1. Patagonia’s Current Strategy: Key Processes and Customer Perception
In the context of our business model our number one key process is our Rules and Norms (a complete breakdown of Patagonia’s current business model and a to-be-proposed business model are available for review in Exhibit I). This ethos that started with the founding of Chouinard Equipment continued through the creation of Lost Arrow and indeed Patagonia.
Our self-proclaimed “dirtbag” culture has resulted in some unorthodox business practices over the years. We pride ourselves on our efforts to reduce the social and environmental impact of the lifetime of the goods and services we produce. This is something that our competitors recognize but do not focus efforts on; for us it is of the utmost importance. I took this liberty to draft a Customer Value Proposition (CVP) for our current model: “We provide high quality, durable outdoor athletic clothing and accessories that are produced with a high standard for environmental and social impact. We make the products that we want to use.”
To extrapolate on the latter portion of our CVP, we expect our employees to not only share in the environmental and social consciousness that Mr Chouinard has weaved into the culture of Patagonia but we expect employees to be users of our products as well. This gives us an incredible insight into the functionality and durability of our products. This is exemplified in our generous sabbaticals and midday surfing breaks at our corporate headquarters. Additional insight in this regard is provided by our investment in brand ambassadors, who also provide us with the core of our visual marketing in our catalogs, our website, and social media.
In order of volume we move our products through three main channels: wholesale, retail, catalog/internet. In order of profitability the channels are arranged as such retail, catalog/internet, and wholesale. There is an additional product repair arm of Patagonia’s structure that at the moment is not profitable.
Our commitment to the ethical fiber that binds the core of what Patagonia as a brand stands for results in a product that comes at a premium price, however we believe that the money you spend on Patagonia products is a contribution to our commitment for care when it comes to the environments and social spheres within which we operate. So far we have seen success as shown below.
2. Financial Review of Current Business Model
The competition analysis in Exhibit III outlines our industries averages for financial health. It would seem that our “dirtbag” approach to business has boded well for us over the last ten years. While our total market share (annual sales) is far below the industry average over all the company is making money. Our gross profit margin is over 6% higher than the industry average and our pre-tax profit margin is right in line with the industry average.
While Patagonia’s ROE and ROA are below the industry average it is not my much and our debt to equity ratio is far below the industry average. So while we holds more equity and assets on hand than our competitors we has enough liquid cash flow to finance operations without having to incur much debt. Our 12 month revenue growth is trending along with the industry however our 12 month net growth income is nearly 13% higher than our competitors.
Thus while we are experiencing growth that is on par with the industry we are experiencing a downward turn in our operating and/or material costs. It should be noted that the information here is of companies who compete in our industry but not exclusively. Columbia is the competitor that competes most directly with our niche in the industry and on every account except for debt/equity our numbers are favorable and even in the case of debt/equity the difference is negligible.
The standards for philanthropy and an ethical purview for production and material sourcing at Patagonia are much higher than the industry average. We donate 1% of gross sales to environmental initiatives and causes, and our COGS are higher than competitors as a result of our ethical stance. However, once again (as shown in Lost Arrow: Financials, Exhibit III) we have been operating in the black for the last decade.
This may also be explained by our company ethic. We focus on a curbing of consumption and that focus has limited how much we are willing to spend on advertizing. Conversely our competition holds advertisement as a high priority when establishing sales and brand. This observation is not trivial and could more than account for the balance between our costs and those of our competitors.
3. Moving Forward
As discussed the current model for Patagonia works. You can be a “dirtbag” and make make money. The question is how do we continue on with the goal of 10% growth per year for the next five years? Whatever we choose we must operate within that moral fiber that helped us to achieve who we are today. Following are two suggestions for how to move forward, one uses our current business model, the other proposes a change. Please reference Exhibit I for business model analysis and Exhibit II for strategy.
Strategy: Current Business Model
Tactic One: A Focus on Retail – Our best margins are derived from retail sales however this accounts for just one third of our sales volume. The best type of marketing asset we have are our retail employees. Our Dirtbag Ambassadors are out there skiing, snowboarding, climbing, camping, bouldering, and living the life that Patagonia wants to be an integral part of.
We must expand our retail channel and focus on those areas where dirtbags convene. A quick review of the 26 stores in the United States can be found in Exhibit V. Portland, Seattle, St. Paul, Chicago, Atlanta, DC. Sure dirtbags live in cities but where are our stores in Telluride, Tahoe, Bend, Cheyenne, or Buffalo? An expansion of our retail stream increases profitability as well as the reach of our marketing, the Patagonia way. These are the places our competitors don’t wants stores for lack of traffic, but our stores are more than commerce they are community centers for dirtbags.
Tactic Two: Research and Development – Our industry ethic has produced one of the best research and development laboratories in the industry. We can leverage this in two ways. First and foremost we must fund research to produce material with the ethical and physical integrity that also helps lower our gross margins. We have pioneered ethical durable material in the industry, now we must find a way to do so cheaper.
Doing so would open up the market for those dirtbags who dont have as much money and would normally go to a competitor based on price point. Second we hold patents for these materials we could offer to sell material to other outdoor companies, or begin a joint venture. In either of these cases we must make sure that the material we produced is being utilized in an end product that is up to the standards of Patagonia.
