Incoming MEC CEO says store closures, merchandise changes coming after deal to take co-op private

A MEC store in Montreal in June 2019. The Canadian Press/Paul Chiasson

VANCOUVER — The incoming chief executive of MEC understands the backlash against a deal to take the outdoor retail co-operative private, but hopes former members continue to shop there.

“I can understand that people are upset and want to do something. But I would hope that in the end, people are reasonable and they give it a shot,” said Eric Claus in an interview with The Logic. He will serve as chairman and CEO once the MEC transaction closes, which the parties expect will happen in the fourth quarter of this year. However, a day after the deal was announced, some questioned whether it would run afoul of the laws that govern co-ops in B.C., where MEC is headquartered.

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Talking Point

Eric Claus will take over embattled Canadian co-op MEC when a deal to make the retailer private closes later this year, pending regulatory and court approvals. The company’s brick-and-mortar locations remain important, though some will close, and the product mix inside will change, he said in an interview with The Logic.

MEC announced Monday that its board unanimously supported a deal for the co-op to be taken private by California-based Kingswood Capital Management. The board’s special committee failed to find a way to secure refinancing on suitable terms. Kingswood has formed a Canadian affiliate, to be run by Claus, that will acquire most of MEC’s assets under the Companies’ Creditors Arrangement Act.

The announcement and change in ownership sparked an online backlash from some of the co-op’s more than five million members, with some creating petitions and Facebook groups aimed at saving it. Many complained about not being informed of the process.

The CCAA allows insolvent organizations to restructure their affairs through, for example, “[effecting] a sale of its assets with the approval of the supervising court, and without shareholder or member approvals,” reads a statement on behalf of the MEC board emailed to The Logic.

“This can be particularly important where, as here, time is of the essence to the insolvent organization to ensure that its business can be preserved,” the statement said. “Like many other distressed retailers, MEC has been facing significant business difficulties, exacerbated by the unprecedented COVID-19 pandemic, and needed to act quickly to ensure that MEC could continue its operations and preserve going concern value that would otherwise be lost in a bankruptcy or liquidation.”

Claus, who stressed he isn’t a lawyer, said the MEC board and Kingswood conducted all the necessary due diligence, and that he did not see a way for members to thwart the transaction.

However, it’s not clear whether the deal complies with the provincial and federal laws that govern co-operatives. “We are, along with our federal counterpart, Co-operatives and Mutuals Canada, asking for the governments of Canada and British Columbia to confirm that provincial and federal legislation have been fully respected in this sale, and that the best interest of the members, employees and communities have been taken into consideration,” said Andrea Harris, executive director of the B.C. Co-operative Association. “We don’t have a lot of insight. We haven’t been able to speak with the MEC board members on this and would love the opportunity to engage with them,” said Harris, who noted she had never seen a co-op file for creditor protection. “How is it that a co-op that is owned and controlled by the membership can go this far down a path without connecting with its owners, members, shareholders? I have not seen an answer.”

Claus said when selecting a buyer, the board took into account many factors, including commitment to the brand.

Kingswood “understood the brand,” he said, adding, “I am Canadian and I’m a huge MEC fan.”

Claus, who ran food retailer Co-op Atlantic for a number of years, said he’s attuned to the co-op’s model, and committed to maintaining its values and principles, while tackling the problems that some say are responsible for its pre-pandemic financial woes, including streamlining its wide range of merchandise.

“I think what’s more important than just being a co-op is how you conduct yourself,” he said.

The board also picked Kingswood because it planned to keep more stores open than perhaps other bidders indicated, said Claus. 

The new ownership “has committed to retain at least 17 retail locations,” according to the board’s statement.

It would be premature to say which of MEC’s 22 locations will be chosen to close, said Claus.

“A lot is going to depend on our negotiations with the landlords,” he said.

Brick-and-mortar stores will remain an important part of MEC’s strategy, especially as they drive online sales, he said, explaining customers may come in to learn about a big-ticket item, such as a canoe, and later purchase it on its website.

The pandemic boosted online sales for many retailers and Claus expects some of that increased e-commerce to continue.

That being said, he doesn’t anticipate expanding the company’s store footprint beyond Canada’s borders.

“It’s a difficult model to expand,” said Claus. While he couldn’t say it would never happen, he ruled it out for the foreseeable future.

In addition to downsizing MEC’s retail footprint, Claus plans to tackle its merchandising.

“There’s a lot of truth” to suggestions the retailer strayed far from its original roots of equipping people for backcountry expeditions and moved into a wide range of categories, selling yoga equipment, bicycles and other goods. As The Logic reported in June, critics of the company’s direction in recent years have seized on its expansion beyond its core backcountry products as a major reason for its struggles.

He said he didn’t want to pick on individual categories, but highlighted yoga and pet supplies as among those that may not be the right fit.

MEC added many different types of product to its stores over time, he said, but also failed to remove those that stopped working.

“It’s probably over-assorted, as opposed to rightly and also technically assorted.”

Claus also wants to speed up new product launches. The time between a MEC-label product’s development and when it goes to market “is far, far too long,” he said.

Serious outdoors explorers don’t want to wait six months for the latest technical offerings, he said. Much of the upcoming fall and spring assortment is “pretty well in the bag,” said Claus, but that will start to change in fall 2021.

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Claus is confident the company can succeed despite ongoing financial struggles that only deepened with the COVID-19 pandemic. In April, the company updated members on the coronavirus fallout, saying it caused “significant cash pressure” and is operating in a “keep the lights on model.”

MEC had about $74 million in debt when it filed for creditor protection, which its monitor determined it could not repay or refinance by its September 30 maturity date. The organization is expecting to get $6.4 million from the federal government through the Canada Emergency Wage Subsidy during the CCAA period.

Kingswood modelled out a very slow comeback to normal from the current situation, said Claus, and ensured it’ll have the funds to weather the pandemic.

The transaction’s financial details have not been released, and Claus could not speak about them, but said the deal was not overly leveraged, giving Kingswod ample liquidity and solid financial footing.

“Retail is a tough business to get in,” he said, especially of the current time and environment, but MEC is “an icon in this country, and I’d love a chance to be able to make it better and ensure that it continues.”