REI: Sustained Competitive Advantage through Customer Intimacy

1. REI: Sustained Competitive Advantage through Customer Intimacy By Man-Sang Hahn and Jordan Seidle

2. Recreational Equipment Inc. • “REI achieved remarkable results last year in an economy that remained uncertain, and I credit the dedication and commitment of our more than 9,500 employees who are focused on serving our members and customers.” –IvarChhina, CFO

3. Hypothesis • REI’s focus on customer intimacy has driven their competitive advantage in the outdoor sporting goods and apparel industry.

4. Presentation Outline • Company Profile • Operational Efficiency? • Product Leadership? • Customer Intimacy? • Sustained Competitive Advantage? • Competition • Conclusions • Recommendations/Insights

5. Recreational Equipment Inc. (REI) • “Outdoor retail Co-op dedicated to inspiring, educating and outfitting its members and the community for a lifetime of outdoor adventure and stewardship.” • Offers REI brand high end products in addition to other major brands for outdoor recreation • 2010 Sales: $1.66 Billion

6. REI Profile • Started out in 1938 as a cooperative of 25 mountain climbers who wanted to buy quality climbing gear • Nation’s largest consumer cooperative with more than 4.4 million active members • REI named one of The 100 Best Companies to Work For by Forbes Magazine every year since 1998

7. The Competition • Bass Pro Shops • Customer Intimacy • Cabela’s • Customer Intimacy • Dick’s Sporting Goods • Operational Efficiency

8. Other Competition • According to REI • Best Buy (substitute products) 6 • Average American child spends 47 hours in front of a screen versus 30 minutes of outdoor play in a week

9. REI and Environmental Efforts 4 • Reducing Greenhouse Gas Emissions • Minimizing paper usage • Effective and efficient recycling program • Operating “Green” buildings • Reducing packaging and other waste from products

10. Operational Efficiency or Customer Intimacy? • Operational Efficiency Argument • Retail companies with significant sustainability efforts reduce energy costs on an average of 20% 5 • Major focus of sales is through company website, rather than through more expensive “brick and mortar” stores • Successfully integrated multiple supply channels that help meet customers’ needs and ultimately boosts sales 9

11. Operational Efficiency or Customer Intimacy? • Customer Intimacy Argument • Estimated 17% of customers are willing to switch stores that have implemented sustainability practices 5 • Firms with sustainability programs increase customer retention by 31% 5 • Since initial launch of website retailing, REI has moved to increase “brick and mortar” stores

12. REI Products: Product Leadership? • REI brand gear is competitive with other brands that they sell at their stores • Products are differentiated from other brands, such as Marmot, Keen, Mountain Hardware

13. 2010 Best Gear RatingsAccording to National Geographic Adventure2 • Skis: Rosingol • Soft Shell Jackets: The North Face • Bicycles: Scott USA • Sleeping Bag: Montbell • Other Jackets: Patagonia • Headlamp: Petzl • REI won no product awards

14. Customer Intimacy • Can be expensive, but can also build long term customer loyalty • Emphasis on the customer getting the right product with no limits on time • Long term customer sales is valued over single transactions • Often uses decentralized marketing to empower sales force

15. Building Customer Intimacy1 • Customize Product • Total Solution and Emotional Connection • Be Obsessed with Results • Select and Nurture Core Customers • Make Customers Feel Valued • Enrich Relationships with Employees

16. The Building Blocks • Customized Product • Non commissioned sales • Total Solution and Emotional Connection • Outdoor Enthusiasts hired as sales force • Offers classes and outings to teach people to use the equipment

17. The Building Blocks • Be obsessed with results • No questions asked return policy • No time limits on returns • In store customer tryouts • Select and Nurture Core Customers • Offer in-store member appreciation events • Offer classes and programs exclusively for members

18. The Building Blocks • Make Customers Feel Valued • Membership dividends • Enrich Relationships with Employees • Consistently ranked by Fortune as one of the best companies to work for (#9 in 2011)

19. How REI Emphasizes Customer Intimacy • Focus on in store sales force of “inspired” personnel. 79% characterized as highly engaged versus 70% average of global retail3 • “REI is about helping each customer get the most out of his or her outdoor adventure.”

