Date: May 17, 2004
Vol. VIII, No. 10

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TABLE OF CONTENTS

COMMENTARY: A WELCOME BOOST OF ENTHUSIASM

Until the end of last week, I sensed a sort of malaise in the industry, a passivity. Business seemed ok, but no one was very excited about much of anything. Part of that, I think, is the country's preoccupation with Iraq. In recent days I've heard more complaints about the U.S.- Iraq mess than I have about industry sales.

Then came news about the Gerson license with the Red Hat Society and the plans the Craft Yarn Council of America developed at its recent meeting (see below).

It was refreshing to hear about marketing plans that were enthusiastic, savvy, and aggressive. Nothing passive about them, and a good example for all of us.

Business-Wise. Your insurance costs going up? Worried about U.S. jobs going overseas? Mike doesn't have any solutions, but writes about these issues anyway. Plus, a reaction to the previous Business-Wise column on the meaning of the word, "crafts."

Tech Topics. Did you know the Internet can make – or destroy your company's reputation. Here's how it works, and what you can do about it.

Category Reports. How the Decorative Arts Collection is spreading the word about decorative painting.

(Note: If you visit one of the columns mentioned above and it appears to be an "old" column, click the "Refresh" or "Reload" button on your browser.)

CLN's newest feature allows you to vote on national and industry issues. Our new question – for retailers and for vendors each: How have your sales been thus far this year? Up 10+%? Up 0-10%? Even? Down 0-10%? Down 10+%? Vote, then see how your business compares. (Remember, you can vote only once and your vote is complete confidential.) To vote, click on Industry Polls in the right-hand column, or click HERE.

President Bush will win re-election if the election were held today, according to CLN's decidedly unscientific poll. Mr. Bush defeated Mr. Kerry 56.8% to 37.5%. Ralph Nader did not receive a single vote, but "Other" received 5.7%. It should be noted that the voting took place before the Iraqi prisoner abuse scandal. To see what effect the presidential campaign will have, CLN will give you another opportunity to vote in mid-October.

Tom Bazzone was named President of the company's ReCollections and Star Decorators Wholesale Warehouse divisions. He will report directly to CEO Michael Rouleau.

Bazzone had been Exec VP/COO for Restoration Hardware where he had responsibility for all operating functions as well as distribution and manufacturing, human resources, IT

and real estate/development. Prior to that, Tom was President/COO for Red Envelope, a multi-channel specialty gift retailer. Prior employment included Grossman’s, a building materials

company, and Williams-Sonoma, where he was Dir., Inventory Management and VP, Merchandise Operations.

Harvey Kanter, President of the Aaron Brothers division, had been filling in since the resignation of the former president. Duane Hiemenz, Sr. VP for Star Wholesale, will report directly to Bazzone.

(Comment. A statement from the company said Michaels had been "evaluating our plans for these specialty businesses." Hiring a president with Bazzone's credentials is a sign Michaels has decided to expand the ReCollections and probably the Star Wholesale operations.)

The recent annual meeting of the Craft Yarn Council of America produced a number of strategies designed to build on and expand the growth of knitting and crochet in recent years. The strategies fall into three categories:

1. To reach new consumers: Continue its aggressive public relations campaign, its joint promotion and education programs with industry retailers, and its Certified Instructors Program(teacher-training) programs ... Two new programs include efforts to mobilize current crocheters to teach others: "Each One Teach Two" and "Crochet on Campus."

2. For recent yarn converts: "Knit 911" will be implemented in stores and online this year, to help answer knit/crochet questions ... The "Next Big Thing" involves CYCA members coordinating the introduction of a new series of patterns based on modular project ideas ... Knitting communities – help facilitate new knitters to organize knitting groups ... Revamp pattern instructions with the goal of making it easier for consumers to read and understand them.

3. Continue its market research. Highlights of its 2004 research will be presented at the HIA show in February.

The theme of the meeting was "Keep the Drive Alive". Newly elected Chair Richard Brown said, "We were pumped going into the meeting and even more energized by the conclusion. During the past several years, we’ve seen millions of new consumers enter the marketplace, but we feel it’s just the beginning. The fun, fashion, stress-relieving benefits, and portability these crafts offer make them a natural fit for today’s consumer."

