Date: January 17, 2005
Vol. IX, No. 2

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TABLE OF CONTENTS

COMMENTARY: THE LESSON OF CHRISTMAS

If there's a lesson to be learned from consumers' shopping behavior this past Christmas, it's this: they are becoming ruthless about price.

A. They jammed the stores at daybreak the morning after Thanksgiving, scooping up the early-bird specials, then left the stores when the specials were over. B. They abandoned Wal-Mart for lower prices elsewhere, then flocked back when Wal-Mart cut prices further. C. They streamed back into the stores for the post-Christmas clearance sales.

Clearly, price is king these days, no doubt in part because of inflation in key areas: gasoline, heating oil, health care, education – and even coffee.

(NOTE. In the next issue of CLN, we'll list industry "stars" who will be demo-ing in CHA-show booths. Vendors: if you'll be hosting such a person, email mike@clnonline.com with the person's time, times she/he will be in the booth, and the booth number.)

"Benny Da Buyer". Hot Trends & Trade Shows. Trends change, but the keys to buyers having a successful show do not.

"Vinny Da Vendor". Pricing pressures by retailers are ruining good categories.

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

Retailers and vendors: Are you planning to attend or exhibit at more or fewer shows this year? To vote, click on Industry Polls in the right-hand column, or click HERE.

CLN POLL: MICHAELS – TOP THREAT AND CUSTOMER

Retailers: Whom do you consider your greatest competition? Michaels, 31.03% ... Wal-Mart, 20.69% ... Hobby Lobby, 13.79% ... Non-industry stores (e.g., Target, Linens 'N Things) 10.34% ... A.C. Moore, 6.9% ... Home Shopping TV Networks, 6.9% ... E-commerce, 6.9% ... Jo-Ann's, 3.45% ... Rag Shops, 0% ... Independents, 0%.

Vendors: Whom do you consider your most important customer? Michaels, 33.33% ... Wal-Mart, 24.24% ... Independents, 18.18% ... Hobby Lobby, 12.12% ... A.C. Moore, 3.03% ... Jo-Ann's, 3.03% ... Non-industry Stores, 3.03% ... Home Shopping TV Networks, 3.03% ... Rag Shops, 0% ... E-commerce Sites, 0%.

(Note: Based on conversations with a variety of industry vendors, retailers, and reps.)

1. It will become increasingly difficult to report accurately on overall scrapbook sales because of the ever-growing variety of retailers selling memory supplies. So take what you hear with a grain of salt.

2. The number of memory vendors will decline as consolidation increases. Major causes: cash flow problems, lack of capital to grow the company, profits too small for the work, and fatigue. All will sell to larger, better capitalized vendors.

3. The overall number of independent scrapbook retailers will decline somewhat. Price competition will get tougher.

4. Yarn sales will continue to increase, but not at the astronomical levels of recent years. The greatest growth will be in crochet.

5. At least one category (painting, dollmaking, florals, etc.) will make a surprising rebound.

6. Now that so many consumers are comfortable working with needles, some will try other forms of needlework.

7. Michaels will open more ReCollections stores, but not Village Crafts stores. Jo-Ann's will continue to close its traditional stores and replace them with larger superstores. Hobby Lobby and A.C. Moore will continue to expand. The Wal-Mart juggernaut will roll on.

8. The sewing marketplace will not support two spring and two fall trade shows. The marketplace will determine the winners.

9. More companies of all types will make radical changes in their business, looking to fill a niche and survive. Some may endanger their core strengths as they hop on the latest hot bandwagon.

10. The word "crafts" continues to go out of fashion. Sign of the times: the Society of Craft Designers changing its name to the Society of Creative Designers.

Jeff Gerstel was named Exec VP of Store Operations for A.C. Moore. He will report directly to President Larry Fine. Gerstel had been President/COO of Rag Shops. Prior to that he served as COO of Parts Plus Group, a distributor/retailer of automotive replacement parts, and Factory 2-U as Exec VP of Store Operations and Finance. Jeff also served on the board of directors of ACCI. Reporting to Jeff will be all field VP's and Mike Doto, VP of Store Operations.

