Michaels Cos., a retailer known for selling craft supplies, is diversifying what's on its store shelves to take advantage of gaps in product offerings as other chains file for bankruptcy protection and close their stores.
Michaels said in the past week it has purchased the intellectual property and private label brands of fabric giant Joann, a few months after announcing plans to expand its selection of party supplies around the time that Party City closed all its stores.
The pivot by Michaels, an Irving, Texas-based chain that's financially backed by Apollo Global Management, showcases how it is tackling an ever-evolving retail strategy by adding hundreds of new fabric lines and balloons to its offerings to be more competitive. It also shows how Michaels plans to more efficiently use its real estate portfolio of more than 1,300 stores in 49 states and Canada.
"These are no-brainer opportunities," David Zoller, executive vice president at Texas-based retail real estate brokerage Weitzman, told CoStar News. Michaels gets "more revenue out of their existing footprint with a bigger sales per square foot."
It also means Michaels may not have to shrink the size of its stores — something that has been happening with other retailers, Zoller said.
"It's not just adding revenue to one store. These profitable lines in the business can be reproduced throughout the country," Zoller said.
Before being bought and taken private by New York-based private equity firm Apollo Global Management for more than $3 billion in 2021, Michaels said in a regulatory filing that its average store was about 18,000 square feet. This year, retailers such as Kohl's and Macy's are trying on smaller store options, including some that are roughly half the size of their traditional stores.
Other retailers are pulling out of physical stores outright. In February, Joann decided to close its roughly 800 stores in liquidating its business after filing for bankruptcy protection for the second time in less than a year. And Party City, a chain that once touted itself as North America’s largest party goods retailer, filed for bankruptcy protection in December and closed nearly 700 stores a few months later.
Michaels announced in April that searches for party supplies on its website were up 155% since the beginning of the year. It said it planned to expand its selection of party supplies by 200% beginning in August and add more than 500 products in stores and online. And Michaels' purchase of Joann's IP and private label brands adds over 600 fabrics, sewing and yarn products to its stores.
Michaels did not respond to a request from CoStar News for additional information on its strategy.
New customers
The Joann purchase lets Michaels "better serve both new and existing customers, respond to rising demand across categories, and build on our momentum as the destination for creating and celebrating in North America," Michaels CEO David Boone said in a statement from the company.
In the end, it comes down to bringing more customers into stores, said Mike Geisler, the founding principal and managing partner of Dallas-based Venture Commercial.
"The balloon business was a huge profit center for Party City," Geisler told CoStar News. "It was smart of Michaels to pick up this business, where there are good margins."
Likewise, the fabric business also has good margins, and Michaels will have few rivals outside of regional players, Geisler said. Fabric lines — as well as balloons, once inflated — can take up some real estate, Geisler said, but it's hard to know how much real estate could be devoted to these new offerings.
The added offerings will get new customers through Michaels' doors, Geisler said, adding this is a win for the retailer as other retailers are financially struggling or closing up shop.
"If Michaels can continue to run their stores well, they could have a bright future as their business evolves," Geisler added.
Alan Shor, president of The Retail Connection, said Michaels' diversification into party and fabric offerings makes the retailer more competitive.
"Retailers have to think outside the box today," Shor told CoStar News. "It is so competitive. Inflation has impacted the customer's buying power and e-commerce continues to take billions of dollars out of brick-and-mortar stores."
By adding offerings, Shor said, Michaels can bring in new customers and give them something they can't experience when online shopping, like touching fabric or picking up a helium balloon order for a child's birthday party.
"If they can take a small piece of the market share of each and augment their top and bottom line, it will be a smart move," Shor said.