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Challenges: Young Consumers, Michaels Future, New CEOs, Merchandising ... 

... Pricing, and much much more.

By CLN Subscribers (January 12, 2006)

(Note: The 1/02/06 issue of CLN included an article listing challenges the industry is facing in 2006. CLN sent a draft of the article to a variety of industry professionals, and their comments are below.)

CLN wrote: "Whoever is hired as CEO of A.C. Moore and Jo-Ann's will have a major impact on the industry. If they are incompetent or ineffective .... Or, can they do for their companies what Michael Rouleau has done for Michaels?"

1. I can’t see either company hiring someone incompetent. Maybe someone arrogant who "will come in and show our little industry how business is done." I hope that they will be as savvy as [Michaels' CEO Michael] Rouleau and will enjoy being a part of the industry as he does. – Midsize Manufacturer

2. The Wylys found Rouleau. While I am not sure there is another one like him out there, there certainly are many great retail professionals. A.C. Moore has a couple top-notch execs in Larry Fine and Les Gordon. If they go outside, the danger is if Larry leaves; if they promote him, it's different story.

Anyway, both A.C. Moore and Jo-Ann's can afford to pay the money; and with the stock so cheap, options could be great with a turnaround. There is a big danger if the boards make terrible choices at one or both chains. I think change can be good in both cases; both need a new approach. – Industry Consultant

3. This industry needs CEOs who value consumer education and share that value throughout their organization. All of the independent retailers highlighted in CLN the last year have education in common. These retailers focus on it and find that it is what brings their customers back to the stores and what makes them competitive with the chains in their area.

CLN wrote: "We need to understand her: she is more urban, hip ... Interested in doing her own thing, rather than simply following directions and copying a project ... Wants to personalize everything to the point of having a tattoo ... Far more comfortable with computers than her mother ... She is a post-feminist – not hesitant to take up "feminine" hobbies, but wants to do them her own way. And in this post-feminist world, it's not just women who are potential customers."

1. Speed, authenticity, and technology are top priorities for the younger consumer. Depending on the age group, many of these consumers do not know a time without computers in the schools and homes, cell phones, the Internet, and anyone other than Jay Leno hosting late night TV. – Major Manufacturer

2. You are 100% right, but we need a chain with real imagination and money to make dramatic changes. Only things going on that I see are Michaels Perfect Store Project, Hobby Lobby continuing efforts to change to meet customer needs and desires, Target continuing to build its department, and Wall Mart's changes in layout and mix. – Industry Consultant

CLN wrote: "Is at an interesting point in its growth: a) The U.S. is pretty well filled with Michaels' stores; b) the company apparently hasn't figured out the right formula for its ReCollections stores or it would have opened more than 11 by now; c) the Star Wholesale concept sounds like a good one, but the country can't support that many of them; d) Aaron Brothers continues a very slow growth trend; e) Michaels has lots of cash. So, where does it go for growth? Simply concentrate on improving sales per store?"

1. Hopefully Rouleau moves from emphasis totally on operations and begins redeveloping the merchandising area. If he can do for merchandising what he has done for operations, look out! – Midsize Manufacturer

2. While it may not be apparent to the industry, be assured Michaels has a strategy; Rouleau's a genius. The Michaels board of directors has shown foresight and wisdom, and they have a top-notch group of executives at every department and a disciplined organization structure. They manage the business great and have a great cash flow with no debt. We just are not seeing the strategy, but you can be sure there is one. They have a plan A, B, and C; we just do not know what it is. – Industry Consultant

CLN wrote: "Meanwhile, retailers need to lighten up on pricing so the vendors have some margin to promote the category the way they did when the categories were flourishing .... Need to reduce pricing pressure and special allowances on vendors so they have money for new product development, promotions, and most importantly, inspiration and education so consumers get even more out of crafting. And stop the price cutting that reduces everything to a commodity item of little perceived value."

1. One of the issues that I believe our industry faces is related to essentially ruining a good item by footballing the price to the point that the item no longer has value. A case in point is the Knifty Knitter, set of four looms manufactured by Provo Craft. This set of four is an excellent product and was originally sold to retailers at a cost of about $14 with a suggested retail of $24.99. The price, at some point last year, dropped to just over $11 cost depending on the discounts, etc., that you were able to get. The cost to purchase the item on import, is $6 or thereabouts – but this means you order a container load of product.

Michaels (because that is the one I am most familiar with) first advertised it at $19.99 – a good price with still a good margin and yet a good value to the consumer. Next, they dropped it to $14.99. Then this year, we have seen them advertise it at $8.77 (or something very close to that) to $9.88 or $9.99. I don't know what the other chains have done with the same item.

