not, why not sell the company and set up an environmental foundation? Chouinard's response was less direct, according to Pat O'Donnell, who accompanied Chouinard and his wife on the trip.
"He decided to take a year off and head for Europe."
The Crash
What Chouinard saw in Europe affirmed his gloomy -- and revisionist -- view of the company. He walked into stores where Patagonia products were poorly displayed or where he knew they didn't belong in the first place. Patagonia, he believed, was pumping out too much product for too many nonbelieving dealers to sell to too many mindless consumers. Three months into his yearlong sabbatical, Chouinard returned to Ventura.
At that point, the inclination of most managers might have been to stay close to home and batten down the hatches on the business. Instead, in January 1991 senior management went on a three-week retreat to Patagonia (the real place). There the prime topic of discussion was "the next 100 years." Chouinard's deep and ecological idea was to run the company along "self-sustaining" principles, and this was the notion he wanted to explore down at the end of the world.
Meanwhile, inventory was choking the company, a reality revealed by the numbers in February. They revealed zero growth in Patagonia's domestic business for the fiscal year ending in April, recalls Vincent Stanley, head of Patagonia's wholesale division. Senior management needed to start worrying about the next 100 hours.
Patagonia banked with Security Pacific, which had recently announced a merger with Bank of America. Security's loan portfolio was not as solid as Bank of America's, which, when the merger was announced, led nervous regulators to demand the bank tighten up requirements on its borrowers. At the time, Patagonia had a credit line of up to $39 million, and that sum was not formulaically tied to inventories or receivables. But by May, when Patagonia went to the bank to roll over the line, the bank balked and shortened it to $26 million. Security Pacific also pressured the company to find an additional lender.
Meanwhile, competition was intensifying. Mainstream apparel makers were knocking off Patagonia sportswear at lower prices. Specialized niche companies rivaled Patagonia's quality in more technical gear. Deep-pocketed catalogers like L. L. Bean, Eddie Bauer, and Lands' End were aggressively copying Patagonia's better-selling products.
By May the books showed that while the company had projected 51% growth overall, it actually realized a 31% gain, because of healthy international business. But those numbers obscured flat domestic business -- and an even more worrisome problem. Its warehouses brimming with unsold inventory, Patagonia was in a cash crunch, which culminated in July, when the company had to come up with $2.5 million to meet a loan payment.
Patagonia resorted to dumping goods below cost. "We had a massive amount of inventory," recalls one former employee, Glenn Braly. "It got real ugly. They had employees on the phone calling their friends and family to see if they wanted to buy something." Braly knew the vice-principal at the local high school. He called him up to see if some of the kids would want some Patagonia gear, real cheap.
In July 1991 Patagonia finally did what Galliano Mondin had envisioned and tried to avoid four years earlier. It laid off 20% of its work force. By then O'Donnell, Bussiere, and Mark Eubanks had left the company. Jennifer Ellsworth, the head of product development and a member of the board of directors, was on her way out. Kris McDivitt, Chouinard's trusted confidante, had returned from a three-year sabbatical to reassume the role of CEO.
The layoffs demoralized the rank and file. Some employees who had recently relocated to Ventura to work for Patagonia were among the first fired. And even longtimers like Glenn Braly suffered. Braly had been at Patagonia for 10 years, mostly in accounting. Recently, though, he had moved to marketing. When the cuts came he lost his job in marketing -- and was offered an entry-level job in accounting at half his salary. "I always thought I'd retire from Patagonia," he says with a laugh. He finds it ironic that Chouinard was an advocate of no growth in Ventura, that Chouinard's ex-employees found a tight local job market when Patagonia cut them loose.
The Retrenchment
After a midday game of volleyball, Kris McDivitt rests her feet up on a chair in the conference room. Wearing shorts and a light cotton shirt, she casually draws on a liter bottle of mineral water. McDivitt's cool belies the turmoil that a number of insiders say has beset the company in recent months. Like Chouinard, McDivitt readily admits to Patagonia's loss of focus in recent years and the subsequent belief that the company had the Midas touch no matter what it chose to slap its vaunted label on. But she's also quick to assert that Patagonia's problems are now past. "We had the worst year in the history of the company, and our quality is better than ever. Our performance has gone through the roof."
