Analysis: Michael’s needs to work harder, faster to hold on to its market share

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Analysis: Michael’s needs to work harder, faster to hold on to its market share

By Neil Saunders, managing director of GlobalData Retail - 03/19/2019
Although a lot of the numbers from Michaels are in negative territory, some of this is a function of a shorter trading period compared to last year. On a calendar shifted basis the results were not so bad, with comparable sales up by 1.4%. However, sales and revenue were also dragged down thanks to exceptional expenses and reductions from the closure of both Aaron Brothers and Pat Catan’s stores.

Taking all of this into account, Michaels produced numbers which were reasonable but far from spectacular. This is especially so given the solid state of the consumer economy over most of the holiday period and the potential gains available to Michael’s from the demise of Toys “R” Us. With these dynamics in play, we would have expected more uplift from the underline comparable figures.

Indeed, by our estimates, spending on crafting grew by 2.7% over the reporting period; it was not stagnant as Michaels often claims. Given that Michaels adjusted comparable sales increased by 1.4%, this indicates the chain is still losing market share. In our opinion, this signals there is a lot more work to be done in combating some of the competitive forces which are reducing the relevance of Michaels to consumers.

The holiday period is traditionally a time when Michaels pulls in non-regular customers – those shoppers who don’t normally use the chain because they don’t undertake crafting themselves but who come in to purchase gifts for others. Interestingly, however, our data show that Michaels did not see that much growth in the number of people from this segment. One of the reasons is that customer overlap with non-specialist players like Amazon and Walmart has increased. Occasional customers find the crafting range of such retailers acceptable and enjoy the convenience and low prices that shopping at both affords.

Increased customer sharing has been an ongoing problem for Michaels for some time, but the dynamics this quarter underscore the necessity to boost the brand’s relevance to occasional customers. Some of this can be done digitally, especially via the use of selective promotions and marketing, an enhanced online offer, and a streamlined shopping experience. We are encouraged that Michaels is already working through some of these things, including the investments made in in-store pickup, but maintain there is much more to do in order to drive trade. Away from digital, more effort also needs to be made in stores – especially around occasions like the holidays. Greater prominence of gifting ideas, more inspiration, and more logical layouts are all important.

Away from occasional shoppers, Michaels also continues to suffer from an erosion of dedicated crafters – particularly in specific segments like candle making. Some of these more focused consumers are increasingly turning to online specialists which are often cheaper, have offers for bulk buying, and carry more extensive ranges. Individually, these players are small and somewhat invisible; collectively, their impact puts strong downward pressure on traditional craft stores – and Michaels needs to up its game to maintain its market share among this group.

Overall, Michaels is not a terrible business. Stores are reasonably maintained, investment is being made in digital, and customer service is solid. However, the market is becoming more pressured and Michael’s needs to work harder and faster to hold on to its market share. We see the year ahead as one of adjustment as the company continues to work through its response to more challenging conditions.

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