Life After Disruption: A Conversation with Mark Hill at AFCI

The Association for Creative Industries (“AFCI”) is a non-profit trade group. It facilitates learning, discovery, and connections among a membership predominately comprised of niche producers, specialty retailers, and designers. I recently had the opportunity to speak with Mark Hill, the president of AFCI, about the challenges and opportunities faced by his industry after successive waves of competitive disruption.

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The following transcript has been edited to make it easier to read. This is Dave Bayless for Human Scale Business. I’m speaking with Mark Hill, the president of the Association for Creative Industries (“AFCI”). We’re discussing the challenges and opportunities facing the creative entrepreneurs and businesses his organization serves. What is the Association for Creative Industries? The Association for Creative Industries is a non-profit trade association. We represent retailers, manufacturers, designers, and business service providers within the creative art products industry. The bulk of our membership is based in North America, but we have members in about 20 different countries. We also have an affiliate organization in the U.K. I’ve used the term “creative entrepreneurship,” and I think I know what it means. What do you at AFCI mean by the creative art and creative art products industry? We represent businesses who are involved in creative activities or creative products. We used to be called the Craft and Hobby Association, and that just turned out to be too narrow. We represent companies that produce fine art products such as paint, brushes, and canvas. We also represent companies in the paper-crafting business that make scrapbooks, journals, and planners. Members are also involved in cake decorating, cookie decorating, do-it-yourself home décor, upcycling furniture, stenciling, and stamping. So our membership represents a very, very broad range of product lines. It can be pottery, fine art, and crafts. The scope of our membership also includes kids’ crafts and supplies such as pom poms, chenille stems, and markers used for creative applications. So, our scope is broad. That’s the reason we changed our name from the Crafts and Hobby Association to the Association for Creative Industries. When a company becomes a member of the AFCI, what are the primary benefits they seek and receive? Our brand story is focused around three pillars: learn, connect, and discover. Learning entails an educational conference at our annual trade show in January, and we also provide ongoing education in the form of webinars and podcasts. We have a major trade show where we bring together about 300 to 400 of our suppliers and providers and 3,000 to 4,000 buyers from all over the world. We also fund research on consumer spending habits, participation levels, and attitudes towards creative activities. Our research provides key insights for our retail trade members. If you’re a startup business, our research provides necessary information for banks, private equity firms, or others investors. In addition, we provide the ability for people to connect. That’s through member lists, activities at trade shows, and peer-to-peer connections. Last but not least, we provide affinity benefits for our members. These include discounts on UPS, FedEx, office services, and business services that add up to real cost savings for our members. Tell me more about the nature of the companies that are members AFCI. You described a pretty broad range of functions, but who are actually members? We break our membership down into three groups: retailers, suppliers, and designers. Retailers include very large national chains such as Michaels and Jo-Ann Stores as well as smaller, independent retailers. Some retailers have physical stores; some just have an online presence; some have both. The majority of our retail members—well over 90%—have less than $500,000 in annual sales. They are truly the small, local, independent retailer. Among suppliers, we have members that are large public companies having sales of $500 million to $1 billion. However, around 70% of our supplier-members have sales of less than $1 million. So, a lot of our suppliers are small, creative businesses. About 300 designers are members. They develop creative projects which go into Pinterest, Instagram, and Facebook. They design products for manufacturers that use the suppliers’ basic materials. Designers provide the inspiration for consumers to utilize the materials. There’s been a lot in the news about the turmoil that retailing is going through. What industry trends are impacting your membership the most, and how is AFCI helping them to manage change? Disruption is perhaps the best word to describe the challenges for retailers. We’ve seen the emergence of national, category-focused chains such as Michaels, Jo-Ann Stores, and Hobby Lobby. We’ve also seen the growth of crafting or creative arts sections in chains ranging from Walmart, Target, and Dollar Stores to office supply and home improvement stores. These large competitors have put a significant amount of pressure on small, local, independent retailers. A lot of the latter have, frankly, disappeared. Those small retailers that are surviving are providing differentiated product assortments, unique relationships, and exciting experiences in their place of business whether online or elsewhere. What we’re trying to do as an association is to provide independent retailers with tools and ideas and information on how they can differentiate themselves and maintain their successful businesses. As far as the internet, that’s obviously having a significant impact, too. Many of the larger pure plays such as Amazon and Overstock are members of the association. What we do in that context is provide information on trends and changes. We are seeing significant changes in the way consumers get their ideas for creative projects. It used to be you’d get ideas through magazines or tear sheets in retail stores. You could buy books showing different ideas for projects. Today, the source of inspiration has shifted to the internet. For example, I saw a statistic that 38% of all the ideas used in creative activities come from Pinterest. The whole digital landscape has taken over the way inspiration and project ideas are developed and made available to consumers. So you’ve got growth of chains, reduction of independents, the impact the internet is having on brick-and-mortar retailers, and the changes in the way people are getting creative project ideas. Our role is to provide information, guidance, tools, and techniques to be successful in face of those trends. When there is disruption, there’s challenge. However, there’s also opportunity. What gets you excited about the outlook for the creative arts industry? A couple of things get me excited. Number one is the consumer is more involved in creative activities than ever before. About 60% of households in the United States are actively involved in one or more creative activities. We’re seeing the consumer base getting younger. Although the consumer base used to be 90% or more female, men are becoming more actively involved, sometimes through do-it-yourself activities. In addition, we’re starting to see millennial parents taking the digital tablet away from their kids and getting them involved with handcrafting and creative activities. Not only is it very good in terms of kids’ creative, cognitive, and motor skill development, these activities are spreading virally. They allow parents to get very actively involved with their child. Parents and others are forming communities of like-minded people. So, there’s a very active and growing participation in creative activities. At a time when you might think creative activities are going away, they’re not. The other thing that’s happening about which I’m excited is we’re starting to see a significant number of brand new businesses form. We think a lot of that has resulted from companies such as Etsy getting a lot of people involved in creating handmade products. We’re starting to see maker and DIY entrepreneurs start businesses when they see the potential in creative products. In addition, new technologies such as 3D printing, on-demand production, and small batch manufacturing are starting to favor the emergence of small businesses. They no longer need to make large investments in working capital and inventory. Start-ups can increasingly make products on an as-needed basis. On one hand, you’ve got growing consumer participation. On the other is the fact of the emergence of new businesses. Our fastest growing membership segment consists of start-up businesses. Those are the trends that are really exciting for me and our team I just realized that I’m participating in the trend toward broader consumer participation. I’ve taken on a project upgrading the electronics in one of my guitars. I didn’t have the capability a few years ago. Now there are YouTube demonstration videos and specialty parts retailers. I’m learning how to solder, and the process is a heck of a lot of fun! You know, we spend so much time in front of a screen. Creative activities are a way to relax. Personalization is creative in itself. There are so many ways to engage in personal expression today. People are getting excited about it individually and in groups. You’ve probably heard of knitting bees or paint-and-sips where people come together for a social evening and paint. Creativity is happening in lots of different ways.