CYCA is composed of fiber producers, yarn manufacturers, needle-and-hook producers, and magazine and book publishers. HIA Exec. Dir. Steve Berg also attended.

For further info email Mary Colucci at cmcommunic@aol.com or call 212-570-9883.

In recent issues CLN has written about the good things the Craft Yarn Council of America has done for yarn sales, and we asked why we don't see a similar version for needlework or paint. An email from a subscriber gives an answer:

About two years ago, an attempt was made at an HIA show to launch a needlework guild similar to Craft Yarn Council. The problem is funding. It takes some amount of investment to start almost anything. In the case of the Craft Yarn Council, they began with a meeting 10+ years ago. Many of the manufacturers and raw goods suppliers were located in or near the Charlotte area. The companies had the ability to put funds on the table. Monsanto was the largest contributor, with a fairly deep pocket.

In the needlework group, there is a question of financial depth. There is also not a single large supplier to all needlework manufacturers (like Monsanto) who may be able to put the funding on the table to seriously pursue this. Unfortunately funding is the starting point.

Is it solvable? I really don’t know. – Name withheld by request

The Red Hat Society is one of the fastest growing organizations in the U.S. and Gerson has acquired the license for a wide variety of industry-related products, including silk flowers, talking photo albums and ornaments, jewelry, watches, hat pins, hat adornments, feather adornments, fashion accessories, boas, feathers, totes, etc. Needlework kit/publisher Candamar Designs is the only other industry-related company with a Red Hat license.

The Red Hat society started in 1998 as an informal gathering of ladies dressed in purple and red for tea, and has grown to more than 500,000 women in 21,000 chapters in more than 20 countries. For more info, call 714-738-0001 or visit www.redhatsociety.com.

Red Hat officials said the amount of trademark infringement has grown to the point where the Society "has had to become vigilant in not permitting infringement. The Red Hat Society is committed to taking strong protective action in support of its intellectual property rights in a judicious and evenhanded manner."

(Comment: Previous CLN issues reported on the Red Hat phenomenon at the at the Atlanta, Dallas, and New York gift shows – we knew it wouldn't be long before a savvy craft company became involved.)

Once again we see the buying power of Easter. When it arrives late, March sales are comparatively low and April sales are better than usual. When Easter is early, the situation is reversed. And so it was again this year. Easter was only nine days earlier than in 2003, but it was enough to make a difference.

Because of the effect of a moving Easter date, the best way to evaluate a retailer's performance is to look at the first quarter results, or at least the combined March/April figures.

Jo-Ann's. Same-store sales rose 1.4%, after a same-store sales increase of 3.5% a year ago. Overall sales rose 2.2% to $119.2 million and the gross margin rate improved. For the quarter ended May 1, sales jumped 8.0% to $404.9 million and same-store sales rose 6.6%. First-quarter earnings will be reported today.

Michaels. Same-store sales slipped 1.0%, while overall sales grew 2.0% to $210.6 million. There was a 1% decline in the average ticket, customer traffic, and custom frame deliveries. The strongest categories were yarn, kids, crafts, books, and scrapbooking, and the best regions were the central, southeast, and northeast.

CEO Michael Rouleau said, "We are disappointed that our April same-store sales fell below our expectations. The earlier Easter, coupled with less advertising for the month, affected our performance more than we originally anticipated."

Rouleau reiterated predictions of first-quarter earnings of $0.36-$0.38/diluted share and same-store sales to increase 3%-5% for the remainder of the year.

Hancock. Same-store sales declined 4.6% and overall sales dropped 4.0% to $29 million. For the first quarter, total sales fell 2.6% to $104.8 million and same-store sales declined 3.2%. Hancock will report first-quarter earnings tomorrow.

Even Wal-Mart had a relatively disappointing month. Same-store sales in its Stores division rose 3.6%, below expectations of a 4.2% gain.

