Date: November 1, 2004
Vol. VIII, No. 21

Printer Version

TABLE OF CONTENTS

COMMENTARY: Thankfully, It's Almost Over

So we'll all vote tomorrow. I'd feel better about it if our Presidential candidates, just once, would admit they're not perfect and have made mistakes. Does President Bush really think everything has gone according to plan in Iraq and with job creation? Does Senator Kerry really think every vote he's cast in the Senate over 20 years was correct?

At least we won't have to watch any more attack commercials.

Memory, Paper & Stamps. More strategies to help retailers turn "crafters" into scrapbookers.

Business-Wise. Why scrapbook stores should consider buying a photo kiosk – to protect and increase their sales of scrapbook supplies.

Category Reports. Scrapbook vendors, want to sell to United Kingdom retailers? Read this first.

Legal Q. & A. Copyright infringement – the problem is getting worse in our industry.

Note. If you surf to a column and it's an "old" column, click on your "Refresh" or "Reload" button on your browser.

Will you spend more, less, or the same amount on advertising next year? There are separate questions for vendors and retailers. To participate in the poll, click HERE.

If CLN readers are an accurate reflection of the country (which they probably are not), President Bush will defeat Senator Kerry tomorrow 56.2% to 43.82%.

In CLN's first poll, in which readers voted in the month of April, Mr. Bush defeated Mr. Kerry 56.8% to 37.5% with "Other" receiving 5.7%. So in the last six months the President maintained his popularity, and the Senator picked up the "other" votes. In other words, the party conventions and the campaigns since April did little to change CLN readers' minds.

TwoPeasInABucket.Com, the website for hardcore scrapbook consumers, also had a presidential "election" on one of its message boards. Apparently the industry's business community is at odds with its consumers: Kerry defeated Bush by about 10 points.

1. The shopping season is longer this year; there are 29 shopping days between Thanksgiving and Christmas, two more than last year and the most since 2001.

2. Back-to-school sales are often a harbinger of the holiday season. The National Retail Federation reported this year's sales were $40.6 billion, up only 1.8% over 2003.

3. The October Consumer Confidence survey by the Conference Board revealed the lowest rating in seven months.

4. Merrill Lynch analysts told a retail conference they were predicting the season would be slower than last year, Reuters reported. They predicted sales at general merchandisers would rise 4.9%, below last year's 5.6% and the 10-year average of 5.8%.

5. A poll by Retail Merchandiser.com on the coming season showed 30% expect the season to be the same or worse than last year, 43% expect a 2%-3% increase, and 13% expect a 4%-5% increase.

The number of scrapbook products, retailer associations, magazines, and vendors continues to grow. Now that's true for trade shows, too.

The show management company ConvExx is sponsoring a new scrapbook show, ScrapbookBiz, Apr. 12-14 in Columbus, OH. A full day of education, "Innovations Day," will precede the trade show. ConvExx sponsored the first SILK shows in Las Vegas in the 1990's. For more info, visit www.ConvExx.com or call 702-450-7662. The ScrapbookBiz site, www.scrapbookbiz.com is still under construction.

We know everyone wants a piece of the scrapbook market, including a growing number of companies outside our creative industry. I'm curious how many trade shows are enough in our business? I know a certain number of shows are good for the growth of the industry, but the excess just drains the budgets of vendors and reduces the amount we have to spend on merchandising, ads, promotions, etc., to support the products our customers are purchasing.

I wonder if everyone will be jumping on the bandwagon for another trade show, especially one coming two months after CHA winter show. The scrapbook industry is already filled with shows, mostly consumer, but I'm wondering when the additional shows are ever going to end. The CHA winter show already has a very large scrapbook section and scrapbooking makes up the majority of the summer show. MemoryTrends then follows in the fall exclusively for scrapbooking. Do we really need a fourth show?

I work for a very large manufacturer, and I already have to make tough choices about what shows to support (both consumer and trade) because we can't possibly support them all. I can't imagine what it's like for small companies or those just getting started. And what about the independent scrapbook stores who can't take the time to travel to all the buying shows because it takes them away from their business? Where does it end? – Name Withheld, Craft Product Manager for a major manufacturer

The Customs-Trade Partnership Against Terrorism (C-TPAT) is currently a voluntary program designed to increase security for imports coming into the country. Today, only a very small percentage of containers from China, for example, are inspected. Theoretically, it would be safer if all containers were inspected for bombs and drugs, but that would cause havoc with deliveries and, ultimately, the national economy.

C-TPAT asks vendors to "develop, enhance, and maintain effective security processes throughout the global supply chain."

