Public Company and Patagonia
As resources and commodity’s decrease, it is harder and harder to make a difference in the world today. Patagonia continues to work hard to do their part with the resources that are available. Patagonia is a privately held outdoor clothing company based out of Ventura, California that generates yearly sales of approximately $540 million. Patagonia has developed outdoor apparel that is marketed towards outdoor sports, travel and every day wear. The company integrates Its core values into every product that it produces. They are known for their innovative designs, and environmental responsibility.
Its high integrity and commitment to the environment has placed Patagonia on the Deciphers Institute’s “WorldS Most Ethical Companies” list for SIX consecutive years since the list was first developed In 2007 (Unknown, WOMEN Honorees, 2012). This case analysis will examine the history of Patagonia, and Its business philosophy. Patagonians business model will be evaluated as well as the captured cost and value of the company. Next, we will examine Patagonians environmental position and its sustainability. The product lifestyle initiative will be analyzed and how well it worked for the company.
Patagonians financial statements are important to determine the success of the company’s financial goals. Lastly, I will share some lessons that I learned from Patagonia and this case study. History Patagonia was started from one entrepreneur’s passion. Hypochondriac, founder of Patagonia, developed a passion for rock climbing. In 1953 his passions brought him west to the San Fernando Valley in California, where he became an expert at climbing. He knew that he couldn’t explore his passion of climbing the way he wanted to because of limited appropriate climbing gear available.
The only available climbing ear were pitons, which are metal spikes that were driven Into cracks or seams In the rocks. Pitons are left In the rock, meaning that a long climb could require hundreds of these tools. After frustration, and financial hardship, Schoolyard became Inspired after meeting a Swiss climber that had crafted his own set of iron pitons. He turned pitons that were stronger than what was currently on the market. Word of Cinnabar’s invention spread, and he began selling his pitons out of the back of his car for $1. 50 each.
Although the hobby was enough to support him, he often lived on less than a dollar day. Drifting along the California coast, climbing in Yosemite, and surfing in Baja, Cinchonas was happy with his lifestyle. By 1966 Cinchonas decided to partner with Tom and Doreen Frost to create Cinchonas Equipment. They quickly became the largest supplier in the United States. For nearly a decade Cinchonas and Frost made improvements on nearly every climbing tool. Tom and Doreen worked with Cinchonas “Just to pay the bills”. In 1972 Cinchonas Equipment added an outdoor apparel line called “Patagonia”.
Patagonia grew very quickly. Cinchonas and his wife Melinda knew they wanted to sell items that would have a minimal impact on he environment. So they made many decisions in their business approach that would help the environment such as using organic cotton to make t-shirts. Soon after the establishment of Patagonia, it became its own company, no longer under the ownership of Cinchonas equipment. However, like many start-up companies, Patagonia tried to expand too quickly. Growing its sales from $20 million to $100 million as well as expanding its services into Japan and Europe.
This wide-scale expansion placed Patagonia into a dire financial situation. The recession that took place in the ass’s forced the company to lay off about 20% of its staff. Patagonia continued to grow despite some of the financial troubles that they faced (Reinhardt, Cascade’s, & Hymn, 2010). Cinchonas did not allow the recession or the financial troubles of the company to stop his vision for Patagonia. Instead, he chose to go in a more sustainable direction. The company switched to the more expensive organic cotton in 1996, a risky business move considering it increased the firm’s supply costs.
However, no other company was producing clothes with organic cotton. He invested in other sustainable materials and decided to make products more durable. This session a risky move because companies often rely on consumers coming back to get replacement products. Plausibly, the more durable the product, the less customers will need to purchase for replacement. However, the exact opposite occurred: consumers were more willing to do business with Patagonia due to its environmental consciousness and the fact that they could trust Patagonians products to last a long time.
Connoisseurship’s on Business Cinchonas used Patagonia as an experiment to “challenge conventional wisdom and present a new style of responsible business” (McAllen, 2011). He wanted to stay way from the traditional way of doing business, and focused his efforts on “doing the right thing”, rather than on profits. Doing the right thing for Cinchonas meant ensuring that every decision that was made regarding the business, was environmentally sound and responsible. One decision that he made was to no longer use anti-odor technology because it was not safe for the environment.