The point is, however, that the product has been completely de-valued. The individual large yellow loom that is in the set of four is sold pretty much everywhere for $7.99 or $8.99. Yet they have footballed the price on the set of four so that it now sells for about the same price as a single loom.

The big question is WHY? Did they really need to do that? What were they trying to accomplish? The actions they have taken have made it virtually impossible for anyone who hasn't purchased the item as part of an "import program" to even offer the item for sale to the consumer. So, what does this say for the yarn shops, independent craft stores, etc?

We have seen Michaels and Wal-Mart doing the same with yarn from Lion Brand -- particularly Fun Fur – did they overbuy, or what is the reasoning?

Bottom line I guess is, why do the "number crunchers" have to essentially ruin some very good items that the consumer perceives have a value and is willing to pay for at a value price? Why do those same number crunchers beat up the manufacturers on price, and then turn around and essentially do the same to all of their fellow retailers? Is it the macho football player attitude of always having to "win"?

It is really frustrating as a consumer and as a store owner to see the "big boxes" take a really valuable product that is used for leisure and creative crafting and destroy it through their pricing games. – Long-time, Independent Craft Retailer

2. Let’s face it, if the chains think that their merchandise is only worth 50% or 60% of retail, then why shouldn’t the customer? They have trained the consumer to believe this, right?

Nice thought, but it isn’t going to happen. Name any industry that headed down this same road and its retail chains "lightened up on pricing." – Midsize Manufacturer

3. Sign of the times: weak retail merchants put pressure on vendors instead of trying harder to sell customers. Of course there are always exceptions. Funny thing is, the chains that work on the customer instead of the vendors are the ones that do the best, because they put pressure on themselves, instead of trying to shift to others. – Industry Consultant

4. Yes! There is less value placed on crafts than there was in the past; what does the retailer do to mitigate that? I believe it's partly caused by the plethora of big-box discounters, but it leaves the smaller independent designer who is unable to compete with China/Wal-Mart/Michaels out in the cold unless perceptions and values are actively addressed. – Needlework Designer

5. Discounts and sales are killing our industry. Why buy at full price now if you wait less than a month and can buy twice as much? This in turn makes margins for everyone too small to make a living. The result? CLOSURE.

When the big chains get back to having a January sale for one week and may be a sale in August for end of summer, then we may get back in business with profits for all. But sales every month – I rarely see product at full price any more. – Sandra Murray http://needleandframe.com

CLN wrote: "Make our stores more interesting. Too many stores are boring and do not help light a creative fire in the customers."

1. I agree that the stores are boring, but it's hard to explain that to retailers. Retail is entertainment and show business – and there isn't much in our industry's stores these days. – Industry Consultant

2. I doubt any of our chain stores have visual merchandisers on staff. Most of our chain stores look like what you would expect them to look like after seeing their newspaper ads: they look like a jumbled mess. (Jo-Ann's superstores have certainly taken a step in the right direction but the knowledge and support at store level is suspect.) – Midsize Manufacturer

3. It takes a lot of creativity and product knowledge to create inspiring displays, not to mention staffing. – Major Manufacturer

4. It will take a real wake up call for this to happen. The driver might be non-craft retailers and chains siphoning off enough volume that the craft retailers realize they will lose that contest and need to teach, promote, educate and entertain customers in order to attract enough of them to keep the volume. – Industry Consultant

5. I think display is vital to inspiring customers. I know Michaels is a huge success story; however I do think there is so much product on top of product, not to mention the overstock of boxes on the top of the shelves that it can be overwhelming for newer craft consumers. – Marketing Consultant

1. Many chains don't really understand the craft business and have moved to more "professional" buyers, but they do not have a great understanding of the basic craft concept. At same time, the industry is slow to really understand the changes in consumers and how they really affect the traditional crafts base. This is going to be the true test of where the rubber meets the road for the industry in the next five years, and I am not sure everyone is up to the challenge. Of course, many are and they will prosper. – Industry Consultant

2. On the flip side of that coin, some craft stores are expanding into areas about which they have little or no knowledge – trying to catch the tail of the latest trends – and are unable to provide true customer support. There are even knitting stores whose owners who don't have any knitting experience. How can they expect to retain a customer if they are unable to sell a product with little or no knowledge of what they are selling?) – Needlework Designer

1. Leisure time. I see the current situation as one of increasing competition for decreasing disposable (or entertainment) income. Disposable income is decreasing due to higher fuel costs, higher interest rates, mounting consumer debt, flat take-home pay, etc. Competition for disposable income is ever increasing – more retail square footage in the marketplace, more consumer choices, more big ticket electronic must-haves (Xbox 360, computer, iPod, etc.). The way I see it, our stores and products must be exciting and focused to capture our share of that decreasing dollar. It is all about better niche marketing and better niche merchandising. These points are already touched upon in your #6 where you point out that Michaels has saturated the market and in #5 about merchandising. – A Major Distributor

2. China. This is going to be a monster issue in the next five to ten years. It will be a real balancing act, and I think most have their heads in the sand on this one. Everyone is talking about it, but not many want to do anything about it. Be assured there will be a lot of action – not just talk – in the next few years.