20. How REI Emphasizes Customer Intimacy http://www.youtube.com/watch?v=1nKJhYt06jE

21. Testimonies • “REI is a wonderful store! The customer service is amazing! They are so helpful and kind. I make all my outdoor purchases because of REI’s wonderful staff!” -Christie • “REI is a great store. Anything you need for camping or hiking they will have! Love shopping in store and online. Will be an REI member for life.” -Jen

22. Value Proposition Summary Operational Efficiency Product Leadership • Sustainable efforts reduce energy costs • Some focus on internet sales allows efficient sales and distribution of products • No leading products and developments in gear • Offers other top and innovative brand’s products • Selling products that offer low carbon footprint

23. Customer Intimacy as Competitive Advantage? • Experience Marketing • Customer Service Application • Use of sustainable practices to increase brand loyalty • Outdoor School to educate and encourage customers to use outdoor products • Loyal, engaged, and outdoor focused staff to increase customer engagement • Membership program and incentives to develop higher brand loyalty

24. Sustainable Competitive Advantage? • REI estimated in 1999 that 50% of it’s customers were return shoppers8 • According to Retail Customer Experience7: • (2011) REI ranked #71 for retailers, issues, and trends impacting the customer experience • Best buy ranked #47, Cabela’s ranked #50, Dicks Sporting Goods ranked #69

25. Customer Loyalty4

26. Annual Sales4

27. Major Changes • 1999- Flagship store opened in Seattle, with focus on Experience • *2001- Shop 3 Ways approach to customer service implemented, phone, online, or store • *2002- Membership data tracking “to improve insight” into members spending habits • 2005 New CEO • 2006- Stewardship is greatly improved, and company starts marketing this & provides stewardship report • 2009- Television Advertising

28. How the competition compares

29. Profit Margin REI Cabela’s

30. Conclusions • REI has developed an excellent customer intimacy value proposition • Much of it’s competition is also being recognized as having high standards of customer intimacy as well • REI seems to be making strides in other value disciplines, although they are not leading the industry in product leadership or operational efficiency

31. Does This Support The Hypothesis? • REI’s focus on customer intimacy has driven their competitive advantage in the outdoor sporting goods and apparel industry. • YES! But....

32. Recommendations • Excellence in a value discipline will be most successful when it exceeds the competition’s ability to focus on the same discipline • REI needs to continue to expand their customer engagement, or potentially change their value discipline

33. Trade Off Analysis • Focusing on customer intimacy may divert resources from operational efficiency and product leadership • Hiring knowledgeable and skilled employees come at a cost and may decrease profit margin (REI vs. Cabela’s) • Environmental and other “green” efforts take away from time and resources that could be allocated to other customer-centric efforts

34. So…What did we learn? • Particularly in today’s competitive retail environment, focus on differentiating through customer service and by offering an experience to the customer • Tailor the business to the customer’s needs, not necessarily the shareholder’s needs • Utilize all supply channels but place emphasis on communication and training to help bring channels into closer alignment and cooperation

35. Questions? Comments are also welcome. Thanks for listening. Jordan Seidle & Man-Sang Hahn

36. Appendix • Bibliography 1. Allman, S. (2001). “The road to customer intimacy and customer loyalty”. http://www.ntlfloortrends.com/Articles/Column/fb3dbf42450b7010VgnVCM100000f932a8c0____ 2. National Geographic Adventure (2010). “Gear of the year 2010”. http://adventure.nationalgeographic.com/adventure/gear/gear-of-the-year-2010/ 3. Gebauer, J., Lowman, D., & Gordon, J. (2008). “Closing the engagement gap: How great companies unlock employee potential for great results”. http://books.google.com/books?id=IabU9Ew20rMC&pg=PT28&lpg=PT28&dq=recreational+equipment+inc.+competitive+advantage&source=bl&ots=1AaiGlggZo&sig=y6V8POm7HmcGdWH5UUFzZKsL6nQ&hl=en&ei=VLWZTvTGCqfL0QHi6b3PBA&sa=X&oi=book_result&ct=result&resnum=10&sqi=2&ved=0CF0Q6AEwCQ#v=onepage&q=recreational%20equipment%20inc.%20competitive%20advantage&f=false

37. Appendix • Bibliography (continued) 4. REI Company Website. www.rei.com 5. Jacobi, J. (2009) “Sustainable retail value proposition”. http://www.scottmadden.com/insight/349/Sustainable-Retail-Value-Proposition.html 6. Moore, M. (2007). “Sustainable Spirit: REI chief says the challenge is to connect people with nature”. http://www.childrenandnature.org/index.php?/news_detail/sustainable_spirit_rei_chief_says_the_challenge_is_to_connect_people_with_n

38. Appendix • Bibliography (continued) 7. Retail Customer Experience (2011). “Retailers, issues, and trends impacting the customer experience”. http://www.retailcustomerexperience.com/article/180159/Top-100 8. Powell, M. & Harris, K. (1999). “The sports e-tail: The dangerous dozen”. http://business.highbeam.com/137042/article-1G1-55367421/sports-etail-dangerous-dozen

39. Appendix • Bibliography (continued) 9. Cherkassky, I. (2005). “REI Climbs to Channel Integration.” Target Marketing. Vol. 28, Issue 5, p. 21. 10. Powell, M. & Harris, K. (1999). “The sports e-tail: The dangerous dozen”. http://business.highbeam.com/137042/article-1G1-55367421/sports-etail-dangerous-dozen