Solution structure

Q1:

Target Customer	Product Offering	Sales Channels	Brand Positioning

Q2:

Q3:

Q4:

Q5:

Options from the case:

1. • Pros
   • Cons

1. • Pros
   • Cons
2. • Pros
   • Cons
3. • Pros
   • Cons
4. • Pros
   • Cons
5. • Pros
   • Cons

Question

1. As a trusted advisor to Mike Wallenfels, what strategic advice would you offer him in 2003? And why?20 marks Consider all of the following issues:
   1. Target customers,
   2. Product offerings,
   3. Sales channels, and
   4. Brand positioning.

1. What should Wallenfels define as his "deal-breakers" for an acquisition by Columbia Sportswear?

1. At this early stage in the informal negotiations, should Wallenfels oppose the potential acquisition, actively encourage it, or play a more passive role? Why?

1. The bankers indicated that they could likely locate a financial buyer at an acquisition price perhaps 10% lower than the expected Columbia bid. Would it be advisable for the company to pursue this option, and if so, how should Wallenfels build support for it?

Presuming that the company can secure a significant amount of capital, which expansion opportunities should it pursue?

By early 2003, nearly 10 years after Mountain Hardwear's launch, the outdoor industry had gone through some very significant changes. Since its founding, the company had grown respectably and sustainably. All signals pointed to continuing growth as the company updated its product line and reached more and more specialty outdoor retailers. Nevertheless, Wallenfels and other executives were still eager to see how much farther the company might push its brand. He wanted to engage the company in something of an existential discussion, asking, "What should Mountain Hardwear be?" The company had two basic options: It could remain "a niche brand in a niche market or [it could become] a consumer brand within a consumer market."¹The evolving state of the outdoor industry would largely dictate which strategies would likely succeed.

OUTDOORINDUSTRYTRENDS

Changes in Consumers' Activities

Between the early 1990s and the early 2000s, a wide range of new outdoor activities emerged and became increasingly popular. Mountain biking rose in popularity and then splintered into a number of more specific niche sports. Trail running and snowshoeing surged. Enthusiasts began BASE jumping, kite surfing, telemark skiing, canyoneering, and adventure racing. Meanwhile, backpacking and long-term, multi-day outdoor activities fell in popularity as Americans opted to participate in more "done-in-a-day" activities. In 1994 a typical Mountain Handwear customer might have been a backpacker and backcountry skier. In 2003, that typical customer was more likely to be a snowboarder, windsurfer, and mountain biker (sometimes all in the same weekend).While their activities changed, outdoor apparel customers also came to include more and more women, who helped drive the overall increase in outdoor activity participation rates. In the past, female customers had settled for smaller versions of men's outdoor apparel. By the early 2000s, women came to demand new styles, patterns, and color choices so that women's apparel became distinct from men's. Some apparel companies even launched women's sub-brands that not only designed specific clothing but also changed their marketing formulas to appeal to female outdoor enthusiasts. (SeeExhibit 1for additional information on the changing trends of outdoor activity participation.)

Changes in the Retail Industry

Wallenfels noted that in 1993, there were only a few places where one could buy technical outdoor apparel made by only a handful of specialized companies. By 2003, mainstream apparel companies and fashion brands like Ralph Lauren began manufacturing clothing out of synthetic fleece and high-tech, waterproof-breathable fabrics. A consumer no longer needed to go to a specialty retailer to buy gear; instead, the local sporting goods store would likely have a variety of entry-level products (including basic tents and sleeping bags).Small specialty outdoor retailers like Mountain Hardwear's 100 charter dealers found themselves under great pressure, and many folded or became incorporated into larger retail operations. While general sporting goods stores and even department stores began to compete with the outdoor apparel boutiques, nationwide specialty outdoor retailers like REI became very successful and increasingly ubiquitous. E-commerce brought consumers even more choices, as specialty online stores arose to cater to every niche outdoor activity, and they very often carried wider and deeper inventory selections than did their bricks-and-mortar predecessors. For example, REI.com might sell three times as many tent models as did the company's physical stores. (SeeExhibit 2for additional information on the outdoor apparel market.)

Changes in Outdoor Apparel Manufacturers

By 2003, Mountain Hardwear was one of the few independent outdoor apparel manufacturers left. In a wave of consolidation, all of the erstwhile Odyssey International franchises had recently traded hands. Marmot had been bought by Russell Athletic, a general sports apparel company. The North Face (which had been publicly traded) was saved from bankruptcy by an acquisition by apparel company VF Corporation. Sierra Designs had recently found a new owner in diversified apparel company Kellwood. Even Arc'Teryx, another premium mountaineering apparel company that many considered to be Mountain Hardwear's most direct competitor, had recently completed an acquisition by adidas-Salomon.

