Date: October 3, 2005
Vol. IX, No. 19

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TABLE OF CONTENTS

COMMENTARY: Patience and Ethics  

When a Chicago White Sox batter has a no-ball, two-strike count against him, tv broadcaster Ken Harrelson says the player has to "cinch it up and hunker down." I've never figured out what the batter was supposed to cinch, and I've never heard of anyone who could hunker up, but Mr. Harrelson's advice would be good for the industry these days.

Judging from what I heard in the process of writing the "State of the Industry" report (see below), a series of events and trends seem to have converged to create a perfect storm against retail. (And that was before Katrina and Rita.)

Gas prices and high mortgages gobble up disposable income, oil prices increase manufacturers' and retailers' costs, and heaven help anyone without insurance who gets sick. These are factors beyond our control, so all we can do is ride out the storm and concentrate on inspiring the consumer and then giving her genuine value.

One thing we can do is make certain we don't benefit at the expense of each other. Let's not hurt retailers by dumping product at consumer shows, or retailers improving their margins at the expense of suppliers.

Business-Wise. CLN surveyed many in the industry for a "State of the Industry" report. The summary is below, but the actual comments from a variety of industry pros are here.

"Vinny Da Vendor". A vendor has some sage advice for retailers on the importance of creating a sense of community for customers.

Memory Paper & Stamps. Readers react to the thought-provoking "Memory" interview with Crafters Home President Shane Cullimore on the state of scrapbooking.

Designing Perspectives. Is the industry going to hell in a handbasket? No, says one of the industry's savviest designers, but it is changing.

And still online: "Benny Da Buyer". Spark Craft Studios is the most unique retail store CLN has seen in years – with food for thought for every retailer, large or small in these troubling times.

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

By all accounts, paying for Katrina and Rita will cost $250 billion or so. How should the government pay for it? To vote, click on Industry Polls in the right-hand column or click HERE.

The industry is not impressed with the direction of the national economy – and isn't thrilled at the prospects for the fourth quarter, according to CLN's unscientific poll. Only 4.2% of CLN voters predict the national economy will perform much better than last year, 8.3% think there will be a slight improvement this year, 16.7% believe the economy will perform about the same as in 2004, a whopping 50% predict there will be a slight decline, and 20.8% think the economy will be much worse.

Retailers are even gloomier about their own business. Only 8.3% predict a substantial increase in their business, no one expects a slight increase, another 8.3% think it will be about the same, 41.7% think business will be slightly worse than a year ago, and another 41.7% predict business will be much worse.

Vendors are only slightly less pessimistic. Only 4.2% predict a much better fourth quarter, 8.3% predict a slight improvement, 12.5% think business will be about the same, 58.3% think it will be slightly worse than a year ago, and 16.7% think it will be much worse.

CLN surveyed a wide variety of industry businesses as we enter the critical fourth quarter. The results are not good. To read a sampling of the actual responses, visit www.clnonline.com and click on Business-Wise in the left-hand column. Here is a summary:

Retailers. Independent retailers – general craft and specialty stores – are having problems. Jo-Ann's, A.C. Moore, Hancock, and even Wal-Mart have had disappointing quarters this year, and we're expecting that September sales results, to be released this week, won't be a drastic improvement. Katrina and Rita just made a difficult year worse. Michaels is clearly the shining star, but it appears to be due more to its internal replenishment systems than to any particularly unique products or merchandising strategies.

Memory/paper. The category may have peaked within our traditional industry, but consumer demand could be as strong as ever; the number of sales being siphoned off by Target, Big Lots, and other "non-craft" stores is unknown. The fact that the category is racked with complaints – too many products, product dumping, etc. – is a sign the pie is not large enough.

Beads. A very strong category, but many of the sales are outside the traditional realm of our industry's stores – at consumer shows and on the Internet.

Yarn. Should remain strong for winter, but imports and margin pressures could hurt the efforts of the Craft Yarn Council, which, along with modern designs and new products, is responsible for the category's remarkable resurgence in recent years. A key challenge: move novices from the scarves they knitted last year to larger, more complicated projects.

