People’s Pottery, the 47-store chain specializing in American-made crafts, collapsed last November. The tipping point for the beleaguered company occurred Nov. 14 when the company’s lender, IBJ Whitehall Retail Finance, demanded repayment of a $10.8 million loan. Battered by slow sales and loss of venture capital, People’s Pottery couldn’t pay.

UPDATE 2/14/02

7 People's Pottery Stores Bought by Former Owners in Bankruptcy Court Auction (Note: This news update will appear in the April 2002 issue of The Crafts Report (currently at press), but due to the timing of this news and the publication of our March 2002 news article on the same subject, the editors felt the update should be released online with the original news story.) Jim and Carla Froehler, former CEO and president of CJF Holdings Inc., the parent company of People's Pottery, are part of an investment group that bought back seven People's Pottery stores from the bankrupt craft store chain, according to the Rochester Democrat and Chronicle. People's Pottery and CJF Holdings both declared Chapter 11 bankruptcy in November 2001, and all stores were liquidated in just over a month. The investment group bid on the stores during an auction of the assets of the specialty retailer in January. The auction was held in U.S. Bankruptcy Court, District of Delaware. CJF Holdings Inc. purchased three People's Pottery stores in 1996 and expanded to 52 stores in 19 states within five years. The chain's bankruptcy left behind more than 1,000 creditors, with between $10 million and $50 million in estimated debts. The Froehlers' investment group, called Landmark Retail LLC, paid $760,000 for the leases for seven stores, including rights to the store name, according to court documents. According to the Rochester newspaper, the stores purchased by Landmark Retail are located in: Eastview Mall, N.Y.; Beachwood, Ohio; Farmington, Conn.; Natick, Mass.; Columbia, Md.; North Bethesda, Md.; and Fairfax, Va.

The board of directors quickly ousted the company’s management, CEO Jim Froehler and President Carla Froehler, and hired Gordon Brothers Group, LLC, specialists in liquidating high-profile retail failures, such as Wards and Woolworth’s, to sell off inventory. Then — adding insult to injury — People’s Pottery paid $190,000 to the law firm of Morris, Nichols, Arhst & Tunnell to oversee its bankruptcy.

When the company filed for bankruptcy on Nov. 28, it claimed $20 million in debts and estimated assets of $8 million to $10 million. Among the debt was $3 million owed to approximately 250 to 300 crafts vendors. An attorney working on the case told Sergio Lub, an artist who heads the unsecured creditors committee, that it would be considered a victory if crafts businesses got 1 percent of the amount owed them.

Only IBJ and the pack of bankruptcy attorneys — more than 19 have made appearances in the case so far — will likely see any money from the liquidation. (Some lawyers hired by People’s Pottery charge $450 an hour.)

IBJ, as a secured creditor, is placed at the head of the line for repayment. A secured creditor is a company that obtains collateral for its loan, and IBJ’s collateral was People’s Pottery assets — crafts inventory, trade fixtures and other personal property.

In the first week of December, U.S. Bankruptcy Judge Mary F. Walrath considered IBJ’s proposal to sell off all assets or to salvage part of the chain by selling eight of the ailing stores to Robbie Dein, the founder of People’s Pottery. The Froehlers also tried to buy back some stores.

Walrath denied the request to sell the stores because she believed that liquidation would bring in the most money. She ordered People’s Pottery to sell off everything in the 47 stores by the end of December. The bankruptcy court guaranteed store employee salaries through the end of 2001.

For crafts vendors, already angry about not being paid for their work, the sell-offs triggered more acrimony. The bankrupt chain offered the artists’ work at 40 percent to 80 percent off retail prices during Christmas, while other stores, sometimes located near People’s Pottery stores, sold the same vendors’ goods at standard markup prices.

Sara Easton of Rainy Day Clay employed 31 people in February 2001, when People’s Pottery began faltering in payments. “When summer hit -— my leanest time — we had to lay a lot of people off. We reduced to 15 employees, then to five and then, when a $15,000 check [from People’s Pottery] bounced in November, that just took all my working capital. Now, it’s three people, and we’ve moved into a smaller space.”

Anger over the company’s dissolution spilled onto online crafts chat boards. One retailer summarized the bitterness. “[People’s Pottery] was a virus to the crafts industry. It would gobble up artists and their ideas, family crafts stores. It ate away the uniqueness and hard work of artists and gallery owners. … And now People’s Pottery is being seen for what it is — a legacy of broken promises and dreams. Being in the crafts industry for 30 years, I say good riddance.”

