Mike's often irreverent, thought-provoking analysis of the industry.

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The State of Our Industry

Some positive analyses, some negative, and lots of questions.

Compiled by Mike Hartnett (October 3, 2005)

Karen Ancona, Editor of CNA magazine.

The industry experienced a sort of blood transfusion from three recent trends which brought us many new customers: scrapbooking, beading, and knitting. Many of these are dabblers or weekend crafters. The industry is challenged now to introduce these younger, more affluent crafters to other activities to boost their indulgence in crafting and to sustain some industry growth. They’ll never leave their favorite hobby, but we know they are capable of crafting other types of wonderful projects. It’s up to the retail level to show them how and to grab more of their discretionary dollars.

We already see scrapbookers testing paint on their pages and beads on their cards. Knitters will be adding beads to simple projects this year as fashion demands it. And women already in love with beading may be enticed into stores other than niche bead stores if the selection and classes are right for them. Quality beads are the key to that movement.

Will we make them quilters or painters or clay artists? That depends on merchandising, marketing, and education at the store level. But I personally believe that home decorating and fashion updating will drive the industry in the near future. We have to get better at marketing that news. Manufacturers have introduced some of the best products ever, available at some of the best deals. The responsibility of taking that product past static merchandise rests on the shoulders of our independent retailers.

The good news is that our independent retail base is owned and managed by the highest percentage of men and women I’ve ever known who are business savvy, not just craft savvy. They are already studying the new trio of consumers and putting together some pretty impressive plans on how to increase their interest in crafts. Of course, television is helping and industry events such as Knit-Out will, too. But it will all take time, and shopping, of course, will suffer because of the price of fuel. Expect some static years, easier for well-funded independents to weather than mammoth chain stores. That’s a bit of a flipover in our marketplace.

I don't even know where to begin. It's all very confusing and in many ways very frustrating. It appears that every store is struggling to find its niches and then to meet the consumer needs in a unique way. No on is immune to the impact that the oil and gas prices have on us – and the industry news is no different.

The stores are all changing their mixes in an effort to become/remain profitable. It's a major challenge with no easy solution in sight. We all need help – and I'm not sure the big boxes are doing any better.

1. Scrapbooking has had spectacular growth; the craft and fabric chains have helped by following the independents at first, then jumping in early and really exploding the category sales. The growth was so good, in fact, that the mass merchants, drug stores, food stores, and other big box retailers like office supply chains and now Best Buy have picked up pieces of it. Has the category peaked or are sales from traditional stores being siphoned off?

2. Jewelrymaking has and continues to grow consistently over the last 10 years. The craft chains have done a good job in this. I am not sure they have the space or interest to carry good-better-best, however, which has left a niche for independents. This is not an easy area to manage at retail – SKU intensive, low retail value items, etc. But this category will keep growing.

3. Yarn continues to grow. This is a fashion business that needs constant newness in end use and fun and interesting yarns. In this category you have good retail distribution beyond traditional craft and fabric stores and I would not be surprised to see this continue to increase.

4. One underlying commonality of scrapbooking, jewelrymaking, and yarn is the continued craft and fabric chains' ability to introduce a new or revitalized category to the consumer at a beginner level. Taking customers to the intermediate and advanced level has always been a challenge and one the independents have helped with. This kept the consumer interested. In today's environment it is hard for chains to do more than teach beginners with classes and demonstrations and reach the consumer with sale ads in newspaper tabs.

5. Margin pressure on retail chains and then down the line is hurting budgets at the distributor, importer, and domestic manufacturing level. Really big industries with sophisticated systems do not need 70% and 85% initial markups; these industries are bigger because there is money at all levels left to promote, package, and advertise products.

In our industry now the marketing thrust is primarily price-off ads in the Sunday paper. The concept of using the ads to attract the consumer into the store is proven and valid. However, if you want to expand the business, it is necessary to really show consumers what to do beyond a sign package, demonstration, and beginner class. There are several chain experiments going on that address some of these issues, and they might be the answer to part of the consumer education process.