Others. The industry seems to be suffering from a) vendors rushing onto the scrapbook bandwagon and devoting less time, money, and energy to their traditional categories; and b) margin pressures that have reduced new product development, consumer education, and promotional activities. The result? Low prices, but uninterested, uninformed consumers.

Designers. The willingness of scrapbookers to have their pages published in magazines for free, and the media's enthusiasm for memory/paper crafts have severely hurt professional designers and limited their traditional sources of income. Many are looking to license their designs to other industries.

Economy. The obvious culprit is oil – gasoline prices have skyrocketed, and natural gas and heating oil costs will eat away at consumers' discretionary income this winter. Another insidious drain on consumers' pocket books: health insurance premiums have risen 73% since 2000, while wages have grown only 15%, reports a recent survey by the Kaiser Family Foundation and the Health Research and Educational Trust. And the number of Americans without health insurance grew to a record 45 million last year, according to the Census Bureau. Result? Consumer confidence had its biggest drop in 15 years in September and new home sales plunged in August by the largest amount in nine months, the Associated Press reported.

Some general suggestions, offered by CLN and industry pros:

1. Push beads. Consumers need very few instructions in order to make remarkably lovely jewelry. Giving handmade jewelry as a Christmas present should be very appealing.

2. Home dec. Housing sales and DIY home decorating TV shows are very robust, and craft stores are filled with appropriate products. Through enticing made-ups, advertising, and classes, retailers (with the help of vendors) can position their stores as THE place for low-cost, attractive home dec ideas and products.

3. Push wearables. Glitz and glitter and embellishing clothing are fashionable – just like they were when fabric painting/wearables became the industry's dominant trend in the 90s.

4. Retailers and vendors in scrapbooking should quit pointing fingers and form an organization similar to the Craft Yarn Council of America to promote scrapbooking to novices. It's the only way to make the pie larger. Spend less money developing and buying new products and advertising to the existing base – and more money on attracting the 75% of U.S. households that don't scrap – yet. Specialty stores should a) expand their inventory to inspire current customers to try other types of projects and b) remember the key is attracting newcomers.

5. Consider the "new" consumer: younger, hipper, and more urban, who wants to create individual, personalized projects rather than merely replicate a model. She's also less likely to be inspired by "cute" projects of smiling bunnies.

6. Many of the stores are, well, boring: rack after rack of products with very few ideas of how to use them. Chains should work with their vendors to promote the category, not cheapen the product. And clearly, chains that refuse to accept price increases from vendors who manufacture oil-based products should drop all pretense of calling those vendors "partners."

Note: Have any suggestions for what retailers and vendors can/should due to have a good Christmas season? Email your thoughts to CLN at mike@clnonline.com.

The National Retail Federation (NRF), reported holiday sales are expected to increase 5.0% over last year. Last year sales rose 6.7% over the previous year.

"A combination of many factors, including energy prices, the job market, disposable income, and consumer confidence, will ultimately affect retailers’ sales this holiday season," said NRF Chief Economist Rosalind Wells. "Though it might be easy to label gas prices as the make-or-break factor for the holidays, it is crucial for analysts to look at the big picture instead of isolating one economic indicator to project sales."

"Consumers won’t have to wait until the last minute to get the best deals this year because retailers are expected to be aggressive in their pricing strategies throughout the entire holiday season," said NRF President/CEO Tracy Mullin.

CLN reported in the last issue that Wal-Mart was planning to be more aggressive on pricing this Christmas. "Stores are planning for holiday sales and promotions, so discounted prices won’t have a negative effect on profits," Mullin added.

The retail consulting/market research firm Retail Forward also predicts sales growth will slow, a 5.0% increase instead of last year's 5.4%, but still considers that "healthy."

Britt Beemer of America's Research Group, a consumer market research firm, is not so sure, reported The Free Lance Star (Fredericksburg, MD). "If luxury sales would falter, we could see a huge, huge decline in retail sales. I think that in all likelihood, we will see our first negative Christmas since the Carter administration."

