When Jim and Carla Froehler, the chairman and president of CJF Holdings, Inc. purchased Ithaca, N.Y.-based People’s Pottery in 1996, they embarked on an ambitious plan to expand the two-store operation nationwide. Five years and some 50 stores later, some artists feel they’ve been burned by the very same organization that has held so much promise.

There is no question that the large orders from People’s Pottery enabled some craft businesses to grow to levels they might not have otherwise reached, or at least not so quickly. “At a show, if [People’s Pottery buyers] were there, it would go through like a wave, ‘People’s Pottery is here!’ And if they didn’t go into your booth, it was like, ‘Oh my god, People’s passed me by,’” says one artist, who, like most artists interviewed, wished to remain anonymous.

Jim Froehler reports that during the past five years People’s Pottery has purchased $50 million of American craft and has made “most likely the largest purchases ever made by one organization within the American crafts industry.” He continues, “Our company knew that we were planning to grow within a small niche industry that had not previously experienced this type of opportunity. Therefore, we would be on a learning curve as we moved forward together. ... While People’s Pottery was expanding, so were our artistic suppliers,” says Froehler. “They were adding apprentice workers, taking vacations, expanding their studio buildings, adding new kilns and making money. We helped them grow, and they helped us,” he says.

In recent months, however, artists began posting messages on The Crafts Report’s online discussion board claiming that they have not been paid on time by People’s Pottery. Some artists voiced concern over the potential number of artists affected, and about when they could expect to be paid in full. Froehler asserts that not all of the artists voicing complaints online were suppliers to People’s Pottery.

Artists are owed from $600 to $200,000, says James Dempster, CEO of Manufacturers Credit Cooperative, a Plano, Texas-based credit exchange and collection agency specializing in the gift, stationery and craft industry. Dempster is acting as a mediator between the artist-vendors and People’s Pottery.

People’s Pottery has an active artist base of 1,000 artist studios, according to Froehler. “We owe approximately 10 to 15 percent of our studios money,” he says. “We have been making payments on our payables, unfortunately, just not on the terms that were set, a situation we deeply regret.”

Many artists have said that until recently, People’s Pottery had been timely in their payments. “People’s Pottery has always been a good customer,” says one artist, who also requested anonymity. “As soon as payment was due, the check was here.”

FOR MORE INFORMATION

People’s Pottery (716) 272-1600 www.peoplespottery.com MCC Credit Cooperative (972) 422-7852 www.mcccredit.com Small-business expert Robert Sullivan’s Web site, The Small Business Advisor, provides a number of articles on debt collection and other small-business issues. Visit www.isquare.com.

Dempster says People’s Pottery hit rough water when an investor failed to provide promised funds, some of which had already been spent on the opening of four new stores between January and March. As Dempster explains, People’s Pottery obtains funding from three sources: private investors, retail sales and an asset-based lender, which provides an advance based on a percentage of the value of orders received. (For example, an order valued at $10,000, might draw an advance of $5,000 on a 50 percent agreement.) According to Dempster, “Serious trouble with any one of these three is enough to take a company down.”

Froehler, however, seems optimistic. Of the 52 stores (47 permanent locations, and five temporary stores set up to test certain markets), none has closed, and none is set to close, he says. “We’ve developed a multi-stage financial program to get the company back on track.”

Froehler confirms that the problem arose when financing and the availability of funds expected in the first quarter of this year “did not materialize. … As our cash shortfall occurred, we immediately circled all of our existing financial partners, and told them that we were going from a positive financial projection to a negative one. We needed to involve each partner in what is a complex program to restructure the financial side of our business,” Froehler explains.

Two stages of the multi-stage financial program that aims to bring additional liquidity to the company were completed as of July 17, says Froehler; the second two are slated for completion by the end of September.

A lack of available venture capital is not an unusual challenge to be facing right now, according to Lynn Baklor, a venture capitalist specialist with Abell Venture Fund in Baltimore, Md. “In the last year to year and a half, venture capital has dried up substantially. ... It is probably not a reflection of the business that the venture capital fell through, but probably that venture capital firms have substantially cut back on where they are willing to invest their money,” Baklor says.

But nationally known small-business expert Robert Sullivan asks, “What other options are they exploring? Why isn’t the company going out and getting a loan, why are they waiting for venture capital?”

Froehler responds, “... you do not run a business the size of ours without significant banker involvement. Our lender is one of our financial partners and has been very much involved in assisting us during this period.”

Artists left asking questions
“The worst part was the lack of communication,” says one artist. “They sent faxes saying, ‘We’re thinking of you,’ but they never told us what was going on.”
Froehler says that they did try to communicate with artists and that the faxes were one part of the effort. “We have sent a series of letters and faxes to each of the artists to whom we have been overdue on completely settling their receivables. Everyone on our payables list received a letter or fax. We have also spent an incredible amount of time on the telephone speaking with all that we could. We have not always been able to speak with everyone who called every time they called, but it is not for lack of trying,” he says.

Another artist, who also wished to remain unnamed, however, says that he had been working on a large order for them when someone from People’s Pottery called and asked him to hold off, as they couldn’t handle the order right now. “I thought that was great that they called,” the artist says. Artist Karen Steininger of The Potters, Ltd. in Altoona, Iowa, had already sent her order before she heard of any trouble. After her payment was late, she says she called People’s Pottery and was told partial payment would be sent the next week, and to call back to find out the amount. After leaving seven messages and receiving no faxes, Steininger says she decided to file a lawsuit. “Some people say they’ve gotten faxes or letters, but I have not gotten one.”

