As Media Outlook Cools,
She Tries Scrapbooks;
Wooing 'Elite' Dealers
April 25, 2007; Page A1
On a recent episode of her daytime television show, Martha Stewart set out to make a decorative songbird out of wool and felt. It didn't go smoothly. She struggled to wind the wool into a head and strained to insert wire legs. "This is a tough little bird," she told viewers, frowning.
Now Ms. Stewart hopes a high-stakes crafts project for her company will be less exasperating. On May 1, Martha Stewart Living Omnimedia Inc. will roll out a line of more than 650 products aimed at the legions of hobbyists who assemble elaborate scrapbooks. It's the company's biggest merchandising initiative since it teamed up with Kmart stores in 1997, and it represents a strategic shift toward licensing its brand and selling via the Internet.
What does the domestic-arts maven see in a dowdy industry where merchandise is sold in cluttered stores stacked floor to ceiling with pipe cleaners, Styrofoam balls, glue sticks, beads and fake flowers?
"Paper crafts may sound like a quaint pursuit," says Chief Executive Officer Susan Lyne. "But it's actually a rapidly growing business." Preserving photographs and memorabilia in decorated albums -- enthusiasts call it scrapbooking -- has grown into a nearly $3 billion industry, according to the Craft & Hobby Association. Martha Stewart Living hopes to ring up enough sales of $1.69 colored markers, $4.99 bottles of glitter and other merchandise to generate $100 million of annual sales within three years.
The rollout of Martha Stewart Crafts is part one of a planned merchandising blitz that the company hopes will return it to profitability and deliver long-term growth. Although Martha Stewart Living posted revenue of $288 million in 2006, up 36% from a year earlier, it had a loss of $17 million. It hasn't turned a profit since 2002, the year Ms. Stewart became entangled in a securities-fraud investigation that resulted in her five-month imprisonment on an obstruction-of-justice charge.
Ms. Stewart's high-profile media businesses have traditionally been the company's engine. But both magazines and television face serious long-term challenges, including the migration of advertisers to the Internet and a declining audience for daytime television.
Ms. Lyne's strategy: steer Martha Stewart Living into low-cost, high-margin licensing deals. Ms. Lyne hired Robin Marino, former president of Kate Spade Inc. and a veteran of Burberry Group PLC and Federated Department Stores Inc., as the company's first president of merchandising. Ms. Marino already has lined up deals to sell Martha Stewart dinnerware and furniture at Macy's, premium Martha Stewart house paint at Lowe's and even Martha Stewart-branded homes.
But it's Ms. Stewart's bet on crafts that investors and competitors are watching most closely. The company sees the sector as a promising new revenue stream, one perfectly suited for the Internet. Its entire scrapbooking line will be offered for sale on the newly redesigned MarthaStewart.com, the company's first major retailing attempt via its own Web site.
To succeed, Ms. Stewart will have to connect with a far-flung world of customers, including legions of Middle Americans who may never have used her tips on home decor or holiday cooking. She put her designers to work coming up with new twists on such mundane products as scrapbooks, ribbon, and cardboard boxes. Her executives went looking for a retail partner whose stores didn't look like a mess. And Ms. Stewart herself hit the road to try to woo some hard-core crafters.
Martha Stewart Living has always stood out as a rare business built around a single person's taste and sensibility. The partnership that put its products into Kmart stores has been rocky, with sales lower than expected. That convinced the company of the importance of tightly controlling product design, marketing and even store layouts. Otherwise, the brand will suffer, it concluded.
The crafts business, in some ways, is eccentric. Even outlets operated by big craft chains often resemble Main Street hardware stores from a bygone era, with oddball items stacked inefficiently in a dusty jumble. Suppliers are a hodgepodge, ranging from the office supply giant 3M Co. to a two-person company that sells a single item, Baby Tooth Album Inc.
Scrapbooking draws a diverse crowd, crossing age groups and ethnicity, and is particularly popular in smaller communities. It's possible that crafts and scrapbooking enthusiasts will view Ms. Stewart's glitzy Manhattan media company, along with her exacting recommendations for doing things, with a measure of suspicion.
"I'm not sure people want to bring a brand into their scrapbook," says Shelly Izen, the owner of Scrapbook Fever, a crafts store in Salem, Ore. "Martha's stuff looks pretty, but crafters are strong-willed and don't want to be told what to do. Martha's stuff seems very 'do it this way or no way.' "
Ms. Stewart, in an interview, predicted crafters will ultimately embrace the line. "We have some high-quality, wonderful products that I'm sure people are going to love," she said.
The U.S. craft andrecordedhohobby industry $29.5billiondollars in sales in 2006
Scrapbooking dates back to the 1800s. Mark Twain helped popularize the practice by patenting, in 1872, a "self-pasting" book that had thin strips of glue on each page. It wasn't until the late 1970s, when interest in genealogy spiked following Alex Haley's "Roots" book and TV miniseries, that a cottage industry sprouted to cater to scrapbook fans, who often fill their books with pieces of family history.
Between 1998 and 2006, scrapbooking grew from a $350 million hobby fueled by mom-and-pop stores to a $2.6 billion business, according to the Craft & Hobby Association. Big retailers began stocking items for enthusiasts, such as specialty scissors, stickers and sparkling paper. Wal-Mart Stores Inc. in February said it would stop selling fabric by the yard in certain stores and begin offering crafts supplies.
"It's not a very sexy business," says David Abelman, senior vice president of marketing for Michael's Stores Inc., a big operator of arts-and-crafts outlets in the U.S. and Canada. "But a lot of people have realized it's a good one."