The competition Patagonians products were comparable to those of their competitors. Other stores in the industry such as North Face, Marmot Mountain, and Mountain Hardware, all shared the same interest of selling outdoor apparel. However, because of quality, environmental impact, and innovation, Patagonia is able to charge more for their and some of the top outdoor sportswear companies in the industry during 2009. Patagonians gross profit margin for 2010 was 52. 6%. Whereas the average gross profit margin of the other five companies (Columbia Sportswear, V. F.
Corporation, Nikkei, and Timberland) was $44. 95%. Not to mention Patagonians 12- month Net Income Growth for 2010 was 42. 5%, which was substantially higher than the average net income growth of its competitors at 26. 525% (Reinhardt, Cascade’s, & Hymn, 2010, p. 12). This goes to show that despite the company’s more expensive product, consumers were willing to pay more for higher quality, and items that were environmentally safe. Marketing isn’t that important Patagonia used a much different marketing approach than its competitors, using less than 1% of its sales towards marketing and advertising.
They have strengthened their brand based upon their environmental commitment, and “profit sharing with environmental causes” (Alienist & Door-Near, 2012). As social media becomes more popular, and ads are now a part of what one sees when scrolling down their timeline, any companies get free advertising. The company took advantage of this and used it as an outlet to communicate to consumers and the public. Although it would have given them possibly some advantage, Patagonia did not use its environmental stance as part of their marketing tool.
However they educated the public on the impact that their company had on the environment. Doing so attracted more consumers. Patagonia uses its website not Just for selling outdoor apparel but also as an educational tool about the environment, and the products that the company uses in its production. The type of information that Patagonia put on their website shows that the company has taken their business very serious and that they are aware of their environmental responsibility. They use the website not Just to sell the items, but to showcase that they items that are produced show corporate responsibility.
In addition to the information on their website, Patagonia at times did put out ads for their company. The advertisements were usually very short and included educational messages. They believe that it is more important to show people useful information that will help enhance their lives. In a recent interview Patagonia UP Joy Howard stated that their position is to “solve problems in the world,” and that advertising is the “dead last thing” to the company (McAllen, 2011). This goes to show that the company is more focused on the environmental sustainability than on profitability.
Educating consumers about what they are buying and how it affects the environment, sells the product itself. Exhibit Use of organically grown cotton Patagonians concern for the environment also caused them to decide to use organic cotton in their clothing. They wanted to continue to follow their mission tenement of “Build the best product, cause no unnecessary harm, use business to inspire and implement solutions to the environmental crisis” (Unknown, Company Info, n. D. ). Cotton is one of the world’s most insect dependent crops, therefore causing a risk to the environment because of the pesticides that are used.
In 1996 Patagonia switched apparel to 100% organic cotton products. They already had clothing that was made with conventional cotton, and made up about 20% of the company’s sales, but switching to organic cotton was a risk that they were willing to take. Patagonia was not the first company to use organic cotton. The decision to clothing companies decided to cancel their organic cotton line, so it was perfect timing for Patagonia to drop their line. Although initially Patagonia found success in introducing its organic cotton products, they also faced some challenges.
Because of the items and styles that were unavailable for production using organic cotton and because some of the suppliers refused to switch to organic cotton citing “lack of supplier alternatives and skepticism about the market potential”, Patagonia had to decrease its product line in order to stay in line with the 100% organic cotton initiative that they made. Due to the increased price for organic cotton, the company’s costs increased. Product costs increased 25-30% with the use of the organic cotton. Organic cotton had a drastic decline in production, therefore costs were higher than normal.
In addition, Patagonia struggled to maintain the quality of its product, once they switched. With cotton products making up more than 20% of the company’s sales (Reinhardt, Cascade’s, & Hymn, 2010), they were forced to get it right, and to make their product desirable enough to sell. Business Model: Does it really work? A business model is a model that is designed for the successful operation of the equines, identifying customer base, revenue sources, products and details of financing. Patagonia seems to have a business model that has helped the company be very successful and remain relevant amongst its customers and competitors.