Meanwhile, a survey by the Michigan Retailers Assn. and Federal Reserve Bank of Chicago indicated that 54.7% of retailers are not changing their ordering plans from last year, while 29.5% are reducing orders and 15.8% are increasing them. "The data suggest that the overwhelming majority of retailers are being cautious about the upcoming holiday season," said MRA Chairman/CEO Larry Meyer.

A very forgettable quarter for our industry's retail stocks. The leader was Hancock, which rose 0.45%, followed by Wal-Mart, which fell 9.4%. The rest had double-digit losses: Michaels fell 20.2%, Jo-Ann's dropped 34.5%, and A.C. Moore fell 39.4%. Collectively, the CLN Retail Index dropped 22.3%, the worst performance in recent memory. Meanwhile, the Dow 2.9%. (Note: all results are exclusive of dividends.)

There was very little insider trading during the third quarter. At A.C. Moore, Leslie Gordon sold 12,000 shares for $332,520 and Richard Drake sold 2,000 for $64,000. At Michaels, Michael Rouleau sold a total of 75,000 shares for $3,070,272, and at Jo-Ann's, Valerie Sachs sold 30,000 shares for $693,300. There was no insider trading at Hancock.

Other industry-related stocks had a tough quarter, too. Meredith rose 1.8% and Primedia was up 0.1%, Shopko rose 5.0%, Target fell 5.0%, and Duckwall ALCO was up 9.4%. After a huge gain in the second quarter, Martha Stewart fell 14.3%.

The results aren't much better for the first nine months of the year. Michaels is the clear winner, up 10.2%, but the others have lost ground. Wal-Mart is down 17.2%, A.C. Moore has fallen 33.2%, Hancock has dropped 25.8%, and Jo-Ann's is down 37.2%. The CLN Retail Index is down 19.8% for the year while the Dow is down 2.0%.

Other results for nine months: Primedia, +8.2% ... Meredith, -7.9% ... Martha Stewart, -13.9% ... Target, -0.3% ... ShopKo, +36.8% ... Duckwall ALCO, +29.5%.

The Nominating Committee of the Craft & Hobby Assn. announced the candidates for the Board of Directors to be elected at the next annual meeting during the trade show in Las Vegas early next year. The nominees: Dave Bolen (Jo-Ann's); Richard Brown (Sunrise Craft and Hobby); Bob Ferguson (Ferguson Merchandising); Herb Lantinga (Notions Marketing); and Ron Staffieri (Rag Shop). Pending election by the general membership, the candidates will serve on the board for a three-year term beginning January 2006. Bolen, Brown, Ferguson, and Lantinga currently serve on the Board and are now up for re-election.

Hobby Lobby CEO/Owner David Green made the Forbes 400 list of richest Americans again, ranking #133 with an estimated worth of $2 billion. Forbes wrote: "Started chain of arts-and-crafts stores with $600 loan in 1972. Prefers retrofitting old stores to new construction; eschews bar codes, as middlemen eat profits. Today Hobby Lobby operates 360 stores, most west of the Mississippi. Sales: $1.5 billion. Devout Christian put up $30 million to finance faith-based movies produced by son, Mart. Lives to spread the Word. 'We feel like we have an answer for Why? To change lives for eternity.'"

Among the others tied at 133 with David are some familiar names: William Randolph Hearst III, Wayne Huizenga, Michael Milken, and Ted Turner. Two years ago David tied with Oprah Winfrey on the Forbes list. Last year Oprah was slightly ahead of David, but this year she slipped behind him at # 235 and a net worth of $1.4 billion.

Bill Gates was #1 again at $51 billion. Five Waltons – Christy, Jim, Robson, Alice, and Helen – were ranked sixth (Christy and Jim), eighth, ninth, and tenth. Each had a personal wealth of at least $15.4 billion.

Hancock announced Rita caused stores to lose 100 full days and 25 partial days. Eleven of the fifteen stores closed by Rita reopened last Tuesday and four stores remained closed due to Katrina.

Wal-Mart said 145 stores and 5 distribution centers were closed because of Rita, but the company maintained its September sales forecast: same-store sales would grow 2-4%.

