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February 24, 2021

Promo Continues to Grapple With Rising Prices, Inventory Issues

Suppliers say they’re working to mitigate the impacts of the COVID-related challenges.

By  Christopher Ruvo

Supply chain disruption, rising raw material costs and a devaluing U.S. dollar are key factors driving price increases on promotional products, while a dearth of inventory depth that’s affected the industry remains an issue that suppliers say they’re working hard to overcome.

The challenges are all fallout from the ongoing COVID-19 pandemic which hit promo hard in 2020, driving down North American distributors’ annual sales an average of 19.8% year-over-year.

Arrow going up on stack of coins

Now, nearly a full two months into 2021, some suppliers have begun to announce price increases or say they could implement increases on a gamut of items. They say the increases are necessary to stay viable given the cost pressures they’re facing.

“I do expect price increases,” says Pat Noonan, chief product officer at Issaquah, WA-based SanMar (asi/84863), the largest supplier in the promo industry. “They’re driven mainly by two factors: Increased raw material costs and a weakening of the U.S. dollar against global currencies.”

China is where the majority of promo products sold in North America are manufactured. The U.S. dollar’s value against the Chinese yuan has declined about 8% from a year ago, meaning promo suppliers’ money isn’t going as far as it used to with the factories that produce the goods sold here.

Meanwhile, cotton prices have skyrocketed. The per-pound price of cotton, integral to apparel and other products, rose to 87.33 cents on Feb. 12 – about 80% higher than 10 months before. The price remained elevated above 80 cents as of this writing. Oil prices are increasing too, with U.S. crude hitting a 13-month high of about $60 per barrel. Goldman Sachs predicts that oil, essential to transport goods and a component of products promo sells, will reach above $70 per barrel come summer.

It’s not just cotton and oil that are going up. “Steel, aluminum and wood are also rising,” says Jeffrey Nanus, president of Norwood, NJ-based hard goods promo supplier AAA Innovations (asi/ 30023). “That impacts items our industry provides.”

Shipping Challenges Affecting Pricing Too

Another impact on product pricing is the ballooning costs of shipping items from overseas, as well as the hefty increases in the cost of shipping containers. ASI Media first documented the shipping issue at length in an article published in January. Those issues continue to be in play.

A lack of containers and reduced shipping fleets (which means less available space for transporting goods), combined with rampant demand from Western importers keen to capitalize on post-lockdown economic recovery, have sent transport prices through the roof.

New Kensington, PA-based Polyconcept North America (PCNA; asi/78897), the fourth largest supplier in the promo market, reports a 300% average rate increase on all container shipments from Asia.

Nanus says things were especially bad during the pre-Chinese Lunar New Year importing rush, when premium rates of an additional $3,000 to $8,000 were being charged per container.

The situation is all the more frustrating, say suppliers, because shippers are breaking contractually agreed upon rates to implement the price rises amid the crush of demand. Rates could be climbing higher again soon.

“Container pricing continues to trend upwards,” says Cheron Coleman, vice president of global supply chain at Trevose, PA-based alphabroder (asi/34063), the second largest supplier in the promo industry. “We just received notification of a GRI (General Rate Increase) and a PSS (Peak Service Surcharge) effective March 2021.”

High demand and limited production capacity, a partial consequence of pandemic-driven rollbacks, has also made Chinese factories more expensive to work with, suppliers note. “Labor availability in the U.S. is equally challenging, as competition for skilled workers is driving up wage rates as companies look to expand capacity,” explains David Nicholson, vice chairman of Polyconcept, PCNA’s parent company. “The impact of these factors is unavoidable.”

That impact is higher prices. In a commendably transparent communication to distributors on Feb. 22, PCNA announced that it would be implementing modest price increases effective Monday, April 5. PCNA’s far from the only supplier taking such steps. “We see prices increasing in 2021, especially on larger items where freight is a larger component of the price,” says Nanus.

For distributors, it will be essential to communicate clearly with suppliers to understand how pricing could be changing in order to provide clients with accurate quotes.

Inventory Issues

Another consequence of the pandemic for promo has been inventory issues – or more pointedly, not enough supply of certain products. For sure, that’s caused frustration for distributors.

