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Last Updated ( Thursday, 31 May 2012 21:08 )
DATE_FORMAT_LC2=Thursday,May 31 2012 12:00:00 am EDT   
Hobby Lobby: Growing with Purpose

Hobby Lobby is a retailer that is unique in this day and age because it is one of the few big boxes still growing aggressively across the country. The retailer's commitment to its customers, its privately held status, and its dependency on disposable income make its success an even more fascinating story. Now just over 500 stores, it's a retailer that doesn't want to stop growing, and one with a bigger mission in mind.


Shopping Center Business recently met with David Green, founder and CEO of Hobby Lobby Stores, at the company's headquarters in Oklahoma City. While there, SCB also met with Scott Nelson, assistant vice president of real estate, who is in charge of the company's expansion on the West Coast, where it is focusing most of its efforts.

Starting Small

David GreenHobby Lobby founder and CEO, David Green.David Green launched Hobby Lobby after starting a career in retail management. In high school, he took a course in distributive education which offered credit for working in retail. He worked at a discount retail store called McClellan's in his hometown in rural Oklahoma. After graduating high school, he became assistant manager. He later joined TG&Y — in the 1960s, a growing chain of variety stores — as an assistant store manager and quickly rose to become one of the chain's youngest store managers. Green caught notice of the way products were merchandised and how the displays changed what products sold faster. TG&Y let Green have a lot of freedom as a manager, and he grew areas of the store.


At TG&Y, Green noticed that frame sales were strong, but the selection was small. In 1970, Green and a business partner went to the bank to borrow $600 to manufacture small frames to sell to frame shops and craft stores. The frames were a fad at the time, allowing buyers to customize them with paints and decorations. The little enterprise — the beginning of what would be Hobby Lobby — started in Green's garage. Green and his partner initially used their incomes from their day jobs to finance the operation. In 1972, they opened the first Hobby Lobby in 600 square feet in Oklahoma City; 300 square feet were used to manufacture frames and 300 square feet to sell merchandise. Around this time, Green and his wife bought their partner's share of the business and Green became the sole owner. The store later moved to 1,000 square feet in an old house. In 1975, Green left TG&Y to open Hobby Lobby's second store. That 6,000-square-foot location — also in Oklahoma City — was the company's first entry into mainstream retail.


"The growth has been gradual; one brick at a time," says Green. "It took us 23 years to get to $300 million in sales. In 2011, we increased our sales by $300 million. We did in 12 months what it took us 23 years to build."


As Hobby Lobby grew in Oklahoma and Texas in the 1970s and 1980s, it did so based on the economy at the time in those states. By 1984, Hobby Lobby had 12 stores. The company's stores contained products like high-end gifts and luggage. When the oil bust hit those states in the mid-1980s, Hobby Lobby felt considerable financial pain. It had merchandise that was no longer appropriate for the market. Green and his merchandisers retooled the stores, focusing on the basics: frames, home accents and hobby oriented merchandise that could be purchased economically. The result was that the stores were more successful than ever.


In 1994, Hobby Lobby built the first building at its headquarters in Southwestern Oklahoma City. The 600,000-square-foot building housed all of the company's needs at the time. Today, the headquarters has expanded to over 5.5 million square feet. The company built an 800,000-square-foot manufacturing facility on-site that manufactures frames, candles, potpourri and packaging materials for its stores. The factory employs about 500 people. This summer, the company will complete a 1 million-square-foot expansion at its headquarters.


It's a far cry from where the company started nearly 40 years ago. But, in some aspects, many things are still the same. Hobby Lobby remains a family business at heart. Green's two sons and daughter are in the business, and two grandchildren also work at the company. Green's son, Mart, runs subsidiary Mardel Christian and Education Stores, which shares space on the Hobby Lobby campus, while son Steve serves as president of Hobby Lobby. Green's daughter, Darsee, runs Hobby Lobby's art department. Hobby Lobby has a number of employees who have been with the retailer since it had only a few stores.

Target Audience


Because of its large assortment of products, Hobby Lobby has a broad target audience. The stores are dependent on disposable income; even Green admits that most of the items the company sells are not necessities. Many people do have hobbies, crafts and artistic pursuits they enjoy, and its this niche that the company wants to supply. Hobby Lobby's main shoppers are women of all ages. Because of the dependence on disposable income, the company's stores do best when located in an area with demographics from lower middle class to upper middle class.


The stores' merchandise is heavily related to arts, crafts and home décor projects that customers can create on their own. Hobby Lobby has 80 buyers who are each focused on a small grouping of merchandise. They search magazines and attend trade shows looking for trendy items that they can turn into merchandise.


"We want them to study the market, and we give them the time and resources to do that," says Green. "Each buyer has a small group of goods that they are in charge of. Our crafts department has six buyers; even within the area we break that down to specialties. We do a pretty good job — not a perfect job — of staying up with what's happening in the marketplace."