Among other retailers whose same-store sales fell below plan or analysts' expectations were Target, +4.9%; Limited Brands,, +4.8%; Gap, +3.0%; Marshall Field, +0.6%; Family Dollar -0.4%; Abercrombie & Fitch, -1.5%; Pier I, -1.7%; Sears, -1.8%; Duckwall-ALCO, -2.6%; Big Lots, -4.2%; Kohl's, -4.6%; and Mervyn's, -6.6%.

Some retailers who beat expectations were Urban Outfitters, +32.0%; Pacific Sunwear, +11.4%; Costco, +10.0%; Nordstrom, +10.0%, Federated, +5.4%; and J.C. Penney, +5.3%.

It appears the next area of growth for the 10-store Craft Warehouse operation will be to build a $1.3 million, 10,000 sq. ft. warehouse, according to the Columbian (OR) newspaper. Established as a single store in 1988 by Jerry and Sonja Williams and their sons, Greg, Mike, and Rob, Craft Warehouse has already grown to 10 stores in three states with 500 employees.

Readers may note that CLN is not calling Craft Warehouse a "chain," although it probably meets the mathematical definition of the word. In a conversation with CLN a few years ago (when the "operation" had already grown to eight stores), Greg was adamant that CW was an independent, NOT a chain.

The Columbian article indicates that the Williams' philosophy is unchanged: " Unable to compete with giants like Wal-Mart on price, the Williams' emphasize service, a distinctive product selection, and a knowledgeable staff."

The paper cited replacing picture mats if the customer is unhappy after taking the framed piece home, and "All You Can Bead Buffet," workshops, in which customers pay $10 to learn about beading make as many earrings as they want in an hour.

The hot categories are scrapbooking, yarn, and beads. Scrapbook inventory comprises one-third of a 20,000 CW store in Vancouver, the Columbian reported. "Still, traditional crafts related to picture-framing and home decorating remain the biggest part of the trade."

The Williams are also planning to add two or three "independent" stores in the Vancouver-Portland area. To read the Columbian article, visit www.columbian.com/05112004/business/143672.html.

A recent issue of the NJ Star Ledger reported on the growth of digital scrapbooks which enable consumers to create scrapbooks without ever having to buy paper, albums, or embellishments. These New Age scrapbooks are created on a DVD or even a website and a key benefit is that they can combine photos, diplomas, and other paper memorabilia with audio and video clips. And a web-based scrapbook allows family members around the world to contribute photos and even finished digital pages.

Among the programs/services cited in the article: Sony's Screenblast (www.screenblast.com), a web site for photo sharing that includes scrapbook templates ... Netomat (www.netomat.com) enables consumers to combine multimedia elements and collaborate with distant relatives to create a scrapbook ... iDVD (for the Macintosh) and Roxio Easy Media Creator (for Windows) enable consumers to create multi-media DVDs.

The article also quotes DVD manufacturer Pioneer hyping digital scrapbooks: "DVD writers replace the glue and scissors of a traditional scrapbook and allow for even greater creativity with music, menus, clip art and special effects."

The article concludes that this new technology may be beyond traditional scrapbookers, but not for the computer-savvy younger generation. To read the article, visit www.nj.com/business/ledger/index.ssf?/base/columns-0/10828819708931.xml.

(Comment: To see an example, visit www.screenblast.com/DelilahMay/Pug. It's slow to load, but it gives an example of the potential for digital scrapbooks.)

Recently CLN received the following email. We've withheld the author's name:

I am looking for help and/or direction with my retail scrapbook store. Last July I went on a whim and decided to open the store. I took all of our savings and ordered as much as I could with $35,000. Let me add that I had never worked in retail and had no clue how stores are run.

Within five weeks I opened the doors for business. I was in heaven. Business was growing approximately $600 more every month.

Now, reality has started to set in and I am realizing that I need someone to tell me how things are run in a retail store. I read everything I can get my hands on and spend 3-4 hours every day researching on the Internet. I keep rearranging the store because something is just not right.

I try so hard to keep learning new strategies for marketing, but it seems I'm at a standstill. Recently, business has slowed down; I have read that spring is a slow period for arts and crafts stores, but I am trying to find new ways of bringing in customers. I am a sole owner with a family to care for and find myself wanting to throw in the towel at times. But then I walk into my beautiful scrapbook store and I couldn't imagine not having it.