6. Many manufacturers have so much financial pressures from the chains that product development, marketing, and consumer advertising budgets are no longer available. In addition, China has been a great boon to our industry, but may become a great source of problems in the coming years. The latest trend of Chinese companies hiring U.S. designers to develop products for U.S. retail chains seems in part a dichotomy at best.

China's move from cheap labor is starting to cost them more, along with increased power costs for buying and building machines that will replace some of their labor. We have seen many examples of Chinese manufacturers bringing in sophisticated machines to replace labor, and the ocean and land freight costs, which are born by the U.S. retail chain, continue to rise. In addition, I think it is likely that import duties may rise in certain areas. Look for more anti-dumping duties. All of this leaves the door open for U.S. manufacturers to become more competitive in several areas where they have virtually been frozen out in recent years.

7. Many U.S. manufacturers became too dependent on traditional outlets and did not expand their customer base as fast as the core customer base continued to consolidate.

8. As to upcoming categories, the best one I see right now is embellishments. If you look at ready-to-wear catalogs, they are full of the same looks that were prevalent before fabric paint took off. Already I think you will find appliques, trims, beads, and other embellishments are real growth areas.

9. Manufactures and retailers that are truly best of class are doing well and are continuing to grow. Times are tough, which are exacerbated by Katrina and Rita. I hate to say it, but look for them to get tougher. With continued borrowing, the world situation, and upcoming pressure on the world economy, it is likely to get worse before it gets better.

10. I heard on TV yesterday that China's oil needs five years from now are likely to be increased by the total amount the U.S. uses today. Think about that: we will be competing for oil with China who supplies a tremendous amount of goods to us – and that's not factoring in our increased consumption five years out. I suppose as a worst-case scenario we could be looking at $6 or more a gallon cost for a diminished supply.

11. The challenge and opportunity is, do we have a cohesive industry with common goals and objectives? We have a diverse base, each with their own goals and needs but with common business practices.

I think one of two things are possible: first and most likely, the best-run, best-financed retailers, manufacturers, and distributors will flourish and many of the rest will fall by the wayside. Consolidation will continue at all levels. Means of product development and execution could be hampered.

A bright spot is many real mass merchants are continuing to have increased interest in the craft business, and if they continue, that might attract many more consumers. Scrapbooking is the driver and I have not seen them cutting back space yet. When they do, it is likely they might replace it with other products from the craft and fabric field. But if everyone stays on the margin train and does not have or put enough money and intellectual capital back into the business, many of the consumers will become disenfranchised and move on to other leisure time pursuits.

12. The craft and fabric industry still has a long way to go to harness technology at the consumer level the same way it has in the accounting and distribution levels. If we do not move in this area, the industry may lose out to other industries.

Despite all the above said, I do not see doom and gloom. I can give you countless examples of retail chains, independents, manufacturers, importers, and others that are doing it right, as well as several companies that have realized they need to change and have put people in place to make it happen. The world is just changing at an unbelievable pace, and any company or group of people not in line with the changes could just be left behind.

Yarn is definitely slowing down quickly. Scrapbooking is still strong in major craft chains, Wal-Mart, Target, select specialty retailers, and the remaining group of strong independent scrapbook stores. The challenge is the comp gains are in the low double digit lower than last year and trending down. Office Depot just announced they are getting out of scrapbooking to refocus on their core business.

Beads/jewelry making are VERY strong in the craft chains. Tracking at well over 50% gains year over year. The independent bead store really appeals to the hard-core crafter and these stores are buying in bulk from importers. No need for packaged product.

The word I am hearing now is that wearable art is rebounding and the action is in home dec in all its variations. No one really doing a good job here yet, but all the signs are right: two to three years after a home purchase is when people really start doing home dec accents, etc. Note the housing boom over the past three years.

Kid's crafts are still strong. The industry just needs to keep coming up with exciting assortments of fun, interesting ideas in a variety of materials and target specific times such as camp, Halloween, summer vacation, Easter, etc.

I believe we are getting over stored and this is contributing to the reduced comp-store numbers we are seeing. Expect a great deal of item merchandising for gifts this fourth quarter to drive sales. And there will be more pressure on suppliers to improve margins (lower prices/more rebates co-op allowances, etc.) to offset the slower sales.

