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Comment by alephnerd | Hacker News Reader

The economics of a big-box single dedicated store for hobbyists a la Joann's doesn't work anymore.

The textiles industry is almost entirely outsourced, and the margins of being a middleman like Joann's doesn't work when imports are growing expensive AND online stores can sell similar products at a lower price, and your prices are roughly comparable to the local mom-and-pop.

Furthermore, assuming it's PE that causes companies to fail is a reversal of cause and effect. You sell to PE when your company or organization's "gas" is largely spent, and there is no foreseeable growth, so you cannot raise money traditionally.

For every Joann (stripped for parts by PE) you can also point to a Sailpoint (taken private by a PE and now one of the first IPOs in 2025)

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Better tell Michaels and Hobby Lobby then, because I don't think they got your memo.

Joann's won the industry consolidation phase in the 80s-90s, but took on a lot of debt to buy out House of Fabrics, So-Fro and others. They had almost completely retired that debt by the mid 2000s and would be sitting pretty today, but sold out to private equity in 2010. The PE did the usual LBO shit of borrowing a the purchase money and then transferring the debt to the company. Boom, one billion in the hole, buyers strip anything of value, no coming back from that.

I'll miss them because touching fabric is important. fabric ain't like resistors, one 100ohm feels pretty much like the next, and Joanns covered quilters, apparel sewers and upholstery/decor sewers pretty well.

> Better tell Michaels and Hobby Lobby then, because I don't think they got your memo.

Michael's is owned by Apollo Group.

Hobby Lobby is family owned, but unlike Joann's and Michael's they wouldn't take long term leases or purchase the stores themselves, and concentrate on higher margin furniture.

> The PE did the usual LBO shit of borrowing a the purchase money and then transferring the debt to the company

Yep, but who else was interested in investing in Joann's in the 2010s? There were way better asset classes like Pharma, Finance, and Tech that you could invest in and get better returns.

LBOs are basically investors of last resort - this is where zombie companies (which Joann's absolutely was) go to die.

> I'll miss them because touching fabric is important

And we're lucky that local hobbyist shops still exist along with local fabrics shops. They can provide a better customer experience than a big box like Joann's, Michael's, or Hobby Lobby with decent margins.

> Yep, but who else was interested in investing in Joann's in the 2010s?

This is begging the question. At no point did Joann's require investment.

> At no point did Joann's require investment.

Inventory, salaries, rent, mortgages on stores, ERP, expansion, etc all cost money.

Yet if revenue remains flat or grows at a rate that is lower than the above inputs, you absolutely need capital.

That's just restating the thesis. It's still begging the question.

How do you know? Have you gone over their financial statements?

Call me old-fashioned, but maybe craft stores don't need infinite double-digit growth.

Then why should I (or my 401K provider) put my money in Joanns?

And this is why companies get sold to PE - traditional investors are investing to make money. If an asset isn't making money (eg. Joann's), you invest elsewhere (eg. Alphabet).

And if you're on HN, you probably have a 401K or IRA and are also enabling this, so cut the "holier than thou" BS.

If Joann’s doesn’t grow then why does it need your investment?

A company like Joann's still need to service debt, salaries, inventory, maintainance, etc.

If revenue remains flat or grows at a lower rate than COGS, then you need an influx of capital to manage this.

But this is a bum deal in a lot of cases.

> A company like Joann's still need to service debt, salaries, inventory, maintainance, etc.

So does the locally owned yarn store, which does it without being in your 401k.

1. Smaller Inventory - reduces supply chain complexity along with the need for full fledged ERP integrations

2. Leasing storefronts - Retail Chains and Big Box brands tend to try to take ownership of the property the store is located on, because at their scale it can have potential savings benefits in the medium-to-long term

3. Family as employees - this reduces the impact of salaries, because profit, customer experience, and employee performance are all directly aligned with each other

4. Relationship-based Sales - your local business will maintain relationships with other local businesses, and be flexible with their own needs as well. That boutique's payment is delayed? No big deal, we'll sell you fabric on credit and you can pay us back when you are able to.

