Patagonia's secret sauce l Derek's Deep Dive

Derek’s Deep Dive into The Outdoors: Chapter 2.

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Patagonia - Deep Dive

Practically everyone in the outdoors industry is envious of Patagonia, and the way it has scaled new heights at every turn. While I haven’t personally met Yvon Chouinard yet, I have read so much by him & about him, and watched so much of him that I sometimes feel I know him personally. Nothing beats face to face though. I did try to book him for an event in the Adirondacks once, but once I recovered from the shock of his attendance fee, I politely declined!

Why has Patagonia worked so well, where others have failed?

Let’s start at the start

Although it seems a newer brand, Chouinard began honing the business around 1957, when he started making and selling pitons for climbing. Here, he learnt about the value of USP, and not trying to compete in a commodities market. In 1965 he partnered with Tom Frost, founding Chouinard Equipment. They went about simplifying climbing gear, making it as simple and light as possible, often quoting Antoine de Saint Exupéry, the French aviator:

“In anything at all, perfection is finally attained not when there is no longer anything to add, but when there is no longer anything to take away, when a body has been stripped down to its nakedness.”

They grew at a breakneck speed and by 1970 were the biggest supplier of hardware for climbing in North America. But, there was a problem. The rock. Pitons were causing enormous damage on the rock faces. Patagonia would claim that tis was the reason they wound down the piton side of the business. The more skeptical would say it was like the emergence of aluminum chocks, which could be inserted and removed by hand rather than hammer, in Switzerland. Either way they made it into the first Chouinard Equipment catalog in 1972 and the demand exploded. Here is where we definitely see the emergence of the importance of his community - via the ‘old fashioned’ mail list. It gave Chouinard the opportunity to engage directly with the potential customers through word. I’ve examined a lot of Chouinard’s early copy from these catalogs, and it was absolutely fantastic. There are several examples in his book - ‘Let my people go surfing’, which I highly recommend.

The next evolution was into software. No, not Bytes and Megabytes. Rather, clothes. While in Scotland he came upon a rugby shirt which worked perfectly through the wear and tear of climbing. His network became interested and they started importing and selling clothes. Now that’s a pivot. But one thing he showed from an early point was a brilliant business acumen. And he knew that the hardware business had tight margins and would find it hard to survive. There is lots of fancy jargon around finding inspiration from fishermen and rugby players in designing those early clothes, which may be true, but the long and the short of it was that YC was very in tune with macro business economics, and unit economics. In 1973 the name Patagonia first appeared, as a name for the clothing range. The logo appeared in 1975.

Those early mail catalogs were invaluable as they offered the company the opportunity to engage in what’s now known as content marketing, and it did so with aplomb. Long essays on how to dress properly for outdoor activities were commonplace and appreciated. The brand also began visible environmental activism in 1975, which drew a lot of attention across the US. So, again, Chouinard saw where he could affect change and the headlines followed. They had a habit of putting their money where their mouth was though, and people appreciated this authenticity. By 1986 they were already donating either 1% of total sales or 10% of profit, whichever is higher. This commitment has been stuck to ever since, to be fair.

Patagonia has always been bold in its moves, earning non-paid media attention in the process. For example choosing bold and vivid colors for their clothes at a time that it was considered almost ‘blasphemous’, and always pushing the boundaries of textiles. This is clear. But also calculated.

Chouinard Equipment was put into Chapter 11 bankruptcy in 1989, after a series of lawsuits over their equipment. One was as the result of the fatality of Edward Carrington, RIP. The response was interesting, as there are a number of points of view here. The LA Times ran a good piece at the time when Chouinard cites

“I’ve taken a lot of pride in making the world’s best climbing equipment and trying to do a good job at it, but times have changed,” Chouinard said this week. “Nobody wants to take responsibility for their actions, to say, ‘I screwed up, it’s my fault, I didn’t bother to learn how to use the gear.’ ” L.A Times

I think the above shows a true insight into the founders psyche. Behind the ‘kumbaya’ exterior is firstly, a tough businessman, who won’t concede ground. Records show that, although revenues had dropped, the company finances were sound. So it was more likely a combination of fear of suits over claims of ‘failure to warn’ on harnesses. Eventually Chouinard Equipment settled the largest suit, filed by the family of a man who died in the Tetons while using one of its harnesses. Peter Metcalf, a former protégé of Chouinard put together a group of investors to purchase the company’s liquidated assets. This splinter went on to become Black Diamond Equipment, itself now a household name in the industry, posting revenues in excess of $200m in 2023. It also suited Lost Arrow Inc. - the holding company - as it eliminated the fear of extended liability, and allowed Chouinard to focus on Patagonia, the more profitable part of the business.