The Hobby Lobby warehouse has 67,000 different items that represent about 80 percent of what is regularly in the stores. The remaining 20 percent is seasonal merchandise — like Easter, Halloween and Christmas — that is pushed directly to the stores and changes yearly.


Hobby Lobby has one warehouse, adjacent to its headquarters. Its location in Central Oklahoma enables the company to have the single warehouse, while providing all its stores goods regularly. Every month, district managers visit every store and spot check 100 items from Hobby Lobby's list of 67,000 SKUs.


"Doing that every month, they know if there is a weak department head or manager at a store," says Green. "The average store has about 96 to 97 percent of the items in stock that they check. We don't do this by technology, we do it manually every week."


Hobby Lobby has steadfastly refused to institute technology on this front. Green says this is because he believes that merchandising is best when done from a management level, not by a computer. He also thinks to become great retailers, employees from all levels of management must understand retail merchandising. With 67,000 items in its stores, that is no easy task. During the Christmas selling season, the number of SKUs rises to 100,000.


"There's nothing that sells merchandise like merchandise," Green says. "I want you to see merchandise when you walk in our stores."
To that end, Hobby Lobby's art department creates a lot of pamphlets that show what customers can do with all the merchandise in its stores. Hobby Lobby employs more than 70 artists who create artwork especially for the stores, as well as the displays and many of the items found in the stores. They also create crafts and home goods from the items in the store as displays and for use in the brochures.


"Before they make the brochure that shows the finished piece, they have to look at all our offerings and develop ideas for these creations," says Green.


Twice a year, the company's artists present a show — presented up and down the halls of the headquarters — with about 5,000 designs. Buyers choose from these 10,000 pieces to select new artwork for home goods, gift bags, napkins, fabric, gift wrap, ribbons, coffee mugs and other products.


The top sellers at Hobby Lobby are in the home accents category, which includes frames, artwork, small furnishings, candles, wreaths and similar merchandise. Following that are crafts and hobbies.


Green has seen consumer trends change in the crafts business over the last 40 years. He says while there are many popular trends, a larger one comes along about every 10 years. When he first started in the 1970s, the trend was decoupage, an art of applying decals to wood items. In the late 1970s and early '80s, macramé was the craft of the times. In the late '80s and early 1990s, the trend became wearable art, with painted sweatshirts and t-shirts. Lately, the big trend has been scrapbooking. While that is popular, other crafts like jewelry-making and needle art tend to ebb and flow with the times.


"We do get into trends, but we try to not get into fads," says Green. "Trends usually happen over 2 or 3 years, whereas a fad is gone overnight. We look for the trends."


One of the reasons behind Hobby Lobby's success is its products. While the company does carry items made by others, a lot of the products are created by Hobby Lobby's team of artists and made in its factories. That equates to a lot of items that simply aren't available elsewhere. It also means profit: Hobby Lobby isn't paying another company to source, create or manufacture goods for its stores.


"We bypass a lot of middlemen," says Green. "We do a lot of things that other retailers don't do. It's harder to do that, but we take the time and effort."


To assist in the merchandising, Hobby Lobby has a complete model store — not open to the public — set up in its headquarters. The store is used by its merchandisers and store display people to position merchandise. As well, Hobby Lobby sends photos of this mock store to managers so that they can see how items can be effectively grouped and placed in the store.


"Whether it is seasonal or every day, there is an item in here," says Green. "We don't use computer printouts to be buyers; we use merchandise. We look at it, see the value of it, and see how we want to change it."

Real Estate


To fit all of Hobby Lobby's products into a store requires a lot of space, and Hobby Lobby loves to have space. A typical store location is approximately 55,000 square feet. The company has no preference whether the space is new or second generation. Its growth in the 1990s and 2000s was due in part to its ability to take older Walmart locations. In California, Hobby Lobby has had success locating in former Mervyn's locations. In Washington and Oregon, it has taken over locations formerly occupied by Joe's Sporting Goods. For as many dark stores as Hobby Lobby has taken over, it has opened just as many stores in new locations.


The company has done demographic studies that show sales based on competition, population and other factors. However, Green says, at the end of the day, location is the most important factor as to where people are shopping.


"Whether the space is new or not is secondary to location for us," says Green. "You don't want to be over there when everyone else is over here."


The company will look at markets as small as 30,000 people, as long as there is a strong trade area of 120,000 people. Because HobbyHobby-Lobby-EdmondWEBThe prototype for a Hobby Lobby store is 55,000 square feet. This enables the retailer to sell all of its 67,000 SKUs. Pictured is the Hobby Lobby in Edmond, Oklahoma. Lobby isn't selling necessities, it looks strongly at disposable income. Because the cost of living varies market to market, the company adjusts its requirements when it is modeling locations to accommodate disposable income. In the Midwest, the company looks for median household income of $45,000; in California, that number would rise to about $55,000.


