Purpose and Profit

Context

In the early 1970s, American rock climber and businessman Yvon Chouinard began selling apparel suited for outdoor adventures. He wanted to support his lower-margin climbing gear business with higher-margin clothing sales. In 1973, Patagonia was born.

Before the brand became the trusted name that it is today, it navigated difficult terrain. How did it stay true to its values throughout decades of disruption?

Real-Life Story

Yvon Chouinard’s vision was to sell durable outdoor clothing whose designs and features were based on his experiences on the trail – an idea that resonated well with fellow outdoor enthusiasts.

Patagonia expanded in the 1980s, but Chouinard worried about losing the company’s soul. This period inspired him to embed environmental values into Patagonia’s commercial and ethical practices. The process, however, was not without missteps along the way.

Manufacturing Challenges

Patagonia started incorporating sustainable materials such as recycled polyester and organic cotton into its products, and introduced repair programs to encourage customers to “buy less”. These strategies aimed to reduce the strain of consumerism on the environment.

In embracing sustainable practices, Patagonia reached out to partners to reduce its ecological footprint – all while juggling the challenges of managing costs, attracting customers, and maintaining profitability. The decision, however, led to a perception of Patagonia as a premium brand inaccessible to diverse consumers.

Changing this perception required pivoting to a competitive pricing strategy and reassessing the entire operation.

Balancing commercial pressures and ethical commitments, Patagonia took a good hard look at the manufacturing of its products and followed an unconventional route for a clothing brand: it welcomed third-party auditors to perform critical assessments of its supply chain.

This revamp came amid public outcry in the US to end ‘sweatshops’ in the apparel industry. Many players sought to partner with suppliers that hired cheap labour offshore to cut costs, increase profit margins, and make products seem more affordable.

With clothing brands under intense scrutiny, Patagonia scrambled to ensure each of its suppliers met stringent environmental and ethical standards. The company strived to break away from the image of the ‘sweatshop’ now associated with the fashion industry, so it implemented a rigorous auditing system to identify and address potential issues.

After making progress in the 1990s, Patagonia fell short of its ideals when it began sourcing products from suppliers that promised to manufacture goods at a more affordable cost.

During this period, Patagonia’s network of suppliers expanded – with new ones purportedly “[subcontracting] work to other factories [that Patagonia knew] nothing about”.

The company admitted it lost track of whom it was doing business with and the working conditions in these factories. “For a while, we [dropped] out of the Fair Labor Association,” it recounted.

This misstep prompted Patagonia to tighten its auditing system further and hire a social responsibility manager and other third-party experts to monitor compliance.

Financial Challenges

Despite initial mistakes in Patagonia’s turnaround into an ethical brand, the company gained a loyal following and sales began to grow steadily.

Yet, in 1991, Patagonia’s growth came to an abrupt halt when a recession hit and the company was forced by the bank to pay off its revolving loan. To survive this financial setback, Patagonia made the painful decision of cutting 20% of its workforce, “many of whom were friends and friends of friends,” the company said. “We had become reliant on unsustainable growth, and the consequences were painfully clear.”

This lesson not only tempered Chouinard’s ambition to keep growth targets modest and realistic, but it also provided Patagonia’s foundation for surviving yet another recession.

During the 2008 financial crisis – while most retailers languished – Patagonia witnessed its “two best years ever,” with sales surging from US$270m in 2008 to nearly $340m by 2010.

Having learned its lesson on maintaining a healthy cash flow and keeping growth in check, Patagonia remained debt-free. This status allowed it to extend credit to struggling wholesale accounts and further solidified its market position.

By then, Chouinard had shifted his focus from short-term profit to long-term financial viability. Today, he is known for making decisions on the belief that Patagonia will continue to be in business for the next 100 years. This mindset has become the cornerstone of the company’s sustained growth and relentless innovation.

PostScript: In 2022, Chouinard and his family made an unprecedented decision to donate 100% of Patagonia’s US$3bn ownership to the Patagonia Purpose Trust and the Holdfast Collective. This move ensures all of Patagonia’s profits will be dedicated to combatting climate change and protecting nature for generations to come. The company has continued to attract a loyal customer base willing to pay premium prices for apparel and gear that will last them years.

Key Lessons

1) Embedding core values into your business

Yvon Chouinard’s commitment to environmental stewardship was integrated into Patagonia’s products and practices. WarTime CEOs can ensure their business values are woven into their operations and offerings.

2) Adapting and innovating sustainably 

Patagonia’s shift from short-term profit to long-term viability, especially during financial challenges, highlights the importance of adapting and innovating for economic and environmental sustainability. WarTime CEOs can prioritise sustainable practices even if they require redefining their business model.

3) Maintaining rigorous standards 

Patagonia’s rigorous auditing system to ensure compliance with ethical supply chain practices demonstrates the necessity of maintaining high standards. WarTime CEOs can proactively monitor and improve supply chains to uphold their values and commitments.

4) Balancing growth with financial prudence

Patagonia’s cautious approach, particularly after experiencing financial setbacks, underscores the importance of sustainable growth and financial health. WarTime CEOs can aim for modest, realistic growth targets and maintain a healthy cash flow to navigate economic downturns effectively.

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Until next week, may the force be with you.

Kevin

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