LEAVINGMOUNTAINHARDWEAR INGOODHANDS

Almost 10 years into the Mountain Hardwear journey, Jack Gilbert began openly discussing his retirement from the business. By that point, Wallenfels had been promoted to vice president and was the president's heir apparent. The two top executives began having increasingly detailed conversations about what the company would look like under Wallenfels's stewardship. The emerging trends in the industry and the transition to new leadership offered the company an opportunity to reinvent itself. On the table were changes in the company's branding, product, and channel strategies.

In 2003, Wallenfels was hard-pressed to identify anything in the company that was really broken: Sales remained strong, particularly when compared to the overall industry, and Mountain Hardwear was uniquely positioned at the top of the outdoor apparel market. (SeeExhibits 6and7for additional information on the company's financial health in the early 2000s.) In many ways, the company looked like a much larger, more professional (and profitable) version of itself in 1994; nevertheless, when peering into the future, Wallenfels wondered if he would be saying the same thing in 2013.

GROWTH ANDLIQUIDITY

Cumming remained pleased with his investment in Mountain Hardwear, but it had been nearly 10 years since he initially backed the founders, and he began looking for liquidity opportunities. Cumming began encouraging the company to move toward a liquidity event. Very quietly, the company began working with RBC Capital Markets to explore financing options. Confidentiality was crucial as the company explored its alternatives. Wallenfels was particularly concerned about how his employees and customers would react if they sensed that the company might be for sale.

The investment bankers provided a preliminary analysis, including potential acquirers and valuation estimates. When the top executives shared the bank's analysis with Cumming and the major investors, they met with mixed reactions. Cumming suggested that the pricing range for strategic investors-athletic apparel and equipment companies-met his exit hurdle. Some of the other smaller investors, several of whom were still executives at the company, agreed with Cumming that a transaction at those valuations was attractive, but others did not. The dissenters feared what selling the company would do to the brand and organization they had built. A few of those dissenters did not want to take money off the table at all, and others feared that they would lose control of the brand they had worked so hard to build.

Approaching a Potential Acquirer

In the early 2000s, Oregon-based Columbia Sportswear had contacted Mountain Hardwear several times, making it clear that Columbia would be a potential buyer if the smaller company ever decided to sell. With the board's blessing, Wallenfels and President Jack Gilbert approached their contacts at Columbia to suggest that Mountain Hardwear was finally considering a sale. With an agreement that preliminary conversations would be confidential and nonbinding, executives from both companies began discussing what an acquisition might looklike. From the start, it was apparent that they might be able to effect a transaction that would clear Cumming's valuation hurdles.

Columbia Sportswear Profile

Originally founded as a hat distributor in 1938, Columbia Outerwear vertically integrated and began manufacturing its own products in the 1940s. Gertrude and Tim Boyle, the founders' daughter and grandson, assumed control of the company in 1970 and began to build it into an increasingly successful outerwear company. In the 1990s Columbia expanded into a variety of related outfitting categories, including footwear and outdoor sporting accessories. In 1998, with sales of $427.3 million, the Boyles took Columbia Sportswear public on the NASDAQ National Market. By 2003, Columbia, had become one of the leading outdoor apparel companies in the world with over $800 million in sales in 2002.Columbia sold merchandise in four categories: outerwear, sportswear, footwear, and accessories. (SeeExhibit 8for further detail about the company's sales in each category.) The company billed itself as "the leading seller of skiwear in the United States," selling though a variety of channels and retailers, including general purpose sporting goods stores and some department stores. Columbia described its outerwear product lines as follows: "Our . . . brands consist of three product segments: our high-end performance Titanium products (high-end, technical, sold in specialty stores); our moderate Vertex products (lower-priced, technical, sold in sporting goods stores); and our most broadly distributed Outdoor Issue products (classic, non-technical, sold in department stores). The company's Titanium line of outerwear featured some technical features and fabrics, and it included some products that competed with Mountain Hardwear's general-purpose, lower-end apparel, but in function and in perceived quality, Mountain Hardwear's products typically came out ahead. Additionally, Columbia offered footwear, fishing apparel, and casual clothing, none of which Mountain Hardwear sold. Also, Columbia did not sell tents, backpacks, and sleeping bags, while those products were highly visible in Mountain Hardwear's product portfolio.Columbia Sportswear's overall brand message conveyed value primarily along with functionality, quality, and innovation. The company's hallmark advertisements featured Gertrude "Ma" Boyle as the wryly humorless arbiter of quality, testing the company's apparel at the humorous expense of her son. The advertising motif-arguably the most successful in the outdoor industry-had been running in print and on television for 20 years, and by 2003 had made icons of the Boyles. The company did not sponsor athletes or expeditions, though it did sponsor events on an ad hoc basis.In 2003, Columbia Sportswear employed over 1,500 people and distributed products in the U.S. and internationally through some 12,000 retailers. (SeeExhibit 9for Columbia Sportswear's 2002 financial data.)

