Margie Parikh Vice-Chair, Board of Directors

Transcription

1 Submission To The Special Committee On Co-operatives Presented by Shona McGlashan Chief Governance Officer Margie Parikh Vice-Chair, Board of Directors Head Office 149 West 4th Avenue Vancouver, BC V5Y 4A6 mec.ca MEC Submission To The Special Committee On Co-operatives 1

2 Introduction Mountain Equipment Co-op (MEC) was founded as a retail co-operative in British Columbia in It remains head-quartered in Vancouver, where it is incorporated under, and governed by, the British Columbia Cooperative Association Act (1999). The business began with six founding members who were active in BC s early outdoor scene, a tiny store in downtown Vancouver, and gear focused on climbing. Since then, MEC has grown to become a national retailer with more than 3.75 million members, fifteen stores in six provinces, a 190,000-squarefoot Distribution Centre in Surrey, BC, some 1,600 employees, and a product offering that continues to grow and evolve in step with active outdoor lifestyles in Canada. Providing members with clothing and gear for backcountry excursions to wilderness destinations shaped MEC s early product offering. Demographic changes within Canada and the trend toward front-country recreation (close to home for short time periods) has led to the evolution of what is now MEC s extensive outdoor product offering. It includes products and services that support members pursuit and enjoyment of cycling, hiking, camping, climbing, running, snowsports and watersports, among other activities. Stores in Vancouver and Calgary and a relatively small membership mainly within Canada s two western-most provinces largely defined MEC s growth in its first 15 years in business. That changed in 1986, when the outdoor retailer opened a store in Toronto. Now, Ontario has five MEC stores, Quebec has three stores, and over half of the co-op s total membership resides east of the Manitoba-Ontario border. Widely recognized for its commitment to sustainability and sustainable business practices, MEC supports various outdoor recreation and environmental conservation initiatives through its community involvement grants program. MEC s sustainability efforts also include formal programs in the areas of ethical sourcing, green buildings, and product sustainability. Quick Facts Sales Lifetime membership is open to anyone by buying a $5 share in the enterprise. Almost 90% of MEC s Canadian members reside in one of four provinces: BC (16.5%), Alberta (24.2%), Ontario (32.8%), and Quebec (16.3%). In 2011, MEC averaged more than 18,750 new members per month. In all, more than 13,000 separate products are available for purchase at MEC. Approximately 40% of sales stem from private label (MEC-brand) products. MEC s gross sales in 2011 totalled $270.1 million, an increase of 3.4% (or $8.8 million) from Ten years previously, in 2001, MEC s sales totalled $153.9 million, or 43% less than where they now stand. The growth can largely be attributed to increased sales from investments in new stores (9 since 2001, including 3 in Quebec and 3 in Ontario) and the growing popularity of mec.ca, MEC s fastestgrowing sales channel. Pricing Benchmark pricing has long been a hallmark of MEC s retail offering. This low everyday price strategy means that members enjoy access to products that are, on average, 7% below market price. The strategy is achieved in part through comparatively low margins and low surplus earnings. For example, from 2009 to 2011, MEC s margin averaged 33.4% of sales, while over the same period, MEC s surplus earnings averaged 3.8% of sales. MEC Submission To The Special Committee On Co-operatives 2

3 Returns and Redemptions MEC has two types of shares: subscription shares and patronage shares. Individual shares of either kind are valued at $5. Members buy a single subscription share to join MEC. At the end of the year, after paying suppliers, employees, and operating costs, MEC returns any surplus to its members, allocated in the form of patronage shares. This member capital is MEC s main source of funding for future growth, given its limited access to other sources of funding due to its co-operative structure. In the years when MEC s financial affairs are sound and the organization is adequately funded, the co-op buys back a number of patronage shares from its members share accounts. MEC returns the money to members in the form of share redemptions. MEC has issued share redemptions to its members 12 times in its history, to total more than $18 million. The table below shows patronage returns and share redemptions from 2001 to Year Patronage Return Share Redemption 2001 $1,885,000 $1,200, $2,561,000 no redemption paid 2003 $6,155,000 no redemption paid 2004 $13,621,000 $1,020, $11,860,000 $2,062, $19,251,000 $2,086, $15,913,000 $3,565, $12,727,000 no redemption paid 2009 $12,176,000 $342, $7,891,000 $2,228, $9,000,000 $2,481,000 Employment MEC presently employs more than 1,600 people. Not surprisingly, most almost 80% work directly in service to members in front-line retail jobs, in a mix of full-time, part-time, and casual employment positions. Operations, product development, and various other business requirements are supported by 278 Head Office employees in administrative, professional, and management positions. The balance of MEC s staff handle in-bound freight and out-bound order and store fulfillment at the Distribution Centre. Guided overall by a strong member service ethic, jobs at MEC are as varied as retail is today complex. From financial, inventory and logistics analysts to IT experts, web developers, product managers as well as HR, marketing, operations and administration personnel, jobs at MEC encompass a broad spectrum. Moreover, the unique skill sets demanded by private-label (MEC-brand) product design, manufacturing, and sourcing give further dimension to MEC s employment picture. In 2011, MEC s payroll totaled more than $52.7 million, or 19.5% of total revenue for the year. By comparison, in 2001, compensation totaled roughly half as much ($25.5 million). MEC policy ensures that front-line retail employees compensation is above the labour market average for the retail sector. A regional pay scale is used to determine compensation. In more affordable cities, the pay scale is $11.50 $18.00 per hour; in more expensive cities (including Vancouver, Calgary, Toronto) the scale is $12.50 $19.00 per hour. As of January 1, 2012, the average wage for MEC store employees was $13.74 per hour. In 2010 and again in 2012, MEC was formally recognized as one of Canada s Top 100 Employers. The recognition affirms MEC s strategic goal of attracting and retaining top talent by being a preferred employer. MEC Submission To The Special Committee On Co-operatives 3

