Craft work Featured

8:00pm EDT May 29, 2003
It's early February 2001, and Alan Rosskamm drives back to Jo-Ann Stores Inc. world headquarters in Hudson.

It's mild and sunny, unusual for February, but Jo-Ann Stores CEO Rosskamm doesn't notice the weather -- or anything else for that matter. The farms, quaint shops and strip shopping centers along Darrow Road blur past, barely registering.

After months of denial, it is this morning that Rosskamm finally wakes up to the fact that his fabric and craft retailer is in trouble. Big trouble.

After a string of acquisitions, a multistate superstore rollout and an onerous introduction of a massive inventory control system, the company held $245 million in debt while profits were down 153 percent from the year before. Its New York Stock Exchange listed stock traded at less than half its value from the previous year.

With these facts weighing on him, now was not the best time to deliver a rousing speech to more than 100 Jo-Ann Store managers from around the country who awaited Rosskamm at Jo-Ann's headquarters.

Rosskamm enters the conference room. The cheery managers, perhaps reading his worried face, quickly silence and sit down to hear what they had expected to be an inspiring state-of-the-company speech.

"I went down there and said, 'Hey group, I don't have anything uplifting to tell you, this is our situation,'" says Rosskamm, who in hindsight can chuckle about the event. "It was the first time I got in front of a big public audience and really said, 'This is our situation.'"

What Rosskamm didn't expect was his managers' response.

"I had people sending me cheer-up cards, saying, 'It is not as bad as it looks, we're going to get through this,'" says Rosskamm, lunching on turkey and Swiss on sliced sourdough bread. "What that told me was that when you really confront your people, your team, with the hard facts, there is tremendous resilience there. They step up, and it's incredibly gratifying the way the Jo-Ann team reacted."

It was not only the buoyant reaction of Jo-Ann's 22,000 employees but also the nation's Zeitgeist which helped rebound the retailer from the time Rosskamm announced the company's turnaround plan in March 2001 to today.

As witnessed at stores like Home Depot and Lowe's, and Jo-Ann competitors like Michael's Stores and Hancock Fabrics, over the last two years, consumers seemed obsessed with improving and beautifying their homes. The nation's crafts and sewing industry grew from $23 billion in 2000 to $29 billion in 2002, according to the Hobby Industry Association, and in 2002, consumers spent $20 billion more on crafts and sewing than they spent at the movies.

The "nesting" trend couldn't have been better timed for Jo-Ann.

"Luckily, sewing and crafting seem right for America right now," Rosskamm says. "The whole nesting and cocooning phenomena, people spending time at home, looking for ways to express caring for family and friends with personalized gifting and all of that certainly helped."

The turnaround isn't quite over, but the company is now stable enough to allow Rosskamm and his team to focus on the next growth phase of the business, bolstered by the lessons learned not only over the last two years of turnaround but by the company's 60 years in business.

Too much, too fast

Alan Rosskamm has a unique look for the leader of a $1.5 billion company. While most CEOs opt for the clean-shaven look, he sports a broad mustache. His short, white swept-back hair is offset by black eyebrows and dark eyes. He's in the creativity business, so why not distinguish himself with a unique look?

Exceedingly polite, Rosskamm sounds more like a physician than a retail magnate. His words are calm, patiently delivered, even when discussing unpleasant topics like having to close 150 stores and cutting 8 percent of his work force.

"What we were guilty of clearly is undertaking too much, too fast, and not paying attention to the rule that a strategy is only as good as your ability to execute it," Rosskamm says. "We really stumbled badly on the execution because we were trying to roll out superstores the same time we were trying to put in major new systems, build a new logistics capability -- all envisioning of this long-term growth strategy -- right after we had digested a major acquisition.

"We both got leveraged financially, but more importantly, we got beyond our human capacity to execute effectively."

Jo-Ann grew from 655 stores in 1994 to 1,058 by 1999, primarily through acquisitions. The two biggest purchases were Cloth World in 1995, when Jo-Ann picked up 340 stores, then in 1998, when it acquired West Coast chain House of Fabrics and added 262 stores.

Although many redundant stores were closed after those buyouts, the acquisitions nearly doubled the size of Jo-Ann Stores. That, in part, required the retailer to take on more than $245 million in debt by 1999.

