REI co-operative marketing creates stir

In early July, REI’s marketing and merchandising teams held web conference calls with its vendors to announce a new co-operative marketing program to replace the old one. The 36-minute call supported by PowerPoint slides detailed the basic modifications to the current co-op program. REI’s vice president of marketing, Tom Vogl, told SNEWS® the changes were needed to keep the program productive, consistent and transparent for all its vendors.

It wasn’t long after the initial meetings between REI and its vendors that the SNEWS phones and emails began to buzz with incredulous responses to the program. In short order, we were being inundated with links to the web presentation (we really only needed one, but thank you), copies of the PowerPoint, copies of vendor contracts, the Q&A form REI provided vendors, as well as other support materials given to vendors.

In every case, including during interviews conducted at the Outdoor Retailer Summer Market trade show earlier this month, vendors requested complete anonymity. They feared reprisal but wanted the story told so they came to SNEWS, telling us it was the only media entity that could tell the story properly while not placing vendors in jeopardy of retribution from REI for speaking out or sharing proprietary information for our background.

We were granted an interview with REI executives after the show to discuss the co-operative marketing program, and we spent 45 minutes on Aug. 14 speaking with Vogl; Angela Owen, vice president of merchandising; and Michael Collins, vice president of public affairs.

When we mentioned to Collins, Vogl and Owen that vendors were fearful of speaking to us on the record, each expressed surprise that any vendor would feel that way. Each also stated it was the intent of REI to work with every vendor as a partner, in all ways.

SNEWS has spoken with many of REI’s vendors — large, medium and small — under the assurance of anonymity. What follows are questions we were asked followed by summary answers that utilize information received during vendor interviews combined with facts pulled from REI’s internal documents and information gathered from our interview with REI:

How is the program being structured?

According to REI’s FAQ sheet regarding the program, “REI’s Cooperative Marketing Program, or ‘Co-op’ is a program designed to drive smart, efficient growth for REI and its vendor partners. REI’s vendors equitably contribute to the program at a rate of 2 percent based upon cost receipts, and funds are invested by REI approximately 75 percent in short-term sales driving programs, and 25 percent in long-term market growing programs. All vendors with cost receipts greater that $150K participate in the program.”

How does this differ from REI’s previous program?

According to vendors and REI, the previous co-op ad program was voluntary and varied widely. Numerous vendors told us REI would come to them each year, ask what the vendor co-op ad program was, tell them what REI would like, and then work with the vendor to set up a workable contract. In many cases, the co-op ad payments were already at 2 percent. In many others, it was significantly less, and sometimes amounted to zero. Some vendors expressed to us that they were very happy REI was leveling the playing field and forcing all vendors to pay into a program at the same level.

Isn’t REI now just doing what other large retailers in other markets, such as sporting goods and department stores already do?

Yes. The vendors SNEWS spoke with who currently conduct business with The Sports Authority (TSA) or Dick’s Sporting Goods told us it is typical to expect to pay 3 percent to 5 percent mandatory co-op dollars in addition to charge-backs, damaged goods allowances, warranty allowances, new store allowances, and other items. So the amount of money requested makes REI an apparent saint in the retail world. There is an exception to sainthood, however, that was mentioned by those we spoke with who do business with most of the big-box retailers. The difference between REI and Dick’s, for example, is that Dick’s apparently works very closely with its vendors to develop programs in partnership with the vendor brands that are good for the vendor and its brands — something REI is stating it cannot do or, perhaps, will not do. In addition, we are told that both TSA and Dick’s provide vendors with very detailed accounting about how each brand’s co-op dollars are being spent. REI said “We will not be aggregating reports on marketing activity by department or brands, even for internal use. Our media mix has grown to a level of complexity and variety of forms that this is not practical.” REI also told us it will develop twice-annual reports that will share general information about strategy, investments, campaigns and overall results.

Many of REI’s larger vendors have told SNEWS that the retailer’s answer to them is simply not acceptable. They added REI has historically been very poor at providing vendors with detailed information that provides meaningful insights into how vendor dollars are being used and if that is in line with a vendor’s own brand initiatives.