5. Smaller scale - you don't need a $100m influx of capital if you are a single or couple local stores. Mo money, mo problems (and a major reason why several unicorns have stayed private over an extended period even before the IPO window shut)

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There are plenty of difficulties when managing a small business as well, but they are different from those that a Joann's might face.

It must be possible to manage a company in a sustainable way where constant influx of capital is not necessary. In fact the vast majority of companies must be run that way because they don’t have access to large amounts of capital, no?

> It must be possible to manage a company in a sustainable way where constant influx of capital is not necessary

It absolutely is! It's called being "Free Cash Flow" (FCF) Positive - ie a business generates more cash from operations compared to capital expenditures.

Sadly, not all businesses can become FCF Positive - especially if they are heavily leveraged, have significant liabilities, or don't care for optimizing for FCF at the expense of expanding market share or growth.

FCF Positive has become the primary indicator for business health over the past 2-3 years, whereas before the primary metric was market share growth, but it is very difficult to retool or drastically change a business.

More fundamentally, a company like Joann's is dealing with a relatively crowded market (Michaels, Hobby Lobby, resurgence of boutique craft shops), and something has to let go.

I guess the lesson here is that a leveraged growth strategy is a one way journey.

You can succeed with a leveraged growth strategy, such as Nike. A strategy is a tool - it works good in some cases and less well in other cases

I meant one-way in the sense of "one-way decision". If you don't succeed, it's very hard to go back.

It doesnt need growth, but it needs returns. Outside of stock offerings, companies dont see a dime when you buy stock.

If stock price is too low, than the company is worth more dead than alive.

The hypothetical here is a Joann’s that never went public, not a Joann’s that is already far down the “we exist to grow” strategy road.

I fundamentally agree that companies don't need to grow. They do however need to have returns.

Companies need returns to justify their continued existence to owners.

Growth comes into the picture because if someone thinks growth is possible, they are willing to pay more for it then an owner thinks it's worth.

This is an extremely common PE situation, where a management firm and Banks think more profit could be generated then the current owner. Then they offer more money than the owner thinks it's worth and try their luck. Sometimes it works out, and sometimes it doesn't.

The other common case is when PE act a buyer of last resort. If someone doesn't want to run a business anymore, they look for a buyer.

Why would that be the hypothetical? The people that made Joann are the ones who decided to make it a publicly listed business, all the way back in 1969.

https://www.cleveland.com/pdextra/2010/12/the_history_of_jo-...

notcancer stated:

>Call me old-fashioned, but maybe craft stores don't need infinite double-digit growth.

Craft stores don't need double digit growth (returns is more accurate than growth), but Joann did because Joann's owners decided they wanted to try to expand their business, and probably their own wealth, and so they tapped the public equity markets.

People seem to be upset that business owners desire to bet for bigger returns, but isn't that the business owners' right? A lot of times, it doesn't work out, or it eventually doesn't work out. But what is the alternative?

State ownership of business or heavy restrictions on the ability of owners to sell, dissolve, for take risks with business they own.

I don't agree, but that seems like the clear alternative.

Some people might propose preventing debt backed private equity firms from defrauding investors, but those laws are already on the books. The banks that fund buyouts and sometimes get left holding the bag absolutely know the risks and have well funded legal teams capable of protecting them.

Consumers don't get a say because they are not actual equity owners things like securing access to yarn or all you can eat shrimp do not supersede property rights in the view of the government.

> State ownership of business

Until they either collapse (LGFVs in China) or severely degrade in user quality (Air India), and it's the taxpayers on the hook.

> heavy restrictions on the ability of owners to sell, dissolve, for take risks with business they own

Then there's no incentive to start or scale a business, for example why business incorporation in Switzerland is preferred over France despite similar/same culture, but easier ability to incorporate, sell, or shut down businesses

> Consumers don't get a say because they are not actual equity owners things like securing access to yarn or all you can eat shrimp do not supersede property rights in the view of the government

I can still go to Michael's, Hobby Lobby, or my local crafts shop to buy the same products.