By January, some of the anger was gone, replaced by resigned acceptance. “It’s sad,” says Margaret Lent of Margaret Lent Handwovens, whose company holds $44,000 in unpaid invoices. “I’ll be licking my wounds for a while. Fortunately, between retail shows and shops and galleries that carry my work, I have not had to lay anyone off.”
“We’ll survive,” says Mingyu of Liz Palacios Designs, whose company is owed more than $65,000. “But we never had to go through something like this before.”

The company in its heyday

Although the company’s final days created anger and confusion, there was a time — between 1997 and 2000 — when People’s Pottery enjoyed good will among landlords, investors and crafts businesses.

Mall developers loved them. During the boom times, People’s Pottery sales averaged about $500 a square foot, more than twice the mall national average of $230. Said one developer in an article about the company in 1999, “[People’s Pottery] is the kind of tenant we go out of our way to seek. We’d be happy to have them in any shopping center we own.”

Investors also loved them. Jim and Carla Froehler had 30 years of retail experience including work for Hickory Farms of Ohio, Borders Books and Music, and World of Science. They acquired People’s Pottery from founder Robbie Dein in 1996, and within a year, the Froehlers had obtained $17.4 million worth of financing from banks and private investors. Millions more were borrowed from 1998 through 2001.

Crafts companies also loved them — at least those “lucky enough” to be selected by a People’s Pottery buyer at a crafts show. “The good times were good. They were very good,” says Paul Lubitz of Holly Yashi Jewelry (owed over $200,000). “They were taking our products to the people, and it was flying off the shelf — not just us, but a lot of vendors — and it showed us that there’s a market for our product that’s not just in nice tourist destinations. All of a sudden it’s in a mall in Cleveland and Rochester.”

“They ordered large quantities, and it completely changed my business life,” says Lent. “I was small — just three people — and once we started getting larger orders, I moved the business out of my house, added more people and we began to make a respectable living.”

Between 1997 and 2000, the Froehlers expanded the People’s Pottery chain to 52 stores in 19 states and discussed plans to expand to 250 malls.

As the chain grew, so did the aspirations of many crafts vendors. “I was at a show and didn’t know anything about People’s Pottery,” says Richard Urban of Richard Urban Ceramics, “and Robbie Dein came through my booth and said, ‘I’ll take 60 of these and 40 of these.’ It was such a huge order. It was exciting. He was very professional, and he seemed to know a lot about the work. And then after he left, some people in my aisle said, ‘That’s People’s Pottery. They’ve got 40 stores.’ And I remember thinking for the first time I could make a viable living.”

The beginning of the end

Troubles began in 2001. The company started the year reeling from a weak Christmas in 2000 and from the slow starts of some new stores. Strapped for capital and lacking a backup plan, the company cut back on expansion, opening only three stores in 2001. By February 2001, People’s Pottery was delinquent in vendor payments. Policies changed, placing some vendors on installment payments.

“We started on net 30,” says Mingyu. “Then it became net 45. By the end, they were really paying late — 90 days, 120 days. Finally in summer [2001], we stopped shipping.”
Venture capital was disappearing — a result of the dot-com failures — and People’s Pottery scrambled to get another $3 million from the venture capital firm Jefferson Capital Partners in the summer of 2001. As late as August there was hope that the company would pull out of its tailspin. Lisa Passero, the newly hired CFO, instilled some confidence, and the board of directors assured vendors in a conference call that cash would be available. The goal was to make it through Christmas and pick up a cash infusion in January 2002.

But the Sept. 11 attacks exacerbated the precarious financial situation. “Immediately after the 11th, I think sales were off by about 50 percent, and over the following weeks, sales were off at our stores, and nationwide, between 35 to 45 percent,” says People’s Pottery founder Robbie Dein, vice president of merchandising and vendor relations. “The cash flow wasn’t sufficient to support the debt. After the drop in sales, [IBJ] just pulled the plug.”

IBJ and People’s Pottery had a complicated arrangement known as an asset-based loan. “An asset-based lender like IBJ provides an advance rate of cash that they give to People’s Pottery as the company receives shipments from vendors,” says James Dempster, CEO of Manufacturers Credit Cooperative, who has helped crafts companies recover debts. “Let’s say, hypothetically, they’re operating on a 50 percent rate. If People’s Pottery received a $100,000 shipment from a crafts business, IBJ would loan 50 percent ($50,000) to People’s Pottery at the time the shipment arrived and the other 50 percent when the shipment was sold.”

