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The Emperor's Used Clothes

7/11/2012 --

Case study explores Patagonia's radical move to encourage used apparel sales through partnership with eBay.

ANN ARBOR, Mich. — Outdoor outfitter Patagonia Inc. has long been a champion of the environment and corporate social responsibility. Founder Yvon Chouinard created a company that reflects his values and makes those values clear to stakeholders and customers. While Patagonia was a pioneer in the field of what's now called social entrepreneurship, more companies have followed its lead in mixing profit with solving a social or environmental issue. But a recent step by Patagonia tests that commitment. In 2011 it started the Common Threads initiative, a platform that allows owners of Patagonia apparel to sell their used clothing online. Patagonia facilitates the sales through a partnership with eBay and doesn't take a cut of the action. Though this might cost the company sales in the short term, it's a logical extension of its commitment to the environment — a sustainable society must consume less. A new Erb Institute/GlobaLens case study, "Patagonia: Encouraging Customers to Buy Used Clothing," breaks down this strategy. It was written by Allyson Johnson, Courtney Lee, Steven Rippberger, and Morgane Treanton under the supervision of Professor Andy Hoffman. In this Q&A, Hoffman notes that the move is a big leap even for Patagonia. Any company, even one with social values written into its corporate creed, must be profitable or it isn't sustainable. Encouraging sales of used apparel cuts right into the profit mission of Patagonia. But Hoffman, Holcim (U.S. Professor of Sustainable Enterprise and professor of management and organizations, says such tradeoffs are necessary for hybrid corporations. These new companies, he says, are redefining capitalism. Hoffman also is director of the Frederick A. and Barbara M. Erb Institute for Global Sustainable Enterprise at Ross.

Patagonia has a history of leading the pack on sustainability issues. Why was this considered a radical step, even for it?

Hoffman: You're telling customers, "Don't come to our store and buy our stuff. Buy it used." It's exciting, it's radical, and it's consistent with the stream Patagonia has been on. They're a retailer, but they care deeply about the environment, so what are the next steps? One is to reduce. So convincing people to buy fewer things is consistent with the business principles they profess. It's a very difficult challenge. But if you think about sustainability, we have to consume less, and that's what they're trying to achieve with Common Threads.

Is this a common struggle with social impact companies who have more than one mission? Do they deal continually with the question of when the social or sustainability mission might weigh more on the scale than the profit mission in certain cases?

Hoffman: That's one of the great challenges in sustainability. When we talk about the triple bottom line in sustainability we talk about environment, economy, and equity — the "three e's". Right now, most companies treat that with a capital "e" for economics and small "e" for the other two. How do we develop metrics for all three categories? How do we aggregate them to make a single decision, and when do we make tradeoffs? When do we choose to protect the environment even when it hurts profits? A whole category of companies called B corporations, or hybrid organizations, is emerging, and a nonprofit organization, B Corp., certifies them. These companies make it explicit that they will focus on social and environmental issues and sometimes that will mean creating social equity or protecting the environment at the expense of profits. To them, it's an important part of the company culture and connection with customers and stakeholders.

Is becoming a B corporation a legal and shareholder protection issue?

Hoffman: Yes. It's a way to let shareholders know that sometimes the social mission might come at the expense of profits, and the company won't be breaching its fiduciary responsibility. It may sound like a subtle semantic change. What they're trying to think about is not doing this to the detriment of the bottom line, but recognizing fully that corporations have a more complex and nuanced purpose. To do everything solely by the profit motivation is not what they're talking about. They're trying to re-conceptualize what a company is. Money is a score at the end. How we get there is more important.

Could you also argue Patagonia has a rational and calculated business strategy motive? That this isnít just about social responsibility?

Hoffman: The difference is in the motivation. We in the business school try to make sense of things like this by exploring the competitive reasons behind a decision. Maybe they're cementing a tie with customers because they care about the environment. Maybe this will increase their future customer base. Maybe it'll put pressure on competitors to do something similar, and they won't be able to pull it off. We can look from the outside and develop all these rational reasons. Internally, I think a more accurate motivation is that this is what Patagonia's culture is all about. Doing things like this energizes and gets people committed to the company as a cause, and not just a corporate entity.

It's also important to recognize that Patagonia is a private company with a very high-end customer base that's more price insensitive than most. If I were going to do something as radical as this, I'd want a high-end, dedicated customer base. Can a publicly traded, commodity-based company pull this off? I'm not so sure. I think it would be harder.

Is it OK to have more than one motivation? Can this be good for both the environment and Patagonia's business strategy?

Hoffman: Absolutely. One of the first things we teach our students is that a company that goes out of business is not a sustainable company. You have to make money.

There's a line in the teaching note that says sustainability is more than risk mitigation. It's identifying long-term business opportunities. Is this an example of that?

Hoffman: Yes. A lot of businesses will start with risk mitigation in addressing sustainability, because fear is driving them. Coca-Cola got nailed over water issues in India. They dealt with it originally as risk mitigation: "We have to do something about this. It's going to hurt." Then their thinking shifted to, "How can we turn this into a business opportunity and something central to the core strategy of the company?" They went beyond reacting to outside pressure and proactively pushed a new strategy.

Has this impacted Patagonia's revenue?

Hoffman: It's too soon to tell.

Has the recession driven any change on consumption habits? There were articles about how frugality has become vogue. Is Patagonia sensing that might catch on?

Hoffman: It's an interesting question. What are the permanent social and psychological effects of this Great Recession? Many people who grew up during the Great Depression stuck with frugality the rest of their lives and carried a suspicion about banks. What will be the lasting effects on the generation coming up now? Consumption is down and debt loads are down. Will they stay down? Let's watch and see. Will the next generation have a totally different idea of what it means to consume? I'm pretty sure it will.

— Terry Kosdrosky



For more information, contact:
Terry Kosdrosky, (734) 936-2502, terrykos@umich.edu