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.
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 the more than 100 Jo-Ann Store managers from around the country who awaited him.
Rosskamm arrives at Jo-Ann’s headquarters and 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.
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.
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
“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 of the years leading up to the turnaround.
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, which, 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.
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.
Carney says the retail chain was “way over inventory” and had exceeded its inventory budget, but was still out of stock on key items.
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.”
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 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.
Matter of editing
The year 2002 was kind to Jo-Ann Stores. While other retailers grumbled of 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.”
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.
” … 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 have 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.
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.
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 generate $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.
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.
Long way to go
Jo-Ann Stores 3.0 is a far cry from when Rosskamm’s grandparents, Hilda and Berthold Reich, opened the first Cleveland Fabric Store, which sold, among the sewing needles and quilting solids, imported cheese.
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 McDonald Investment retail analyst David Rodgers. ” … 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. “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
Come hear Alan Rosskamm speak June 17 at the Smart Business Live Luncheon Series.
