How Michaels plans to get craftier to lift its business now that it’s privately owned again
When Ashley Buchanan first visited some Michaels stores after the retailer’s board approached him about the top job nearly two years ago, he was not impressed. Too many items were out of stock, there were slow moving lines at checkout in the understaffed stores, pricing was confusing, and the stores themselves were hardly palaces of wonder for its arts and crafts clientele, he thought. Things online were not stellar, either.
“I thought it was a rehearsal for the end of the world,” jokes Buchanan, who took the reins of Michaels in early 2020, after 13 years at Walmart, including most recently, chief merchant and operations chief of the mass discounter’s U.S. e-commerce business. “Customers kept telling me ‘I love this place,'” he tells Fortune. “But they were also saying Michaels made it really hard to love it.”
Making Michaels easier to love among its loyal shoppers became a simpler task in March when Michaels agreed to be bought by private equity firm Apollo Global Management in a $5 billion deal, meaning Buchanan could move faster than investors typically allow publicly listed companies to.
To be sure, Michaels was hardly a disaster of a retailer. But it was clearly underachieving. The go-private deal came even as Michaels stock had quadrupled in the year before, helped by homebound Americans turning in greater numbers to arts and crafts and doing things with their hands to pass the time.
That helped Michaels score its best growth in years and strengthened its leading position in a $45 billion industry. Yet, the Apollo executive in charge of its retail investments, Andrew Jhawar, said in a statement in March that the firm sees “significant opportunity to enhance the Michaels brand.”
Indeed in 2020, Michael brought in $5.3 billion in annual sales, up 4% over the previous year. But that’s on par with arch-rival Hobby Lobby and roughly were Michaels net sales were in 2016, illustrating the work needed to finally shake years of stagnation, work better done far from the klieg lights of Wall Street.
“It would have been harder to invest the capital at the store base that we needed to invest again, to refresh the store base, as a public company,” Buchanan says. And now Buchanan can proceed as quickly as he wants to and plans, among others thing, to remodel all 1,250 or so Michaels stores in the next couple of years.
The Apollo deal took Michaels private again seven years after it returned the stock markets. Michaels had been taken private in 2006, and its owners made big strides in improving profitability but without modernizing Michaels stores or e-commerce—problems that persist.
“Michaels has an element of laziness in its stores,” says Neil Saunders, a managing director with GlobalData, pointing to how dated many stores look and how slow Michaels has been to refresh its assortment. And Buchanan, 47, is now implementing his plan to re-energize them.
Becoming a specialty retailer again
Much like the COVID-19 lockdowns were a boon for home improvement, outdoor sports, and baking, arts and crafts thrived as Americans gravitated toward new pastimes, preferably those that involved working with their hands to get a break from all that screen time. Michaels financial results kept improving throughout 2020, and comparable sales rose 12.9% in the fourth quarter.
So the pandemic has offered Michaels the chance at reinvention that a retailer its size rarely gets—an opportunity to stand for something other than old, tired cluttered stores, and discounting and the same-old same-old merchandise. “We had been revamping the entire company, and COVID accelerated that,” the CEO says.
That has meant attacking Michaels’ chronic problems with out-of-stocks that needlessly sap sales; a more concerted effort to cut its bloated assortment by ditching tired brands or products not selling well and speeding up the velocity of new products. Michaels has already cut about 10% of items. That has included a good chunk of Michaels’ home décor—a category Buchanan feels can be a distraction given the overlap with Hobby Lobby, which does a bigger home furnishings business—to better dominate its bread-and-butter categories: arts and crafts supplies. (Home décor and seasonal items generate 22% of Michaels’ net sales. Hobby Lobby is privately held and does not release financial results.)
GlobalData’s Saunders says this will go a long way in addressing the clutter problem at many Michaels stores.
Buchanan, whose children are big glitter aficionados, says that product illustrates perfectly Michaels merchandise problems. The retailer had been selling the same variety of glitter for years without ever changing it up. “We had 13 versions of the same blue. But we did not have like, you know, rainbow; it’s like just simple stuff like that,” he says.
And that wasn’t the only problem Michaels is still working on. Years of coupons and discounts at Michaels have led to a cheapening of the brand and confusion among shoppers on what value items have.
Like many retailers, Michaels is trying to wean shoppers off of what Buchanan calls “a dog’s breakfast” of coupons offering discounts of 60%, and claims some success on that front, saying that 20% off coupons are more the norm now.
Michaels got some help earlier this year on this front when arch-rival Hobby Lobby, which is almost identical to Michaels in revenue, did away with its signature 40% off a single full-price item.
If there’s an area that lends itself to so-called “experiential retail”—industry jargon for features that can make a store fun to visit—it’s arts and crafts. And yet for years, to Buchanan’s chagrin, many Michaels stores have seemed more like warehouses than places of discovery. But the COVID lockdowns have helped with that. Michaels held many Zoom events, such as arts and crafts lessons, a trend that is translating to more in-store events now that pandemic restrictions are easing.
One of Buchanan’s predecessors famously shocked Wall Street when he said a few years ago on an quarterly conference call that Michaels was insulated from Amazon’s pressure since people like to come in and touch arts and crafts. “He was wrong,” Buchanan says. Now it’s clear that it is all the more essential to create some kind of community between artists—or as Michaels calls them, “makers”—given that so many Michaels customers are selling on Etsy now, and selling a lot.
To that end, Michaels in August recently launched a “pro” site for the more serious arts-and-crafters that has instantly generated 10% of its online sales. Michaels is also planning a marketplace to create a one-stop shop for its makers.
Buchanan sees a clear path for Michaels to run away with the arts-and-crafts prize, seeing an e-commerce advantage over Hobby Lobby and limited threat from the likes of Target and Buchanan’s alma mater Walmart, which offer a limited though attractive selection. (He is undoubtedly well aware though that mass retailer Walmart just announced a line of crafts with Todd Oldham.)
And so better e-commerce (a new site is being launched next year), more attractive stores with dynamic refreshing of merchandise, and using its stores and web site to make Michaels central to all the arts-and-crafts aficionados out there, are the basics that guide his strategy.
“We’re providing customers with something that’s a little more tangible than just deep discounts,” says Buchanan. “I mean, we are not a mass retailer of arts and crafts.”
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