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Monday, March 23, 2009

The Arbitrage Opportunity with Knitting

The arrival of spring means many things, but for me, it also means the end of the knitting season. As the days are no longer filled with cold, rain, and snow, there’s not the same desire to hole up inside with the knitting. I’ve been working on what Kristin Spurkland, author of the Knitting (Man)ual calls a Helmet. It’s a ski hat with an open face that’s taken a surprising amount of time and yarn. However, given that I am doing a round of 170 stitches on size 4 needles, I shouldn’t be surprised.

With no knitting project stories to share, I will address the business of knitting and where the arbitrage opportunities lie. I learned in business school that you can use the phrase “arbitrage opportunity” endlessly. It has been defined as buying burgers for a $1 in upper Manhattan and selling them for a $1.10 in lower Manhattan. In business school, my classmates seemed to have a different interpretation. For example, someone asked me to bring them back a bottle of dessert wine from Capetown, South Africa when I was there for Spring Break. The bottle costs $25 but they gave me $40 and when I tried to give him back the change, he refused and told me to take advantage of the arbitrage opportunity. This individual had already graduated while I was still a student so I took the extra $15 but I felt more like a porter getting a tip than a slick hedge fund operator.

Here are the arbitrage opportunities in the knitting world that I learned while working a knitting store, teaching, and contemplating starting my own store. I did actually work as an hourly sales person on weekends and taught but here's what I learned what I would have to do in order to support myself.

Teaching classes: The best opportunities are teaching group classes. Teaching 8 people takes the same amount of time as teaching 2 people. Since I would get paid per person, it could really add up and was better than private lessons. My best class was called "My First Socks" which sold out. I advertised it as an easy sock class but it was atually the same sock pattern as everyone else. I got approach from working on one esoteric pattern that the author had promised was easy, I believed the author, and had a fun time knitting it. Later on, someone told me that pattern was actually really hard. If the author had told me that it was a hard pattern, it would have been a different experience.

Opening your own store: I had done a marketing analysis for a knitting colleague who was thinking of opening her own store. From doing that work, I realized that if you are the only knitting store in a few good zip codes, you can get enough business. Portland, OR had an incredible expansion of knitting stores including knitting cafes which made the neighborhood of your LYS (Local Yarn Store and this is an official term) a lot smaller. To be successful long-term, you needed enough space and be able to survive the summer dry season. The smaller yarn stores closed eventually since they didn't have enough inventory to be a one-stop yarn store. Yarn stores also had to contract during the summer and save enough cash to survive until the knitting season returns in the winter. I actually got laid off in the spring as the LYS where I worked only retained its core employees during the summer.

Needle and Yarn production: This is where the best arbitrage opportunity lies in the knitting business. Forget teaching, forget opening your own store. With knitting growing in popularity, there was a shortage of yarn and a severe shortage of knitting needles. We would get only half our orders filled by yarn and needle companies because they didn't produce enough. The yarn company that did best was Brown Sheep, the maker of Lamb's Pride 100% wool since it was so good for felting. Felting (which involves a 100% wool product that is than sent through a top loading washing machine a few times which makes a soft, felty knit good), especially felt bags had just taken over the knitting world a few years ago. If knitters would have ever been inclined to riot, the shortage of Lamb's Pride might have been a reason.

With regards to knitting needles, there were only a few good mid-cost knitting needles out there which mainly bamboo. Plastic needles are terrible to work with and hard wood needles were really expensive. Demand is huge as any new project requires a new set of a very specifically sized and shaped needle so every knitter is always buying new needles. I always figured that it couldn't be too hard to mass produce knitting needles but given supply, it must be difficult to mechanize.

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