Strategy Two: A New Business Model
There comes a time in a business’ life when you have to ask: While what we are doing has worked, how long will it work? To achieve the goal of 10% growth per year we may have to think outside of our wheelhouse and think about how committed we are to our ethical and social standards. As long as we continue to produce more clothing people will buy it. As it stands our customer base has expendable income. How can we convince them to only buy what we need? Through an expansion of our clothing repair services and clothing swap market. A case is made for the business model change in Exhibit I.
Tactic One: Expansion of Repair and Retail – It is not our goal to abandon what has made Patagonia the company it is today, thus once again we will need to expand retail stores however we do so in a way that will facilitate clothing repair. Each store should have a mending workshop staffed and equipped to repair what comes their way. To really take advantage of this service we must willing to mend non-Patagonia clothing.
This will do two things: it will reduce the overall number of unnecessary purchases in our market and it will introduce people to the Patagonia lifestyle through our retail store. These store can also facilitate a recycling program for those articles of gear that are beyond repair. Something as simple as an in store credit can get people who would otherwise go to Nike experience Patagonia C&A. Additionally the expanded retail presence will be an opportunity to create a network for clothing swaps
Tactic Two: Expansion of Internal Repair – Expand the repair infrastructure behind retail presence. That is to say, as opposed to expanding retail and having repair work centers in-store, invest in larger repair facilities that stores can send garments to. In our current business model we are reaching critical mass with regard to how much clothing repair we can handle. If we strategically place lager facilities near our exiting stores we can handle this work load our selves. This also ensures that the materials and process of clothing repair is within the ethical conduct of our company without having to do audits of our outsourced partners.
The clothing repair infrastructure for our market is basically nonexistent at this point and with research and development focused on this new business model we can create and dominate this market. This will once again involve repairing more than just Patagonia products but in the end that’s what this business model is about. To survive and grow into the next decade we must not just reduce the consumption of our customer base but we must reduce the consumption of our competitors as well. When a dirtbag holds on to a coat for another year he helps reduce Patagonia’s impact on the earth and its inhabitants. When Patagonia repairs a Columbia or North Face coat and it lasts for another year we have slowed the consumption of unethically produced clothes and possibly created another dirtbag.
Exhibit I: Four Components of Business Model Framework (Johnson, Christensen, Kagerman)
Customer value proposition (CVP):
Current: Providing high quality durable outdoor athletic clothing and accessories (C&A) produced with a high standard for environmental and social impact. Proposed: In addition to production, engage the consumer in the environmental and social impact of their outdoor athletic C&A by involving them in the maintenance/repair/swap of C&A. Profit formula:
Current: Standard industry mark up on goods sold. Proposed: Lower the price of goods sold and charge a small fee for repairs or continue with current price structure charge cost for repairs of Patagonia clothing/accessories, charge premium repair rates for non-Patagonia clothing and accessory repair. Cost structure:
Current: COGS = 80% materials 20% parts with a wholesale margin of 45% and a retail margin of 65% Proposed: A modified cost structure that emphasizes retail sales and profits off of repairs Margin model:
Current: Largest channel of sales in wholesale 44%, second retail 33%, and finally Catalog/internet 23% Proposed: Shift focus from wholesale to retail/catalog/internet sales, add additional emphasis on repair cost structure for maximum profitability
Current: In general keeping inventory exhausts resources, something which Patagonia wants to minimize. Thus production should match as close to demand as possible. Assets should be available, although they do not need to be incredibly liquid. Proposed: Same as current model.
Current: People: There is a certain type of person who works for Patagonia. Ideally a person who works at Patagonia is the ideal consumer of their goods. Brand: With a strong brand associated with high environmental and social standards combined with a strong dislike of standard advertising channels for the industry the reputation Patagonia’s brand has gained is remarkable (this is achieved through the people they employ as well).
Technology: Their ethical commitment to responsible sourcing and production has resulted in some profitable patents of great C&A material. Proposed: The current Key Resources should not be lost but the Technology will shift to the new business model – a focus on materials , threads, and substances for repair. Additionally there would be a re-purposing of Facilities to reflect this model change as well.
Current: Rules and Norms: Patagonia’s Rules and Norms inform every aspect of their business and it is no different when it comes to their Key Processes. So while manufacturing, service, and training are all important, it all comes down to the Rules and Norms. Propsed: This would not change.
When a new business model is needed.
1. The opportunity to address through disruptive innovation the needs of large groups of potential customers who are shut out of a market entirely because existing solutions are too expensive or complicated for them. The product repair market is just this. As it stands now such jackets tend to be luxury purchases as they hobbies they are designed for are not generally cheap ones to keep.
2. The opportunity to capitalize on a brand new technology by wrapping a new business model around it or the opportunity to leverage a tested technology by bringing it to a whole new market Patagonia isn’t capitalizing on a new technology when it comes to C&A per se but the market could motivate their R&D department to develop a technology that could be incorporated into the repair model. 3. The opportunity to bring a job-to-be done focus where one does not yet exist The expansion of clothing repair for Patagonia and other non-Patagonia C&A provides a real opportunity for an existing market that consumers may not know they need. It creates a job to be done (clothing repair as opposed to replacement). 4. The need to fend off low-end disrupters.
Patagonia would be a low end disrupter in the repair market; repair is cheaper than replacement. 5. The need to respond to a shifting basis of competition. Patagonia would be shifting the basis of competition.