(FORTUNE Small Business) – Conservative taste rules at Marshall Field's Home Store in the affluent Minneapolis suburb of Edina. Patterns are discreet. Colors are subdued. Painting subjects range from ships to flowers. Everything matches, and nothing is out of place, except for that vintage hot-pink poster hanging above the brown armchair. A classic advertisement for a 1959 Picasso exhibit, it's a sweet deal at $1,500. But in this emphatically traditional setting, the poster has the forlorn look of a Deadhead at a church social. And that's a big problem for a small local company called Art Holdings.

"Why don't people buy good art?" asks Greg Hennes, the CEO of Art Holdings, which operates 11 galleries in the Midwest and provides art consulting services to Fortune 500 companies all over the country. "I just don't get it."

Founded in Minneapolis in 1989, Art Holdings achieved early success as a corporate art consultancy that bought paintings and sculptures for such clients as American Express, United HealthCare, and Wells Fargo. But many corporate customers stopped buying fine art after the stock market crashed in 2000. Hoping to expand beyond the fickle consulting market, Art Holdings spent $2.1 million in 2001 to buy an online art dealership and an art-rental business. Revenues continued to climb, reaching $6.8 million in 2004, and the company remained profitable.

In the fall of 2002, Marshall Field's invited the company to open retail art galleries in 11 of its department stores in Illinois, Michigan, and Minnesota. Hennes leaped at the opportunity with characteristic gusto. In less than four months the company bought, framed, and hung 5,000 works of art in shops that it named Look Galleries.

Almost immediately Art Holdings began to flounder. Neither Hennes nor any of his senior managers had much retail experience, and they made one mistake after another. Hennes bought a set of vintage comic books and framed the covers, hoping customers would purchase them to decorate children's rooms. That was a bust. "Lesson learned: Stay away from children's art," he says.

The galleries sell a broad range of traditional and contemporary art, including oils, prints, posters, photographs, and sculptures. Prices range from $25 to $10,000. But from the start, shoppers either didn't like or couldn't afford much of the art. And Art Holdings' marketing efforts actually drove customers away from the galleries. Last year one gallery sponsored an Ugly Art Contest. Shoppers who brought in particularly unattractive pieces of art would be entered in a raffle for two $1,000 gift certificates. Only two contestants showed up with ugly art. Each walked away with a prize. More recently Hennes spent $17,000 on newspaper ads to promote a midwinter art sale in the galleries. Store revenues plunged that weekend.

Hennes and his staff have learned other painful lessons in the past three years. Shoplifting has been a major problem in some of the Michigan galleries, most seriously in the battered blue-collar city of Flint, where unemployment has hovered at 10% ever since General Motors shut down several factories there in the 1980s. (Marshall Field's recently closed that store.) "How is it possible to walk out of a store with a framed painting?" Hennes asks.

Managing its $1.5 million inventory has been a constant challenge. Some of the unsold art is gathering dust in storage rooms. Meanwhile Art Holdings has been too cash-strapped to stock up on framed black-and-white photographs and other items that actually sell. After four years, only three of its galleries are turning a profit. Eight others are breaking even or losing money. Art Holdings' total revenues rose 35% last year, to $6.8 million. The company was profitable, but much of the growth came from a rebound in corporate consulting. Hennes remains frustrated by the slow growth and spotty performance of the retail galleries. "We know this business can generate revenue of $7 million or $8 million a year," he says.

Big retailers such as Marshall Field's have long had a fascination with fine art. Forty years ago Sears Roebuck & Co. dabbled in the art business, selling paintings and sketches by Picasso and others at prices ranging from $30 to $3,000. More recently Costco, the warehouse giant, has been selling works by the likes of Miró, Modigliani, and Chagall, though the prices are higher. Example: $129,999 for a crayon drawing by Picasso.

FSB recruited three experts to help Art Holdings. In 1985, Keven Wilder co-founded an upscale housewares retailer called Chiasso. She sold the five-store chain and catalog business in 1997 and became a retail industry consultant in Chicago. Cynthia Cohen is a director for three major retail chains--Bebe, Hot Topic, and Sports Authority--and president of the retail consultancy Strategic Mindshare in Miami. And Paul Erickson, a senior vice president at the Minneapolis branch of the consulting firm RMSA, has 25 years' experience in inventory-management issues.