Under the weight of 400 new stores, many on the West Coast, Jo-Ann's Hudson distribution center was bursting with extra inventory and was too hopelessly low-tech to support a chain of its size. A West Coast distribution center and a better inventory control system were now critical.

"Operationally, the company had started to struggle," says David Rodgers, a retail analyst for McDonald Investments in Cleveland. "That was born out in the operational results, and we saw the stock price react."

With the influx of new inventory, the chain ran a "Band-aid" approach to logistics for at least two years after the last acquisition, says Jo-Ann Stores chief financial officer Brian Carney.

"We rented a contract facility in California to get product to the stores," he says. "The stores were getting two receipts from two warehouses. We had a lot of inventory in back rooms."

Meanwhile, Rosskamm and his logistics officers prepared the launch of a massive $33 million retail inventory control system by German conglomerate SAP AG.

"We just had a whole host of problems, and we're not blaming SAP at all," Carney says. "It was a rough installation. We have to take some of the blame, but it's a very exacting system. With SAP, you have to list every item to every store, otherwise it won't replenish. And if it doesn't think you're supposed to have it, it ignores that you're selling it."

Jo-Ann spent five months debugging the SAP system. However, while the system was getting its kinks worked out, Jo-Ann buyers and store managers ignored its commands. Buyers wrote their own purchase orders based on demand from store managers, not on what SAP was telling them.

"Everything was done by word-of-mouth," Carney says. "So, at the end of '01, we were way over inventory, we had blown our inventory budget, yet we knew we were out of stock on our key items. Alan always said we were in the worst spot a retailer can be: You've got all cash tied up in inventory, and you're not selling the stuff that you've invested in."

Fortunately for Jo-Ann, it had built a strong brand since it opened its first Cleveland Fabrics Store in 1943. Customers remained loyal to the chain despite its inventory troubles, although Rosskamm remembers one enlightening incident in Florida when a customer threw a swatch of black fabric in his face.

"'How can I make this skirt if I can't buy a seven-inch black zipper in your store?'" Rosskamm remembers the woman shouting. "And our poor frontline sales associates were hearing that every day."

Flow the product

The result of that SAP and infrastructure investment can be witnessed today through an unassuming "Store Personnel Only" door in the back of Jo-Ann Store's Hudson retail store. Once you step through the door and into the 1.2 million square foot distribution facility, you realize what an undertaking it has been for Rosskamm since the acquisition campaign began in 1994.

Joseph Erli, manager of the Hudson distribution center, walks the seemingly endless aisles of 26,000 Jo-Ann products stacked on racks 20 feet high and carefully bar-coded, everything from white shirt buttons and thimbles to ficus trees and resin furniture.

Green conveyor belts carrying cardboard boxes and blue plastic cartons rumble overhead. There are seven miles of conveyer, says Erli, a stout man with a thin gray beard and large bifocals. Yellow forklifts with flashing red lights beep as they zoom past. The entire warehouse roars with the sound of constant movement and activity.

What you don't notice is people. There seem to be very few until you arrive at the main sorting or "pick" area. There, dozens of workers travel graded metal catwalks -- as high four stories -- moving products from boxes into plastic cartons. Once the carton is full, it's placed on a conveyer belt in the middle of the catwalk, which carries it to the shipping area.

This constant stream of product moving in and out of the distribution center is a drastically different operation than it was only six years ago.

"We used to go through shipping and receiving cycles," Erli says. "In other words, we'd get all these import containers into the outside building and we'd do nothing but receive for two solid weeks, fill the building up and then we would pick it out for two weeks. Now we flow the product."

Erli, who came out of the supermarket and home improvement retail industries, helped implement the changes in distribution, including its conveyor system, the warehouse management software and the sorting area. But with the new stores, Erli quickly ran out of room with the seasonal influx of products.

In 1999, Jo-Ann broke ground on its 600,000-square-foot West Coast distribution facility in Visalia, Calif. The warehouse, which handles one-third of Jo-Ann's inventory, opened in April 2001 and helped remove the burden from the overstocked Hudson facility.

At the same time the California facility opened, the bugs were worked out of the chain's SAP system. Stores began to get restocked with high-demand products automatically, and the system pointed out redundant products and items that just weren't selling. The retailer was able to dump 20 percent of inventory in its distribution center, a $16 million reduction.