Colorbok, a creator and distributor of scrapbooking, stationery, toys, and gift products, acquired Quincrafts, a pioneer and market leader in crafts for kids. Quincrafts' Makit&Bakit is one of the oldest and best known brand names in the industry, and the Makeit&Bakit Suncatcher kits were recently ranked among the top 10 arts and crafts products for kids by a trade publication.

Terms were not disclosed. This transaction follows the equity investment last May in Colorbok by the private investment firm, FdG Associates.

Headquartered in Braintree, MA, Quincrafts manufactures 200+ kids craft-activity products which are sold worldwide under brand names such as Makit&Bakit, Betty’s Beginner Stitchery, and Sand Creations. Colorbok plans to combine the Quincrafts business with its existing Kids Crafts and Activities division.

Doug Dossey, of FdG Associates said, "We look forward to continuing to ... take advantage of the healthy organic growth environment and to continue to identify acquisition opportunities among niche-market leading businesses."

Quincrafts has played an important role in the history of the craft industry. The company was started about 30 years ago by Charlotte Vollin, Estelle Sugarman, and Sylvia Schwartz. They started their company because they couldn't find craft activity projects for their daughters. Quincrafts was one of the first "craft" companies to exhibit at shows sponsored by the then all-hobby Hobby Industry of America. Eventually Charlotte became not only the first "craft" person on the HIA board, but also the first woman.

Later the ladies sold Quincrafts to the conglomerate, General Mills. As has happened before in the industry, the manufacturing giant screwed up the company, and Charlotte, Estelle, and their daughters, Nancy and Debbe, bought it back for a fraction of what they'd paid for it – and then Nancy and Debbe built the company back up again.

For the last 19 years the second generation, Nancy and Debbe, have been operating the business and will continue to work with the new ownership.

(Comment: We suspect that, unlike General Mills, Colorbok is very knowledgeable about the craft industry, and so history won't repeat itself.)

Still in bankruptcy, Garden Ridge is fighting in court with Allied Capital, which holds a second lien on substantially all of the retailers' assets. Allied has objected to Garden Ridge's proposal to extend its Debtor-In-Possession credit facility from $70 million to $80 million.

Allied claims Garden Ridge has made no amends to protect Allied's interests. Allied also claims Garden Ridge is making little progress formulating an effective reorganization plan. The court has scheduled a hearing on the complaints for tomorrow.

Michaels was the clear winner in December, out-performing industry-related chains and almost every other type of retail operation. Same-store sales rose 14% and overall sales rose 19% to $557.9 million. Execs now expect same-store sales to rise 3%-5% in January and have raised their fourth-quarter expectations to $0.75-$0.77/share based on same-store increases of 5%-6%.

CEO Michael Rouleau attributed the strong showing to more effective ad circulars, better weather, improved use of featured store space, an expanded holiday gift-giving program, and the automated replenishment system.

For the month, customer traffic was up 11% and average ticket increased 3%. The Northeast, Pacific, and Southeast zones performed the best. The strongest categories were Christmas, Scrapbooking, and Kids Crafts, followed by Needlework and Yarn.

Jo-Ann's. Same-store sales rose a strong 4.2% while overall sales rose 6.2% to $261.5 million. Year-to-date, sales are up 4.3% to $1.68 billion and same-store sales are up 2.9%.

Wal-Mart. A very topsy turvy month. After the disappointing Thanksgiving weekend, execs predicted same-store sales would be at the low end of their original +1%-+3% prediction. The company lowered prices further, and then had a better than expected post-Christmas period. End result? Same-store sales rose 3.0%.

Hancock. Overall sales slipped 1.6% to $49.9 million and same-store sales fell1.7% – a slight improvement over recent months. Year-to-date, total sales are $395.9 million, down 3.6% and same-store sales are down 3.9%.

Toys R Us. Same-store sales fell 1.4% – and Wall Street thought that was good. Sean McGowan, an analyst with Harris Nesbitt, told Playthings.com, "I think the results are encouraging in the scope of the entire toy industry."