If you can give me some direction, ideas, marketing concepts, strategies, etc., or any advice at all, I would greatly appreciate your time. – Name Withheld

Comment: Is there hope for this retailer? What suggestions do you have? Email them to mike@clnonline.com and we'll pass them on.

Sales are up. We have had two amazing years sales-wise, but like the retailers, we plow it all back into the company for new product development because new products are the name of the game. We are beginning to work with smaller chains and buying groups.

Some of our independents (mostly the bigger ones with good inventory that have the cash flow and space to buy every new product) are fine, but we see some dropping out, too. We actually have four independent scrapbook stores here in town (plus Michaels and Hobby Lobby) – two that are doing pretty well (one very well), and two that are only so-so.

Part of the problem is that so many stores have been started by women who love scrapbooking as a hobby and want to open their own stores for fun, but then find they really don't have the business sense to run it correctly.

Bank loan officers (mostly men) don't have a clue as to what scrapbooking is, and even if these ladies went about funding it properly through bank loans instead of a series of credit cards, I'm not sure many of them have the financial savvy to see the long-term picture. The ones who survive obviously either are financially savvy or have access to someone who is.

I am shocked on a daily basis by the number of stores who don't know what a credit reference sheet is and just pay for everything on a credit card instead of requesting net 30 terms. Yes, some are new, but a lot of them think they should use their credit cards in order to rack up points on their airlines so they can afford to fly to trade shows; but then they can't afford to pay the credit card bills, so they get a new credit card and start all over again.

I'm sure there are some people who use their credit cards wisely, but judging from the number of cards that are declined and the number of different credit card numbers we are given by the same stores, I think most are not using them wisely.

It does seem that the bubble will burst soon and either independents will have to gang together in order to get some buying leverage – we don't mind fair discounts if it means large orders – but I also see a trend toward the smaller manufacturers banding together through company buyouts so as to save some money that could go toward owners' salaries! Not that we've been approached, but it's a scenario that makes good sense. – Name Withheld

Designer/author Tera Leigh has been nominated as President Elect of the Society of Craft Designers (SCD). Leigh has been a featured speaker at numerous trade shows and conventions, a columnist/contributor to various industry magazines, and written three books. Her website is www.teraleigh.com and www.teras-wish.com. She is also the founder of the award winning Memory Box Artist Program, which has provided 60,000+ boxes "for families of infants that pass away in the hospital so that the families did not leave the hospital empty handed without any representation of that child's life."

Veteran designer Vicki Schreiner was nominated for Secretary/Treasurer. Nominated for a two-year term are Marie Browning, a bestselling author and designer; Chris Wallace, Marketing Communications Dir. of Walnut Hollow; and Kirsten Peters McGrath, a 13-year veteran with experience as a professional craft producer and as a designer/teacher for Duncan. Nominated for a one-year term are Elaine Pecora, a designer and teacher with 10 years of industry experience, and Debra Quartermain, a 20-year industry veteran freelance designer.

The 2004 SCD Conference will be Sept. 8–11 in Albuquerque and its The House That Crafts Built will be on display at the ACCI Show July 16-18. For info, visit www.craftdesigners.org, call 740-452-4541, or email scd@offinger.com.

1. Digital photography is not only making major changes in our industry, but in diplomacy, politics, and war as well. According to the Associated Press, those horrific photos of U.S. soldiers humiliating and abusing Iraqi prisoners were taken with digital cameras and, thanks to the Internet, were instantly spread around the world. Those photographs of the flag-draped coffins of U.S. soldiers that the government didn't want us to see were also taken with a digital camera and emailed home.

2. Duncan did some spring cleaning recently and amassed a collection of products that weren't really saleable, so last Saturday they invited area teachers to their facilities in Fresno, gave each of them a shopping bag, and let them take what they wanted. How desperate are our poor, underfunded teachers? A total of 650 teachers from 29 cities attended!

There's a lesson here for retailers who have a collection of products that have stopped selling: call your local grade school and do what Duncan did. You clear space for new products and you get a tax break.