It would seem to those vendors we spoke with that if TSA and Dick’s, where the breadth and depth of vendor numbers and complexity of programs rival REI’s, can provide reporting and collaborative co-op ad programming, then REI should be able to do so as well.

Should all vendors be treated equally?

Perhaps in a utopian world, the answer would be “yes,” and REI is to be commended for attempting to build an equal structure into its mix. It seemed the old co-op structure meant a few vendors carried the marketing load for many. However, the fact is, all vendors are not equal, just as all retailers are not equal. Though REI declined to discuss specifics with us, we do know from talking to a broad spectrum of vendors that margins, wholesale pricing, dating and more that REI gets are not necessarily equal — simply because it is a much larger retailer in some cases, and also because in some cases, it has worked with vendors to establish the price at which a product will sell and the manner in which REI will sell that product. All that means is margins for vendors are tight and there is not much wiggle room for smaller vendors or even larger vendors to find an extra half-percent for co-op advertising — and that’s IF the vendor were paying 2 percent to begin with.

In addition, numerous vendors pointed out to SNEWS that they consistently work with REI on brand initiatives that benefited both REI and the brand involved, including special seasonal mark-downs, grand opening specials and other promotions. Several vendors told us that if REI continues to insist on the mandatory 2 percent co-op, then they would likely curtail or cut back other ways they were involved with REI to ensure the dollars spent remained consistent year-over-year.



Is all this fuss simply because of a timing issue?

To some degree, it appears the answer is “yes.” A number of vendors told us that REI’s timing was very poor in announcing this since pricing for spring 2009 product had already been announced. That means vendors had no room to work in any increases in co-op ad dollar spend which would create an immediate hit to the pocket book. Since boards and shareholders expect profitability, we were told it was likely this action could affect how much vendors now have to spend on product development, innovation and programs that will drive sales and interest in product categories in the long term.

Does REI’s co-op program benefit all vendors and help the industry grow as it says?

In some respects, the answer would be yes. Few retailers and, frankly, few manufacturers, can have the impact REI does reaching millions of consumers with messaging and brand loyalty we were repeatedly told by vendors. REI says that it will contribute 25 percent of its co-op ad program dollars to what it called long-term marketing to grow industry participation. This will be in addition to the commendable 3 percent of its annual operating income that REI already sets aside to promote stewardship and outdoor recreation programs — reported as $3.5 million in 2007. A large percentage of the vendors we spoke with acknowledged that REI is perhaps the best and most effective marketing vehicle to drive an increase in overall participation in the outdoors with youth and with people of color.

One large vendor told us that its participation in the REI co-op program was unquestioned, and that it trusted REI to spend the money it received in a manner that would certainly increase sales for its brand, as well as other brands. Several smaller vendors too told us while 2 percent was a bit rich for their blood, they felt of all retailers to ask for this, REI was to be trusted most in terms of spending the money wisely and, ultimately, to drive traffic and sales.

However, a significant percentage of REI’s larger vendors told us — we are paraphrasing — that REI does what it does primarily to market its own brand and stores. REI does what it does with marketing and promotions and puts things into its catalogs to sell more products. It is really not a brand-building organization for any brand other than for REI. It does put product images into emails and catalogs and on the web, but only to build an image for REI. Some retailers ask vendors, we were told, “What can I do to build your brand in my store?”, but not REI.

And therein appears to be the greatest objection — the requirement by REI for 2 percent without promising two things: One, detailed reporting and, two, collaborative marketing strategies to guarantee each brand contributing to the co-op ad program is being marketed appropriately and consistently with the brand’s own strategic growth and image goals.

Is a vendor putting itself at risk for Federal Trade Commission scrutiny by signing the REI Co-Operative Marketing Program agreement?