C&T Publishing donated $10,000 generated from proceeds from its recent warehouse sale to the American Red Cross. The C&T staff also donated 25 quilts and customers donated 32 quilts which C&T shopped to Houston's Quilters Comfort America program.

Individual retailers are helping, too. Monkeyshines Beadery, a bead shop in North Carolina, is donating 100% of the proceeds from its website. Visit www.monkeyshinesbeadery.com and Mississippi Paper Arts continues its massive card project, too. Visit www.mississippipaperarts.com.

CLN has reported in previous issues about the Rwanda Knits project launched by Cari Clement of Caron Int./Bond America. The project involves establishing knitting co-ops for poor women who have no other means of support.

A container of 630 knitting machines, donated yarn (from Caron), irons, accessories, etc., is shipping this week to Rwanda. Notions Marketing donated sewing needles (for sewing beads to felted bags, a new project there), Wrights/Boye gave crochet hooks and yarn needles, and Soho/Sterling donated felting books.

"It's taken a year of work (and frustration) to finally get this shipment on the water," said Cari Clement, who has spearheaded the program, "but in a couple months when the container arrives in Rwanda, over 16 groups of women – victims of gender violence, widows from the genocide or AIDS, and women who make less than 50 cents a day – will have a way to make a living through knitting. We've even found a Kenyan spinner who will make the yarn for the machines."

Rwanda Knits has a group of seven trained teachers who travel around the country and teach small groups in an organization, who then teach their members. To learn more about the program, visit www.bond-america.com/whats_new/rwanda_june_05.html.

Internet radio is a relatively new medium that is being used by at least two industry companies. One advantage is consumers can listen at their convenience, and because the shows are archived, listeners can eventually listen to all of the past shows.

1. Creative Lifestyle Radio is a weekly one-hour creative talk show beginning in November and featuring interviews with Aleene Jackson's family. Starr Hull is the host, and the preliminary guest list includes Aleene, Heidi Borchers, Tiffany Windsor, and Candace Liccione, plus industry personalities. Sponsorship packages are available. Call 805-544-9220 or emailstarr@slaslo.com.

2. Already on the "air" is the Diva Craft Lounge with host Danielle Forsgren and features interviews with scrapbook and craft personalities. The motto: "Besides putting the fun back into crafting, the Diva Craft Lounge is dedicated to empowering all women to 'Dare to be Bold, Different and Kind.'" The current show's topic is "Mixed Media Collage."

Both series are or will be part of World Talk Radio at www.worldtalkradio.com which also includes a very wide variety of other shows.

1. This doesn't relate directly to our industry, but I have to get it off my chest. Federated Department Stores, which owns Macy's and recently acquired Marshall Fields, announced it was changing the Marshall Fields name to Macy's. I grew up in Chicago and can tell you, a) Marshall Fields is a Chicago icon, a fundamental piece of Chicagoans' image of themselves and their city; and b) Chicagoans hate being compared to New York.

This move by Federated to take a Chicago icon and change it to a New York icon is the dumbest move I've ever seen a retailer make. It's so stupid it borders on the pathological.

2. A thought on pricing. For the last 10 or 20 years, the trend in the U.S. seems to be the rich are getting richer and the poor are getting poorer. The number of millionaires grows, as does the number of people who sink into poverty. That's reflected in sales statistics: high-end stores such as Nordstrom are thriving, while retailers catering to consumers living paycheck to paycheck – Wal-Mart, the dollar stores, etc. – are not doing as well.

With our industry's constant emphasis on cheap, cheaper, cheapest, we're assuming our customer is the penny-pinching, paycheck-to-paycheck consumer. Is that a good long-term strategy? Even Wal-Mart is hedging its bets with a huge ad campaign in Vogue magazine and sponsoring CBS' Face The Nation. The discounter is even considering buying high-end clothing vendor Tommy Hilfiger, according to Women's Wear Daily.

Re-read the interview with retailer Jan Stephenson at Spark Craft Studio ("Benny Da Buyer"). This store emphasizes ideas, individuality, and community over price. It would be fascinating to see larger stores test that same idea.