The Mountain Hardwear Perspective

When Mountain Hardwear executives began to consider an acquisition by Columbia, it was clear that Wallenfels would be responsible for managing the integration should a merger transpire. Then he would likely take responsibility for the day-to-day operations of the company while Gilbert would stay with the company for the short term to help provide continuity and stability. Accordingly, Gilbert asked Wallenfels to define his own "deal-breakers" for a potential transaction, and then he asked Wallenfels to develop plans for managing the company's various constituencies from the announcement of the deal through the post-merger integration.

Wallenfels was keen to capitalize on Columbia's assets, including its balance sheet, manufacturing capacity, supply chain expertise, distribution channels, and marketing prowess. With the support of Columbia, Mountain Hardwear could increase top-line growth while improving the margins on some, if not all, of its products. Significant bottom-line growth could come from any number of tactics, some of which Wallenfels hastily listed as follows:

1. • Selling into new channels
     • Mainstream sporting goods retailers
     • Department stores
     • Catalogues (L.L. Bean, Land's End, or others)
   • Developing lower-end, high-volume products
   • Expanding the product line into new activities (casual wear, running clothing, skiwear, etc.)
   • Lowering existing quality thresholds
   • Expanding brand exposure through marketing and PR
   • International sales

Nevertheless, each of those approaches had potential hazards and costs. The very prospect of an acquisition could make it difficult to manage the company's various constituencies.

Employees

The management team was adamant about taking generous care of employees through any transaction. They discussed this issue early in the conversations with Columbia, and they made it clear that employee dignity and fair compensation would be fundamental to any deal, and so Wallenfels was not anxious about layoffs. Nevertheless, many employees would likely fear for their own job security and career potential. Wallenfels was concerned about convincing employees that a merger would be in the company's best interests, ensuring them that the culture and brand would remain true, and keeping them engaged and productive. No one believed in the company's authenticity and brand messaging more than the employees, and many would not take kindly to the yoke-the new routines, systems, and values-of a big corporate parent.The managers would be concerned about losing their independence and compromising their management styles. Many of them had little interest in becoming "a consumer brand in a consumer market." The small company could be nimble, and its managers bore considerable responsibility. They would rightfully be concerned by installing several new layers of management above them. Some would be concerned that Columbia would dilute or destroy thebrand proposition that they had worked so hard to build. Most had not worked for public companies, and they might be concerned that the restrictions and constraints of working within a public company-including being subject to Sarbanes-Oxley requirements-would be burdensome.

Customers

Wallenfels was particularly concerned about how Mountain Hardwear's retailers would react to an acquisition. They too had helped build the brand that remained one of the last independent premium outdoor apparel companies, and the retailers would not want to lose the exclusivity that it represented. Many boutique retailers would fear that the products would change, and some would not understand the potential synergies that a larger parent company like Columbia could bring. Wallenfels expected the specialty retailers to fear that new channels would erode their margins on the premium Mountain Hardware products. Undoubtedly, some would drop the line or at least threaten to do so.

Consumers

Though many consumers would never know that the company had been acquired, the most valuable customers-alpine climbers and hardcore enthusiasts-would likely find out and be put off. Being acquired by Columbia would be perceived as a blow to the company's mantra of authenticity, and the hard-won air of exclusivity (or snob appeal) could be threatened if the company were acquired by a larger partner. Mountain Hardwear would have very limited abilities to explain the benefits of an acquisition to those consumers.

Investors

Some investors (likely a majority of the shareholders) would be eager to effect a transaction that would give them liquidity either in cash or liquid stock. Particularly for Cumming, the financial terms of the deal would determine whether he would support the transaction. Other investors, especially a few of the executives who wanted to stay the course, would be opposed to a deal that would give control to a corporate partner.

CONCLUSION

Gilbert and Wallenfels believed that they could eventually negotiate with Columbia a price and terms that would win enough votes to do a deal, but they were not necessarily sure that it was the right move for the company.

End of the Case

Exhibits

Exhibit 1

Select Data from the Outdoor Industry Association's Annual Participation Survey (2004) Definitions

Enthusiastsare the most frequent participants in an outdoor activity. They represent the core outdoor recreation market and are of the most interest to the Outdoor Industry Association members. They are the Americans who purchase the majority of higher priced and technologically advanced outdoor products and services.

TheParticipantmarket segment represents all Americans who, based on our description of an outdoor activity, believe they participated in that activity at least one time during the past year. Enthusiasts are included in this segment but represent only a fraction of the total. Consequently, most participants represent "potential" enthusiasts. It is these potential enthusiasts that often determine the level of growth of an activity.

