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Has REI grown too big for its britches?
By Craig Medred
Anchorage Daily News


March 01, 2005

Anchorage, Alaska - When kayaker Andy Ryan in Seattle - REI member 348240 - got the runaround from America's largest consumer cooperative, climber Neil O'Donnell in Anchorage - REI member 1228171 - got mad.

And therein lies a story, but first a little background.

As many know, REI is the acronym that grew into the common name for one of America's largest outdoor retailers. The company started in 1938 as Recreational Equipment Inc., a Seattle-based consumer cooperative.

On paper, it remains a cooperative. And in its self-promotion, REI makes almost as big a deal of this as it does of its social consciousness and environmental awareness.

"Being a cooperative business remains central to REI," the company proclaims on its Web site. "While nonmembers are welcome to shop at REI, only members enjoy special benefits, including an annual member refund on eligible purchases."

The wording in that last sentence is most interesting. Back in the day, REI shared its profits _ if any _ with its members in the form of an annual dividend. That ended in the 1990s, however.

Now, REI is managed to ensure a 10 percent annual refund on purchases. The old, cooperative idea of sharing profits has become the new, capitalist marketing technique of bribing consumers to bring in their business.

Today, the REI dividend looks a lot like the 5 percent "cash back rewards" on your Citibank Visa card - only 5 percent bigger.

After paying member refunds in 2003, REI posted a healthy profit of $19.1 million on revenues of $805 million. The profit was not shared with cooperative members. It was rolled over into REI's continuing expansion.

What was once a business in a somewhat dumpy location that sprawled through several interconnected buildings in Seattle's hospital district is now 69 shining stores in 24 states with plans for adding new stores at the rate of seven to 10 per year for the next five years. The expansion has made some question whether the friendly Northwest equipment cooperative has abandoned its democratic, egalitarian roots in an effort to transform itself into the Wal-Mart of outdoor retail.

Ryan - a former reporter for the Anchorage Daily News turned freelance writer, environmentalist and public relations consultant - went exploring that question in a June 2003 story for the Seattle Weekly.

"Most of all," he wrote, "I've wanted to know whether the 2.1 million active members - purported owners of this (then) $735 million-a-year business - have even a remote say in the way it is run. In other words, do the members really own REI? And if not, who does?"

The answer Ryan got from REI executives was, in essence, that it was none of his business. When, for instance, he asked REI president and CEO Dennis Madsen what he and other top executives got paid, Ryan was told the information was privileged.

"I can't think there's any reason we want to disclose confidential information like that," Madsen said, and never mind that such information is freely disclosed by all publicly traded companies.

This is where O'Donnell enters the picture. Though he has never met Ryan, the two men share a couple connections. O'Donnell is a former chairman of the Mountaineering Club of Alaska, to which Ryan was attracted when he lived here. Both men are longtime REI members.

O'Donnell read Ryan's story, which recounted an icy exchange between the reporter and the CEO over the matter of executive compensation, and was incensed.

"I'm an attorney," O'Donnell said. "I said, 'That's ridiculous. A shareholder would have a right to know.'"

What followed was a nearly yearlong war of memos between O'Donnell, REI board chairman Bill Britt of Anchorage, REI general counsel Pam Myers and Madsen.

The war began with O'Donnell asking about REI profits and executive salaries and Madsen insisting that such things are confidential.

"We view this information as both confidential and competitive, and it's never been made an issue prior to Mr. Ryan's article," Madsen wrote O'Donnell in July 2003. "We base our pay for every position in the company on market surveys, and these are reviewed by the board compensation committee for fairness, and to ensure they are appropriate."

Threatened with legal action, REI bosses eventually changed their tune. Finally, O'Donnell was allowed to send a representative to REI's offices in Sumner, Wash., to inspect company records in 2004.

They showed that Madsen and other top REI executives make a large amount of money to run the cooperative. Madsen's annual compensation was near $1 million in 2003. Chief operating officer Sally Jewell that year earned $635,000.

All told, the compensation to the top five REI managers amounted to nearly $2.7 million in 2003 for a company that generated $805 million in sales.

To put this in terms every REI member can understand, it means this: Every time you spent $300, the top five executives made a buck.

Or, as O'Donnell observed, if you bought a kayak (a $900 to $1,000 purchase) the CEO - Madsen - made a buck.

REI today defends these salaries by arguing they are in line with what is paid top executives at the Sports Authority and other major sporting goods chain stores. REI's defense went up on its Web site at the same time it posted the executive salaries that O'Donnell had brought to light.

This information can now be found, if you dig around enough, on The posting of the information there appears to be part of REI's new openness.

There is room for more. Last week I asked REI to calculate the average hourly wage for co-op employees.

The answer, from Diana Kim in Human Resources, was that "REI on average pays about $12.83 per hour. This is highly due to the large amount of retail employees we have on board in our stores."

Costco, Inc. - which is not a high-minded co-op, but a cutthroat capitalist business - also happens to have a large number of retail employees. They make, on average, $15.97 per hour.

REI, it would appear, could do better.

In fact, instead of defending its executive pay as commiserate with that of other sporting goods retailers, maybe REI ought to take a leadership role and set a standard for other sporting-goods retailers to follow.

How about tying executive pay to average pay?

How about the REI board stipulating that in the future the pay of the CEO will be no more than 15 or 20 times the average hourly pay of all other REI employees. That hourly wage of $12.83 translates into an annual salary of $26,686.

A CEO getting paid 20 times that amount would make $553,720 a year. That's a lot less than what is now paid Madsen, who is due to retire in March. But I'd wager most of us could get by on a half-million a year.

I know that Alaska Mountaineering & Hiking owner and sometimes-salesman Paul Denkewalter here in Anchorage manages to survive on substantially less. How hard could it be for REI to find someone capable of running the company for this paltry sum, particularly given that REI insists that so many of its key decisions are made by the member-elected board?

When REI was attacked in 2000 for moving its last U.S. garment-making business to Mexico (most of that REI-brand merchandise was already being made in China), Madsen told a Seattle newspaper that if REI members didn't like it, they had an open forum in which to express their views.

"Members elect the board of directors," he said. "They are certainly able to communicate with the board members and let their views be heard."

Sure they can. That's what O'Donnell tried to do. His first letter was to board chairman Britt. It was intercepted and answered by Madsen. O'Donnell had to write another letter asking Madsen to forward the Britt letter to Britt. And then the letters went flying back and forth for months before O'Donnell finally got the information that should have been public from the start.

Given O'Donnell's persistence, and his obvious interest in seeing that REI is fairly managed, the Anchorage attorney would seem to me a great candidate to join the REI board in the future. But we can probably all rest assured that isn't going to happen. The people who get elected to the REI board are the people nominated by the REI board.

It is very much an insider's game. The friendly, little cooperative might still do a good job of putting on appearances. And given some of the really awful places to work in America today, it may well deserve the accolades it continues to win for being one of the country's better employers. But it isn't really much of a cooperative anymore.


E-mail Craig Medred at cmedred(at)
Distributed by Scripps Howard News Service,

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