Creative Leisure News - Business-Wise

Mike's often irreverent, thought-provoking analysis of the industry.

The Changing (Disappearing?) Core of the Industry

Bob Ferguson and Mike Hartnett discuss the year's major issue.

(December, 2003)

Note: In our last Business-Wise column, we published a letter from Fred Zerull, a 71-year-old industry veteran who began his retail life with a fabric store. He has changed many times since then, and recently liquidated his Ben Franklin Crafts store into a collection of specialty stores under one roof � framing, art, quilting, yarn, and upholstery. You can read Fred's letter by clicking on "Leaving 'Crafts' For Specialty Stores" in the right-hand column.

Some of the responses are included in the 12/1/03 issue. But Fred's letter also generated a lengthy discussion between Bob Ferguson and CLN's Mike Hartnett.

Bob Ferguson of Redmond, WA is widely considered the most successful independent retailer in our industry. He is also a member of the board of directors of the Hobby Industry Association and a leader in the Sierra Pacific Crafts group. Bob responded to Fred's letter, which elicited a response from CLN, which Bob, in turn, answered.)

The Discussion, Pt. I: Bob Ferguson.

I have read, with great interest, the letter written by Fred Zerull. I have known Fred for more than 40 years because my mother, father, brother, and sister worked for Fred at one time or another in the 60's and 70's. I have always known him to be a fine retailer and a very astute study of the industry trends. I was sorry to see Fred drop his membership in Sierra Pacific Crafts, but apparently SPC could not provide "value" to his membership within the framework of changes he needed to make to continue to be a viable business in the Redding market. Conversely, Fred always added value to the organization with his forward, if sometimes strident, opinions.

I have not seen his new store changes, but would guess that, like his letter said, he made changes as a result of his perception of how he can continue to be a merchant working within the real world trends of Redding, California. That is a smart retailer.

I would take exception to some of the ideas he has put forth in his letter, while at the same time saying that he is closer to right than many craft retailers might imagine today.

His suggestion that crafts as we knew it in the '90's is dead is, of course, correct. Like any other business, if you are doing it the same way you did it in the '90's, you are driving on a rugged road.

That said, crafts is not dead. Crafts as we know it in 2003 is vastly different than it was in the 90's, and different even than it was in 2002, but it is far from dead. Scrapbooking is hotter than hot and yes, even with two Michaels, two JoAnn's, and 10 small independents selling scrapbook products and all within five miles of us, it is still the hottest concept in the crafts business today, at least in our area..

Beading and jewelrymaking is a huge category. With 70%+ margins and a following of customers from many miles around, even with the above-named competitors and a half dozen independent bead shops in the area, I would hardly call that craft category dead. As the country song says, "I like it, I love it, I want some more of it!"

Yarn is bigger than it has been in all the 40+ years I have been involved with that end of the business. New goods arrive almost daily and new consumers (read: young) are drawn to the category by many factors that have resurrected this formerly "dead" line.

Knitting and crochet are so hot that manufacturers of the various needles involved are having a hard time keeping the pipelines filled with product. We have knitting needles that sell for more than $20 a pair that the manufacturer cannot bring in fast enough. (Yes, they are made in China or they would never be manufactured.) Meanwhile, our customers put their names on a waiting list to purchase them as soon as they become available.

These categories are not dead by any means, but they have changed and thank you craft designers and consumers for your change in interests. Yes, the run-and-gun days of the 90's are gone and from this independent retailer, I say, "Hoorah!"

Since I don't operate in California, I cannot take exception to Fred's concept of dropping employee benefits, but in my market I cannot believe that no benefits equals attracting quality staff members. Our business success is absolutely dependent on the commitment and creativity of our staff, and paying them either with hard dollars or a combination of that and strong

benefits, as well as providing them with a sense of ownership of their responsibilities, has been a winning formula for us.

The bottom line: I believe Fred has done what is right for him in his market. Every independent should be thinking along similar lines: A) Dominate the category or get out of it. B) Upgrade and offer knowledgeable, professional customer service. C) Find niches that chains cannot merchandise well. D) Change, Change, Change.

Thanks, Fred, for always leading the way. I have learned a lot from you over the years and even while you sit in that beach chair in Maui, you continue to inspire and motivate a lot of us to keep the faith � and change. � Bob Ferguson

The Discussion, Pt. II: Mike Hartnett Responds.

Bob: I don't disagree with Fred turning to specialty stores, just as I don't disagree with Crafts magazine changing to Paper Crafts. What concerns me is this: if everyone turns to specialties (heck, I thought crafts WAS a specialty) and abandons the "core," what happens to the industry when those specialties eventually decline?

When hot trends � the scrapbooking of their eras � declined, there was always a "core" from which grew the next hot trend. If we lose the core (and I'm not sure I can even define the core).... � Mike Hartnett, CLN

The Discussion, Pt. III: Bob's Answer.

Well, for all of our sakes, Mike, I hope you are worrying needlessly. Unfortunately, I think you make some very strong arguments in the direction of how we are losing the core of what we are, or at least what we have been.

I should only try and tell you the other side of the story: I do go back a few years in this and other retail endeavors, and the essence of what a retail business is has always had to shift with the consumers' interests.

As you might remember, many of the old geezers like me, Fred, and so many others came out of the variety- or department-store world. We saw so many of those companies fail to address or embrace the world of change in their industries. We ultimately saw failure across the landscape because the "core" of the business changed and the businesses did not. Look at W.T. Grant, Woolworth, Newberry, TG&Y, and department stores like Frederick and Nelson, Rhodes, Liberty House, and so many others. If you look carefully, you will find that the "core" of their businesses changed and they did not even know it until it was too late.