They have stayed true to their core values which is to provide quality, integrity, and environmentalism. Since the start- up of Patagonia, they have never operated under conventionalism, and has continued to stand out from every other outdoor apparel chain. Focusing more on environmental sustainability and social responsibility rather Han profits, Patagonia has become the worldwide leader of environmentally responsible business. They have continued to remain innovative in their approach to doing business, as well as in the product development and marketing.
Creating and Capturing Value Achieving Growth, being Profitable, and minimizing ecological expenses are somewhat contradictory goals but somehow Patagonia has been very successful at achieving these goals. Their business model is based on making minimum environmental impact but creating products that have create value, without compromising the company’s capital. In order to stand apart from competition, Patagonia has effectively positioned itself as a supplier of superior quality products and has continued to commit itself to minimize its impact on the environment, once again staying true to its core values, and mission statement.
On the supply side of the business the company uses activities and relationships along the value chain that provide the finished goods and create value. The company has been able to create value by creating integrity in its product and product’s performance. The company shows confidence in the product that they create, by offering warranties and as well s the promise to provide replacement products when items become too worn. They also creates value by using only quality materials such as organic cotton when manufacturing its products.
They have also created value by influencing the customer’s experience. Patagonians uses catalogs that don’t focus so much on selling their product as other companies do, but the catalogs are informational in nature regarding the environment (Wang, 2010). Patagonia also only works with suppliers responsibility, therefore never compromising the value of the company or its products. Patagonia has also created a social and psychological factor through their advertising, educational messages, donations, and campaigns.
This has helped the company capture value because the company differentiated themselves from its competitors and other apparel companies, and it gave consumers the willingness to purchase a product with quality despite the fact that their apparel was more expensive than its competitors. The fact that Patagonia cares about the environment, and customers feel that they can trust their product, consumers are willing to pay more for Patagonians products.
Sustainable future Patagonians business model is not one that is begging for consumers to come in a arches their product on an impulse. In fact their model is designed to do the exact opposite. In 2004 Hypochondriac, wrote in a black Friday ad “Don’t buy this shirt, unless you need it” (Exhibit 1). This statement was not made because Cinchonas doesn’t want his items to sell, or doesn’t want the business, he made the statement because he wants his consumers to make responsible decisions that will have a positive effect on the environment.
He helps consumers make those smarter decisions by producing items that last longer and that do not need to be replaced as often. Patagonians Environmental Position Patagonians business model supports environmental position in that the company makes a deliberate attempt to focus more on the products that they sell rather than on the profits that they make. They do so by launching such initiatives as their Product Lifestyle Initiative where they encourage consumers to reduce, repair, reuse, and recycle their Patagonia purchased products.
This particular initiative does not focus on profit, it actually costs the company more money, however, they choose to stay focused on acting environmentally responsible, and not causing unnecessary harm to the environment. For the most part, Patagonia has used the same business model since it opens its doors in 1972. Their focus has always been the same, “inspire and implement solutions to the environmental crisis” (Unknown, Environmental and Social Responsibility, n. D. Over the last 40 years, Patagonia has become a leader in the industry have implemented many environmental and social initiatives such as; using only organic cotton in its cotton products since 1996; redefining corporate transparency through its Footprint Chronicle” website – documenting what is working in the supply chain, what’s not, and steps the company is doing to address TTS challenges; launching its Common Threads Partnership, which invites customers to take mutual responsibility for the entire life cycle of the company’s products through the 5 Or’s: reduce, repair, reuse, recycle and remained; becoming the first brand member of the [email protected] system; being one of the first California companies to switch to wind energy upon deregulation and adding on-site solar energy systems; being the first company in California to incorporate as a benefit corporation launching $20 Million & Change, a fund to help like-minded responsible start-up companies; and Becoming one of he first U. S. Outdoor apparel companies to introduce Fair Trade Certified”* garments (for fall 2014). (Elks, 2013) resources to help the environment and still maintain its integrity as well as follow its mission statement. They have continued to remain as the leading outdoor apparel company with more than $600 million revenue in 2013. Patagonia has not slowed down.
Their business model has worked for them over the last 40 years. As times continue to change and other retailers pick up on Patagonians business practices, such as being more environmentally conscience, the use of organically grown cotton, he product differentiation threatens the sustainability of Patagonians business model. Other retailers offering a similar product as Patagonia, affects their gross profit margin, therefore causing Patagonia to continue evolve and spend more money to create product differentiation within their organization. Patagonians business model does place some pressure on their environmental stance and could cause some conflict in providing high quality products.
