2016/07/06

New Frame Of Mind: How Michaels Stores Are Crafting A Modern Brick-And-Mortar Experience


Emerging from the escalator of the subterranean Michaels in midtown Manhattan, CEO Chuck Rubin pauses at the entrance to make a point. To his right is a rack containing a dozen adult coloring books, their pages full of fairies, dogs, butterflies and Harry Potter characters. They’re one of the hottest items in the store and brought in an estimated $40 million in revenue last year. A decade ago Michaels, which prided itself on stocking the basics, probably wouldn’t have carried those books and certainly wouldn’t have displayed them prominently. Now trendy products are front and center, part of Michaels’ attempt to attract new types of customers and make its cavernous stores more navigable. “We’re not Apple. We don’t make the new iPhone that people will line up in advance for,” Rubin says. “We need products that people want in an environment they want to shop in.”

Michaels is one of the most surprising retail successes of recent years. It has stuck to transforming its brick-and-mortar stores while almost completely ignoring e-commerce. Back in the 2000s it had a more limited concept of its customers and what it should sell them. Then Blackstone Group and Bain Capital, the private equity firms, bought Michaels for more than $6 billion in 2006 and watched sales stall and profits vanish. Change didn’t come easily. Six people had the CEO role before Rubin, the son of a Boston liquor store owner who worked his way up through Office Depot, took the job in 2013.

Rubin knew Michaels couldn’t simply stick to its knitting. While the company’s core hasn’t changed–it sells cheap craft supplies–Rubin has modified its stores to make it easier for novice crafters to find items. They’re bringing in more of those types of customers by moving beyond sewing-room basics, adding cooler items, like those coloring books, and Michaels-exclusive products, such as Isaac Mizrahi-branded yarn .

Its 1,352 stores brought in $4.9 billion in sales last year, up 22% since 2010. Sales per square foot are around $225, rising from $205. Earnings have more than tripled to $363 million. And since Michaels went public again two years ago, its stock has increased almost 60%, while the S&P Index gained 2%. “Michaels has done a lot to improve store operations–some basic things it lacked in the past,” says Michael Baker, a Deutsche Bank retail analyst.
The most striking part of Michaels’ success is how it contradicts the digital era’s implied mandate for retailers–that survival hinges on selling online. But Michaels hasn’t wasted millions competing withAmazon.com AMZN +0.62% on e-commerce. It’s grown while focusing squarely on improving what’s within its stores’ four walls.
The namesake of Michaels was a bespectacled, cherub-faced Texan named Michael Dupey. He turned his dad’s Dallas five-and-dime into a chain of crafts stores and sold them to the billionaire Wyly brothers in 1983. The combined firm IPOed as Michaels Stores a year later and expanded steadily through the ’90s.

By the time it attracted Bain and Blackstone, it had two co-CEOs, Jeff Boyer and Greg Sandfort. As the business began to decline the next year, the duo departed. Brian Cornell, a grocery veteran, replaced them before leaving to run far bigger Sam’s Club in 2009. Then Wal-Mart executive John Menzer took the spot for three years before suffering a stroke. Another pair of co-CEOs (Charles Sonsteby, the chief financial officer, and Lew Klessel, a Bain Capital executive) filled in until stability finally presented itself in the form of Chuck Rubin.

At first blush Rubin seemed an unlikely choice. He didn’t knit, bake or paint. But he was just the type of outsider he wanted Michaels to draw in. To make Michaels stores a more friendly environment to new shoppers, he has added big red signs to guide customers to departments, like baking supplies and paint. The displays are more accessible now–shorter in height, less crowded and newly adorned with decals explaining an item’s best use. Employees wear easy-to-spot cardinal-colored vests.

Better stores alone weren’t enough. Michaels needed more popular goods that could build a broader audience, too. That’s why Michaels has started selling things like washi tape–bright rolls of decorating tape in every shade and design imaginable–and kinetic sand, a Play-Doh-style moldable substance. And then there’s the strange success of the Rainbow Loom, a child’s toy that turns colorful rubber bands into bracelets, necklaces and key chains. His executives had spotted the toy for sale in a couple of Dallas stores in spring 2013. After racing to strike a supply deal with its creator, a Nissan Motors engineer, Michaels sped up its supply chain to get Rainbow Loom on shelves in time for Christmas 2013. It became a smash hit, adding an estimated $100 million to 2013 sales. “Rainbow Loom was a grand slam. It doesn’t happen too often,” says Rubin. But, he adds, “the skills that we developed were reusable.” Today Michaels often gets products to shops six months after they’re designed (or bought from a supplier). It used to take a year plus.

The Web remains a no-man’s-land for Michaels. The company doesn’t believe selling craft supplies is well suited to e-commerce. A large part of Michaels’ clientele want to, say, feel a fabric before buying it, and a lot of its sales come through spontaneous purchases and browsing–the kind of discovery shopping keeping Barnes & Noble open. Even if Michaels wanted to compete with Amazon, it almost certainly couldn’t build something bigger or better. Why go face-to-face with a giant when you can dodge it? Still, some think Michaels can’t hide forever.“Nobody is immune from Amazon,” says Wedbush Securities analyst Michael Pachter.

No more than 5% of Michaels’ revenue comes from online, and its e-commerce business didn’t exist until two years ago. Rubin knows all that stands between Michaels and Bezos is the in-store experience, which largely explains his preoccupation with upgrading the shops. And he knows his stores need to continue improving. “It can be a little intimidating–that’s the downside,” he says from the Manhattan location, displays of graduation party supplies and day planners behind him. “The plus side is that this is a place that has everything for creativity.”
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