Patagonia banked with Security Pacific, which had recently announced a merger with Bank of America. Security's loan portfolio was not as solid as Bank of America's, which, when the merger was announced, led nervous regulators to demand the bank tighten up requirements on its borrowers. At the time, Patagonia had a credit line of up to $39 million, and that sum was not formulaically tied to inventories or receivables. But by May, when Patagonia went to the bank to roll over the line, the bank balked and shortened it to $26 million. Security Pacific also pressured the company to find an additional lender.
Meanwhile, competition was intensifying. Mainstream apparel makers were knocking off Patagonia sportswear at lower prices. Specialized niche companies rivaled Patagonia's quality in more technical gear. Deep-pocketed catalogers like L. L. Bean, Eddie Bauer, and Lands' End were aggressively copying Patagonia's better-selling products.
By May the books showed that while the company had projected 51% growth overall, it actually realized a 31% gain, because of healthy international business. But those numbers obscured flat domestic business -- and an even more worrisome problem. Its warehouses brimming with unsold inventory, Patagonia was in a cash crunch, which culminated in July, when the company had to come up with $2.5 million to meet a loan payment.
Patagonia resorted to dumping goods below cost. "We had a massive amount of inventory," recalls one former employee, Glenn Braly. "It got real ugly. They had employees on the phone calling their friends and family to see if they wanted to buy something." Braly knew the vice-principal at the local high school. He called him up to see if some of the kids would want some Patagonia gear, real cheap.
In July 1991 Patagonia finally did what Galliano Mondin had envisioned and tried to avoid four years earlier. It laid off 20% of its work force. By then O'Donnell, Bussiere, and Mark Eubanks had left the company. Jennifer Ellsworth, the head of product development and a member of the board of directors, was on her way out. Kris McDivitt, Chouinard's trusted confidante, had returned from a three-year sabbatical to reassume the role of CEO.
The layoffs demoralized the rank and file. Some employees who had recently relocated to Ventura to work for Patagonia were among the first fired. And even longtimers like Glenn Braly suffered. Braly had been at Patagonia for 10 years, mostly in accounting. Recently, though, he had moved to marketing. When the cuts came he lost his job in marketing -- and was offered an entry-level job in accounting at half his salary. "I always thought I'd retire from Patagonia," he says with a laugh. He finds it ironic that Chouinard was an advocate of no growth in Ventura, that Chouinard's ex-employees found a tight local job market when Patagonia cut them loose.
* * *
The Retrenchment
After a midday game of volleyball, Kris McDivitt rests her feet up on a chair in the conference room. Wearing shorts and a light cotton shirt, she casually draws on a liter bottle of mineral water. McDivitt's cool belies the turmoil that a number of insiders say has beset the company in recent months. Like Chouinard, McDivitt readily admits to Patagonia's loss of focus in recent years and the subsequent belief that the company had the Midas touch no matter what it chose to slap its vaunted label on. But she's also quick to assert that Patagonia's problems are now past. "We had the worst year in the history of the company, and our quality is better than ever. Our performance has gone through the roof."
McDivitt says the tough year has been salutary for Patagonia as she ticks off the various steps -- a closer eye on credit, fewer styles, more local suppliers, earlier purchases by dealers -- the company has taken to tighten up its operations. "People take a lot of potshots at Patagonia because we're a bigmouth bass," McDivitt continues. "We don't follow the trend. But when the chips are down people respect us for that."
Chouinard amplifies McDivitt's cool and confidence. He now claims his hiring of professional managers with insufficient visceral feel for the business was misguided. "It showed a lack of confidence of a small company trying to become a middle-size one. We hit $50 million and said, 'We've got to get some experts in here.' " He believes the company has now "returned to its roots" -- Patagonia-speak for culture.
"This is a unique culture, extremely unique. Not everyone fits here," Chouinard adds. "I've found that rather than bring in businessmen and teach them to be dirt bags, it's easier to teach dirt bags to do business."
In fact, he says, "we realize we don't need any managers. The company is now divided into small working groups. The solutions come from all the people working together."
Meanwhile, he will let the catalog, the company's centerpiece, "die a slow death" by halting direct-mail efforts and sending it only to people who request it. For now Chouinard, who considers himself a lousy manager but "a good leader, a good teacher" will concentrate on more vital concerns. And what are those?
"I'm teaching my employees business philosophy." Asked what that means, he says it involves teaching how to manage the business in an environmentally sound, self-sustaining manner for the next 100 years. "It deals with the fact that there won't be a lot of job openings or upward mobility here in the future, and how do you then keep people motivated? It deals with how do we cope with the idea that we're polluters?"
As for Chouinard himself, his role will remain largely unchanged. He will continue to travel seven or eight months of the year, testing equipment. He reasons that this is only, well, natural. "I'm the outside guy. I bring new ideas into the company. And besides, I'm a lousy manager."
* * *
"We Don't Talk About Profit"
"The main cause of Patagonia's current prob- lems is their arrogance," says Bob Woodward, the publisher of "Specialty News." "They got carried away with their own self-importance. There's a lot of preachiness and New Age stuff there that rings hollow." The result, says Woodward, is a company that charges too much for what it delivers, a company that wants to save the world but cannot preserve the jobs of its very workers. "I think the company is in worse shape than people realize."