3. Regarding the flap about products with what looks like the Creating Keepsakes logo being carried in Jo-Ann's, one reader wrote: "I read with great interest your article on the new Jo-Ann's line that is apparently NOT a CK line. Actually, I read it twice, and all I got from it was DAMAGE CONTROL." (The capitalization is the reader's.)

It's easy for readers to be cynical about that, but take it from me, a former employee of CK's publisher: Primedia is a HUGE conglomerate. And among problems inevitable with size is the left hand not knowing what the right hand is doing. So as the magazine rolls along, the licensing division a thousand miles away is making deals.

4. Finally an apology for sending you more than one email saying the last issue was online. Apparently the server hiccupped, or something, and more than half of you didn't receive the notice. We didn't know who had not received the notice, so we sent it to everyone again, just in case. Computers, I love 'em, I hate 'em, I love 'em, I hate 'em.

MISCELLANEOUS NEWS 

BIG LOTS. To read TD Monthly's article on the retailer's foray into scrapbooking, visit www.toydirectory.com/monthly/article.asp?id=1485. Excerpt: "The chain started carrying scrapbook supplies last October, and early this year announced its purchase of $6 million in such materials, which it has been selling for 60 to 80 percent off retail. Products include paper, tools, embellishments, rubber stamps and stickers by high- and lower-end manufacturers."

PEOPLE. John Menzer, the former head of the old, now-defunct corporate Ben Franklin operation, has been promoted at Wal-Mart again. He had been President/CEO of Wal-Mart Int. and is now Vice Chair with major responsibilities for the U.S. operation ... Stephen Quinn, a marketing exec for Frito-Lay, joined Wal-Mart as Sr. VP-Marketing ... David Schlessinger, the founder of the now defunct Zany Brainy chain, is at it again. He and Tom Vellios have launched Five Below, a 36-store chain selling name brand items to teens and tweens for $1 to $5, reported the Richmond Times-Dispatch ... Sam Walton's youngest son, Jim, was appointed to the Wal-Mart board of directors, replacing his brother John, who died in a plane crash earlier this year ... ... Industry veteran Tera Leigh is featured in the November issue of Real Simple magazine.

YARN. How much has the category grown? Here's an example: In a meeting with investors and analysts, Spinrite execs announced sales in the past two quarters were $78.2 million, up 38.7%. In the past five years, revenues have grown form $66.4 million to $140.9 million. The company's market share is 62% in Canada and 18% in the U.S. Spinrite is now a public company, traded on the Toronto exchange ... To see photos from the Martha! episode that featured an audience full of women wearing their version of Martha Stewart's poncho, visit www.lionbrandyarn.com/marthaShow.html ... Last Saturday A.C. Moore stores hosted a free, four-hour "knitting party" with demos, instructions, etc.

RESEARCH. The Craft & Hobby Assn. is busy working on its new Size of Industry Study, while Craftrends is releasing highlights of its new Scrapbook Retailing in America study at the upcoming MemoryTrends show, and CNA has mailed questionnaires for its industry study, the results of which will be released in January. If you received a questionnaire, answer it!

ACQUISITION. Kandi Corp. acquired MNC Studio Designs and MNC owner Mary Norwood joined Kandi as Program Manager. Mary and the Kandi design team have already developing exciting new designs and product additions which will leverage the creativity embodied by MNC's designs and Kandi's embellishments

E-COMMERCE. The Commerce Department reported retail sales over the Internet rose 7.2% in the second quarter, the largest rise in three years, Reuters reported. (Comment: Will we see more of this trend if gas prices continue to rise?)

TV. The third series of Beads, Baubles and Jewels uplinks to PBS stations Nov. 9. Actress/beader/QVC veteran Katina Forte is the host. Sponsors include Bead&Button magazine, Fire Mountain Gems and Beads, BeadStyle magazine, Beadalon, Westrim Crafts, Blue Moon Beads and Pure Allure "Crystal Innovations" ... The ninth Hands On Crafts for Kids uplinks Nov. 6. It's sponsored by Fiskars, Pacon, Decoart, Royal & Langnickel Brush Mfg., Walnut Hollow, Heart of Ohio Tole Chapter, and the Society of Decorative Painters. Both are produced by KS Productions, which also produces America Sews, Scrapbook Memories, America Quilts Creatively, and Needle Arts Studio.

