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Key Challenges/Opportunities for the Craft Industry in 2006

Office Supply, private label, and direct import.

by Deborah Murphy (January 16, 2006)

(Note: Deborah is an accomplished veteran industry consultant and President of Deborah M, Inc.)

1. Office Supply.

The challenge and opportunity for the craft industry offered by competition from the Office Supply channel will be heightened in 2006. Beyond the obvious difficulty of competing on price for basic craft supplies, storage/organization, and paper products, crafts will have the additional challenge of this channel continuing to offer a broader array of craft, hobby, school, scrapbooking and papercrafting supplies � and store-within-a-store seasonal assortments.

At the same time, these imminent threats offer a huge supply opportunity for manufacturers (and thereby design opportunity for designers), and a notable educational opportunity to create incremental craft consumers. There are additional strategic/competitive opportunities for manufacturers and retailers: office supply offers no educational component at store level, few kits (aside from kids), and very little identification as a creative destination � YET!

A look at some Office Supply data reveals important factors, (culled from numerous sources, including research from the School, Home, Office Products Association).:

Size of Sector: $312b in sales

Trends: Linking with freight suppliers, paper companies, and e-tailers ... Focus on end-user (consumer) ... Direct-to-consumer sales, and consumer sovereignty ... E-catalogs ... Broader array of product.

Growth Factors: 3.5% annually ... More income-producing home offices ... Less public-sector school funding pushes private sector-spending (at non-coop pricing) ... More home schooling; supplies are purchased at retail ... Rising employment, increased employer spending ... Immigration raises public school enrollment ... E-commerce investment and growth ... Global sourcing, supply chain management.

Product Array: Furniture ... Computers, Accessories and Office Equipment ... Paper Products ... Craft and hobby supplies ... Scrapbooking/paper crafting supplies ... School supplies, including Back to School which is now being extended ("Back IN School") across September, October, and November ... Basic office supplies ... Store-within-a-store seasonal assortments.

Office Supply Opportunities.

Craft Manufacturers: Size of market, including incremental craft consumer ... Number of "doors"; "channel blurring" which influences consumer to accept/demand a broad range of supplies at one stop ... Store-within-a-store assortments ... Kits ... Partnerships in private label.

Craft Retailers: Carry more "office supplies" ... Carry more storage and organization ... Carry more Back IN School supplies ... Kits ... Education (on the aisle, and in the classroom) ... Private label (build store brand loyalty) ... Store-within-a-Store seasonal assortments.

Craft Designers: Alignment with manufacturers who are/will be supplying this channel.

Craft Consumers: Increased awareness of Craft product ... Increased destinations for entry-level experience, supplies and commodities ... Increased loyalty to craft retailers who support/supply creativity.

2. Private Label/Direct Import.

Private Label and Direct Import are linked by shared market conditions that first foster their growth. The challenge and opportunity (for the craft industry) presented by these linked phenomena will also be heightened in 2006.

Factors influencing both Private Label and Direct Import include the increasing sophistication of supply chain management and global sourcing � both with positive impacts on profitability. As various channel participants (craft, office supply, drug, grocery, specialty) become more adept at managing their supply chain, and at the same time rely more heavily on global sourcing, the opportunity to develop and merchandise Private Label and Direct Import product becomes critical and feasible. Frequently Private Label and Direct Import product becomes the same thing � and their availability applies intense pressure on competitors.

Because of global access to sourcing, and "channel blurring," the same products are increasingly available at numerous stores. Private Label offers a strategic means for a retail operation to differentiate itself, and has the tactical effect of tightening supply control and bolstering margin. At the same time, well-managed Private Label product development and marketing have been shown to build retailer brand loyalty with its consumer.

Today, the growth of Private Label exceeds that of national brands (SHOPA Flash Report, May 2005). In addition, as the traditional distribution chain evolves to supply the consumer directly, Private Label becomes more tenable (distribution is direct). In addition, Private Label offers retailers a tightly held entry to "opening price point" and "price tiered" strategies (Good, Better, Best) that are easy for the consumer to understand and support.

Direct Import offers the retailer the means to develop and market Private Label product. As the sourcing event becomes tightly managed, the opportunity to merchandise Private Label becomes compelling both from profitability and supply points of view.

For the craft industry, these twin phenomena present intense competitive threats � and offer supply, design, education, and competitive opportunities. Top-line trends, culled from numerous sources, including SHOPA research (School, Home, Office Products Association:

Size of Sector: Across all categories, up to 20% of goods ... $60 billion annually in consumer spending.

Trends: Growing at twice the rate of national brands ... 5% annual increase over five years.

Growth Factors: Strategic differentiator ... Margin builder ... Consumer loyalty builder ... Bolsters store positioning and relationship with consumer (visual merchandising, themes, values) ... Channel blurring (broader shared array, across channels) ... Consumer recognition and acceptance of private label as a "brand" ... Supply chain efficiencies and global direct sourcing.

Product Array: Broadening beyond food and drug ... Mature, slow growth categories with low innovation requirements.

Private Label/Direct Import Opportunities.

Craft Manufacturers: Participate/partner with retailer ... Provide expertise, and share in volume opportunity ... Participate, or be on the sidelines ... Increased shelf space.

Craft Retailers: Introduce private label, which is well-accepted by consumers ... Build relationship with customer, build store brand ... Bolster margins ... Differentiate product (strategic/competitive), especially in mature categories.

Craft Designers: Add value of American design (for American end-users) to overseas-sourced product in design-led categories ... Add value of end-uses (creative applications) ... Invent, develop, and promote unique uses in mature categories ... Customize educational programs by retailer.

Craft Consumers: Up to 30% price reduction with no reduction in value proposition ... Higher market basket spend ... Interest in and support for "brand" product extensions � both in array and in end-use.

Among the numerous threats and opportunities for the craft industry in 2006, competition from Office Supply, Private Label, and Direct Import are among the most critical for us manufacturers, retailers, designers � and consumers � to acknowledge, understand, and embrace. By apprising ourselves of these market trends, evaluating our ability to participate in these areas, and executing our own competitive strategies, we craft industry participants can continue to secure our share of the consumer's creativity dollars, and capture an incremental share � share of market AND share of mind.

(Note: To contact Deborah, email dmurphy3388@earthlink.net. To comment on the issues raised in the article, email your thoughts to mike@clnonline.com. To read previous "Vinny" columns, click on the titles in the right-hand column.)

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