3. Packaging Digest interviewed an exec at Real Time Solutions, which sold "picking" systems to Michaels for two of its warehouses. The article is full of jargon, but it's a prime example of just how high-tech distribution has become. The system allows Michaels to pick and fill 15 truckloads of products per day, from an inventory of 16,500 SKU's. Read the article at www.packagingdigest.com/articles/200405/99.php.

SALES. Business seems to be very, well, quiet. CLN is not hearing any terrible tales of woe – but nobody's particularly happy, either. "Flat" is the term heard most often from vendors and retailers. Investors apparently thing so; the CLN stock index has fallen 9% since April 2.

INVESTING. The private equity firm FdG Associates made a "significant equity" investment in Colorbok, which will use the funds to support its continued growth and expansion. Terms were not disclosed, but Colorbok's management, including CEO and co-founder Bill Taylor, remains in place. The Dexter, MI based Colorbok operates four business segments – memory/craft, gift/stationery, kids, and photo albums. Taylor said, "This transaction is a powerful endorsement of our business model, and of the craft and hobby industry .... With this financing, we will be able to solidify our leading position, expand further into the mass retail market and better service our existing customers."

POLLUTION. Wal-Mart will pay a $3.1 million fine to settle a Clean Water Act violation stemming from excessive storm water runoff from its construction sites, Reuters reported. As part of the settlement, Wal-Mart agreed to improve runoff controls at the 200+ sites each year where the company builds stores. The EPA had charged Wal-Mart for violations at 24 construction sites in nine states and claimed the retailer had failed to obtain required permits, had not instituted a runoff control plan, and had failed to install controls to prevent discharges.

WAL-MART. For the fiscal first quarter ended Apr. 30, earnings rose 22% to $2.2 billion (50 cents/share), beating analysts' expectations by a penny, Reuters reported. Overall sales rose 14.2% to $64.8 billion and same-store sales were up 6.4%. Reiterating what CLN had previously reported, CEO Lee Scott voiced concern about rising gas prices. He said high gas prices took an average of $7+ out of the typical customer's disposable income each week.

PEOPLE. Mike Edwards resigned as Exec VP of Jo-Ann's to become CEO/President of Lucy, a west coast retail operation. No replacement has been named.

IS ROMANCE DEAD? A study of women homeowners by Mathew Greenwald & Associates for Sears found that one-third of respondents said they'd prefer to receive a dozen tools rather than a dozen roses for Mother's Day, reported Retail Merchandiser.

CORRECTION. In our previous issue we said the excellent radio news programs, All Things Considered and Morning Edition, were produced by PBS. We should have said National Public Radio.

CHARITY. Michaels board chair, Charles Wyly, his wife Dee, and the Wyly family have donated gifts totaling $20 million to help build the Dallas Center for the Performing Arts. (Note: The Wylys didn't make all their money on Michaels. They're in computer software, telecom, oil refining, restaurant, and investment-fund businesses, too.)

PRICES. Wal-Mart once used the slogan, "Always the lowest price," but changed it to "Always low prices." Here's an example of why: A study of the cost of 30 popular video games by a Piper Jaffray analyst revealed that Wal-Mart had the highest cost of the seven retailers studied, Reuters reported. Wal-Mart was 9% higher than the low-price leader, Amazon.com. Others in the study with lower prices were Best Buy, Target, GameStop, Electronics Boutique, and Toys R Us. "... we find this hard to believe," a Wal-Mart spokesperson told Reuters.

FAMILIES. Michaels will offer a Free Family Event at each of its approximately 820 stores on June 12 from 10 am to 3 pm. The event is being sponsored by Klutz, a publisher of kids' activity books, and participants can choose among several bracelet projects, two of which are found in Friendship Bracelets, a Klutz book which is a National Parenting Publications Gold Award winner.

KNITTING. The Fall issue of Cast On magazine, the official publication of The Knitting Guild Assn. (TKGA) will feature two "Best of Show" designs and patterns from this year’s TKGA Knitting Design Competition. The next TKGA conference will be July 22-25 in Manchester, NH, held in conjunction with a FiberArts Market held in the same location. For more info, call 740-452-4541, fax 740-452-2552, email tkga@tkga.com or visit www.tkga.com.