Still, suppliers say the inventory problems aren’t a result of slacking or bad planning. Rather, they’re a repercussion of everything from the shipping/transportation challenges to trying to adapt to rapidly changing end-market demands that have resulted from COVID-19 to the tricky act of balancing inventory investment against what demand might actually be in a highly uncertain, irregular coronavirus-impacted market.

The inadequate supply of containers and shipping capacity has resulted in it taking longer to get products from overseas to the U.S. and Canada. Limited capacity for air freight, which has also gotten more expensive, contributes to the problem. Backlogs at domestic ports, along with trucking and rail transport delays, compound the struggles. The result of these and related factors is that it’s taking longer for suppliers to replenish stocks.

“We are planning on two-to-three weeks longer than normal for ocean cargo to arrive,” says Nanus.

Some suppliers report that the shipments ordered last year that were expected stateside by January were pushed out to February, March and even April.

As Nicholson relates, suppliers essentially stopped new orders during much of Q2 and Q3 in 2020 given the significant fall-off in demand. As marketplace conditions improved, there ensued a sprint to replenish inventory – both within promo and across many other industries. “The supply chain is simply not elastic enough to support the current demand,” says Nicholson in explaining another reason for delays in inventory replenishment.

Additionally, the pandemic has driven meaningful shifts in what end-buyers are purchasing. What were traditionally strong-sellers for events and in-person meetings have been replaced by much higher demand for gifts, safety-related items and at-home products. “This has required suppliers to adapt forecast projections and to shift what they are buying,” says Nicholson. “All of this has created real challenges in maintaining adequate inventory levels – and will likely not rebalance for the industry until later this year.”

Nanus shared a similar perspective. “Suppliers are facing new challenges forecasting inventory given the pandemic and change in product sales,” he asserts. “Standard items that would normally be strong sellers may have slowed while products geared to the home are on the rise. With this in mind, suppliers are reworking inventory levels to meet current sales needs. Therefore, suppliers may run short as demand returns to a more normal level of basic product.”

Combating Inventory Challenges

Certain executives see the inventory issues normalizing, at least for their companies if not industry-wide, by some time in the second quarter.

“Inventory challenges are being caused by an imbalance of supply and demand,” explains Noonan. He shares that for SanMar Q4 2020 sales came in stronger than the company had forecast. That resulted in inventories being pulled lower than SanMar is comfortable with for Q1. Nonetheless, the supplier has been diligently working to correct the issue – something Noonan says is bearing fruit. “In general, we expect to be back in a healthy inventory position by some time in Q2,” he says.

Pat Noonan

Pat Noonan, SanMar

PCNA has been proactive on the inventory front, too. Anticipating inventory challenges amid the expected economic recovery in 2021, PCNA significantly increased inventory purchases on core, best-selling items last autumn, investing an additional $10 million to ensure deep stock on those popular products – inventory above and beyond what the firm would normally carry.

“As a result, our current inventory position at ETS, Trimark and Bullet (all PCNA brands) is quite strong today,” says Nicholson, adding that PCNA has also accelerated new product development, while working to expand its decorating capacity in anticipation of stronger demand later in the year.

As proactive suppliers deal with these marketplace vicissitudes, they do so with one eye always on the specter of COVID, outbreaks of which have the potential to affect their operations/production capacity both domestically and abroad at factories where promo products are manufactured.

Noonan, for example, notes that in Sri Lanka some factories are working at reduced capacity as that country has had COVID outbreaks in the apparel sector in recent months. In Vietnam, he says, “various regions have gone into lockdown in the past few weeks, which impacts the ability of people and materials to flow freely and can certainly lead to delays.”

Fortunately, suppliers relate, targeted lockdowns in China that occurred amid relatively small flare-ups of COVID in January 2021 did not have a significant impact on supply chains.

Still, with a global pandemic still raging, an industry like promo that relies on a worldwide production network must remain nimble and continue to adapt in order to capitalize on opportunities that exist. The success of that effort will be contingent, to a degree, on the ability of suppliers and distributors to communicate and work collaboratively.

“This is one of the most resourceful industries in the world,” Sara Lavenduski, ASI’s executive editor of digital content, writes in a recent opinion piece. “I firmly believe that suppliers and distributors can continue to find grace and understanding to extend to their partners. Because without strong relationships on the other side of the pandemic, the industry will be a shell of what it once was.”