"The sweet spot for us is the middle income customer," says Nelson. "As far as demographics go, if a site falls into that category, it will typically work for us."


Nelson, who has been with the company for almost 19 years, is responsible for Hobby Lobby's real estate west of the Mississippi, where it is targeting expansion in Washington, Oregon and California. The company is also seeking expansion in New England, Pennsylvania and Florida.


When modeling a site, Hobby Lobby also looks at population density.


"We are looking for a location in the retail core, preferably in a power center, although we have done standalone, strip center and mall locations," says Nelson.


The company prefers locations that have ceilings that are a minimum of 14 feet high and 220 parking spaces. For a standalone location, the company needs about 4.5 acres.


While Hobby Lobby is aggressive, it is also patient. In some markets, it has been waiting for development to return rather than develop a freestanding store.


"David and Steve [Green] have said that there is no deal that we have to have — don't make it happen," says Nelson. "Deals have to fit into our sales projections. Even for great locations, we won't pay over what we need to achieve our minimum profits."
The real estate department has free reign to make as many sensible deals as it humanly can, but that number is limited by space availability. In 2011, the company opened 33 new stores. In 2012, Nelson expects the company to do about the same. In 2013, the company is predicting around 40 new stores.


"For many years, we locked in around 25 stores per year," says Nelson. "That was about a steady 7 percent increase in store count per year for us. Now, 7 percent is 35 stores. We really have the base and we have a system to recruit managers that makes opening stores easier."


Hobby Lobby built part of its human resources philosophy around its store openings. Each store has a co-manager. That co-manager is groomed specifically to take over a new store as Hobby Lobby expands.


"We don't have a problem getting talent for our stores, which is a key thing while we are expanding," says Nelson.
To ease the effort of expansion, Hobby Lobby has a network of tenant representation brokers. The brokers bring Hobby Lobby's real estate department locations. If Hobby Lobby likes the location, typically it will drive the entire market when it views the site.
The real estate department has three regional representatives in-house: one handles the Northeast, one the Southeast, and Nelson, who handles the west. The department also has a lease administrator, a site analyst and a number of assistants.


In markets with high barriers to entry, like the Northeast, Hobby Lobby has modified its format to take smaller locations. Green says the retailer can locate in boxes as small as 45,000 square feet, but some accommodations must be made. When Hobby Lobby takes a smaller location, it has created a list of items that it removes or relocates to different departments — generally bulkier ones, like lamps and mirrors — that can take the merchandise level down without heavily impacting sales.


"Sometimes what we would like ideally is not necessarily what we can get," says Green. "We have to back away from our ideal store. If we don't, we would never get into the Northeast."


The company has set an aggressive growth strategy because it is financially able to take advantage of lower real estate prices, while filling gaps in its nationwide approach to retailing.


"We have always felt that we were able to grow as fast as we wanted to grow with our own money," says Green. "Today, we are opening 30 to 40 stores per year. We can do that with cash. We have no debt and we still have money to invest in other businesses."
In addition to Hobby Lobby stores, the company also owns the Mardel Christian & Educational Supply chain (approximately 30 stores); Hemispheres, a furniture and home goods retailers (six locations); and a number of manufacturing and distribution businesses, all related to its stores.


Bigger Mission


David Green believes that there is a larger purpose to Hobby Lobby, more than selling goods and services. Green built Hobby Lobby by operating on the principles taught in the Bible. His book, "More Than A Hobby: How a $600 Investment Became America's Largest Craft Superstore," written in 2010, details his commitment to this belief.
The company has used its profits each year to fund causes close to its beliefs. Namely, Green says, Hobby Lobby gives half of its profits to various ministries. And that amount is not unsubstantial, adding up to hundreds of millions of dollars each year for this $3 billion enterprise.


But before profits are awarded to their beneficiaries, Green believes Hobby Lobby must first take care of its employees.
"Before we [give any money] we owe it to the people who brought us where we are," says Green. "It's important to us to do the very best we can for our employees."


Effective April 16, Hobby Lobby raised its minimum hourly wage for full-time employees to $13. The company's stores are only open 66 hours per week; they are closed on Sundays and close at 8 p.m. the rest of the week so that employees can spend time with their families.


"We feel like we have tremendous loyalty from our employees," says Green. "We don't want to ask them to be loyal to us if we are not loyal to them. They know we can't just give them lip service."


In addition to the profits that the company gives away to charities and ministries each year, the Green family has also been strong backers of endeavors that aid various causes. Most notably, the family gifted $70 million to Oral Roberts University in 2007 to save the university, which was $55 million in debt and had budgetary issues. The Green family believes strongly that life in all aspects should be led by the teachings of the Bible, and it leads by example.


"We give our life to two things which are eternal, that is God's word and man's soul; everything else is temporal," says Green.

— Randall Shearin

 

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