Inventory in smaller, traditional stores dropped 12 percent, and its superstores' stock sank by 17 percent.

"We're well ahead of the curve again on the logistics," Carney says. "By having the right systems in place and the right logistics network in place, it has let us now start driving the top line again."

Matter of editing

The year 2002 was kind to Jo-Ann Stores. While other retailers grumbled about a slow economy and low consumer confidence, Jo-Ann reported same-store sales increases -- the best indicator of a retailer's health -- every month in 2002.

For its most recent fiscal year, which ended Feb. 1, 2003, Jo-Ann reported $44.9 million in profits versus a $14.9 million loss from the previous fiscal year. Its stock, which traded at $10.70 a share the previous year, now traded at $26.18 per share.

In March 2001, Rosskamm laid out a three-year goal for the turnaround. Two years later, it appears as if he is nearing the finish line. Logistics are running smoothly, debt was reduced by $180 million, 148 underperforming stores were closed and more than $50 million of the least productive inventory was eliminated, all of which freed up more than $80 million cash.

"It really became a matter of editing and getting down to core," Rosskamm says. "Editing out the redundant product, and the nonproductive products, editing out the nonproductive stores ... and then also be very well edited in terms of go-forward spending and controlling your capital budget ... really focusing only on what's most important and getting full alignment of the whole organization, and then communicating like hell to make sure that everyone understands what needs to be done."

With most of the "editing" completed, Rosskamm has turned his sights on Jo-Ann Stores' next growth phase, informed not only by the lessons of the turnaround but also acknowledging that the retailer got more than a little bit lucky.

"As we look toward the future, we're not wasting time patting ourselves on the back," Rosskamm emphasizes. "We're very proud of what we did, but all the things we have apparently done right in the past two years have been helped and made a lot easier by the fact that our industry has been much in favor with the nation's consumers."

Remarkable phenomenon

Jo-Ann's growth, Rosskamm believes, will be in the 35,000-square-foot superstore or big box, the model that has been so successful in the last decade for sporting goods, books and electronics. The move will be the third major reinvention of Jo-Ann Stores.

The retail chain began with one 1,400-square-foot store in Severance Shopping Center on the corner of Euclid and Superior, where Rosskamm spent nearly every Saturday as a child. The store, named after a combination of the names of Joan Zimmerman and Jackie Ann Rosskamm, the daughters of the founders, began as small, free-standing stores located in shopping centers. During the 1970s and 1980s, Jo-Ann moved into larger, 4,000-square-foot spaces in regional malls.

Shortly after Rosskamm became Jo-Ann Stores' CEO in 1985, the chain moved from the malls into 10,000-square-foot stores in strip malls, which was the business model at the time. Rosskamm remembers asking his father, Martin, to let him take on the challenge.

"I said, 'I'm probably not ready, but we're really drifting, give me a chance,'" Rosskamm remembers. "To his credit, he did so. Although I heard about it at home, in public he never second-guessed me, and he gave me the opportunity to turn things around at that time. Now we think we have a formula that again will give us a huge opportunity to grow and serve our customers."

The superstore rollout began in 1995 with Jo-Ann's Hudson flagship store as a test market laboratory, called "Jo-Ann etc." The store was 46,000 square feet, about 11,000 square feet larger than the reformatted model Rosskamm plans to pursue.

"We said, 'Let's put everything in the box we think she would like buy from us, and see what it looks like,'" Rosskamm says. "If it never makes a penny, we'll still be a better company because we'll learn about things we can apply to the chain, products we'll discover and whatever."

Due to the acquisitions, inventory overhaul and the challenge of surmounting long-term debt, the superstore rollout stalled in the late 1990s. But Rosskamm was still encouraged by the numbers created by these bigger boxes.

The traditional 14,000-square-foot stores do $100 of sales per square foot, while the older 45,000-square-foot superstores do about $130 per square foot. The 35,000-square-foot superstores -- the prototype Rosskamm plans to pursue -- will launch with $150 of sales per square foot and mature at between $160 and $170 a square foot, according to Jo-Ann Store's estimates.

