Michaels divisions - Four divisions make up corporate Michaels Stores business

DSN Retailing Today, Jan 27, 2003

The growth of Michaels Stores into a $2.8 billion company depends mainly on the success of its core craft chain, but diversification has become a strategy in recent years as the retailer seeks new ways to leverage its strengths.

Four different divisions make up the. Corporate Michaels Stores business, including the Michaels and Aaron Brothers retail chains, an in-house frame manufacturing division and the latest addition, a wholesale operation.

Two of these sister divisions are in early stages of development. Michaels purchased Aaron Brothers art and framing stores in 1995, which has grown during that time from 50 stores in California to 150 in eight states. Three years ago, the company bought Star Decorators' Wholesale Warehouse, a one-store florist and decorating supplies operation in Dallas. That business is now beginning a slow expansion, with potential to grow to 50 outlets.

The final division, Artistree, manufactures frames for Michaels and Aaron Brothers. As a supportive function solely, Artistree doesn't sell products to other companies.

The company's ceo has hinted that yet another division may emerge as Michaels Stores explores new growth opportunities. Though mistakes can be made through aggressive diversification, Michaels has been careful. Each piece complements and enhances the company's core competency, which is craft retailing.

Michaels Stores

Flagship sailing full steam ahead

Michaels Stores owes the majority of its industry dominance to the growth and success of its flagship craft chain, which accounts for 95% of its revenue.

But like any mature retailer in a specialty niche, Michaels continues to seek ways to improve efficiency, grow sales and expand market opportunities as it closes in on projected saturation. At 759 stores in 48 states and Canada, the retailer forecasts it can grow to 1,300 units in current markets.

Even with years of expansion ahead, smaller markets are one opportunity the retailer is just now exploring. Last spring, Michaels unveiled its first small-format store called Village Crafts by Michaels. Averaging nearly 12,000 square feet, these stores are half the size of a typical Michaels and target communities of 70,000 to 90,000, markets too small to support a regular store. The layout and merchandise are comparable to Michaels, but scaled down 70%.

"We think there are about 150 of those markets in the country," said Doug Sullivan, evp of store development. "It's a go-forward program for us."

Four Village Crafts opened last year, and eight will debut this year. Profitability and sales per square foot are comparable to Michaels, while the average store brings in $2.2 million versus $3.7 million at a prototype Michaels.

Another growth opportunity lies in international expansion, though Michaels is only concentrating on Canada at this point. The chain had three stores in Puerto Rico, but closed those last year after a profitability analysis. With 38 stores in Canada, the company forecasts it can build to 89 in that market.

Meanwhile, a priority for several years now has been installation of state-of-the-art systems and centralized processes to enhance store productivity. This year, a key project is the phased rollout of automatic replenishment and perpetual inventory, a program that should be fully installed by 2004.

"The efficient management of inventory is what's going to give us $5 million per store and world-class profitability," said ceo Michael Rouleau.

By 2006, the company wants to reach this goal of $5 million per store, raising the bar from today's $3.7 million. This would also hike company revenue from an estimated $2.8 billion for the current fiscal year to $5 billion.

As the benefits of automatic replenishment kick in, the company expects to reallocate payroll savings back into customer service. This will be the next stage of Michaels' evolution into what Rouleau calls the "idea store," with increasing emphasis on classes, demonstrations and customer interaction.

"It's going to be a combination between using technology to really make sure we have the right goods on the right shelves all the time and then driving that to a competitive advantage by making the store a real experience," Rouleau said.

Part of the store execution strategy entails refining assortments and boosting the average ticket, which is about $18 currently. Michaels continues to refine its prototype, with the latest changes unveiled recently at a store in Southlake, Texas. Though subtle, the changes include a few switches in adjacencies, expansions in certain categories and a softer-toned signage package intended to appeal to its core customer base that's 92% female.

The changes in Southlake will be rolled out to all new, expanded and remodeled stores this year, then added to existing stores over the next three years.

Areas to be expanded as part of the new prototype include scrapbooking, wedding, apparel crafting, yarn, candy making and baby shower accessories. Consequently, areas to be cut back are candies, baskets, dried floral and readymade frames. A new kids crafts section will be added, bringing all such items together. In the past, these products were in various departments.