5.11 Tactical CEO Dan Costa – Exclusive Interview

5.11 Tactical CEO Dan Costa – Exclusive Interview

USA – -(Ammoland.com)- 5.11 Tactical recently raised the price of their legendary tactical pants by 25 percent.

In an exclusive interview, Tactical Gear Blog spoke with Dan Costa, 5.11 Tactical CEO, via telephone to learn more about the recent price jump on a number of 5.11 products.

During the interview, Costa described a “perfect storm” that led to the $10 price increase of 5.11 Tactical pants.

Why did prices increase? Costa mentioned a combination of reasons, including the rising cost of oil, cotton, labor and the dollar’s declining exchange rate in the world economy.

Interview:

TGB: What are the determining factors behind the 5.11 product price increase?
DC: We’ve had the same price on our product for the last 10 years. We’ve seen price increases continue, but we’ve always figured out how to offset that by creating new products in our line and new categories to keep the prices in line. What happened this time is like the perfect storm.

First of all, you’ve got oil. Oil prices are up, so transportation costs are high. All of our goods come from the Far East, so that’s a big trip and a lot of gas. The other thing is a lot of the products are made with oil. The nylon products are oil based and so are the shoes.

Secondly you have the price of cotton. I think it went over $2 a pound, and it used to be 50 cents a pound like a year and a half ago. So, the fabric price is up—the cotton crop was bad, the planting of the cotton was low and the consumption was high.

And then there is another thing that was thrown in, and this is like a two-edge sword. Asia is so big, and so powerful that they can kind of move markets when they want to. So they either buy up the commodity, or they don’t allow that commodity to come into that country. Like they wouldn’t allow India to import cotton into China, so that created a price increase on the product you could use in China. Well, that’s where the sewing was done. So they raised the price of their own cotton because they are so big, they could do that.

And then there’s the second edge to that sword, and that is Asia again. A good example is Taiwan. All the shoe manufacturers that I know, and I know about 15 of the top shoe manufacturers in the world, they are all Taiwanese. Their factories are not in Taiwan; their factories are in mostly China and are moving out of China and into other countries. But they all started in Taiwan, and for some reason, Taiwan just became the shoe guy. Then they went to China because the labor in Taiwan became too expensive. Taiwan got more educated; they started making computers, and they started making software. The jobs paid more, and they were better jobs. Instead of working in a hot shoe factory, you are in an air conditioned lab—and you get paid twice as much. All the workers moved over to the computer companies and didn’t want to make shoes anymore. The shoe companies moved to China.

So, the same thing just keeps happening [in the garment industry]. It just kind of hopscotches from third-world countries that need the jobs. When that labor moves and people don’t want to do that type of work anymore, then the labor has to go somewhere else where jobs are needed. Now the product is moving further east. And then you have the dollar versus the Chinese Renminbi. There is an imbalance in the dollar as well.

So you’ve have the dollar, you’ve have labor that went up [in price], and the labor that is moving. You’ve have the price of the materials, and you’ve got the price of the transportation of those materials. Nothing else could come into play. The only other thing that could come into play … I don’t even know what that could be. I don’t know how it could get any worse.

TGB: Were there any other options explored before you decided to make a price increase?
DC: Well, our only other option would be to lessen the quality. We would have to cut back on the weight of the fabric, go to B-class factories for better pricing or cut the amount of stitches. That’s not even an option for us. Again, when we look at the price of our product, what’s in it and the durability … I mean we were selling 5.11 TacLite and tactical shirts for $39.99. If Patagonia was selling that shirt, it would be $80. And we were selling it for $39.

TGB: What has customer feedback been like so far?
DC: The customer knows. The customer understands. The customer reads the paper and sees what’s going on with oil prices, cotton and labor. I think we have a pretty good trust factor with our customers at 5.11. When we talk to our customers, many of them said, “I was wondering how long you could sell your pants and your shirt for $39—it just seems so inexpensive.” Sometimes we even have customers in other parts of the world saying, “You know, you should raise your prices because I think people think your quality is poor because your prices are so low.”

We work on a certain margin, and we try to keep that very tight because our law enforcement customer and our public safety customer, they don’t get paid a lot. Our job is to keep those prices intact. We have a mission statement: We make product that exceeds the needs of our customer for function, innovation and durability, and we deliver it to them at a value. That doesn’t mean a low price. That means a value.

TGB: Is this the first time 5.11 has raised prices on the original 5.11 Tactical Pants?
DC: When I bought the company in 2000, the 5.11 Tactical Pants were $60 at Royal Robbins. I decreased the price to $39.99 because we sourced the product better, we bought more fabrics, and we did more things to get the product priced lower—mainly just eliminated a lot of the middlemen they were using in Asia. We opened our own offices in Asia. Rather to pay people to do it, we did it ourselves. We decreased our prices from $60 to $39, and it’s been $39 since.

TGB: Twenty-five percent is a rather significant price increase. How do you think the market will react?
DC: We announced the price increase back in November or December, and we just got back from a big trade show and made sure all the consumers knew that prices were going up. And again, most of them looked at us and said, “Hey look, I’m surprised you are able to keep the price the way you have been.”

TGB: What’s the reasoning behind a $5 difference, as opposed to the standard $10 difference, between MAP and MSRP on tactical pants?
DC: Again, I think the goal was to keep the prices as close as possible—give the consumer the price that they need. It’s all about the consumer for us. If we take care of the customer, and we have that loyalty and that trust between us and the end-user, then we really don’t have to worry about anything else. If we take care of our customers, our customers will take care of us.