McDivitt says the tough year has been salutary for Patagonia as she ticks off the various steps -- a closer eye on credit, fewer styles, more local suppliers, earlier purchases by dealers -- the company has taken to tighten up its operations. "People take a lot of potshots at Patagonia because we're a bigmouth bass," McDivitt continues. "We don't follow the trend. But when the chips are down people respect us for that."
Chouinard amplifies McDivitt's cool and confidence. He now claims his hiring of professional managers with insufficient visceral feel for the business was misguided. "It showed a lack of confidence of a small company trying to become a middle-size one. We hit $50 million and said, 'We've got to get some experts in here.' " He believes the company has now "returned to its roots" -- Patagonia-speak for culture.
"This is a unique culture, extremely unique. Not everyone fits here," Chouinard adds. "I've found that rather than bring in businessmen and teach them to be dirt bags, it's easier to teach dirt bags to do business."
In fact, he says, "we realize we don't need any managers. The company is now divided into small working groups. The solutions come from all the people working together."
Meanwhile, he will let the catalog, the company's centerpiece, "die a slow death" by halting direct-mail efforts and sending it only to people who request it. For now Chouinard, who considers himself a lousy manager but "a good leader, a good teacher" will concentrate on more vital concerns. And what are those?
"I'm teaching my employees business philosophy." Asked what that means, he says it involves teaching how to manage the business in an environmentally sound, self-sustaining manner for the next 100 years. "It deals with the fact that there won't be a lot of job openings or upward mobility here in the future, and how do you then keep people motivated? It deals with how do we cope with the idea that we're polluters?"
As for Chouinard himself, his role will remain largely unchanged. He will continue to travel seven or eight months of the year, testing equipment. He reasons that this is only, well, natural. "I'm the outside guy. I bring new ideas into the company. And besides, I'm a lousy manager."
"We Don't Talk About Profit"
"The main cause of Patagonia's current prob- lems is their arrogance," says Bob Woodward, the publisher of "Specialty News." "They got carried away with their own self-importance. There's a lot of preachiness and New Age stuff there that rings hollow." The result, says Woodward, is a company that charges too much for what it delivers, a company that wants to save the world but cannot preserve the jobs of its very workers. "I think the company is in worse shape than people realize."
Judith Karp, an attorney representing a chain of outdoor stores that is in Chapter 11 and owes Patagonia $500,000, echoes that notion. "The last three years have been a nightmare for the outdoor-gear industry," she says. Increased competition, decreased snowfall, a bruising white-collar recession, and the Persian Gulf War have hit all suppliers hard. "Patagonia's not down and out, but there's no way it can be sitting pretty." Karp adds that given the thin margins and long credit terms in the garment business, getting stuck with an excess of inventory can be ruinous to profitability. "I wouldn't be surprised if it had a loss in each of the last two years."
Patagonia insiders recall certain cash-strapped months in 1991 when the company "lost a lot of its independence" to the banks. Asked about that, Chouinard simply replies, "We got caught in the squeeze between Security Pacific and Bank of America." Asked if the company has been able to maintain its profitability, Chouinard says, "We don't talk about profit."
Patagonia's growth -- and profitability -- have been largely fueled by periodic technical breakthroughs that have produced revolutionary fabrics the company has been able to use exclusively for a short time. The latest -- and hottest -- was a fleecelike fabric that Patagonia trademarked "Synchilla." The company's exclusive on this fabric lasted two years, ending in 1987. Since then competitors have knocked off Synchilla with a vengeance. Meanwhile, fleecelike products still account for about 60% of Patagonia's sales, says Pat O'Donnell. The company acknowledges that future fabric breakthroughs will be evolutionary. Nonetheless, Chouinard says: "We're sitting on tons of good ideas that we're not going to do. We'll do only the killer ideas."