Buffeted by Disruption

The small, independent retailers that made up what was once known as the “art, craft, and hobby” trade have been hard-pressed by a series of retail innovations:
  • In the 1980s and 1990s, “category killers” including Michaels, Jo-Ann Stores, and Hobby Lobby emerged as national powerhouses. Many mom and pop retailers couldn’t compete with these big box stores’ selection and prices.
  • The success of the category killers attracted the attention of even larger big box stores, namely Walmart and Target, which added arts and crafts aisles.
  • By the 2010s, the category killers were, in turn, under pressure by internet retailers, most notably Amazon.
As Rajiv Lal and Jose Alvarez noted in Retailing Revolution: Category Killers on the Brink, “Amazon leverages its higher inventory turns, lower investments in physical assets, and faster cash conversion cycle to deliver up to 20 percent cost savings to the consumer. At a 5 percent price advantage, consumers might not see much advantage in shifting their purchases online, but at a 20 percent discount, it is not a matter of if but when the category economics will shift.” Retailing Revolution: Category Killers on the Brink If many of the largest retailers in the industry are besieged, what hope is left for the little guys? Speaking from his perspective as a seasoned turnaround executive, Mark Hill sounds surprisingly optimistic.

New Growth in the Long Tail

In an era of digital media and entertainment, one might expect that participation in creative activities would be declining. According to AFCI’s research, that’s not the case. In fact, participation in creative activities is growing and broadening. Once consisting almost entirely of women, the consumer base now includes growing numbers of men and children. As a whole, the creative industries are alive and well.
Those small retailers that are surviving are providing differentiated product assortments, unique relationships, and exciting experiences.
Furthermore, Mark notes that start-ups in the form of specialty retailers and niche producers are the fastest growing segment of AFCI’s membership. After years of decline or stagnation, there is new growth in the long tail of the creative industries. These new ventures, though, are more focused on offering differentiated products and experiences than were their business forebears. As Mark put it, “Those small retailers that are surviving are providing differentiated product assortments, unique relationships, and exciting experiences.”

Cultivating a Reinforcing Cycle of Innovation

Through its trade shows, educational programs, networking initiatives, research, and affinity programs, AFCI seeks to cultivate a reinforcing cycle of innovation among suppliers, retailers, and designers. AFCI Reinforcing Cycle
  • Specialty retailers compete through superior market segmentation, a deeper understanding of their customer, and a differentiated product offering.
  • Niche producers use their creativity and speed advantages to develop a continuous stream of innovative products and materials.
  • Designers connect products, materials, and consumers—and generate retail demand—by developing inspiring designs, projects, and educational content.
These specialty retailers, niche producers, and designers are a fragmented bunch. AFCI has positioned itself to provide the connective tissue and supporting framework for an industry that continues to evolve. AFCI Website
I’m taking a deeper dive into industry dynamics that simultaneously encourage market fragmentation and infrastructure consolidation in an article titled, Shopify Flow and Wholesale Poised to Accelerate Business. It will be publicly available in mid-September. Shopify Flow and Wholesale Poised to Accelerate Business