We need a hot category! I believe it is beading/jewelrymaking. Retailers should promote make-it/take-its in their stores to convert current consumers to this craft and do outreach marketing to attract new consumers. There is a very high trial-to-adoption rate, but consumers have to do it themselves, not watch a demo.

I'm not saying it's tough out here, but it's changing. We're just in another of those "rearranging" phases, as the industry further consolidates. I was in the Florida panhandle region last week and visited a couple of stores in the Destin/Ft. Walton area. They are still hurting from Hurricane Ivan last Sept., and "Dennis" this July. Their doors are open but it's a struggle. I can only imagine what's happened to the economy further west in the hardest hit areas. I'm sure we're all feeling some fallout from that.

But over all, things are good. I still think the biggest challenges facing our retailers are self-imposed. With better education and better business practices they can be overcome. So we're trying to spread the word.

I don't know that I have any answers to your questions, but I do have some observations – maybe rants is more accurate.

As far as when the economy downturns, it's true that in the past people turned to crafting. But in 2005 our industry has more competition for leisure time than ever before: consumers are working longer hours, surfing the Internet, attending school and family activities, exercising, eating, and watching television. All of these things are more options for that leisure time than ever before.

Last week, in the paint aisle of a large chain craft store, the everyday price for the 4-oz. bottle of acrylic paint was $0.99. In the late 90s, the same bottles sold for $2.49 or more.

Meanwhile, imported painted items in retail stores are well done, yet so inexpensive that consumers can purchase attractive, designer-inspired items for much less than the cost of materials – let alone the time and learning curve involved in painting a project to achieve a similar quality. Well-painted products in stores like Linens N Things, Bed, Bath and Beyond, and especially Target do not seem to be inspiring consumers to paint for themselves – just to shop.

As big business moves into and acquire companies the craft industry, it seems we're losing our "personality." We don't seem to feature and promote creatives as in the past. In the 90s, Priscilla Hauser, Donna Dewberry, Dee Gruenig, and Debbie Mumm, just to name a few, rose to recognition.

[Editor's note: Actually Priscilla has been a star since the 70's, as were a number of other painters such as Sue Scheewe. In the 80's, cross-stitch designers such as Alma Lynn rose to prominence.]

These ladies are inspiring, but where's the next generation of creative leaders? It doesn't seem that today's creatives enjoy lasting popularity. Yet, why are the DIY shows successful? They show average people creating successfully with smart, fun talented hosts showing them how to do it.

Today's do-it-yourself television shows don't show the designers going into the craft chains to get supplies. Teens (and a lot of other people) love ABC's Extreme Home Makeover series, which shows them how to do things with supplies from a home improvement store – not a craft store.

Add this to the fact that most of today's teens are the product of at least the second generation of moms who work full-time outside of the home, and it's easy to see that most teens are not learning about making things inside their home from people they're related to like Mom or Grandma – but through television or the Internet – and they're not learning to go to craft chain stores.

While visiting a local knitting shop this weekend, I saw several teens and college age students shopping and buying. There was also a couple mother/daughter shopping teams. They were selecting yarn and discussing projects, and the shop's staff was helping them select the proper knitting needles for their project and providing tips for finishing their project. This sort of experience is non-existent in the craft chains.

Chain buyers today are more powerful than ever. Demands on vendors are more exhaustive than ever. With the imperative insistence on not just lower prices, but THE LOWEST PRICES, the margins for advertising, education, and promotion so slim, they're practically gone. The chains have reaped the benefits of lower invoice pricing and more programs, but have not increased store staffing; nor have they focused on insuring that the in-store staff is knowledgeable about how to use the product in the stores.

(Note: Have any reactions to the writers' thoughts? Email them, on or off the record, to mike@clnonline.com. To read analyses specific to scrapbooking, read the current Memory, Paper & Stamps column. To read a savvy designer's perspective on the state of the industry, read the current entry in Designing Perspectives. To read previous Business-Wise columns, click on the titles in the right-hand column.)

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