Patagonia's decision to stop sending its catalog via direct mail seems curious, since the catalog -- unreliant on middlemen -- enjoys the highest margins of any of Patagonia's operations. (The company won't say what those margins are, nor will it say how much of total sales the catalog accounts for.) Wayne Badovinus, head of Eddie Bauer, says that once a catalog stops prospecting for new customers, "you are effectively out of the catalog business" because the existing customer list dries up quickly. Chouinard's strategy is to stick to the high and counterintuitive road -- to slow sales and increase profit, to throttle back on the catalog, to keep traveling while "educating" employees about the lack of job mobility within a company in which they have no equity stake. If he can finesse all this he will have accomplished a masterstroke.
Mike Graham, founder of Sole Survivor, a Ventura-based sportswear company that previously contracted with Patagonia, believes that apparel makers can't abandon top-line growth in the '90s as consumers grow increasingly more value conscious. Volume, he believes, is half the answer.
On the other end of the equation lie the challenges of protecting niche markets while continuing to realize operating efficiencies. Notes Annelle Beebe, a former Patagonia employee and cofounder of Ojai International, another Ventura-based apparel company: "Patagonia needs its high margins to run the company the way it exists, with the day care, the nice building, the generous benefits. In this economy, that's tough. I think they're feeling the pressure. We have some of the same dealers, and we hear from them that Patagonia sells a product for $60 while ours is $35 to $40."
Steve Peterson, for one, simply says Patagonia lacks the fiscal and operating discipline to run lean -- and stay that way. "Cutting off growth and fine-tuning profitability is hard because that takes good, rigorous management. That's not possible at Patagonia. They won't accept the ramifications of such a course of action. It just won't happen."
The End of Charisma
Time's passage has a curious -- and refreshing -- habit of proving many central ideas very wrong. The earth was once flat; the earth once lay at the center of the universe. In Patagonia's case, a small example comes to mind: its environmental audit revealed that cotton, that most natural and wholesome of fibers, taxes the environment heavily in its progress from seed to $59 button-down shirt.
In the '90s a central belief of business will be turned on its head. The success of many businesses and endeavors of the '80s became identified with the personalities of their leaders and founders. From Ronald Reagan to Jim Bakker to Donald Trump, a hallmark of the '80s was the phenomenon of the charismatic leader.
But from that brand of leadership arose a corrosiveness -- a toxicity, even -- generated by the ego of the leader, the adulation of the led. Pat O'Donnell believes this is a fate that entrapped and befell Patagonia. "I used to tell Yvon he was like Elvis Presley: 'You'll be dead, and people at Patagonia will still be asking, What would Yvon think of this design?' "
The companies that survive the '90s will not just scrap the corrosive cult of personality. They will be run by employees encouraged to think for themselves -- on the job and about the causes in which they believe. These companies will be run by managers who walk the shop floor day in and day out. They will be run by people who ultimately respect business as a force for social change, and don't just look at it as a necessary evil to that end. For now Patagonia, held hostage by its considerable image and elaborately constructed -- and constricting -- ideology, does not fit that model.
Yvon Chouinard touts his company as a model for the future, when, in fact, its time may already have passed.
Problem 1. Are Chouinard’s absences from the company good or bad for the company?
Problem 2. Do Chouinard’s proposals to increase profit in the future make sense?
Problem 3. Why have CFO’s come and gone at Patagonia over the years?
Problem 4. Is “true debate” nonexistent at Patagonia?Why/why not?
Problem 5. What hiring criteria does Chouinarde use?
Problem 6. How does Chouinard set his financial goals?
Problem 7. What happened when Chouinard hired the designers? Why?
Problem 8. Was Chouinard ‘s quality/price strategy right for 1991? Why/why not?
Problem 9. What triggered Patagonia’s financial crisis?
Problem 10. What should Chouinard do in the next 5 years?