#741 1938 · REI (Recreational Equipment, Inc.) · Retail / outdoor gear
REI made its customers the owners, so the company profits by having them come back rather than by squeezing each visit
the problem
A retailer's ordinary incentive is to extract as much margin as possible from every individual purchase, which pushes pricing and service toward whatever maximizes each single transaction rather than the customer's decision to return
background
Seattle engineer Lloyd Anderson wanted a quality ice axe for mountaineering but found local ski shops charged high prices for poor gear, so in the 1930s he began importing a better, cheaper axe from Austria for himself. When climbing friends heard about it, they asked him to order for them too, and the informal favor threatened to become an unpaid full-time job with no way to fund the buying power a real supplier relationship required.
On June 23, 1938, Anderson and his wife Mary formalized the arrangement as a cooperative rather than a conventional shop: 23 fellow Mountaineers club members each paid $1 to join, pooling money for group purchasing power and, crucially, becoming legal co-owners of the business rather than customers of it. Run out of the Andersons' West Seattle attic and kitchen, the co-op ended its first year with 82 members and a $212 surplus, which was returned to members as a patronage dividend proportional to what each had bought — not paid out as a fixed discount, but as a share of the year's actual performance.
what everyone would do
The standard way to run a retail business is as a conventional corporation, where the company's incentive is to extract maximum margin from every individual sale, since profit flows to owners and shareholders who have no stake in whether the same customer ever returns. Anderson could have simply formed a normal ski shop, priced gear at whatever the market would bear, and kept the profits himself — the standard path any importer with a growing customer list and real supplier relationships would take once the informal favor became a viable business.
what they saw
Anderson saw that a conventional retail structure would put his own financial interest in tension with his customers' — every dollar of margin squeezed out of a single sale was a dollar taken from the same climbing friends he was trying to help get better gear at a fair price, which conflicted with his own stated reason for starting the whole enterprise ('I never thought a man should make money off his friends'). Structuring REI as a member-owned cooperative instead meant the company's financial upside came from members choosing to keep buying and keep bringing new business, not from extracting more from any single transaction — realigning the company's incentive with the customer's interest rather than against it.
the move
By chartering REI as a member-owned cooperative instead of a standard retailer, Anderson tied the company's financial upside to repeat, higher-volume purchasing by the same members rather than to maximum margin on any single sale: each active member pays a one-time fee (originally $1, now a $30 lifetime fee) and in return receives an annual patronage refund — currently about 10% of what they spent on regular-priced gear the prior year, paid as store credit — funded by the co-op's actual surplus rather than a fixed markdown. Because members only get money back by returning to buy at REI again, the incentive that would normally push a retailer to squeeze every visit instead rewards the company for making customers want to come back.
why it works
By returning surplus to members as a patronage dividend proportional to what each member actually purchased, REI made the payout depend entirely on members choosing to come back and spend money at REI again — a member who stops shopping there stops receiving dividends, so the company's financial performance is directly tied to earning repeat business rather than maximizing the value extracted from any one visit. Because the dividend was funded by real annual surplus rather than a fixed discount, the incentive scaled naturally with how well the co-op actually performed, giving REI's own leadership the same reason to run the business well that a conventional owner would have, without needing to squeeze margin from any individual customer to do it. This structural alignment is likely why REI became one of the few consumer cooperatives to scale into a mainstream national retail brand rather than remaining a niche buying club — the co-op structure didn't just distribute goodwill, it created a genuine, sustained commercial advantage (member loyalty, repeat purchasing) that outlasted the founders and survived REI's growth from 23 members to over 24 million.
the payoff
REI grew from 23 founding members contributing $1 each in 1938 into one of the largest retail cooperatives in the United States, reporting more than $621 million in annual revenue by 2000 and, per REI's own membership disclosures, over 24 million members today receiving annual patronage dividends — with the founders, Lloyd and Mary Anderson, holding membership cards No. 1 and No. 2 until their deaths.
where it breaks
This mechanism depends on there being a genuine, healthy surplus to distribute — a cooperative running on thin or negative margins has nothing meaningful to return to members as a patronage dividend, and the incentive alignment collapses into a symbolic gesture rather than a real financial relationship. It also depends on maintaining the actual mechanics of member ownership and dividend distribution as the company scales — the RetailWire source itself notes recent criticism that REI's corporate structure and executive compensation have drifted from its founding democratic principles as the company grew large, a caution that the cooperative structure's benefits erode if governance and payout practices don't keep pace with the company's actual scale and complexity. And this model works specifically for a business where repeat purchasing behavior is genuinely valuable and trackable — a company whose customers make only one-time or rare purchases has little to gain from tying payouts to cumulative repeat spending, since there's no meaningful return-customer relationship for the incentive to reinforce.
what came after
REI's co-op structure is regularly cited in retail and cooperative-business literature as one of the few consumer cooperatives to scale into a mainstream national retail brand rather than staying a niche buying club, and the company deliberately re-emphasized its 'co-op' identity in marketing and its logo starting in 2014-2015 after decades of downplaying it, treating member ownership as a competitive differentiator rather than a legacy footnote.
references
- [1]Seattle Times — Lloyd Anderson, REI founder, diesThe Seattle Times, 2000archive.seattletimes.com
- [2]RetailWire — REI Co-op Revolutionized Outdoor RetailRetailWire, 2023retailwire.com
- [3]Wikipedia — REIWikipedia, 2026en.wikipedia.org