QUILTING. Sharon Hultgren, the inventor of the EZ Angle, is now a consultant with Airtex and will demonstrate the company's Roll and Quilt batting at the Spring Quilt Market.

WORTH READING. The interview with Brenda Lugannani, a former VP/Merchandising for Michaels, in the May issue of CNA. Sample: "It is a very rare retailer, on the chain or the independent side, that can embrace the craft consumer. She is special, and she has astounding loyalty. She wants to be heard, and she has strong opinions. The question is, is the craft industry listening to her or is it responding to the sirens of profit, growth, and competition?"

WORTH READING. Highlights of the Quilting in America 2003 research study in the May issue of Craftrends.

DOLLAR STORES. The category, described in the previous issue of CLN, continues to grow. Family Dollar opened 31 stores in the month of April alone and is on schedule to open a total of 525 stores this fiscal year.

SECRET OF SUCCESS. "Our niche seems to be identifying areas where no one else has dared to tread, and then go in fairly deep." – Small Scrapbook Vendor

SCRAPPING. Once again "scrapbooking" placed #2 in keyword searches on whereoware.com – a gift search engine, Gifts & Decorative Accessories reported.

ACQUISITION. We've learned that Solo Cup has purchased Creative Expressions, the partyware company.

CLN will profile one company per issue, which will remain online for at least a year. A Profile is a perfect way for a new company to let itself be known to the industry, or for an established company to enhance its reputation by showing the industry its history, diversity of products, personnel, etc. For more information on how your company can be profiled, call Mike Hartnett at 309-925-5593 or email mike@clnonline.com.

The only personnel recruitment firm specializing in our industry has the following job openings.

Call 360-834-0802; fax 360-834-0702; email jessica@creativenetworkinc.com; or check www.creativenetworkinc.com. The read a sampling of the current job listings, click on Jobs in the left-hand column or click HERE.

A. C. Moore (ACMR). Last*: 24.18 ... Change**: -3.05
Hancock Fabrics (HKF). Last*: 13.21 ... Change**: -1.65
Jo-Ann Stores (JAS). Last*: 24.90 ... Change**: -3.37
Michaels (MIK). Last*: 46.21 ... Change**: -3.82
Rag Shops (RAGS). Last*: 3.41 ... Change**: -0.49
Wal-Mart (WMT). Last*: 55.06 ... Change**: -1.94
CLN Retail Index. Last*: 166.97 ... Change**: -.7.8%
Dow Jones Index. Last*: 10,012.87 ... Change**: -2.4%
*May 14 ** from Apr. 30 Prices are exclusive of dividends

(Note: We ran this cautionary tale before, but it's back by popular demand. Author unknown.)

A Japanese company and an American company had a canoe race on the Missouri River. Both teams practiced long and hard to reach their peak performance before the race. The Japanese won by a mile.

Afterward, the discouraged Americans formed a task force of senior management to investigate and recommend appropriate action. Their conclusion was the Japanese had 8 people rowing and 1 person steering, while the American team had 8 people steering and one person rowing. So the task force hired an expensive consulting company. The consultants said too many people were steering the boat, while not enough people were rowing.

To prevent losing again next year, the U.S. team's structure was reorganized to 4 steering supervisors, 3 area steering superintendents, and 1 assistant superintendent steering manager. They also implemented a new performance system that would give the 1 person rowing the boat greater incentive to work harder.

It was called the Rowing Team Quality First Program, with meetings, dinners, and free pens for the rower. Even new paddles and medical benefit incentives were promised for a winner.

The next year the Japanese won by two miles.

Humiliated, the American management laid off the rower for poor performance, halted development of a new canoe, sold the paddles, and canceled all capital investments for new equipment. The money saved was distributed to the senior executives as bonuses.

1. For more information on how your business can be the subject of a "Business

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5. Creative Leisure News is published on the first and third Mondays of each month. Your next issue will be Monday, June 7.

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