TGB: Are you concerned with undermining your wholesale business by having such a minimal difference between MAP and MSRP?
DC: No, I think everyone pretty much charges MAP. I think MSRP is kind of like out there. It probably means more outside of the United States than inside. Duties and tariffs outside of the United States are really the reason for MSRP. The people in Europe will charge MSRP instead of MAP.

TGB: You sell your products at MSRP on your official website.
DC: That’s right. We are always above the retail price. If someone has to get the product, like tomorrow, we have so many products. There isn’t a dealer anywhere that has what we have. We have $40 million worth of inventory—every size and every color. If someone needs a size triple-X OD green tac vest, and they need it tomorrow because they are going to the Middle East, they know they can get it.

For them to pay $5 more or $10 more, they are OK with that. We need to offer that to our customer. That is why we have our website, and that’s why those prices are a little higher—just to make sure we do take care of our dealers. On the other hand, we need to make sure we don’t forget the hand that feeds us—and that’s our consumers.

TGB: With the difference between MAP and MSPR on tactical pants cut in half, is this a new strategy to do more online business on your website?
DC: No. Our online business as a percentage is a little bit less than it was in the years past. I think that is because of the broad distribution of 5.11. You can get 5.11 online now at so many good retailers, and they are holding lots of inventory. Many of our big dealers have tons of 5.11 inventory, so that decreases the need for consumers to have to fall back on [5.11’s website] for those items.

We are actually doing less business online ourselves as a company than we were in the past, which is fine with us because that is not the biggest part of our business. We do very small percentages in our own online business. However, our online business throughout the world is going crazy. I would say anybody who sells 5.11 online—it’s their largest product they sell.

TGB: Not to name names, but there are certain dealers like LA Police Gear who have introduced private label tactical pants to the market. They are 5.11 dealers who have made a name for themselves by selling your product. Does it bother you to see this type of activity?
DC: I think it was good that they did it because they found out it wasn’t that easy. In fact, now they are not making [the pants] anymore. LA Police Gear just purchased massive amounts of 5.11 pants in huge bulk buys, and they are discontinuing their private label pant because of inconsistency, fit issues and delivery issues. Actually, they can’t even get the goods right now. They can’t even get a factory to make their product.

Making a garment is not easy. Making something that fits well, forms well—they just don’t pop out of a bag. You’ve got to make sure you have the right standards, quality control measures, factories… [you have to make sure] the fabric is coming from the same mills and the same partners. I think Sean at LA Police Gear found out that it wasn’t all a bowl of cherries out there. He came back to us not too long ago and said, “OK, I’m done with this. I’m ready to buy more 5.11 because everything I bring in, I sell like crazy. So, I am just going to bring in more of it.”

TGB: That’s a huge compliment to you guys, because you make it look that easy.
DC: We actually helped him with his private label in the beginning to make sure that he didn’t get hurt, and I think it was great that he learned it’s not what they should be doing. He said, “Our focus is selling products and selling brands, and that’s what we are going to stick to.”

TGB: Do you foresee other manufacturers changing their prices as well?
DC: Oh, that is automatic. Read the paper. If you are doing research on price increases, go online to Nike. It’s impossible [that prices won’t go up] with the perfect storm we just talked about.

It would be different if cotton prices just went from $50 to $65 or $70, and that if they were going to go back down to $50 when the crop comes out. This is not that. This is a five-star perfect storm. All the stars have lined up on this one. Nobody is able to absorb these increases.

TGB: Do you think the price will ever decrease?
DC: I don’t know. I don’t know what’s going on in the world. I see what’s happening in the Middle East with oil, and oil might even get crazier. I mean, I would say there is a better chance of the prices going higher than lower in this world today. There is a better chance that a year or two from now, the prices would be even higher than lower. I wish it was not the case, but there is nothing that tells me [it could decrease]. There are lots of things that tell me it could happen the other way.

TGB: Word on the street is that 5.11 is going public. Can you confirm, deny or even discuss this?
DC: 5.11 has many options because of our growth and expansion worldwide. I’m not sure which avenues we’ll take, but it will be interesting to see what happens. Nothing will happen in the next year because we have too much growth in our international business to finish first.

TGB: Does this price adjustment factor into 5.11′s potential IPO?
DC: No, that would not affect it at all.

TGB: What has it been like at 5.11 since the private equity firm made the acquisition?
DC: It’s been great. It’s been interesting. For me, I’ve always owned my own company. When we went to market 5.11, we put the company out to bid, and we had 100 companies bid [on 5.11]. As they were interviewing us, we were interviewing them. We picked a company that luckily picked us. It’s a private equity company that has been around 40 years based in London, Boston and San Francisco. The people we deal with, the lead partner, it’s the only job he’s ever had. For me, it’s been a great learning experience. They appreciate how hard we work for them as a company. It’s been a very good, strong relationship. It’s been great for 5.11′s growth.

When we did the deal with TA Associates in 2007, we were doing about $80 million in sales. This year our budget is to do over $200 million. So, they are quite happy, and so are we. They have a company that kind of runs itself. Other than board meetings, I really don’t ever see them or talk to them. It’s pretty much business as normal. If you were an employee at 5.11 in Modesto, and you were working in design or the warehouse or accounting, you would have never known the company has exchanged hands. You wouldn’t know. There is no difference.

TGB: Is it affecting the strategic direction of 5.11?
DC: No. We create the direction, and we are deciding the path and the future. As long as we take it from $80 to $200 in that amount of time, they are sitting back saying, “Hey, this is working out just fine.” I would imagine if we were taking it from $80 to $60, there’d be some direction.

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