It requires the vendor to jump through various paperwork hoops in order to be certified. Once certified, one industry vendor told CLN that he thinks his goods will get through customs more quickly. There's also the chance that C-TPAT may eventually become mandatory, the vendor surmises, so he might as well jump through those hoops now. He's guessing it won't become mandatory until "something happens," like a bomb smuggled into the country.

Visit www.customs.ustreas.gov/xp/cgov/home.xml then click on "Customs-Trade Partnership Against Terrorism (C-TPAT)" in the right-hand column.

CLN talked recently to an industry vendor who had just returned from China. Like so many other U.S. manufacturers, he has been forced by the constant demand for lower prices to move much of his operation to the Far East. His business is doing well, he says, but "It's scary."

1. The Chinese economy is growing so fast, more than 9% annually, that the country's growing demand for oil will keep U.S. gas and oil prices high, if not higher.

2. If so much of our economy depends on manufacturing in the Orient, the Orient will ultimately control our inflation rate. Some areas of China are suffering from a shortage of workers, which has forced some factories to increase wages and improve working conditions. That, of course, has already caused some price increases. Last week the Chinese government raised interest rates in an effort to cool the economy; that, too, could ultimately result in higher prices for Chinese products.

The vendor said many Chinese workers used to return home for as much as a month to celebrate the Chinese New Year. That stopped for a while because the workers were afraid their jobs would be given to someone else while they were home. Now the practice has resumed, thanks to the shortage of workers.

3. Meanwhile, the New York Times reported recently that seasonal imports from the Orient are clogging U.S. ports and overtaxing connecting rail lines and truck companies. For example, imports from China alone are up as much as 20% this year. That means slower deliveries to retail stores. Since there is no sign that demand for Far Eastern products will diminish any time soon, it makes one wonder if the problem will worsen.

After writing the "Ominous Trends" piece above, we emailed it to an industry veteran who has lived in the Orient for decades. His answer, point by point:

1. Yes, the China economy is growing fast. Even though it is "communist" in name, it is by far the most capitalist country is the world. A lot of the high price on oil is due to the

horribly weak U.S. dollar. This is not mentioned much. Likewise, you hear a lot about the "overvalued" Chinese Yuan, but really it's more the weak U.S. dollar. Look at the other currencies - Euro, Canadian $, Australian $, etc. The U.S. has dug itself a big financial hole (Bush) that is going to be hard to dig out of.

2. So what? In long run, this is good for everybody, including the Chinese who will have a higher standard of living. Then they might import more goods from U.S. and elsewhere.

3. The U.S. has simply not been able to keep up its own infrastructure, whether it be rail, roads, or ports. Demand for Far East goods won't diminish, so the U.S. better adapt soon.

Crafts Retail Acquisition Corp., an affiliate of Sun Capital Partners, completed its acquisition of Rag Shops which operates 69 fabric/craft stores in the East and Florida. "With the addition of Sun Capital's operational experience," said Sun Capital VP Michael Fieldstone, "and the substantial financial resources of the equity investors, Rag Shops existing management team is well equipped to strengthen the company's market position and to take advantage of new opportunities."

Rag Shops' President Jeff Gerstel added, "We are extremely excited to join with Sun Capital as we continue to focus on our vision for the future."

Approximately 1,910,524 shares of stock were tendered at $4.30. Total cost of the transaction was about $9.2 million. Rag Shops stock, traded on NASDAQ, has ranged between $1.75 - $6.75 in the past five years, and was trading under $3.50 when the offer was made.

Hancock Chair/CEO Larry G. Kirk, 57, announced he will retire from active involvement with the company not later than his 60th birthday in October, 2006. Hancock's board has begun a search for his successor and will consider internal and external candidates. Kirk has been with Hancock for 33 years.

Kirk said, "I informed the board at the regular meeting in June that I did not wish to extend my commitment to the company past the age of 60. In our annual succession review that followed in September, plans were formalized for an orderly succession process with the knowledge that a thoughtful and deliberate search could require some time. Today's announcement is the necessary first step in that process .... Until a new CEO is selected and in place, I pledge to them and to our stakeholders my total commitment to Hancock Fabrics."

Although Hancock's stock has faltered this year during the transition to the new warehouse facility, under Kirk's leadership the stock has risen approximately 250% in the past five years, all the while issuing quarterly dividends. Meanwhile, numerous other fabric retailers (House of Fabrics, Cloth World, Fabricland, etc.) went bankrupt or were sold.