Rosskamm points to Jo-Ann's Montrose store as a harbinger of the nationwide superstore's success. Early last year, Jo-Ann closed the 16,000-square-foot store, which had about $2 million in annual sales, slightly better than the chain's traditional stores. A Michael's store moved into the same shopping center, and within six months, Jo-Ann re-opened across West Market Street in a former Homeplace 35,000-square-foot big box.

The Jo-Ann superstore, which opened in October last year, is expected to land $5.3 million this year. Michael's, which never had a store in the area, has $3 million to $4 million in sales.

"Out of the West Akron area, the marketplace has gone from supporting $2 million to supporting $8 million of revenue," Rosskamm says. "It's a remarkable phenomenon. Making more product available in a better environment with more support is giving the consumer the inspiration and the confidence to do more."

And apparently to buy more.

Even where the Jo-Ann name is new, like in Phoenix, consumers are responding to the superstore model. Four years ago, Jo-Ann had 14 smaller traditional stores in that market, with annual sales of $13 million. Six of those closed and were replaced with four superstores. Last year, those 12 stores landed $35 million in sales.

"What's unique about them is that they are the only ones that cross over in the sewing and craft and home d├ęcor," says analyst David Rodgers.

Rodgers says Jo-Ann's superstore niche will be in selling most of what its competitors offer in the areas of craft, sewing and home decor, so the consumer will shop Jo-Ann first and get what she needs. Then, if she can't find everything, only then will she go to a Michael's Store, which is primarily craft, or a Hancock Fabric, which focuses on sewing.

The superstores are also in prime "Class A" retail locations, while the traditional stores are in less competitive, harder-to-find strip mall locations.

"While it's not a completely unique strategy, it's unique in the world of sewing and craft, and it's proven it can be successful, but it's still early in that process," Rodgers says.

Rosskamm is confident the Montrose phenomena will bear out across the country. Industry research firm Thomson & Assoc., which has performed similar market research for Home Depot and other retailers, reported to Jo-Ann that there are at least 600 locations where demographics would support a superstore.

"Our ability to take any major U.S. market and replace traditional stores with superstores gives us incredible power to grow the business and to gain market share," Rosskamm says. "It's all from the leverage of being able to provide a more complete offer to the consumer, one-stop shopping, and it's the reason we're so excited about the opportunity to roll out these superstores across the country."

The challenge for Rosskamm is to convince otherwise those consumers who still think of Jo-Ann Stores as only as a sewing store -- not to mention the fact that Michael's is still a larger chain in annual sales and number of stores. Rosskamm says there will be some Sunday newspaper advertising inserts, but the main marketing effort will be through direct mail targeting the company's extensive loyal customer base.

"Although we never want to test that loyalty again, it is certainly gratifying that over 60 years, we've built enough confidence in our brand that she gave us another chance," Rosskamm says. "And now I think she's much more satisfied with what we have for her."

Long way to go

Jo-Ann Stores 3.0 is a far cry from what it was when Rosskamm's grandparents, Hilda and Berthold Reich, opened the first Cleveland Fabric Store, which sold imported cheese among the sewing needles and quilting solids.

Rosskamm has the data to back up his superstore plan and the knowledge gained from the latest turnaround. He anticipates opening 30 to 40 superstores over the next two years, with an annual earnings growth of 10 percent to 12 percent.

"They're not necessarily in a turnaround mode, but they're still in a transition mode," says Rodgers. "Now, as they start to roll out 20 to 25 stores this year, this is the first time they've done that. So they still have a little bit to prove to Wall Street, in that can they do this profitably and on time, and what's the impact going to be for the consumer. If they can complete the transition this year and move into next year and accelerate those store openings, the stock will reflect that."

The question is, will the nesting and cocooning trend continue? Will aging baby boomers continue to spend their time and disposable dollars on leisure activities? Rosskamm hopes so, but he isn't relying on consumer whims to guide his growth strategy.

"Everybody talks about it, but it's about continually improving your ability to deliver the right product to the customer at the time she wants it," Rosskamm says. "It's having all those backroom systems and processes in place, so you when you start focusing on new markets and new stores, the core business is going to run efficiently.

"We have become a much more efficient, much better retailer, but we still think we've got a long way to go." How to reach: Jo-Ann Stores Inc., (330) 656-2600 or www.joann.com.