By Mario Toneguzzi
The sale of Vancouver-based retailer MEC (Mountain Equipment Co-op) to a U.S.-based private investment firm raises a number of questions about how Canadian consumers will respond to the change in ownership.
How will this acquisition affect consumers’ trust in MEC? How will it affect consumers’ trust in the retail industry? What’s to come? There are so many questions people are asking about the sale to Kingswood Capital Management while the well-known retailer remains under creditor protection in Canada.
A CANADIAN BRAND BEING ACQUIRED BY AN AMERICAN BRAND INEVITABLY ERODES CONSUMER TRUST
Dr. Saul Klein, Dean of the University of Victoria’s Gustavson School of Business, said his guess is that this will erode trust significantly for a few reasons.
“One is when we see a Canadian brand being acquired by an American one, that has a negative impact. We saw that quite sharply with Tim Hortons a few years ago. That was again one of the most trusted brands in Canada and then new ownership came in and started making changes. It really undermined a big part of the value proposition for Canadians,” said Klein.
“For MEC, I think it’s going to be even stronger because of the co-op structure. The customers are members and it’s hard to gauge how many, but a significant number of their members are quite unhappy with this. As members of a co-op they have a very different view on what the purpose of the organization is. And MEC on their home page would say they are about values not profits. That’s a big part of what kept people going to MEC. It’s those values about ethical sourcing, about playing a positive role in society, active on the climate front.
“The risk is that the new owners by necessity will have to cut costs and have to push some kind of a turnaround and the risk is they might get away from some of those value-based elements that are a big part of what makes MEC such a trusted brand in
For the past five years, the Gustavson Brand Trust Index has been tracking consumers’ trust in brands with MEC consistently holding the top spot as one of the most trusted brands in Canada.
There are a number of challenges taking place against the MEC sale. An online petition by members is opposing it as members are raising money for legal fees to challenge it.
“We’re living in very strange times,” said Klein. “In a normal year, I would have thought that MEC probably could have recovered. They had a financial problem in 2019. But to restructure and cut costs and get things going just when the pandemic hit made it impossible. We’ve seen so many retailers fail during the pandemic and MEC wasn’t in a good position to get through it. That certainly also undermines the trust.”
The overall trust of a company like MEC comes from its values, the quality of its products, and the quality of the service.“The people in the stores really had an in depth understanding of what they were doing, and they were similar to their customers in the sense that they shared the same enthusiasm for the outdoors,” said Klein.
“The big question is going to be what are the new owners going to do. As a private equity firm, they have to make money or find a way to make the organization profitable. They have said that they’re going to keep 17 out of the 22 stores in operation but are their stores going to look different? Are they going to be able to attract new customers in greater numbers than they’re going to lose existing customers? I think many of the current customers will not stay with MEC. And if they try and attract new customers, they risk diluting their core position which is what probably got them into a little bit of trouble to begin with. So they’re in a catch 22 here.”
MEC OWNERSHIP CHANGE JUST ANOTHER RIPPLE IN THE TIDAL WAVE OF CHANGE HAPPENING IN CANADIAN RETAIL
“On the one side is the original co-op members, customers and grassroots origins of this storied green Canadian brand. On the other side is Kingswood, a private equity firm that personifies late stage capitalism. Sort of a battle between left and right. Not unlike a broader battle we face in modern society,” said Winder.
“So far, Kingswood has said all the right things to try and win over MEC stakeholders — sending an open letter to members that tried to calm the waters. Meanwhile, some co-op members have raised money to obtain legal representation and potentially block, if not re-shape the deal.
“This is not a great way to start a business relationship and probably sets the stage for several years of distrust and disagreement. I can’t help but think about the tumultuous 3G Capital/Tim Horton’s franchisee relationship that played out in the media over the last half decade or so. We all saw how tough that was and the impact it had on the business.”
Winder said trust is a critical part of any union and so far, at least on the MEC side, it is non-existent.
“But what happened to the MEC board? Did they not obtain the sign-off from members before the deal? It sounds like they may not have. If so, that may be a clue to a culture that was toxic to begin with – at least between members and the group that steered the broken retailer. Was this part of the underlying problem to begin with?,” added Winder.
“The irony is that both sides need each other. MEC needs funding and expertise to reconfigure its business model to make money and remain a going concern. Kingswood needs a strong, differentiated niche business that is in distress so that they can apply their financial wizardry to make strong returns for their investors.
“Will they be able to work together to accomplish their goals? Time will tell. One thing is for certain. If the two sides can’t find common ground the customer will suffer the most in the end.”
Michael Kehoe, a retail specialist with Fairfield Commercial Real Estate in Calgary, said the recent ownership change at MEC is another ripple in the tidal wave of change on the Canadian retail landscape.
“MEC has an established pattern of customer traffic and sales and that will be hard to disrupt even in these challenging times. The loyalty to the brand lies in the quality product offering and the customer service. I am expecting some MEC locations to close as the new ownership sets in. Now with the loss of the MEC Co-op status the playing field has been levelled in this retailing category.”