The 90’s however brought their own issues including laying off 20% of their workforce. YC lists this as among the worst years of his life. And I believe him. Having experienced the same (albeit at a much smaller scale), I can attest to the sleepless nights. But he and the company did what they had to do, and got through it.

Once in the 21st century Patagonia hit a new gear and has gone from strength, often using earned media. It plays on its activist reputation - e.g. the selective corporate co-branding:

“Patagonia has nothing against your client or the finance industry, it’s just not an area they are currently marketing through our co-brand division. While they have co-branded here in the past, the brand is really focused right now on only co-branding with a small collection of like-minded and brand aligned areas; outdoor sports that are relevant to the gear we design, regenerative organic farming, and environmental activism.” Patagonia, the person said, is “reluctant to co-brand with oil, drilling, dam construction, etc. companies that they view to be ecologically damaging” and while orders are approved on a case-by-case basis, this includes “financial institutions.” @binnaskim

While one might look at this as missing a trick, Patagonia saw it as a major PR opportunity, aligned with the brand. And boy did it work - many, many articles have been written by publications with major domain authority on the subject.

Growth to date has been stunning, as seen in the below 2 charts, from different decades:

In 2018, Patagonia earned 41% of their total global sales through their direct-to-consumer channels (online and brick & mortar) and 59% of sales through wholesale partners. Accurate and more up to date splits are not readily available but one would suspect that this has remained fairly consistent after the post pandemic online boom. North America makes up 75% of its sales, The rest comes from Japan and Asia-Pacific (15%), Europe (8%) and Latin America (2%). Although I suspect that the European figure has risen, as I sit here and type in my Patagonia fleece!

The company is highly profitable! Something that must be highlighted in today’s business landscape. It has also helped pioneer a number of other initiatives - repair, don’t replace clothes, childcare in the workplace, flexi-time in line with surfing conditions (I’m not joking!) - but there are also skeptics. Their supply chain was questioned - and shortcomings found, of which Patagonia washed their hands citing they don’t have control over their supplier wages. Like most big corporations, the bona fides of their initiatives were closely scrutinized, including by yours truly.

My conclusions? A lot of my skepticism has evaporated since YC announced the donation

“Yvon Chouinard, founder and majority owner of Patagonia, dominated the headlines last week for doing something that no other billionaire has: donating almost all his wealth at once. He gave his apparel company and its millions in annual profits to an environmental nonprofit and placed its voting stock into a trust.” Forbes. 20 Sep 2022

That’s what I call putting your money where your mouth is. And I’m converted. Real. Authenticity.

The CRUA Insight

Capital is the focus at CRUA right now. We’re closing an equity crowdfunding round which is proving difficult, given the current macro climate and current interest rates. Hopefully both will align sooner rather than later. We’re nearly at 90% of our goal, with other conversations ongoing. Hoping to close soon. Tale a look at the Seedrs campaign, in case it may be of interest:

This year feels very different for us. We’ve begun a real deep dive into the unit economics of our business and worked so many permutations and combinations. The challenge for scaling brands is, always, to scale profitably or at least at breakeven. Personally, I don’t believe it is possible in most cases with just a paid media strategy. Hence we’re putting a lot more focus on organic traffic, specifically through YouTube and Instagram - as these are the channels that our customers tell us they hang out in, and look to for buying help. We’re also examining what part Amazon can play in this, and have spoken to a lot of Amazon only sellers, with very successful businesses. More on that in Chapter 3, next week. Believe me, Amazon is a tough nut to crack. But if you do, the world’s your oyster. For now, we feel we’re finally getting to the right formula. Watch this space.

More next Tuesday, in Chapter 3.

Thanks for reading.

Derek.