Although consumers are willing to purchase products from Patagonia at a high price, with initiatives such as the Product Life Cycle, consumers are purchasing less, and Patagonia will overall have more overhead, due the repairs that they are offering their consumers. If consumers aren’t buying as often, it will be difficult for Patagonia to continue to purchase the high quality materials that they use to produce their garments. Product Lifestyle Initiative: “Reduce, Repair, Reuse, and Recycle” The Product Lifestyle Initiative was a plan by Patagonia to help customers to buy only what they really needed, and encourage them to reduce their consumption.
Patagonia would promise to provide their customers with high quality garments, and roved a guarantee that would allow customers to have their items repaired if anything ever happened to them as many times as needed. Once the products are no longer wanted, the customers are asked to “facilitate its reuse” (Reinhardt, Cascade’s, & Hymn, 2010). The store planned on doing this by creating an online swap meet. Once all options were exhausted and there is no longer use for the product, customers are asked to recycle their items with Patagonia. In planning for this initiative to take off, the executives acknowledged many obstacles that would hinder the success of the initiative.
Analysis of the Initiative As Patagonia stays focused on doing their part to not cause unnecessary harm to the environment and plans to reach and maintain 10% annual growth in sales other a five year timeshare, starting in 2010, their Product Lifestyle initiative would likely hinder the type of above average growth that they are seeking. The initiative is expected to cost $60,000 over the course of the first year of implementation (Reinhardt, Cascade’s, & Hymn, 2010). Although that amount is very small compared to the amount of profit the company makes, sales would drop and cost of labor would increase. Patagonia is one of the only companies that offers to fix damaged items for customers. Through the Product Lifestyle Initiative, they will repair products from other brands, and “encourage customers to limit their consumption to only essential products,” (Reinhardt, Cascade’s, & Hymn, 2010, p. 8).
The Product Lifestyle Initiative however, it seems as though it will cost more to implement and maintain the initiative, than revenue that will be generated from the initiative. The initiative will cause a higher rate of product returns, and new team members will need to be hired in order to create a repair department or use a third-party vendor. In 2010 the company was insignificantly staffed to handle the existing returns. In order to accommodate the increase of returns, the stores were told to provide replacement products in order to reduce wait times. Furthermore, in order to increase “the percentage of recyclable products from 65% of products in June 2010 to 90% in spring 2011” investment in research and development would have to increase (Reinhardt, Cascade’s, & Hymn, 2010).
All of the things that are involved in this portion of the initiative cost more money for the company, but it does not mean that there would be more profit. The initiative does not seem to generate any venue. Although Patagonia focuses more on the environmental footprint than on profits, realistically, in order for them to stay in business and continue to grow at a steady rate, it is not beneficial for them to implement initiative that cost a more than they will be able to bring in. The replacement portion of the initiative could increase revenue for the company. Since Patagonia is willing to allow customers to bring in garments purchased from other retailers for repair, they could charge those customers a small fee.
Customers who purchased their products directly from Patagonia and are able to provide a except or some proof of purchase, could get their products repaired for free. For customers who own Patagonia products, but bought them from other sources such as used clothing stores, could still bring in their garments for repair, but at a small fee. The initiative would have no affect on the way that customers purchase products in the store nor customer behavior, but it could potentially have a negative effect on the business if implemented. Although implementing the initiative will promote responsible behavior for customers and the company, it may do more harm than good to gross profit margin.
If the company is serious about continuing to grow the company 10% over the five year time frame, they would want to think about how they can implement initiatives that not only help maintain their environmental position, but also that increase their profit. Has Patagonia been successful in achieving its goal of profit? Although Patagonia spends most of its efforts focusing on its environmental responsibility, in order to remain in business and profitable they must also set financial goals. While focusing on their environmental responsibility, they set a goal to increase sales by 10% annually. Patagonia has been successful at achieving this goal. For 2011 fiscal year, Patagonia reported annual sales of $417 million.