Net income for the third quarter ended Sept. 30 was $986,000 ($0.05/fully diluted share), down 21.7% from a year ago. But the 2004 results include a cost of $0.04/share as the result of an accounting change. Excluding that charge, earnings would have been $0.09. The quarterly results also include management's estimate of $0.04 for the insurance recovery for lost merchandise in excess of cost and other expenses related to the July collapse in the company's Blackwood, NJ facility. (The company insures its warehouse inventory at selling value; the insurance proceeds are an offset to sales the company lost as a result of the incident.)

As CLN reported in our last issue, sales for the quarter rose 9.2% to $107.7 million and same-store sales rose 0.3%.

Sales for the first three quarters have risen 12.7% to $320.4 million and same-store sales grew by 3%. Net income for the period is $2.57 million ($0.13) compared to $2.73 million ($0.14) a year ago. The 2004 results include a cost of $0.12 as the result of the accounting change. Excluding that cost, earnings would have been $0.25.

CEO Jack Parker said, "Our organization had to deal with numerous issues including the inability to ship merchandise from our warehouses for over one week. In addition, key merchandise was unavailable for several weeks and we lost significant amounts of imported fall ribbon, flags and fall seasonal and basic floral merchandise that could not be replaced. Due to the unavailable merchandise, we curtailed two key promotions in August and September. Service levels to our stores and in-stock positions for our customers are now almost back to normal. We know that the fourth quarter will still be a challenge, but we believe that our merchandise plans will enable us to achieve our expectations."

Trend gurus now say cocooning is evolving. After 9/11 consumers wanted to stay home and isolate themselves from a world growing ever more frightening. Now they're "hiving"; they're still at home, but are reaching out and connecting with the community while still taking pride and comfort in their home.

Focus group studies conducted by Libbey, a glasswear company, indicate more consumers approach mealtime and home entertainment as mini-events, and they want products that can help them create an atmosphere and set a tone – be it for an everyday family dinner, an informal gathering of friends, or a formal dinner party. According to studies by the research firm, Yankelovich Partners, 65% of consumers entertain regularly at home.

Savvy retailers can take advantage of this trend by providing consumers the products and projects for creative home entertainment – floral arrangements, painted glasswear, cross-stitched napkins, embroidered tablecloths, etc.

(Note: This note from an independent scrapbook dealer makes one wonder if this is an isolated case or representative of a growing problem in the industry.)

We're in a real Catch-22 right now; we need to replace inventory that has been sold, but yet we need that money to catch up on where we fell behind. Neither of us has/had any money to pump into this business; we rely solely on the financing we received when we started up in February., 2003.

We do have a plan in place and we're slowly catching up. There is a light at the end of the tunnel, but it's hard to budget the catch-up when you're never sure of the income for the week!

I mean, we know at home we get $x.xx per week as my husband is on salary, so we can budget what gets paid when. But here? Some weeks it's amazing and others it just isn't. We can never predict when we're going to have great days!

I'm confident we're going to make it. I refuse to go down without a fight; actually, I refuse to fail at this! We're just having a really rough go at the moment. Our creditors have been amazingly understanding, and are working with us to solve our problem. – Name Withheld

I took my first decorative painting class in 1986. I paid for the class and bought brushes, paint, and a surface to paint. I learned a skill, painting techniques, and lots of info about decorative painting. I probably spent about $100 and it was a great class. I think this is pretty normal for people taking classes.

So my question is this: In the world of scrapbooking, it seems that classes are frequently judged by the amount of "free stuff" students leave with. (She with the biggest "swag bag" took the best class.)

I (naively) thought that the purpose of classes was to teach and drive the customer to the store to buy the product. I cannot believe how much product is given away these days at the crops and classes. It's good to get product in the hands of the customer, but hasn't this gone a bit too far? – Julie McGuffee, Kievlan-McGuffee Designs

1. So cocooning is evolving into "hiving." I think this provides a wonderful opportunity for our industry but ... couldn't these trend gurus have come up with a better name than "hiving"? Sounds like a skin disease to me.

2. Interesting thought: Because everyone is pressed for time, everyone values a home-made gift more than ever before. People always have, but in today's world it will be appreciated even more than before.

3. Reuters published an interesting piece on how some analysts use unusual ways to forecast holiday sales. A.) Merrill Lynch uses the first frost as an indicator. The earlier the cold weather, the more consumers spend on heat and the less they have for Christmas gifts. B) Others use the popularity of photos taken with Santa and sales of Christmas trees – signs of consumer confidence. C) Goldman Sachs analyst Peter Appert uses his Appert Gift Wrap Indicator; retailers order the decorative paper in proportion to the sales they expect.