This is the long-term key for the U.S. economy as well as the craft industry, and I am amazed not more action is going on. You have written on the Tara and candle situation; wait until the American public realizes the long term impact of cheap goods on their future.

If I sound like I am on a bandwagon, I think this will be the biggest issue I have ever seen in my business lifetime. I think this will be an amazing story over the next decade. For example, if manufacturing continues to go offshore to places like Asia, and tech to India and Asia, where will Americans end up making money to pay for all the goods? And oil prices will keep rising because of the huge increases in oil needed in Asia and China. Just the increases needed in Asia and China over the next five years are equal to U. S. total consumption today. – Industry Consultant

3. Independents. It would be a good idea for companies to realize how important independents are to the industry. My favorite example of a large company actually realizing that and working with it is EK Success. They do not just give all the goodies to the Big Guys, but work with independent retailers giving them product, ideas, and looking for input on product development.

Perhaps if more companies gave the small guy something in comparison to the discounts and terms they give to Michaels, etc., we would not have such a stagnant industry. Who is responsible for the lack of creativity? The majors who get every discount so that there is no money for development, yet the CEO makes millions of dollars in salary. – Large Independent Retailer

4. Hispanics. The craft industry, like most industries, is struggling with this one. On one side, when did you meet any Hispanics in our stores? On the other side, I think there will be a big backlash in the next five years over the illegal immigrant issues. This is an interesting segment with plus and minus implications and getting very little action, other than a lot of lip service. – Industry Consultant

5. E-commerce. You need to add something about the Internet. It's a biggie and has the possibility of beating the living heck out of the brick and mortar stores. Just a possibility right now, but if lives get any busier.... – Painting Teacher/Author/Consultant

6. Purchasing. Chains should quit basing purchases of new products on a twenty-store, six-week test. – Midsize Manufacturer

7. Consolidation. We’re seeing the consolidation and departures that occurs as a category peaks. Soon there will be two or three major vendors driving the category. With the strength of some of the investment groups that have been buying scrapbook companies, we may have five or six, but it’s going to take large companies to be able to withstand the pressure and requirements the chains are implementing. – Major Manufacturer

I was bothered by the comment in the newsletter about A.C. Moore's and Jo-Ann's same-store sales being hurt by Target’s presence in the craft business. I feel this remark is way off base.

Target is carrying a very limited number of craft SKU’s relative to specialty craft retailers. Their assortment is focused on "kits" versus individual component items. Their presence in the craft business should actually be helping sales at all specialty craft retailers, as new consumers "sample" craft items at Target and then seek specialty retailers for a wider selection of craft component items.

If Target’s minimal presence in crafts was hurting specialty craft chains, why aren’t Michaels same-store sales off, too?

While some of the sales increases at Michaels can be attributed to supply chain improvements, Michaels has taken a very aggressive stance in merchandising and refreshing merchandise assortments. I believe their aggressiveness in this area will continue to drive same-store sales increases after the effect of the supply chain improvements "comps out."

I work for a company that does business with all four retailers, and Michaels/Target are each head and shoulders above Jo-Ann's and A.C. Moore in merchandise selection and keeping their assortments "fresh" and on trend to attract new consumers.

I think the issues at both Jo-Ann's stores and A.C. Moore are leadership issues. Bob Ferguson is right on the money when he says the best thing that can happen to Jo-Ann's is to hire a Mike Rouleau. I would second that for A.C. Moore. The best thing that can happen to the craft industry in 2006 is for both leadership positions at Jo-Ann’s and A.C. Moore to be filled with dynamic, forward thinking executives of Rouleau’s caliber. – Director of Supply Chain Planning, Major Manufacturer

(Note: Have any thoughts on these subjects? Email CLN at mike@clnonline.com. To read readers' reactions to specific product categories in the original CLN article, click on "Challenges: Scrapbooking, Beads, Yarn, Home Dec, & Decorative Painting/Cross Stitch" in the right-hand column.)

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