Ms. Lyne hopes he's right. Worries about the future of Martha Stewart Living's media holdings have contributed to a 21% drop in the company's stock since Dec. 20. The CEO is eager for licensing deals to kick in. "The year ahead is an important one for us," she told investors in a conference call in February.
Martha Stewart Living's stable of magazines -- Living, Everyday Food, Body & Soul, and the newly launched Blueprint -- are growing, Ms. Lyne notes. Ad pages for its flagship magazine, Martha Stewart Living, totaled 1,287 in 2006, according to the Publishers Information Bureau, up 95% from 2004, when advertisers fled following Ms. Stewart's conviction.
But the magazine has yet to regain its 2002 peak of 1,887 pages, and the gains are slowing. That troubles some investors and analysts. In this year's first quarter, ad pages in Living increased 11%, compared with an 80% increase in the same period last year. By comparison, Time Warner Inc.'s Real Simple magazine, which gobbled up market share during Ms. Stewart's legal troubles, saw ad pages rise by 32% in the first quarter.
Ms. Stewart's chief financial officer, Howard Hochhauser, says the company expects advertising revenue to grow by about 25% in 2007, due largely to a recent price increase. He says the company views publishing as a "vibrant" business.
Ms. Stewart's syndicated television program, "Martha: The Martha Stewart Show," has won awards and attracted strong advertiser interest, but hasn't met ratings expectations. The program attracts about 1.5 million viewers each day, according to Nielsen Media Research, about 40% fewer than stations anticipated when it launched at the beginning of the 2005-06 season.
Shows with similar ratings typically face cancellation. But General Electric Co.'s NBC Universal, which distributes the program, has agreed to give "Martha" another year before deciding its fate. Ms. Stewart recently fired the show's executive producer as part of an overhaul effort. "We are bringing back more of what Martha is known for, teaching and how-to inspiration," says Ms. Lyne, who notes that much of daytime television has been struggling. The company cautioned investors in February that it expects TV revenue to drop in 2007 because of a failed DVD effort.
The merchandising relationship with Kmart, a unit of Sears Holdings Co., has also been disappointing. In recent years, sales have been lower than anticipated, partly because higher-end consumers interested in Martha Stewart products were unenthusiastic about her Kmart line, retail analysts say. To make matters worse, Kmart has shuttered dozens of stores. A Kmart spokesman declined to comment. Ms. Lyne says the company plans to "refresh" its Kmart product assortment later this year. The current agreement between Ms. Stewart and Kmart is set to expire in 2010.
Despite the Kmart problems, the company believes that merchandising and licensing deals can deliver growth opportunities and high profit margins, while requiring little upfront investment.
Ms. Lyne says the crafts push will lend itself to Internet promotion and merchandising. Scrapbooks are often assembled communally, with aficionados hosting "cropping parties." MarthaStewart.com aims to both sell scrapbook supplies and serve as an online forum for crafters. Users will be able to post videos and photos of their projects, view craft-related video clips from Ms. Stewart's show, and download instructions. The company says crafts is already the second most visited section of the site, after food and cooking.
To protect its brand, Ms. Marino sought an exclusive partnership with a specialty retailer. The company decided that two national chains -- Jo-Ann Stores Inc. and Hobby Lobby Stores Inc. -- were too downscale, according to two executives involved in the matter. Representatives of those companies didn't return calls seeking comment.
Martha Stewart Living executives opened negotiations with Michael's Stores, which has 920 stores in the U.S. and Canada. The typical Michael's store stocks 44,000 different items, says Harvey Kanter, the chain's executive vice president and chief merchant. In exchange for a commitment from Michael's to reduce clutter by reorganizing its shelves, Martha Stewart Living named the retailer the exclusive bricks-and-mortar outlet for its merchandise, at least until the fall.
Mr. Kanter say the changes were helpful but not extensive. "We just needed to think a little bit harder about our customer's needs," he says.
For their product line, Ms. Stewart and Hannah Milman, editorial director of crafts for Martha Stewart Living, tried to come up with new twists on old products. Ms. Milman says innovations include adhesive-backed ribbon and "collector boxes" in which crafters, instead of pasting keepsakes into scrapbooks, can create displays for wall-mounted dioramas.
Senior licensing manager Alex Perruzzi says the design flourishes will allow the company to market and price the merchandise, which also includes some paper products unrelated to scrapbooks, as premium and "aspirational." A white cardboard box for holding cupcakes -- think school bake sales or housewarming presents -- is based on one from Ms. Stewart's favorite bakery in Paris. Sheets of colored paper aren't described as brown, but as "Norwegian chocolate."
In January, the company dispatched Ms. Stewart and a dozen executives to Anaheim, Calif., to give a group of "elite" private craft dealers a sneak preview of the line.
As the invited dealers sipped wine and munched on gourmet Asian appetizers, Ms. Stewart and her team talked up products ranging from stickers of daisies ($4.99 a sheet) to an ergonomically designed paper punch ($9.99). When Ms. Stewart held up one of the blank scrapbooks from the line, the crowd responded with a chorus of oohs and aahs.
The dealers, who had started lining up for Ms. Stewart's demonstration two hours in advance, reacted positively to most of the products. But some references to Ms. Stewart's deluxe lifestyle didn't play as well. When Ms. Stewart described how she converted an entire floor of her "winter house," located on her Bedford, N.Y., compound, into a craft-making studio, several dealers rolled their eyes.
"This is just a little preview, but we are devoted crafters, as I hope you can tell, and this is just the beginning," Ms. Stewart said.