On a recent morning FSB sponsored a frank five-hour therapy session with the senior management team of Art Holdings. First at the plate was Wilder, who had recently visited an Art Holdings gallery at Marshall Field's flagship store in downtown Chicago. She had not been impressed, Wilder told the group via speakerphone. The gallery was nearly impossible to find: She didn't see any signs, and a Marshall Field's receptionist sent her to the wrong floor. Wilder finally stumbled on the gallery in a remote corner of the eighth floor, near the furniture department. "No man's land," she sniffed.

A lone salesman was minding the store. He ignored Wilder, even though she lingered for a half-hour. Some of the gallery walls were bare, another retail sin. "It looked more like a warehouse than a gallery," she says pointedly.

At Marshall Field's insistence, none of the pieces carried any information about the artist or the art. "Anyone who intends to spend that kind of money on art wants to be romanced," she says. "They are not buying décor. They are making a serious investment, and they want a glass of champagne and the story behind the art."

Moreover, Art Holdings has yoked itself to a retail partner that is currently in disarray. Founded before the Civil War, Marshall Field's is the retail dowager of the Midwest. But like many upscale chains, it has struggled in recent years. Last year Marshall Field's was sold by retail giant Target to May Department Stores. May is now being acquired by Federated Department Stores. Hennes worries that May's corporate overlords will toss him out if his galleries don't fit into the new business plan for Marshall Field's. "Take a good hard look at your business partner," Wilder insists. "Do you really want to hitch your wagon to the declining fortunes of an old department store?" (A Marshall Field's spokesman says the chain doesn't comment on its relationships with vendors.)

"Retail is a savage business," says Cynthia Cohen, speaking via speakerphone from Miami. "Are you a retailer at heart or a corporate art consultant? From my point of view, you aren't yet thinking or acting like a retailer." Hennes should negotiate a better deal with Marshall Field's. Under the current contract Art Holdings must maintain galleries in all 11 stores, even though most are losing money or just breaking even. And aside from providing floor space and collecting rent, Marshall Field's seems to do little for its struggling tenant.

Hennes should either close the money-losing stores immediately or demand a rent-free grace period during which he can try to turn the stores around. He also needs to push for better locations, such as a kiosk in the first-floor "hot zone" where shoppers mill about before deciding where to go.

Cohen suggests choosing the most successful gallery as a model store to test product mix and promotions. "You need to be more creative," Cohen says. "Make your galleries a destination. Create events around a particular artist or a time of year. How about a campaign aimed at helping new homeowners decorate? Are you listed in the bridal registry?"

Art Holdings also needs to develop a stronger brand image for Look Galleries, Cohen says. The brand should be consistent across store signs, logos, brochures, advertising, even the sales staff's apparel. The company website is a case in point: "You've got nothing but words on your home page," she scolds. "No personality. Boring!"

By now, Hennes and his staff are frozen in place. "They're telling us our baby's ugly," sighs business-development director Kim Cameron. But Cohen isn't finished. "You need to hire a true merchant, someone who really understands--and loves--retail," she says.

"We'll consider it," Hennes replies tersely. After the executives cool off, inventory expert Erickson takes the floor to deliver more bad news. "Based on your numbers, only one store can be considered successful," he says. "I am beginning to think that your corporate consulting business is supporting your retail experiment." His suggestion: Reduce excess inventory immediately by selling stockpiled art on eBay or at the company's popular outlet store next door to headquarters. Another possibility is a big sale promoted with high-impact advertising in Chicago, Detroit, and Minneapolis, Art Holdings' three main markets.

Erickson urges Hennes to spend more time with retail statistics, analyzing selling patterns in the galleries based on brand, price, category, and season. "By analyzing historical performance, you can generate a plan that maximizes sales," he says. One key measure of success in retail is "turn," the time it takes to sell a particular item. Average inventory turn at Look Galleries is a glacial 1.9 years. A healthy turn for an upscale arts and crafts gallery is four months. "You need to be more aggressive about markdowns and spiffs," Erickson says. (Spiffs are commissions paid to salespeople.) "And you must be more diligent about reordering key items that sell well."

Six weeks after the intervention, Art Holdings started implementing some of the consultants' suggestions. Some of the galleries' oldest stock was shipped to the outlet store and sold at a discount, which brought in much-needed cash.

Plans are afoot to improve the website. Among them: digital photographs of all artwork will be uploaded to the website as soon as the art goes to a gallery. Art Holdings has also increased its trunk shows (where outside vendors bring in work to sell directly to customers in the galleries) from one show a month to three.

Hennes met with Marshall Field's representatives in midsummer to discuss how they might help boost sales and profits in the galleries. As of late August he was still waiting to hear from them. Oh, and that $1,500 Picasso poster still hadn't sold as FSB went to press.