BEADS. Email from trend watcher Ellie Joos of Ellie Joos & Associates after a visit to Manhattan: "One of the big trends is colored beaded necklaces made from layers of beads or stones such as raw turquoise, amber, amethyst, etc., or long strands of plastic or resin beads, mixing in charms and other items. Also, turquoise is hot because of the Western influence in fashion showing up now and continuing into spring. Yesterday I was in Henri Bendel's, a very chic, upscale department store which has a department selling these necklaces; but the interesting aspect was that they also had a clerk behind a table with trays of beads helping consumers to make their own! A make-it/take-it in Bendel's! Also, the accessory department was overflowing with some of the most wonderful flower pins, belts, hair bows, and other fantasy hair items; they were very expensive, but could be easily made by crafters."

QUOTATION. "I was in Texas this week visiting all types of accounts – floral, drug, hospital gift, craft, grocery. Retailers said sales were very soft and customers very cautious and more pessimistic than optimistic." – Industry importer

PEOPLE. Popular industry veteran Howard Hoffman is Director of Sales of the Hobby/Craft division of Cardinal ... Rita Madsen is the new Marketing Manager for Speedball Art Products.

TOYS. Three major toy manufacturers -- Mattel, Hasbro, and LeapFrog -- warned investors they expect "lackluster" sales this holiday season ... The Wall Street Journal reported Toys R Us is actively trying to sell its toy stores. Prospective buyers include buyout-investment firms and real estate companies ... KB Toys will close 141-238 underperforming stores by Jan. 31 as part of its effort to emerge from bankruptcy ... Interesting reading: The Playmakers chronicles the development of 100 years worth of the greatest toys and the people who created them. Visit www.theplaymakers.com.

QUOTATION. "If it were a country, Wal-Mart would be the 21st largest economy in the world, ranked just behind Taiwan and ahead of Austria. If all of its employees resigned overnight, it could fill its vacancies by hiring Iceland and Estonia. Meaningless statements, maybe, but ones that underscore the sheer scale and might of the company." – MorningNewsBeat.com.

SEWING. The sixth series of Sew Young, Sew Fun uplinks Dec. 12 to PBS stations. The show is hosted by Kay Milenius and Shannon Mullen and is sponsored in part by Husqvarna Viking, Coats & Clark, Joann's, Velcro, Pfaff, White, and Wrights.

YARN. Norwegian Spirit acquired the North American distribution rights of Sandnes yarns, knitting patterns, and accessories. Sandnes named Betsy Marlow, formerly of Dale of Norway, as North American Sales Manager. Sandnes' product line includes a wide variety of natural and mixed-fiber yarns and a growing number of patterns. Call 866-347-0809 or (soon) visit www.spirit-norway.com.

BANKRUPTCY. Frank's has asked the bankruptcy court for permission to pay $606,000 as bonuses to 10 execs so they will remain with the company through liquidation, the Associated Press reported. For example, the plan would give a $137,000 bonus to CEO Walter Spokowski, who earns an annual salary of $275,000, if he remains through Dec. 31. These, of course, are the same execs who put the company into bankruptcy in the first place (except for Spokowski, who joined Frank's less than two months ago). That would mean $606,000 less to pay the creditors.

TV. The Today Show segment featuring craft products designed for senior citizens was rescheduled for today and tomorrow; the two-part series is called "Hobbies and Helpers."

BOOKS. The new releases from Jeanette Crews Designs are available at www.jeanettecrews.com/results.cfm?Subcategory=109.

MEMORY. Some interesting new sites/companies: A new video, Scrapbooking Recipes 2005, www.scrapbookingrecipes.com ... A new scrapbook company (paper, embellishments, etc.): Savitri's, 451E. 58th Ave, Ste. 3870, Denver, CO 80216-8352; call 720 435-9239; visit www.savitris.com ... Publications Int. needs companies to contribute page layouts and/or materials for a new magazine, 20-Minute Scrapbooking. The deadline is Wed. Call 847-583-4547 or email at bbatiste@pubint.com ... Interesting site: www.scrapgirls.com ... For info on scrapbooks/copyrights, read CLN's new Legal Q. & A. column and visit http://scrapbooking.about.com/library/weekly/aa032701a.htm The 11/16 issue of Woman's Day has an interview with Leeza Gibbons about scrapbooking and her Legacies line of kits/supplies made by Xyron.

POVERTY. Researchers at Penn State U. studied every county in which a Wal-Mart store opened in the 1990s and discovered those counties experienced smaller reductions in family poverty rates than counties that did not add a Wal-Mart store, United Press International reported.

WAL-MART. Apparently the discounter doesn't have much of a sense of humor. It now refuses to sell the Comedy Channel's Jon Stewart's new book or George Carlin's latest effort. (Comment: As Wal-Mart grows ever more powerful and ubiquitous, will Wal-Mart become the arbiter of what we can and cannot read?)

