#29 - Patagonia, Recessions, and Flight to Quality
As we enter another recession, Patagonia founder Yvon Chouinard probably isn’t losing any sleep.
When the economy turns south, you often see a fight to quality in financial markets. Investors sell riskier assets and buy safer ones. For example, swapping stocks for bonds. Consumers may exhibit a similar dynamic.
In Let My People Go Surfing, Patagonia founder Yvon Chouinard says that recessions have been good for business:
“Consumers become very conservative during recessions. They stop buying fashionable silly things. They will pay more for a product that’s practical, multifunctional, and will last a long time. We thrive during recessions.”
Later on in the book he mentions that:
“In the past, recessions have hurt our competitors and driven customers to us because people become less frivolous in their purchases. They didn’t mind paying more for goods that won’t go out of style and are of such quality that they last a long time.”
In general, recessions aren’t good for business as consumers pull back on spending due to necessity or fear. US retail sales declined sharply during the financial crisis and are falling now:
Source: U.S. Census Bureau, Retail Sales: Retail and Food Services, Total [MRTSSM44X72USS], retrieved from FRED, Federal Reserve Bank of St. Louis;, May 23, 2020.
Economic shocks have a way of shaking up the status quo, forcing people to rethink priorities. Getting a new pair of tasseled loafers or refreshing your cravat collection may no longer seem that pressing when unemployment is pushing 20%.
My grandmother lived through the Great Depression and this left a lasting mark on her behavior. I know because she would talk about it every time I visited her. She’s not alone. As the New York Times wrote in a 2009 article:
“The Great Depression imbued American life with an enduring spirit of thrift. The current recession has perhaps proven wrenching enough to alter consumer tastes, putting value in vogue.”
So perhaps it shouldn’t be surprising that a company like Patagonia with a design philosophy centered on making durable, multifunctional goods would do alright when times get tough. One quality item can do the job of several of lesser quality.
Like beauty, quality is in the eye of the beholder. Feel plays a large role. Quality is the way some cars take sharp corners or certain knives cut. Hard to describe, but you know it when you feel it.
This makes quality difficult to quantify. It can’t be captured in a single metric or OKR. If what gets measured gets managed, then a hard to measure attribute like quality could easily be neglected.
Try coming up with a list of publicly traded companies that consistently produce high quality clothing. It’s not that easy.
For me the answer is Lululemon. While this is a subjective exercise, my criteria for quality here are comfort (duh), durability (can be used for years), and multipurpose (in Covid times, gym shorts are the new suit pants, the new chinos, and the new jeans; you can even work out in them).
Patagonia is private, so it's not easy to see how it’s holding up in the current economic environment. However, Lululemon is public, so it’s possible to get a temperature check on them.
The diagnosis: so far, so good.
Here’s the year-to-date performance of Lululemon’s stock compared to an index of the Consumer Discretionary stocks in the S&P 500 (XLY):
Source: Google Finance, Lululemon (LULU) versus Consumer Discretionary SPDR (XLY). 2020 YTD comparison as of May 23, 2020.
Lululemon has held up relatively well on this view. However, this could be due to the fact that athleisure is now office attire for the work from home crowd. Zoom out five years and Lululemon’s outperformance is starker:
Source: Google Finance, Lululemon (LULU) versus Consumer Discretionary SPDR (XLY). Five-year comparison (June 5, 2015 through May 22, 2019) as of May 23, 2020.
The opposite of quality is fast fashion. When Yvon Chouinard mentions “fashionable silly things” it’s not hard to imagine him referring to the likes of Forever21, H&M, and Zara.
Zara and a handful of other brands are owned by Inditex, a Spanish company. Here’s a year-to-date comparison of Lululemon and Inditex:
Source: Google Finance, Lululemon (LULU) versus Inditex (IDEXY). 2020 YTD comparison as of May 23, 2020.
The same relationship holds looking at longer time scales.
Of course, you can’t draw sweeping generalizations from the performance of two companies, but Patagonia and Lululemon provide evidence that quality matters. While it can’t be compressed into a single metric, consumers quickly suss it out.
As we enter another recession, many businesses are nervous. My guess is that Yvon Chouinard is sleeping well.
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