QUOTATION. "Fashion would be more appealing to consumers if it didn’t change so quickly. The demand for change has put an enormous strain on the business and caused artificial changes in styles, and that ultimately is why so many people have rejected fashion and walk around in T-shirts and comfortable pants." – Thomas Ford, fashion designer

STOCK. UBS boosted its rating for Michaels from neutral to buy. The firm thinks Wall Street is underestimating the retailer's earnings growth potential, although it warns that higher gas prices, Katrina and Rita, and more challenging sales comparisons could hurt short-term prospects, CBS MarketWatch reported.

MEDIA. The Craft & Hobby Assn. announced the launch of its official publication, Portfolio, for CHA members. It's a quarterly, full-color magazine that execs say will contain an entertaining, informative blend of association and industry news, ideas, tips, and trends. The first issue will be mailed in December.

TRADE. U.S. and Chinese negotiators renewed talks on limiting the flood of Chinese clothing and fabric imports, but U.S. officials are not optimistic, the Associated Press reported.

LEGAL. Several retail groups filed an antitrust lawsuit against Visa USA, MasterCard Int., and numerous banks, saying they plotted to set excessive credit card fees, Reuters reported. In 2003, Visa agreed to pay about $2 billion and MasterCard $1 billion to settle a lawsuit by retailers claiming they were forced to accept higher-cost, signature-verified debit cards.

RESEARCH. A new study by Scarborough Research, a market research firm, indicates Wal-Mart and Target are attracting distinctly different customer bases. The study indicated that Wal-Mart shoppers are more likely also to shop at dollar stores and Kmart, while Target shoppers are more likely to also shop at Nordstrom and Macy's.

TRADE SHOWS. AES Logistics and the Craft & Hobby Assn. have added Roadway to the CHA Member Services freight program for trade show shipments. Enrolling in the CHA freight program allows exhibitors to ship to any trade show within the continental U.S. on either Roadway or Overnite, a UPS company, at low rates. To receive a rate quote exhibitors should call 877-890-2295 and identify yourself as a CHA member.

RETREATS. Industry and TV personality Tiffany Windsor is conducting Creative Mavens retreats on creativity and wellness in Desert Hot Springs, CA. For more info, call 805-544-9220 or visit www.creativemavens.com.

CONDOLENCES. To the family of Micki Reis, a long-time employee of Hoffman Media, which has established a Micki Reis Memorial Fund. All donations will be given to the Big Oak Ranch, a place for abandoned or abused children. Visit www.bigoak.org.

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

A. C. Moore (ACMR). Last*: 19.17 ... Change**: -0.65
Hancock Fabrics (HKF). Last*: 6.67 ... Change**: +0.56
Jo-Ann Stores (JAS). Last*: 17.28 ... Change**: -1.21
Michaels (MIK). Last*: 33.01 ... Change**: -0.45
Wal-Mart (WMT). Last*: 43.66 ... Change**: -0.21
CLN Retail Index. Last*: 162.46 ... Change**: -.1.6%
Dow Jones Index. Last*: 10,569.02 ... Change**: -0.7%

 (Note: Actually, this was emailed from a subscriber.)

One day God was looking down at earth and saw all of the rascally behavior that was going on. So he called one of his angels and sent the angel to earth for a time.

When he returned, he told God, "Yes, it is bad on Earth; 95% are misbehaving and only 5% are not."

God thought for a moment and said, "Maybe I had better send down a second angel to get another opinion." So God called another angel and sent him to earth for a time, too.

When the angel returned he went to God and said, "Yes, it's true. The earth is in decline; 95% are misbehaving, but 5% are being good."

God was not pleased. so he decided to email the 5% who were good, because He wanted to encourage them, give them a little something to help them keep going.

Do you know what the email said?

No?

Okay, just wondering. I didn't get one either.

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3. Creative Leisure News is published the first and third Mondays of each month.  Your next issue will be Monday, October 17.

xxx

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