We heard from more than one vendor there was concern that signing the contract REI was putting forward could put vendors at risk for Federal Trade Commission (FTC) scrutiny. Keep in mind, we are not lawyers here at SNEWS; however, after checking with government insiders very familiar with FTC rules and regulations, the only possible – albeit slim — risk when it comes to the FTC, would be in the area of anti-trust using the Robinson-Patman Price Discrimination Act of 1936. If it could be shown REI and a vendor were working together in some manner to fix prices using the co-operative ad program, there could be an anti-trust issue and that, our insiders said, could interest the FTC. Otherwise, we were told, this is simply a matter between REI and its vendors with each free to do business with the other, or not.

The one area pointed out as possibly problematic for vendors had to do with REI asking vendors to sign their agreement to the following:

“As part of the contract relationship with REI, Vendor agrees to participate in the REI Co-Operative Marketing Program (the ‘Program’) on the terms outlined in this agreement. Vendor represents and warrants that (i) its participation in the Program is either consistent with Vendor’s own advertising program or constitutes a duly authorized amendment to that program; and (ii) the signature of its representative is fully authorized and binds Vendor in all respects.”

If signed, that statement does appear to force a vendor to acknowledge to any other retailer that its existing advertising program either matches that of the REI co-op ad program or is being modified to match that with an amendment. That means if you are a retailer doing business with a vendor at the $150,000 level or above, you could reasonably expect a vendor to offer you the same deal it is giving REI – 2 percent co-op ad dollars being put into a marketing fund with no specific reporting.

This may not be a legal issue, but it could make things a tad uncomfortable for vendors and retailers when it comes to co-op ad dollar negotiations. Our sources recommended simply crossing out the reference to this agreement being consistent with an existing program or representing an authorized amendment before signing.

Does this program really make the playing field level for vendors with REI?

Well, not exactly. It will level the playing field in terms of the REI co-operative advertising program. But the equality stops there.

After talking with leading vendors, it became very apparent that for inclusion in special promotions, offers and other deals, you have to have a close working relationship with REI’s product managers. It was uncanny that several vendors, on separate phone calls, told us almost the same line, which went something like this: The key part of the marketing and promotional relationship with REI is to establish close working relationships that go beyond the simple buying and selling of product. You have to know how to work the system and realize little in terms of special opportunities appears to be strategic and is more likely opportunistic — it seems if you are in the office on the right day and meeting with the right person, the right promotional opportunity might get tossed into your lap.

Those brands that are preferred vendors, and those brands that get plenty of additional REI exposure have established close, working relationships with REI that extend well beyond products being bought and sold. Moral: Apparently, if you want to get some of that preferred promotional love the other brands appear to be getting, it might be time to cozy up with your REI product manager a bit more.



Should all retailers expect 2 percent co-op dollars when working with vendors?

Expect? No. Ask for? Yes. The message we heard loud and clear from most vendors we spoke with was that while the typical range is 1.5 percent to 2 percent of gross dollars for a co-op ad program, vendors would likely spend even more IF a retailer can come to them with a solid and well-thought-out plan to drive more customers into the store and increase a brand’s sales as a result. Of course, those same vendors also told us that they would expect their co-op dollars to be spent in a manner that is clearly in line with the brand’s strategic growth and marketing initiatives.

If a vendor does not sign the contract, then what will happen?

The “I refuse to sign” card is one that can certainly be played as long as the vendor is sitting at the poker table with REI. In its conversation with us, REI did not state it would cut off a vendor if it did not sign and very clearly stated that in all cases it considered the vendor-retailer relationship a partnership. But, SNEWS would surmise in any buying and selling relationship, if the relationship becomes strained for whatever reason, it could be terminated – and, in this case that would likely be far worse for a brand than for REI. It seems REI is clearly holding most of the cards here. Our bet is that REI will work closely with each of its vendors and, depending on how important that vendor is to REI (there goes that equality concept flying out the window again), a modification to the plan could be hammered out.

We also suspect given the behind-the-scenes pushing by some of REI’s larger vendors, REI will look to find the means to provide more detailed reporting. We also suspect it will work with various brands to ensure what it does promotionally is in line with that brand’s own strategic initiatives.