This should be clear from my post, but you are preaching to the choir. In my opinion, if someone wants to gut their business, that is their choice. If someone doesn't like the options, they should start a competitor.

basing a system on the idea that consumers shouldn't have to shop or businesses can never fail leads to all sorts perverse outcomes.

As a reminder, the question was “why does a craft store need double-digit growth?” And the answer is “it doesn’t, until the owners make a big enough bet that it’s unrecoverable if they fail”.

In Joann's case, they were competing with Michaels and Hobby Lobby, nor were they that differentiated from Michaels.

You seem to be getting personally offended by someone suggesting an established crafts store doesn't need to be positioned as a financial asset – you might be projecting a bit with the "holier than though" comment.

> ... so cut the "holier than thou" BS.

Woah, that's not nice.

The person you replied to mentioned double digit growth and they're right. Not everything has to have hyper growth. If, as an investor, you want hyper growth, there are entities that can give you that. But even _some_ growth still means your 401(k) is growing and that 401(k) is supposed to grow for you for decades, compounding, not return you 50% next year so you can buy a new jetski.

Technically, if you use SP500 as a benchmark, you do need double digit growth. Why would I invest in a business without the prospects of additional returns, especially when SP500 is nearly risk free?

Why should I invest in my own business if I am not going to get at least what SP500 does? Other than buying myself a job.

Is the purpose of a store to sell goods to people or to make it so you can retire after sucking it dry?

For what it's worth, I do have a 401(k), I AM holier than thee, and I don't think we should cannibalize every last business on earth and sell its organs in an alley in the name of economic growth. But those decisions are above my pay grade.

Even if you don’t have a 401k or IRA or otherwise personal investment in the market, everyone is exposed via tax liabilities of their city/county/state’s taxpayer funded defined benefit pension plans…which are invested in the private equity funds that everyone loves to gripe about.

Lower returns means higher tax liabilities.

> The economics of a single dedicated store for hobbyists a la Joann's doesn't work anymore.

Why is that? I still see stores for board games and the likelihood of making a profit from a board game is abysmal. Blick Art seems to be doing well enough. Even Barnes and Nobles had a turnaround.

I just went to a JoAnn’s a few months ago. If you told me that they were getting a PE makeover I wouldn’t have known.

> Why is that? I still see stores for board games and the likelihood of making a profit from a board game is abysmal. Blick Art seems to be doing well enough. Even Barnes and Nobles had a turnaround

I mean big box retailers.

A major aspect for big box retailers is real estate. Joann's, Michaels, Toys-R-Us, etc would often take either long term leases or outright own the property of the store itself.

A smaller/local business targeting hobbyists can concentrate primarily on customer experience and inventory, because they generally do not try to enter the asset speculation game as well.

> The economics of a single dedicated store for hobbyists a la Joann's doesn't work anymore.

More's the pity then.

I meant a big box.

I think the hobbyist model will continue to work and thrive if you are a local/regional business

Maybe a bit of a chicken or egg problem? I don’t know enough about Joann, but I remember when borders closed and B&N went almost too. At the time, these stores had become a bore. Only peddling bill O’Reilly and Hillary Clinton’s books. But now bookstores are thriving too, and so is B&N in large part because each store is managed independently, and not driven by corporate and their large contracts with large publishers.

So maybe when you stop being customer centric and become corporate profit centric you end up losing customers first and profits later.

PE firms in these cases are just the bottom feeders that processes these corporate carcasses, not the cause of their deaths.

It’s different when PE firms go after resources that people need, like health care or elderly care. Here they are acting as sociopaths. They know people will pay as much as they have to, as the other options are death and suffering. Despicable.

> So maybe when you stop being customer centric and become corporate profit centric you end up losing customers first and profits later

You can be customer centric AND profit centric. The issue is when "customer centric" doesn't align with "profit".

Big box and chain retailers often try to own the property the store is located on, so they would essentially become a property speculation play.

Add to that the cost of managing inventory, which means you want to reduce the amount of SKUs offered in order to reduce management overhead, but as a customer that feels like an adverse customer experience. Yet unlike a local business, that chain retailer cannot optimize on customer service because of those thin margins needed to service real estate.

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