Key Findings: Six-Year Trends

1. • In 2003, nearly two-thirds of Americans 16 and older participated in at least one of the core human-powered activities, a participant level up 8% from 1998 when 59.9 million were identified as a participant. The participant base has grown by 16 million Americans to nearly 142 million in 2003-outpacing natural population growth by a wide margin.
   • In 2003, four activities show participant levels that are higher than in 1998:
     • Canoeing (+18.6%)
     • Snowshoeing (+92.9%)
     • Telemark skiing (+216.7%)
     • Trail running (+15.5%)
   • Overall trends reveal that participation in many activities is stable.
   • In 2003, commitment to human-powered activities, as measured by enthusiast levels, were also up since 1998. One in five (19.5% or 42.9 million) Americans 16 or older participated in at least one of the core outdoor activities at enthusiast levels. Comparatively, overall enthusiast activity was reported in 1998 by 16.2% (or 34.1 million) Americans 16 or older.
   • A wide range of activities have shown an increase in enthusiast levels compared to 1998:
     • Paved road bicycling (+28.3%)
     • Single track bicycling (+150%)
     • Dirt road bicycling (87.5%)
     • Rafting (80.0%)
     • Snowshoeing (+400%)
     • Telemark skiing (+200%)
     • Trail running (+36.8%)
   • Only one activity had a lower enthusiast level in 2003 than in 1998-backpacking (-20%)

Select Data from the Outdoor Industry Association's Annual Participation Survey (2004) Discussion of Six-Year Demographic Data: Females

1. • In 2003, female Americans were participating in at least one of the core human powered activities at greater levels than in 1998-an overall participant incidence that has gone from 53.4% to 57.3%.
   • Enthusiast activity in at least one of the core outdoor activities was also up in 2003 (14.6%) compared to 1998 (11.8%).
   • Snowshoeing in particular has grown in popularity among female Americans since 1998. The participant level has increased 163% to 2.1% of females 16 and older, and gains in enthusiast levels have been even more dynamic (+200%).
   • Paved road bicycling and car camping are two other activities that have experienced significant growth in female enthusiast activity when 2003 levels are compared to 1998.

Discussion of One-Year Trends

A recent gravitation to "emerging activities" such as rock climbing and whitewater kayaking, staled in 2003. Because these activities require special skills, venues, and equipment, they experienced declines during the year, but the participation slack was taken up by . . . car camping and paved road bicycling. Notably, these two activities share similarities that fit the mood of the American population 16 years and older in 2003. Both activities are familiar, affordable, family- oriented, accessible, and not overly physically demanding.

1. • Participation in several human-powered activities declined in 2003 compared to 2002- including several of the adrenaline/emerging activities that had grown dynamically in recent years:

1. • • Ice climbing (-72.7%)
     • Whitewater kayaking (-55.6%)
     • Natural rock climbing (-32.3%)
     • Cross-country skiing (-30.6%)

• Touring/sea kayaking (-27.8%)
• Artificial wall climbing (-17.1%)
• Bird watching (-13.1%)
• Single track bicycling (-9.6%)

• The activities that enjoyed the largest enthusiast populations for 2003 included paved road bicycling (14.9 million), hiking (10.5 million), and car camping (8.6 million).

1. • In 2003 enthusiast levels were up for two activities-the same two activities that experienced an increase in participant activity:
     • Paved road bicycling (+30.8%)
     • Car camping (+30.0%)
   • The incidence of enthusiast activity declined measurably for three activities:
     • Ice climbing (-50.0)
     • Whitewater kayaking (-50.0%)
     • Backpacking (-46.7%)

Source: Outdoor Industry Association.

Exhibit 2

Select U.S. Sports Apparel Market Data (as of 2003)

U.S. Sports and Apparel Sales

• Sports apparel sales fell by 2.3% in 2001 versus the prior year.
• Unit sales increased by 3.1% versus the prior year.
• Sales for the sector are expected to remain flat in the near-term.

Consumer Demand

• Average prices paid for sports apparel declined 5.2% versus the prior year.
• Prices are expected to remain compressed further in the near-term.
• Mass-merchants gained market share while sports retailers declined; specialty stores sales percentage remained relatively unchanged.

The Next Big Thing

• The latest industry innovation is soft shell fabrics.
• The new material should drive renewed sales growth as consumers replace/supplement existing hard shell outerwear.

Product/Style Features

• Consumers continue to demand that outdoor apparel and equipment products be more versatile, comfortable, easier to use, and lighter in weight.
• Consumers are also trending toward simplicity in design.

Source: RBC Capital Markets.

Exhibit 3

Mountain Hardwear Positioning