So, in order to maintain the rapid rate of store expansion, more merchandise was needed in order to borrow more money. This created a risky financial footing. Once inventory shipments slowed drastically, the bank stopped writing checks. Payments to vendors stopped, and it was impossible to borrow more money.

“I always told people whatever I knew about the financial situation,” says Dein. “But I couldn’t write the checks. I could only call payables and say, ‘So and so didn’t get paid. What’s going on?’ Bridging the gap as to what the management needed and what the artists needed put me between a rock and a hard place.”

Among those hardest hit is the venture capital firm Jefferson Capital Partners who, according to some reports, stands to lose more than $12.5 million, including $1.5 million it may have to pay to IBJ to guarantee a loan. (IBJ had required backup collateral from investors if the sale of the assets wasn’t enough to cover the loan.)
Dein, who sold his business to the Froehlers for cash and stock, also stands to lose. Any hopes of redeeming his shares — estimated at one time to be worth a half-
million dollars — ended in November.

The Froehlers, who reportedly received six-figure salaries and equally large expense accounts, suffered losses when the stock became worthless. But the couple shielded themselves from personal liability by purchasing People’s Pottery under their corporate entity, CJF Holdings, Inc., which also filed for bankruptcy. (The Froehlers did not return calls for this article.)

It’s not uncommon for management to avoid personal liability, although in recent years, some officers and directors of companies have been sued by creditors in bankruptcy when there is evidence of wasting of company funds, mismanagement or fraud, according to bankruptcy expert Jack Williams, a scholar in residence at the American Bankruptcy Institute (www.abiworld.org).

Even if a crafts business was fortunate enough to clear a People’s Pottery check between Aug. 21 and Nov. 21, 2001, another Dickensian twist looms on the horizon. Under a principle known as avoidable preferences, the bankruptcy judge can order vendors to refund those payments. “As a rule of thumb,” says Williams, “it’s usually not effective to go after someone for a [payment] that’s less than what it costs to collect, and classically that’s between $5,000 to $10,000.”

Also, a crafts vendor can disregard a demand letter from a bankruptcy trustee for repayment without breaking the law, says Williams. Repayment is only required if the bankruptcy trustee follows up on the demand letter.

What’s next?

As this article goes to press, Dein was planning to make a second bid to the court to acquire eight or nine store leases. The Froehlers were also reportedly going to bid on one or two stores. Stocking those stores on credit may prove difficult for the Froehlers.

“I would need more information,” says Lent with circumspection. “I have only this experience with Carla and Jim.”

Urban agrees, “I would have to know a lot more.”

Dein seems to have emerged from the disaster with credibility somewhat intact. “Robbie was good when he was the owner,” says Deborah Chapman of Tin Woodsman Pewter Company, whose business is owed over $44,000. “Most people running craft galleries are really in tune with what they’re selling. They used to be potters and jewelers, and Robbie comes from that background.”

“I hold Robbie in the greatest esteem,” says Easton, “and I sincerely believe he had nothing to do with this. If he opened something tomorrow I would give him credit.”

But even with Dein at the helm of a resurrected People’s Pottery, will the public respond, especially since consumers have reportedly been unable to use store gift certificates or credits?

“I’m concerned about doing the right thing by people,” says Dein, “so if I am able to re-open some stores, I will consider honoring gift certificates and credits. It’s an expensive proposition, but I know that the idea can work, and if I fill those stores with the right merchandise, I believe the public will respond.”

Others also believe.

“It’s most important to continue with the People’s Pottery experiment,” wrote Lub in an online exchange (his company is owed $139,000). “As globalization brings shiploads of cheap imports, we need to protect our foothold in the largest retail market in the world — American malls.”

“There were upsides in spite of the ending,” says Lubitz. “We were on a national stage, and it gave us confidence to start national advertising.”

“It was a great concept bringing crafts to a market that wouldn’t come to crafts shows and wouldn’t seek out the unusual gallery,” says Lent. “Perhaps with a more solid business philosophy, it can work.”

Lessons learned the hard way

The experience — and the economic downturn — has forced some crafts vendors to rethink previously lenient attitudes about extending friendly terms to stores. Said one ex-People’s Pottery supplier, “I wouldn’t do it again. Right now I’m dealing with another store that’s having trouble, and I’m probably not going to be so lenient.”