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'Worst case scenario:' Backlash grows over proposed MEC deal

Alicja Siekierska
·5 mins read
TORONTO, ON - May 25  A small line up of people wait to enter the Mountain Equipment Co-op (MEC) store at Queen W and John street. Many stores are open now in downtown Toronto.  A few shops had small lines out front but it was generally quiet. The COVID-19 pandemic continues to dictate isolation and distancing in Toronto and around the world. covidpd corona coronavirus covid May 25 2020        (Richard Lautens/Toronto Star via Getty Images)
MEC has reached a deal that will see the company acquired by a U.S.-based investment firm. (Richard Lautens/Toronto Star via Getty Images)

2016 was a busy year for outdoor recreation retailer MEC. The company was in the midst of an expansion, opening six new stores in B.C., Alberta, Ontario and Quebec, and announcing plans for two more in Calgary.

“The store developments are part of an unprecedented period of growth for MEC,” the company touted in a news release at the time.

Today, one – or more – of those store locations may be slated to close after the company’s board of directors unanimously approved a deal to sell MEC to Kingswood Capital Management, a U.S. private investment firm. Kingswood Capital has committed to keeping 17 of the company’s 22 retail locations open.

The deal – reached after the company obtained creditors protection under the Companies Creditors Arrangement Act (CCAA) – will also mean the end of the company’s 49-year run as a co-operative, a move that has been met with backlash by many members.

“Today's announcement, including the transition from a co-operative structure, is creating a positive path forward for MEC. Kingswood's commitment to honouring the MEC ethos and the solid financial footing that this transaction will provide gives us tremendous confidence in the future,” MEC board chair Judi Richardson said in a statement released this week.

“Since our founding in 1971, MEC's deeply loyal customers have been synonymous with who we are and what we do. That won't change."

But some members are worried the transition from co-operative to private company owned by an American investment firm will change the business. An online petition calling on the board of directors to cancel the deal and hold immediate board elections has received more than 86,000 signatures.

A joint statement from Co-operatives and Mutuals Canada and the British Columbia Co-op Association called on federal and provincial governments to confirm that “legislation has been fully respected allowing the sale of this iconic Canadian co-op retailer to a foreign entity, and that the best interests of MEC members, employees and the communities they serve are being given full consideration.”

Steven Jones, a MEC member who ran unsuccessfully for the company’s board on several occasions, called it “a worst case scenario.” He believes members should have been consulted by the board before the deal was approved. He also says the company lost its way pursuing an aggressive expansion strategy that led not only to a greater store count, but to selling products in categories that were highly competitive.

“As a co-operative, it’s important to be fairly conservative with your finances,” Jones said.

“I was worried that the growth story was just a bit too aggressive in a few different dimensions, and that as a result, we were potentially putting that future at risk.”

How MEC got here

MEC had been grappling with financial challenges before the coronavirus pandemic struck and exacerbated the issues at many struggling retailers.

Last year, MEC reported a loss of $11.49 million on sales of $462.45 million.

The financial issues were dire enough that the company said it formed a special committee to engage in “an extensive examination of options and alternatives to address the persistent financial challenges faced by MEC’s business in recent years.”

A cash flow forecast included in a pre-filing report part of the CCAA proceedings shows that the company expects to lose $17.4 million in the 11-week period ending Nov. 29. Its total debt will hit $92.4 million by the end of November, and it expects to require interim financing of up to $89 million.

According to court documents filed as part of the creditor protection process, MEC was at risk of defaulting on its existing credit line without support or accommodations from its lenders. The company owed $74 million on the existing credit facility, led by RBC, that was maturing on Sept. 30.

MEC said that the special committee looking into its financial woes sought refinancing from a variety of lenders, explored government support and funding MEC “through voluntary member assessments.” In the end, the committee recommended the acquisition, “a solution that ensures MEC’s mission will continue.”

“After careful consideration of all viable options, the Board made this difficult decision," Richardson said.

"Despite significant progress on a thoughtful turnaround strategy undertaken by new leadership, no strategy could have anticipated or overcome the impact of the global pandemic on our business.”

MEC not alone in COVID-19 struggles

MEC is certainly not the only retailer that has turned to CCAA amid struggles in the coronavirus pandemic. Another outdoor retailer, Sail Outdoors Inc., filed for bankruptcy protection in June. Aldo, Reitmans, DavidsTea, Groupe Dynamite have also filed for creditors protection.

If the deal goes through, one challenge for MEC’s new owners will be to hold onto the loyal customers that have expressed outrage over the proposed transactions, says strategy expert Mark Satov. Still, he expects MEC members will continue shopping at the store.

“They will because at the end of the day it’s actually a great store, they merchandise really well and they have really cool things that you can’t get anywhere else,” he said, adding that the company has made errors over the last several years, including moving its marquee Toronto location from King St. to the pricier Queen St. a few blocks north.

“I think there are a lot of missteps but I’m not worried about the backlash.”

Charles De Brabant, executive director of McGill’s Bensadoun School of Retail Management, says MEC “lost the plot” when it came to its strengths, including experience-based retail and engaging with its loyal customer base. Whether a private equity acquisition will solve the company issues remains to be seen, he says.

“Private equity firms have been pretty bad if not abysmal at buying highly-branded companies and building them for the long term,” he said, pointing to J. Crew and Neiman Marcus as recent examples. But he also believes that the company has hired the right CEO in Eric Klaus, and retail trends in the the outdoor recreation category are positive going forward.

“At the end of the day, I think if you go back to the roots of the brand and focus on that niche, you can be successful.”

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