4 Community Investment Through its Community Involvement Program, MEC invests in grants and partnerships to support organizations working on conservation and access to outdoor recreation, which together help support Canada s outdoor community. In 2011, community contributions totaled $2.76 million. Of this, 64% was directed at projects or partnerships that support access to outdoor recreation or outdoor activities themselves. Since 2001, MEC has directed more than $16.6 million to community investments. Green Buildings MEC builds and operates some of the most energy-efficient retail buildings in Canada. The Ottawa store was the first retail store in Canada to comply with the (now defunct) C2000 Green Building Certification, while MEC Montreal was the first store in Quebec to achieve the designation. Likewise, MEC s Winnipeg, Burlington, Longueuil, Barrie, and North Vancouver stores have all been purpose-built to high green building standards, while other stores in the network have been retrofitted to accomplish similar objectives. MEC personnel have acquired in-depth knowledge and understanding of green buildings and how green buildings can be tailored to support MEC s brand and its sustainability objectives. In that light, MEC stores embody innovation, reducing the co-op s ecological footprint while contributing community benefits, positive customer experiences, and healthy workplaces at the same time. Product Sustainability MEC is committed to advancing product sustainability efforts inside and outside the organization. Internally, MEC employs a lifecycle approach that is geared to choosing lower-impact materials and production techniques to build better products for members and reduce our ecological footprint. While work on this front has only been underway for a few years, it is yielding positive results: in 2011, 644 products were made with environmentally preferred materials (such as recycled polyester and organic cotton), while 39% of textiles came from facilities with environmental management systems. Formal targets have been set to increase both on an annual basis. Industry Collaboration Notwithstanding efforts within MEC, a collaborative industry-wide effort is needed if product sustainability is to be fully realized. That s why MEC has taken a leadership position in developing and advancing the Eco-Index, a decision-making tool created by member companies of the Outdoor Industry Association that promises to transform product design and development. Technical assistance from the US Environmental Protection Agency has validated the effort and extended its reach into the wider apparel and footwear sectors. Proof of such reach is the Sustainable Apparel Coalition (SAC), of which MEC is a founding member. The SAC is a collaborative effort of retailers, brands, and other organizations that aim to reduce the environmental and social impacts of apparel and footwear products sold around the world. Collectively, members of the SAC represent over one-third of global retail purchasing power. MEC Submission To The Special Committee On Co-operatives 4

5 Capitalization MEC makes investment decisions based on its financial outlook at a given point in time. Federal tax law enables MEC s growth and its short- and long-term financial health by facilitating its ability to retain members capital to fund day-to-day working capital and store and product investments for members. The Canada Revenue Agency summarizes the applicable provisions (Section 135, Patronage Dividends) of the Income Tax Act as follows: In computing income for a taxation year, a taxpayer is allowed to deduct patronage dividend payments made to customers. While the taxpayer involved is usually a cooperative corporation, sole proprietors, partnerships and ordinary corporations may also qualify for the deduction. (Source: CRA Income tax Interpretation Bulletin IT-362R) In turn, this provision of the Income Tax Act corresponds to Section 5 of MEC s Rules of Co-operation, Allocation of Surplus, which reads in part: 5.02 Subject to Rule 5.01, the Co-operative may apportion surpluses from its business to any or all of the following: a) declaring patronage returns, and distributing them to the members as set out in Rule 5.03, b) declaring dividends and paying them to the members at a rate not to exceed 8% yearly, c) retaining all or part of the residue for the purposes of the Co-operative, d) donating all or part of the residue for charitable or educational purposes. Member Equity Members total equity in the co-op represents the slow and steady accumulation of subscription shares and patronage shares minus redemptions paid over the course of 40 years in business. Pooling members shares for mutual benefit helps MEC maintain solid financial health. In other words, members equity is retained in MEC to finance our operations and improve our ability to serve members by investing in inventory, new stores, and infrastructure. The amount of patronage shares each individual member accumulates is small, but is significant when it is pooled with those of all other members. Indeed, at the end of 2011, members combined equity in MEC totaled $160 million, an increase of $7.6 million from Recommendation Owing in part to its incorporation in BC, MEC has few direct dealings with the federal government. However, to the extent that MEC is both a retailer and a manufacturer, it is best aligned with the mandate and purview of Industry Canada. For this reason, MEC supports the Canadian Co-operative Association s recommendation to see Industry Canada as the federal ministry that would be responsible for the co-operative sector. Beyond that, MEC encourages the Special Committee to recognize co-operatives as an important sector of the economy deserving of a policy and legislative framework that enables them to grow and thrive. Generally speaking, MEC has employed provisions a, b, and c above to build members equity through patronage returns, and to underwrite capital investments. It is important to emphasize that MEC s capital structure is lowgeared that is, total borrowings are low relative to total equity (see below). This conservative approach is a function of MEC s lower surplus targets as well as MEC s limited access to funding, which is generally confined to bank borrowing rather than alternatives available to other private or publicly traded companies. From 2001 to 2011, MEC s capital investments (mainly store developments and infrastructure) totalled $132.5 million. MEC Submission To The Special Committee On Co-operatives 5