Others. Nordstrom, +9.3% ... Costco, +9.0% ... Target, +5.1% ... Walgreen, +4.2% ... Family Dollar, +4.0% ... Best Buy, +2.5% ... Federated, +2.3% ... Dollar General, +1.7% ... Duckwall-Alco, +1.0% (but listed crafts as a strong performer) ... Big Lots, +0.1% ... Rite Aid, -2.7% ... ShopKo, -5.3% ... Circuit City, -5.8% ... Bombay, -6.0% ... Pier 1, -8.8%.

Sales for the fourth quarter ended Dec. 31 rose 18.4% to $177.3 million and same-store sales rose 5.6%. For the year, sales rose 14.7% to $497.6 million and same-store sales grew by 4%. CEO Jack Parker said December was the strongest month of the quarter with increased customer traffic, average sale, improved margins, and "excellent" sell-through of seasonal goods.

But the company is lowering its full-year earnings expectation to $0.86 - $0.88/share from $0.94 - $0.97, due to an accounting change, significant expenditures in the new distribution center required in the aftermath of the roof collapse in the old distribution center, and additional costs for Sarbanes-Oxley compliance, insurance, and store openings.

For 2005 the company is forecasting 15 new store openings and the relocation of an existing store, overall sales to increase 18% - 19%, same-store sales to grow in the mid-single digits, and net income to grow 30% - 35%. The current store count is up to 96.

Outgoing U.S. Commerce Secretary Donald Evan said in a speech to the American Chamber of Commerce in Beijing, "When China's leaders fail to produce results on the points of friction in our trading relationship, their failure only empowers those critics within the U.S. political system," Bloomberg News reported.

NOW he says it, after turning in his resignation from his cabinet post?

The "points of friction" including piracy of intellectual property rights, government loans/subsidies to exporters, keeping the Chinese yuan pegged to the dollar and thus not allowing it to "float" as European currencies do, and allowing U.S. direct-sale companies such as Avon and Amway to resume business in China.

CLN thinks the U.S. will talk tougher, but will not push very hard as long as the U.S. wants the Chinese to help disarm North Korea.

The proliferation of consumer scrapbook shows is creating some interesting situations. The Scrapbook Expo sponsors have sent a letter to vendors saying if they exhibit at certain competing shows in 2005, that will hurt their chances of obtaining a booth at the 2006 Scrapbook Expo shows in those areas. In other words, if a vendor exhibits at the 2005 Memories Expo show in Pasadena, it hurts his/her chances of getting a booth at the 2006 Scrapbook Expo show in Orange County. The same is true for the Memories Expo in St. Charles, IL and the Scrapbook Expo in Chicago, the Great American show in San Antonio and the Expo in Austin, and the Memories Expo in Orlando and the Scrapbook Expo, also in Orlando.

While on the surface this smacks of restraint of trade, there's a certain logic to it. Scrapbook Expo president Jennifer Davis points out that a) her shows already have long waiting lists – she limits the number of booths so the crowd won't be spread too thin; b) in Texas this year there will be four shows in four months within a 200 mile radius; c) if consumers see the same vendors they saw at the earlier show, they'll stop coming.

Davis has already been imposing this policy on her own shows for two years. If a vendor other than those in the consolidated shipping group exhibits at the Scrapbook Expo in San Francisco, that limits the chances of obtaining a booth at the Scrapbook Expo in Sacramento.

Denise Brosie, Event Manager for the Memories Expo shows, believes in letting the chips fall where they may. "Memories Expo welcomes all exhibitors to our events, regardless of

other industry shows in which they may participate. We believe competition and choice is healthy for our industry."

Davis' philosophy is similar to deer hunters. Without hunting, the deer population would explode, there wouldn't be enough vegetation for all of the deer, and eventually they'd all die of starvation. Too many shows (with the same vendors) could ultimately result in no shows at all.

Who's right? Vendors – and ultimately consumers – will decide.

(Note: Feel free to email your thoughts -- on or off the record -- on consumer shows to mike@clnonline.com.)

(Note: The following are CHA exhibitors whose new products can be seen on their websites. EXHIBITORS: If your new products are on your website, email mike@clnonline.com and CLN will report it – and link to your website – in the next issue, the last pre-CHA-show issue.