Froehler says, “We have confirmations of sent faxes and letters,” maintaining that all artists on their payables list have received them.

Steininger has filed a suit in an effort to get in the front of the line of people waiting to be paid, but other artists have not even filed with collections for fear of burning bridges if People’s Pottery recovers. Steininger, however, says she is finished with the relationship. She says, “I would rather work with 50 stores who pay on time.”
Froehler says, “We have purchased $123,445 from [The Potters, Ltd.] studio from 1997 to 2000, with the orders growing in size each year. We owe them $8,702 that is approximately 60 days overdue.”

Some artists have said the size of previous orders in the past doesn’t make up for late payments now. Other artists, however, have voiced strong support of People’s Pottery, despite the recent situation. One supporter is Lisa Haug, who manages the financial end of her business, Pottery Art Studio in Navarre, Fla., which she runs with her artist-husband, Chris Haug. “They’ve been honest with us and never promised me something that they haven’t been able to follow through on,” says Haug. “They’re not running and hiding; I’ve been able to get Jim Froehler on the phone, or Carla on the phone, and as the owners of a company like this, that holds a lot of weight. ... They got in a sticky situation, but I think we all have at some point. It’s been frustrating and stressful for all of us, including them, but we’re going to stick by them,” she says.

This seems to be the message Froehler is trying to send. “Fostering the growth and development of the studio-retailer relationship took some time,” he says. “Especially early on when orders would frequently arrive late or sometimes not at all. Or, when the merchandise arrived at our warehouse in unacceptable condition due to poor craftsmanship or poor shipping procedures. But, we understood this was a two-way street,” he continues. “The relationship would need time to work and develop properly. During the past five years, we have never turned back one order for arriving late.”

Common risk of expansion?
Sullivan, who is author of “The Small Business Start-Up Guide,” and has appeared on CNBC and National Public Radio (NPR) as a small-business expert, says rapid expansion by its nature is not necessarily a risk. The problem is poor planning, he says, referring to CJF Holdings’ reliance on investor financing. “That is just bad business. There should have been a plan in place to prevent this,” he says.

Baklor says, “It sounds like they’re just caught between a rock and a hard place,” adding that it is not the best etiquette on the part of a venture capitalist to make a promise of funds and then to pull back. However, she adds, “There absolutely should have been a contingency plan in place.”

Sullivan adds that artists, who are unsecured creditors (as opposed to secured lenders, like a bank), may have little recourse for getting any money back should People’s Pottery declare a Chapter 11 bankruptcy, even if they file a suit now. “If the company is without funds, squeezing them isn’t going to do any good,” Sullivan explains.

The fact that Froehler says People’s Pottery is still paying their debts — just a little late — seems comforting to some, but Kim Marie of Kim Marie Fine Pottery in Homer, N.Y., has little room for comfort right now, she says. Marie was advised by her bank to use a low-interest credit card to cover the cost of supplies to fill a large order for People’s Pottery, she says. “I figured I had finally made the big time.” When payment did not come in, Marie was unable to pay monthly bills, and says that her business and mortgage are now in jeopardy. “It wasn’t just the money, it was the fact that I hadn’t applied to my normal shows because I needed a full two months to fill that large of an order,” she says.

On one level, Marie and People’s Pottery are in the same boat — both were expecting money to arrive that never came. However, Marie says, “I just received a memo on Friday … [from People’s Pottery] … [It] said the pain the problem has caused is not one-sided. While this may be true, the effects to Carla and Jim are easily not the same as for me. ... I’ll be lucky if I don’t lose my business and my home.”

Froehler says, “Kim Marie made two shipments to us. ... These were ordered and shipped with 90 days terms. The majority of the payable would not become due until mid-August,” he says. “She elected to have approximately one-third of the work returned to her.”

Kim Marie says while $7,538 was to be due in August, her first bill of $1,998 was due on June 11 and wasn’t received. “While this may not sound like much, their delay in payment has had monumental effects on my business and family,” she says.

Regardless of your personal finances, a small-business owner considering sending a large shipment to any retailer, Sullivan says, should always get at least a percentage payment up front. “At least cover your raw materials,” he says. “If the company says, ‘Sorry, we can’t do that,’ then the artist has to say, ‘I’m not interested.’” This may sound extreme, but in Sullivan’s eyes, it is the smartest way to run your business.

Froehler, however, says, “This is simply not how business is done for anybody.”

Some artists are still deciding whether to send shipments to People’s Pottery, even though they haven’t been paid in full for their last shipments. Sullivan says, “I personally wouldn’t do it without getting something up front. You could say, ‘I’m happy to deliver, but I want X percent down.’ I don’t know what that percentage should be for this situation, but at the very least it should cover your out-of-pocket costs. If they give you nothing,” says Sullivan, “then you ought to be extremely suspicious. If the company is still in business, some of it, no matter how little, should be coming back to the artists.”

Some artists say they foresee bankruptcy for People’s Pottery, others predict a recovery. Froehler himself conveys more of a lesson-learned attitude than a seriously troubled financial future. “We’ve learned some very important things this year, and we will be back on track and stronger for it,” he says.

As Sullivan points out, however, a non-public company, like People’s Pottery, does not have to disclose financial information. If they are planning to file for bankruptcy, they are under no legal obligation to disclose it.