Woolworth was a classic. I started with that company in 1959 and in the mid 90's, when they closed it down, they were still merchandising the same goods to the same customers they embraced in the 50's. That meant that their customer just got older and poorer as time went on, and the young and more affluent went elsewhere to buy their needs and desires. Isn't that where Kmart is today?

These retailers did not die or get where they are today because they did not have customers who wanted to buy. They simply failed to change their core merchandise philosophies and kept addressing the needs of a shrinking number of consumers.

In stepped the Targets and Wal-Marts of the world who offered a different slant on the products that Kmart tried to merchandise, in locations that were of far more interest to the average consumer than the locations that Kmart stayed with over the years.

Right here in relatively affluent King County WA, Kmart had one store which they opened in about 1972. Their mistake? Simple � and anyone with a year's worth of retail experience could see it � they tried to entice that affluent consumer with the same core products that worked in Bakersfield or in the old Kresge or Woolworth stores around the country.

Our core in the craft industry has changed. When we started into the craft business in 1979 after a mildly successful run as an independent variety store, we opened up with the four lines that were core products at that time: yarn, fabrics, macrame, and plastic flowers. We also had a fine

selection of beads, but the beads of that time were plastic or wood; there were few choices as to color or shape. That was our core and the customers loved it.

When plastic canvas and macrame began to falter, we tore our insides out trying to determine what would be the next basic product in our industry. In the case of flowers, along came silks and we were off and running at even higher levels of interest than previously thought possible.

We went outside to other industries and found tole painting, at that time a strictly boutique line that interested only the hard-core and talented painters. We worked it and taught it and showed it and modeled it and saw it morph from painting on wood to painting on every kind of surface imaginable, including apparel and even warm bodies in the form of tattoos. While some

called it "apparel painting," we saw younger consumers getting interested, so simply gave it a new name, "wearable art."

We went to the framing industry and saw opportunity there and added both custom and artists frames to an already existing tabletop photo frame line.

Those lines became our new core. Along the way we saw opportunity in many more lines like cross stitch that was also considered a boutique or specialty line. Over and over and over we saw our core merchandise lines change as the consumer changed. We had some years when the basics were things like dollmaking and simple products like felt squares. Sometimes our other heart-and-soul products were so hot we could not keep them in stock, and then the next year we could not give them away. Same thing today.

Some stick and some do not. The last big boom/bust in jewelrymaking saw us go from $15K a month from January to August one year to $2K a month from September to November of that same year. Did we eat some inventory? Hell, yes, and then came up with Beady Babies the following year that created $250K in sales for us in 15 months until all the big boxes and wannabes of the crafts world jumped on the bandwagon and we moved on.

Framing is bigger and better than ever even despite the fact that every Joe Dokes and corner retailer, along with every big box in the world, has gotten into some form of framing.

So what can the independent do? Move on or set the bar higher. Fortunately there is a huge quality issue revolving around framing and we take advantage of it. We cannot begin to compete with the Michaels and Targets of the world on their same ground, but we can do better than they can when it comes to quality, and we do.

Our core product have changed, and even some of the core principals surrounding custom framing have changed, but WE, not they, set the bar and make them chase us. I took in 415 custom framing jobs last week and any Michaels store would die to have that many customers in their custom departments in a month, even with their 40%-off coupons (which we do not ever run or accept).

Look at yarn. Three years ago we had cut back yarn to a few basics and about 20' of space with a $50,000 inventory and less than two turns a year. Our knitting classes attracted a few of us of the geezer age, but then some brilliant wag in one of our other classes said, "Why don't you call it something besides knitting classes? That's what my grandmother and mother did."

"Yarn Yoga" was born and we have had a full house every Friday night for two years. Now that inventory is four times that $50K, the turns are 8 times, and we only have one item from our inventory of just three years ago that we still merchandise in our store.

The core of the business has shifted and we are delighted with the results. What was the core of the business three years ago is now sold in every Michaels, Fred Meyer, Wal-Mart, and corner gas station in the world, while we have happy customers lining up to buy the new "core" products.

Of course we cannot sell it to our customers without some high level form of expertise to help

customers make choices, but with a gross margin 20 points higher than what we had with the old "core" products, we can afford such expertise on the sales floor.

I can only see from the perspective of an independent retailer. Chains have their niche and we have ours. I would worry more about the manufacturing side of the business and what they are doing to themselves when they bet the farm on the Michaels and Wal-Marts in this industry.

The new core: paper arts � and it's a huge draw; beading with its glitz and excitement; and specialty yarn and the myriad of things to do with it besides making afghans; and then there are all the other new things.

The real trick is not to worry about what the "core" merchandise is in the business, but worry and help to identify what crafting is to the consumer at the moment. Crafting is a components business. It always has been and will continue to be so forever.

We have taken departures like home dec that have been immensely rewarding and still continues to be so in many ways, but the real customers in our business want to "do it themselves," and as long as we constantly try to identify and then react to what the consumer wants to turn into core products, we will be successful.

In 2002 we sold about 40 units total of a particular product. Last week we sold over 100 units. Why? We have a new "secret" core idea and merchandise program surrounding this product. It will be a hot line producing fantastic results until the pipeline is full. The manufacturer will eventually figure out what we are doing with it and sell it to Michaels and Wal-Mart and it will get a big ride for a short time and we will move on to a new core product.

What is core? It is what the consumer says it is, and smart retailers respond in whatever manner is appropriate for their market(s). If Crafts magazine turns into paper crafts and paper eventually finds its role in the sunset, they will morph again into whatever is "core" at the moment.

My three granddaughters will be doing great "crafts" in their own way long after you and I are pushing up daisies. Now go worry about something important, like where to find a decent quality bottle of Cabernet. � Bob Ferguson

(Note: Want to join in the discussion? Email your thoughts to mike@clnonline.com.)

xxx