Artgirlz. (New exhibitor). A wide variety of very graphically interesting papers, collage kits, peweter charms, borders, words, and images. Visit www.artgirlz.com.

C&T Publishing. Has launched Create & Treasure, a new book and paper crafts line for paper crafters, including Altered Board Book Basics & Beyond, a how-to book by Jan Bode Smiley; The Paper Crafter's Color Companion (pocket-size cards by Joen Wolfrom); and Ready-to-Go! Blank Board Books. Visit www.ctpub.com/client/client_pages/press_releases/2004_1231.cfm.

Delta. Has introduced the FabriCraft Peel ‘n’ Stick Memory Program, which enables scrapppers to add acid free fabric to their pages. Visit www.homespirations.com/DELTA/FabriCraft/FC-memory-program/FC-page1.html.

EmbellishMATS. (New exhibitor). Polythylene "Pounding Board" for eyelets. Visit www.embellishmats.com.

Janlynn. New products too numerous to mention. Visit www.janlynn.com for new needdlework collections. The company has also introduced new lines in its recent acquisitions: Sanook Paper (www.sanookpaper.com) and Stamps Happen (www.stampshappen.com).

Leather Etc. Has new additions to the line of RubOuts The Eliminators – battery-powered erasers that can be used without damaging paper. Visit www.leatheretc.biz/html/erasers.html.

Mountain Mist. The new Heritage Collection includes A Touch of Silk and A Touch of Cashmere in various sizes of batting, fiberfill, and pillowforms – and A Touch of Wool and Completely Cotton which are available in 4 batting sizes each. Visit www.mountainmistlp.com/new-products.htm.

(A note from industry veteran Herb Rancourt)

Yesterday afternoon, two eight-to-nine year-old girls rang the door bell. As I opened the door, one of them began reading a prepared text soliciting donations for the Tsunami relief fund, Doctors with Cause.

It turns out that they decided to spend the remaining time of their holiday vacation making crafts to sell and donating the money to the charity. The two of them pulled their savings together and asked their moms to drive them to Michaels and Tall Mouse to buy supplies.

They had made beaded bracelets (simple pony beads on elastic cord – they explained the meaning of the colors); red rose corsages; and decorative, scented votive candles.

I questioned them ... and their enthusiasm for crafting really came through. Their exposure and experience with crafts did not come from school, church, or outside groups like the girl scouts. They told me it came from their parents who wanted them involved with creative processes, and I quote, "away from TV and video games."

I'm sure there are hundreds of stories like this over the past week of kids getting involved and doing good things in support of the Tsunami relief. What impressed me was their enthusiasm for the crafts and the intent and outlet their parents provide them. – Herb Rancourt

Paula Alvarez and Dale Thompson are the latest Wal-Mart employees to get married – in their Wal-Mart store – in Junction City, KS, the Associated Press reported. Co-workers made register three the altar and the loving couple exchanged vows in the checkout lane where they had met and where Thompson later proposed. The reception was held in the store's break room, but there was no mention of where the newlyweds spent their wedding night.

If the love birds spent their wedding night in a big box store, hopefully it wasn't the Toys R Us or Circuit City in Charlotte, where last week police captured a fugitive who had been living in the stores for months, eating baby food and watching DVDs, the Charlotte Observer reported.

And maybe it's just as well the newlyweds didn't run into Dean Wooten. Wooten, 65, was fired as a Wal-Mart greeter in Muscatine, IA for greeting customers with a computer-generated photo of himself, the AP reported. In the photo Wooten appeared to be naked – except for a carefully placed Wal-Mart bag. Wooten told customers this new uniform was part of Wal-Mart's new cost-cutting policy. Wooten's unemployment compensation claim was rejected by a judge, who was quoted by the AP as proclaiming, "A reasonable person would know the act of showing a naked body wearing a Wal-Mart sack would not be good for the employer's business."

Meanwhile, the Michaels in the Ford City shopping center in Chicago will probably not report very good sales – because a gas leak blew up the parking lot.

