Editor's Note: The following is an excerpt from the new edition of "Let My People Go Surfing" by Yvon Chouinard, including ten more years of business unusual.
By Yvon Chouinard, Founder of Patagonia
We believe quality is no longer a luxury. It is sought out by the consumer, and it is expected.
The Strategic Planning Institute collects data on the performance of thousands of companies. Its yearly report, titled PIMS (Profit Impact of Market Strategy), now shows quite clearly that quality, not price, has the highest correlation with business success.
In fact, the institute found that companies with high product- and service-quality reputations have average return-on-investment rates 12 times higher than their lower-quality and lower-priced competitors.
Whenever we at Patagonia are faced with a serious business decision, the answer almost always is to increase quality. When we make a decision because it’s the right thing to do for the planet, it ends up also being good for the business.
During the worst days of the Great Recession, I spoke on a panel of surf industry leaders about Patagonia's use of only organic cotton and efforts to clean up our supply chain. A CEO of one of the largest surf companies said he made a few T-shirts and hats from organic cotton, but had to stop when the recession hit. I asked how his sales were doing, and he mentioned they were down 20 percent. Ours were up 30 percent that year.
That company and others in the surf industry are barely hanging on now because they didn’t understand that their young customers have changed.
Product returns and bad quality in manufacturing cost millions of dollars annually. (In 1988, each return cost us an average of $26 to process, and that number has only increased.) But what is the cost of a dissatisfied customer? Surveys show few customers will contact a company about a problem, but up to half who experience problems will never purchase from that company again.
Patagonia is privately owned. We have no desire to sell the company or to sell stock to outside investors, and we don’t want to be financially leveraged. In addition, we have no desire to expand Patagonia beyond the specialty outdoor market. So, how does finance react to these very clear-cut dictates?
First of all, by growing only at a “natural rate.” When our customers tell us they are frustrated by not being able to buy our products because of constant out-of-stock situations, then we need to make more, and that leads to “natural growth.” We do not create artificial demand for our goods by advertising in Vanity Fair or GQ or on buses in inner cities, hoping to get kids to buy their black down jackets from us instead of the North Face or Timberland. We want customers who need our clothing, not just desire it.
We never wanted to be a big company. We want to be the best company, and it’s easier to try to be the best small company than the best big company. We have to practice self-control. Growth in one part of the company may have to be sacrificed to allow growth in another. It’s also important that we have a clear idea of what the limits are to this “experiment” and live within those limits, knowing that the sooner we expand outside them, the sooner the type of company we want will die.
Because of our pessimism about the future of a world economy based on limited resources and on endlessly consuming and discarding goods we often don’t need, not only don’t we want to be financially leveraged, but our goal is to have no debt, which we have achieved.
A company with little debt or with cash in the kitty can take advantage of opportunities as they come up or invest in a startup without having to go further in debt or find outside investors.
In an age when change happens so quickly, any strategic plan must be updated at least every year. Many Japanese companies don’t do yearly budgets; they do a new budget every six months. In our case, an inflexible plan would be centralized planning at its worst. It builds in a certain rigidity, a certain bureaucracy, that is oblivious of changing realities. A budget can be a valuable guideline and planning tool, or it can be a bludgeon.
We have to look ahead in other ways as well. It’s the role of financial people not only to tell you what happened, but also to prevent rude surprises in the future. A company should always be playing “what if” scenarios—e.g., what if all our top management goes down in an airplane crash, our warehouse burns down, our main computer melts down or gets a virus? We don’t need operational plans already set up to deal with these crises, but we do need to identify which could strike so we are less likely to take a hit.
That same desire for transparency extends to our dealings with the government. We don’t play games with the tax man or auditor. Our tax strategy is to pay our fair share but not a penny more. We don’t, with clever advice, develop complex schemes to avoid our taxes. The same holds true for our accounting procedures. We know of legal ways to change how we account for our money that would result in dramatically different reported earnings from year to year. In fact, we could, within accepted and legal accounting practices, like so many public companies, show a profit every quarter. But our accounting strategy is to use only those techniques that, in the view of our CFO, provide the most accurate and consistent reflection of our true financial position.
We are approached by prospective buyers almost weekly, and their intent is always the same. They see an undervalued company that they can rapidly grow and take public. Being a publicly-held corporation or even a partnership would put shackles on how we operate, restrict what we do with our profits, and put us on a growth/suicide track. Our intent is to remain a closely-held private company, so we can continue to focus on our bottom line: doing good.
Yvon Chouinard is the founder of Patagonia.
This is an excerpt from "Let My People Go Surfing" by Yvon Chouinard, published on Sept. 6, Penguin Books, an imprint of Penguin Publishing Group, a division of Penguin Random House LLC. Copyright by Yvon Choinard, 2005, 2016.