During the 2012 fiscal year Patagonia recorded its best year financially. They increased their sells by 30% earning $543 million (Shannon, 2013). As of 2012 Patagonia has doubled its revenue and tripled its profits since 2008 (Martin, 2012). They continue to perform financially although not at a consistent rate. However they have come very close to their sales goals each year and some years far exceeding that goal. Patagonia has done many things to continue to remain competitive in the outdoors apparel industry. In 2010 Patagonia Cost of goods sold and the company’s sales have not been truly consistent, but they remain successful in their efforts.
Although Patagonia has a history of doing well financially, Yves Chicagoan admitted in 2012 that he did not expect the company to continue to grow at the same rate as other retailers are catching on and trying to adopt some of their philosophy. Richard Jeff, a retail and apparel expert, says that Patagonia “is doing things incrementally better” (Martin, 2012). Which means that the competition is lurking closely behind. As Meany’s catch on to their philosophy, Patagonia will need to be more innovative in its approach in order to continue to grow at a steady rate. What if Patagonia were publicly traded? Some of the most successful organizations are publicly traded. Companies that are publicly traded allow the market to determine the value of the company through daily stock market trading (Unknown, Public Company, 2014).
Publicly traded companies have less control over the organization structure and must answer to shareholders’ on certain decisions. They also give less control to the owner and company founders. Patagonia has an organization structure that is different than any other organization out there. The structure of the organization allows the company to focus on environmental awareness as opposed to profits as most companies. If Patagonia were publicly traded, the dynamic of the organization would be completely different. Being a private company, Patagonia is not required to report to stockholders or gain their approval in any way. This is one of the biggest advantages for Patagonia and their business structure.
If Patagonia were publicly traded they would have to change the organization Truckee to focus more on the profit, as shareholder’s would have an interest in the company, and would want to ensure that they are able to profit from any decisions that are made regarding the organization. The decision to use only organically grown cotton may not have been approved had Patagonia been publicly traded, because to shareholder’s they could see it as a potential risk. They are able to take on greater risk because there is no one to tell them that they can’t. As a publicly traded company Patagonia and its founder would have much less control over the business structure, ND every decision would be about how to gain profit. Publicly traded companies have many pressures on them including how quickly the company is expected to grow. The business model would not focus on being responsible.
Not to mention as a private company, Patagonia is not required to make their financial information public, as publicly traded companies are. With sales growth reaching an average of 6% each year, and the company closely reaching their sales growth goal of 10% the current strategy works very well for Patagonia. The decision to utilize organic grown cotton in its garments, has been very successful. Patagonia has been innovative and works diligently to stay ahead in sales as well as it environmental operations. Being a private company has allowed Patagonians decision-makers to not only focus on what they want, but also on what is best for the company.
Patagonians market strategy, though exceedingly bold, is sustainable in the sense that eccentric ideas have become their norm. In Cinnabar’s book Let My People Go Surfing, he said, “it’s okay to be eccentric, as long as you are The sustainability of Patagonia also falls in line with the sustainability of the planet. There are many companies that can learn from Patagonians business model forever in order to remain successful it would be difficult for some of the top retailers to remain competitive in the market should they change and adopt Patagonians practices. Patagonia has built their business and brand around a philosophy instead of around products.
Their business strategy has driven up sales to 6% and continues to offer high-quality premier garments. Patagonians business model being much different than its competitors, leaves room for continued growth and innovative ideas. Would other firms choose to follow Patagonians environmental practice? Although Patagonia has been successful in its business approach and environmental practice, it would be difficult for already established firms to successfully fully take on Patagonians environmental practices. All things being equal, if Nikkei and Patagonia were to share their practices, they would reach a Nash equilibrium. Lessons Learned Patagonia continues to focus on the environment and making a difference one step at a time.
This action is commendable, especially because they are not following the norm for the industry. With the success of Patagonia I have learned that in order to be successful, you must also do what you are passionate about, and allow everything else to fall into place. That is what Cinchonas did with Patagonia. He was passionate about the environment and the affect that his decisions had on it. Although he wasn’t as focused on profits as other organizations, he was able to follow his passion and have the most successful outdoor apparel company in the country. The type of passion that Yves Cinchonas has for the environment and Patagonia can definitely be applied to many aspects in life.