Wal-Mart awarded Toner Plastics its Craft Supplier for the third quarter. The award is based on a number of factors including growing sales faster than inventory.

"We are extremely fortunate to be a Wal-Mart supplier," said President Steve Graham, "and this recognition is a tribute to all our hard-working employees. Our company is quite small compared to many of the suppliers and that makes the award all that much sweeter. Wal-Mart is taking some hits in the press lately but they have always treated us ethically and fairly. They are responsible for a lot more jobs at little companies around the country than one can possibly imagine and we are one of those companies."

Toner manufactures CraftLace (plastic lace to braid key chains and lanyards); Fun Wire (plastic-coated wire for jewelry and crafting); hemp products; and Christmas ornament kits.

(Comment: No doubt this is not the first time Wal-Mart has recognized a U.S. vendor, with U.S. products, but it's nice to see.)

In a London Times article, William Rees-Mogg describes an economic theory called "marginalism," in which a small amount of a product can affect the price of an entire category. For example, if there's a need for 25 apples, and there are 26 apples, that 26th apple lowers the price of the other 25. If there are only 24 apples, the missing apple raises the value of the 24.

In other words, "economic change is determined by what happens at the margin of transaction," Rees-Mogg wrote.

Why am I writing about this? Because this issue contains predictions for the new year and Rees-Mogg concludes, "What is the prospect for the dollar? That depends on China. The euro? China. The oil price? China. Industrial commodities? China.... In each case, the forecast was not based on the absolute size of the Chinese economy, which is still much smaller than that of the U.S. The forecasters, looking at their different markets, were all convinced that marginal changes attributable to China would be the decisive factor. That and low Chinese costs."

FLORALS/GIFTS. The Dallas Market Center (DMC) plans to launch new gift and home temporary shows in January, March, June, and September, 2006. All temporary resources will be leased and managed by the DMC; the 2005 events will continue to be managed by George Little Management. The 2006 temporary shows will be held on the 12th and 13th floors of the World Trade Center .... CNL Income Properties plans to acquire a majority interest in the DMC, including the World Trade Center, Dallas Trade Mart, Int. Floral and Gift Center, and Market Hall. The current management company, Market Center Management Co., Ltd., will continue operating the facilities. For more, visit www.dallasmarketcenter.com.

SCRAPBOOKING. Actress Lisa Summerour appeared in several movies, including Philadelphia in which she played Denzel Washington's wife. But four years ago she cut back her film career – to become a sales consultant for Creative Memories, Reuters reported. "I can work from home and have more control over my schedule," Summerour told Reuters. "It's fun."

SCRAPBOOKING. Kroger – yes, Kroger, the grocery chain – is now carrying major scrap supplies in at least some of its stores.

VENDORS. A.C. Moore will hold Open Buying Days in 2005: Mar. 1 ... Apr. 5 ... May 3 ... June 7 ... Sept. 6 ... Nov.1. Email dorothyh@acmoore.com for an appointment.

PAINTING. There are a limited number of 10'x10' and 5'x10' booths left for the Society of Decorative Painters Conference May 26-28 in Tampa. Call Yvonne at 316-269-9300, ext. 109, or email yvonne@decorativepainters.org.

MEDIA. Delta's FabriCraft Peel 'n' Stick Fabric is featured in the January issue of Woman's Day which has an overall distribution of 9+ million.

PEOPLE. Wal-Mart named Eduardo Castro-Wright, currently President/CEO of Wal-Mart Mexico, to be Exec. VP/COO of U.S. Wal-Mart Stores.

TOYS. Despite not faring too poorly this Christmas, Toys R Us will probably still be sold, Business Week reported ... The Int. Toy Center’s two showroom buildings may be sold, but the Toy Industry Assn. told Playthings it is committed to the city through 2006 for the American Int. Toy Fair.

DISTRIBUTION. Jo-Ann's will spend $45 million to build a 700,000-sq.-ft. distribution center in Opelika, AL to support growth in key southern states, such as FL, GA, and TX. It's Jo-Ann's third distribution center. Groundbreaking will occur in March and shipments to stores are expected to begin in April, 2006. The center will eventually create about 425 jobs.