COMPANY FOR SALE. Needlework design & publishing company with strong brand name/image. Wholesale and retail departments. Annual sales of $1.6+ million. Contact Mike Hartnett (309-925-5593 or mike@clnonline.com) for confidentiality statement and more info.

QUOTATION. When Time asked Wal-Mart CEO Lee Scott what was the quirkiest economic indicator he looked at, he said, "The thing that we see that really tells us the most about the consumer's financial situation is displaced merchandise. [Customers] fill their baskets; then what they do is take that merchandise out as they pick other things up. When the economy gets tougher, we have to go through that store more frequently. We saw that this year particularly as we got later in the summer." Scott also told Time that Wal-Mart's best selling item was ... bananas!

STOCK. Wachovia cut its recommendation on Michaels to market perform.

One of the most successful "quiet" companies in the industry is Westlake Associates, a 10-year-old consulting firm that has created successful product lines, sales strategies, and merchandising programs that have increased sales for a wide variety of large and small clients, including some of the industry's best known vendors and retailers. Westlake also works with investment companies to help maximize opportunities and improve under-performing assets.

The mission, says President Peter Heinsimer, is "to work with companies to develop new or re-invented businesses, concepts, products, and programs that meet their goals and objectives and have the potential to contribute significant volume and bottom-line profits."

Westlake has fulfilled that mission in a variety of ways, from creating product lines and tweaking existing products, to providing merchandising and marketing strategies, to sales and supply-chain improvements.

Heinsimer is truly an industry veteran; he began his career as a chain buyer; later he was a partner in the top macrame company when macrame was the scrapbooking of its day. Since then he has been involved in product development, marketing, sales and importing. Westlake partner Terry Hunt, adds her extensive talents for design and product development. Terry was in charge of product development for Westrim prior to starting M.T.Hunt Designs, which over the years has designed many successful consumer products and programs for the craft and home decor industries. Peter and Terry have been involved in helping to develop many industry top selling items and programs in the macrame, twisted paper, craft basics, kids crafts, jewelrymaking, home dec, framed art, seasonal items, finished florals, publishing, and television areas to name a few. In addition to working together Terry and Peter have been married for over twenty years.

A key to Westlake's success is the vision. "While many companies resist or have a concern of the unknown and the future," Peter says, "we see unparalleled opportunities for those who rush to embrace the changes needed to capitalize on those opportunities.

"With the world changing at an ever faster pace," Peter added, "successful companies will continue to look for new ways to expand their capabilities, while streamlining operations and increasing efficiencies. Westlake will complement your core competencies with the right synergy to help move your business forward at an accelerated pace.

Who should use Westlake's services? Any company "looking for new and creative ways to expand their present business, reach new markets, start a new business, or invest in growth opportunities, and which is prepared to meet the exciting business environment of the future."

PERSONNEL. Peter Heinsimer, President; Terry Hunt, Chief Creative Officer. (Other Westlake associates are specialists who are assembled on a project-specific basis.)

ROLODEX. Westlake Associates, 29740 Kimberly Dr., Agoura Hills, CA 91201. Call 818-889-4853; fax 818-889-6221; email westlake01@aol.com.

Note: 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.

To see the latest openings, click on Jobs in the left-hand column or click HERE.

A. C. Moore (ACMR). Last*: 25.72 ... Change**: +1.51
Hancock Fabrics (HKF). Last*: 10.27 ... Change**: +0.07
Jo-Ann Stores (JAS). Last*: 24.66 ... Change**: +0.45
Michaels (MIK). Last*: 29.10 ... Change**: +1.68
Wal-Mart (WMT). Last*: 53.92 ... Change**: +1.39
CLN Retail Index. Last*: 143.67 ... Change**: +3.6%
Dow Jones Index. Last*: 10,027.47 ... Change**: +0.9%

Emailed from a retired industry veteran:

If you had purchased $1000 of Nortel stock one year ago, it would now be worth $49. With Enron, you would have had $16.50 left of the original $1,000. With WorldCom, you would have had less than $5 left.

But, if you had purchased $1,000. worth of beer one year ago, drank all the beer, then turned in the cans for the aluminum recycling refund, you would have had $214.

Based on the above, current investment advice is to drink heavily and recycle. It's called the 401-Keg Plan.

1. For more information on how your business can be the subject of a "Business Profile" call Mike Hartnett at 309-925-5593 or email mike@clnonline.com.

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5. Creative Leisure News is published the first and third Mondays of each month. Your next issue will be Monday, November 15.

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