Published in: 2006
Yvon Chouinard is founder and owner of Patagonia. He began in business by designing, manufacturing and distributing rock-climbing equipment in the late 1950s. Chouinard still spends much of his time in the outdoors and continues to help guide Patagonia.
A DIFFERENT VIEW ON BUSINESS. Patagonia exists to challenge conventional wisdom and present a new style of responsible businesses. The accepted model of capitalism, the endless growth, deserves the blame for the destruction of nature. Patagonia will prove to the rest of the world, that doing the right thing makes for a good and profitable business.
THE YOUTH. After graduating from high school in 1956, Yvon eventually migrated to Yosemite, where few of the big walls had been climbed. Chouinard was sent by the army to Korea, where he worked with civilians and climbed on his spare time. He was honorably discharged in 1964 and in the fall of that year, he stated making climbing gears.
BEGINNING OF CHOUINARD EQUIPMENT. Yvon hired his climbing friends, and most of the work consisted of forging, grinding, and crude machining. In 1966 he moved from Burbank to Ventura where he set up shop in an abandoned packaging company slaughterhouse. The demand for the gears kept growing, so they started to use more sophisticated tools and dies and machinery. Chouinard went into partnership with Tom and Doreen Frost – a partnership that would last for nine years.
GROWTH IN CLIMBING TOOLS. The team redesigned and improved just about every climbing tool. Quality control was always foremost in their minds, because a failed tool could kill someone. Chouinard Equipment were doubling sales each year but showed only about a 1% profit. Because they were constantly coming up with new designs, they would scrap tools and dies after one year that should have been amortized over three or five years. However, competition was low; no one was foolish enough to want to get into that market. By 1970, Chouinard Equipment had become the largest supplier of climbing hardware in the U.S.
PATAGONIA WAS FOUNDED. In the late sixties the company ordered a few shirts from Umbro. Soon they ordered shirts from New Zealand and Argentina. Clothing was a way to support the hardware business. As they began to make more and more clothes and a technical line of rainwear – the predecessor to Gore-Tex – they needed a name for the clothing line. Soon, the name Patagonia came up – and was decided.
THE FIRST CRISIS. In 1974, Patagonia contracted with a factory in Hong Kong for 3,000 shirts a month. Shipments ware late and the quality terrible. Shirts were unloaded for less than cost, and a severe cash-flow problem was a fact. There were lots of sleepless nights for the Frosts and the Chouinard’s and the partnership ended in late 1975. The Chouinard’s were left sole owners of a struggling business. Yvon began searching for a philosophy that would work.
LEGAL TROUBLE. In the late 1980s Chouinard Equipment became the target of several lawsuits. The basis for each suit was improper warning. The insurance company refused to fight any of the suits and settled out of court. The insurance premiums went up 2000% in one year. Eventually, Chouinard Equipment Ltd filed for Chapter 11, a move that gave the employees time to gather capital for a buyout. They purchased the assets and built their own company, Black Diamond Ltd.
SUCCESS AND RECESSION. From the mid-1980s to 1990, sales grew from $20 million to $100 million. All profits were reinvested. In 1991, after years of 30-50% CAGR, Patagonia hit a wall. The country entered into a recession and the primary lender, Security Pacific Bank, was itself in financial trouble and sharply reduced the credit line. In 1991, Patagonia let 120 employees go – 20% of the workforce. The history of Patagonia from the crisis of 1991-92 to the present day has no major crisis.
PRODUCTION PHILOSOPHY. The ideas have to come from as close to the source as possible, i.e. the core customer, to stay ahead of the competition. They know what works, what doesn’t, and what is needed. Patagonia do much business with as few suppliers and contractors as possible. The downside is the risk of becoming highly dependent. But those companies are also dependent on us. The potential success is linked. Patagonia is an ecosystem, with its vendors and customers as an integral part of that system. A problem anywhere in the system affects the whole, and this gives everyone an overriding responsibility to the health of the whole organism.
DISTRIBUTION PHILOSOPHY. Patagonia sell products at a wholesale level to dealers, through own retail stores, mail order, and e-commerce, and do it all worldwide. This diversity of distribution has been a huge advantage. In a recession, when wholesale sales are down, the direct sales channels do well from the loyal customers. Each means of distribution requires its own expertise. The mail-order business requires inventory-depth for immediate fulfillment, an intimate knowledge of catalog merchandising, and close analysis of mailing list performance. Retail requires well-organized merchandise displays and excellent management and training of floor staff. Traditional wholesale is mostly as a simple distribution business (merchandise to warehouse and ship it out). Few businesses master all four business styles, but when you do master them, the four means of distribution work very powerfully in concert.
WHOLESALE RATIO. The main benefit of selling wholesale to dealers is that it requires a much smaller investment to reach customers that mail order or our own retail stores. So how to ensure that the “Patagonia story” isn’t lost in translation. The way the get the message across is to develop a partnership with the dealers. It involves more than trust and goodwill. As a rule, in the U.S. Patagonia work to have eventually 20 to 25% of a dealer’s business and/or be its first- or second largest clothing vendor. This established a de facto partnership. Even a dealer with a strong ego will listen to someone who supplies 20 to 25% of what he or she sells.
GO DO IT, BUT DO YOUR HOMEWORK. Although Patagonia encourage everyone at the company to be “gonzo”, to stick his or her neck out, they don’t want to become martyrs. The problems with risk taking, of course, is that it’s risky. You can minimize risk by doing your research and, most of all, by testing.