SHOWS. MemoryTrends is offering 5'x8' exhibit spaces for the Oct. 10-12 Las Vegas show. The $550 cost includes a 6' white-draped table, side chairs, ID sign, wastebasket, and four lunch vouchers. Call 516-596-3937, email info@memorytrends.com, or visit www.memorytrends.com.

THE WAR. Army Pfc. Kenneth VonRonn, 20 and recently married, was killed with six other U.S. soldiers when their patrol was hit by a roadside bomb, the N.Y. State Times Herald-Record reported. He'd been an A.C. Moore employee before joining the National Guard.

INTERNET. ConsumerReports.org says consumers can "take a ton of cool classes without putting a dent in your budget." The article suggested A.C. Moore which "holds classes at most of its outlets nearly every day of the week."

MEDIA. The Feb. issue of Inc. magazine has an excellent profile of David Blumenthal of Lion Brand Yarn. The article (with a foldout of David!) says Lion's revenue should hit $200 million this year.

PAINTING. The winning projects of Delta's 2004 Delta Painting Challenge have been chosen and free pattern packs of the projects are available at www.deltacrafts.com.

SCRAPBOOKING. Crafters Home, now under the new leadership of Shane Cullimore and with 180+ member stores, will relocate the corporate office to Utah with a satellite office in Phoenix. Call 602-279-0809; email jesse@craftershome.biz or shane@craftershome.biz, or mail to P.O. Box 7548, Phoenix, AZ 85011.

LOOKING TO HIRE. Wichelt Imports, a leading needlework distributor/manufacturer, is seeking a Marketing Manager. Four-year degree in Marketing or related field, at least three years experience and working knowledge of Publisher and Word a must. Knowledge of the needlecraft industry a plus ... Also looking for a full-time Graphic Designer. Associates degree in Graphic Design or related field and two years experience required. Should be able to show portfolio/sample of work at interview. Familiarity with the needlecraft industry a plus. Send resume with references to Wichelt Imports, Attn: Human Resources, N162 Hwy 35. Stoddard, WI 54658. awichelt@wichelt.com.

WAL-MART. Launched a nationwide PR campaign with full page ads in 100+ newspapers to counter the recent negative publicity concerning lawsuits, job outsourcing, etc. "There are a lot of urban legends going around these days about Wal-Mart, but facts are facts," said CEO Lee Scott. "Wal-Mart is good for consumers, good for communities, and good for the U.S. economy." The campaign includes a website, www.walmartfacts.com.

To read about some of the job openings click on Jobs in the left-hand column or click HERE.

A. C. Moore (ACMR). Last*: 27.10 ... Change**: -2.08
Hancock Fabrics (HKF). Last*: 9.36 ... Change**: -0.50
Jo-Ann Stores (JAS). Last*: 27.97 ... Change**: -0.25
Michaels (MIK). Last*: 31.00 ... Change**: -3.74
Wal-Mart (WMT). Last*: 53.99 ... Change**: -3.14
CLN Retail Index. Last*: 149.42 ... Change**: FLAT
Dow Jones Index. Last*: 10,558.00 ... Change**: -2.1%

Note: Last Friday was the fifth anniversary of the Dow's highest level -- 11,723. Five years later, it's still 9.9% below that high.

Due to increasing product liability litigation, U.S. liquor manufacturers have accepted the FDA's suggestion that the following warning labels be placed on all varieties of alcohol containers:

WARNING: The consumption of alcohol may leave you wondering what the heck happened to your bra and panties.

WARNING: The consumption of alcohol may cause you to tell your friends over and over that you love them.

WARNING: The consumption of alcohol may cause you to think you can sing.

WARNING: The consumption of alcohol may lead you to believe that ex-lovers are dying for you to telephone them at four in the morning.

WARNING: The consumption of alcohol may make you think you can logically converse with members of the opposite sex without spitting.

WARNING: The consumption of alcohol may lead you to think people are laughing WITH you.

WARNING: The consumption of alcohol may cause pregnancy.

WARNING: The crumsumpten of alcahol may Mack you thinh you can tipe reel goode 

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