2020

1

Uncertainty Mixed With Optimism

In the third quarter of 2018, the Counselor Confidence Index stood at 117 – an all-time high, well above the baseline of 100 and far from the low of 79 experienced in 2009 during the depths of the Great Recession. But the index, which measures distributors’ feelings about the current and prospective health of their businesses, was down to 110 in Q3 2019, having fallen for four straight quarters.

The decline is a consequence of the anxiety among promo firms, which has resulted primarily from the U.S./China trade war, its corresponding tariffs on more than $360 billion in Chinese imports (as of press time), and its related concerns over a potential U.S. recession. The trade conflict has impacted promo in various ways, including product price increases on duty-affected items. Also, the worry about how the trade war will play out has spread throughout the American economy, destabilizing stocks and casting a shadow of doubt that promo executives fear could cause end-clients to limit investment in ad specialties in 2020. “The uncertainty of the trade war creates an environment where businesses are less likely to invest and spend, which doesn’t bode well for our industry,” says David Nicholson, president of Top 40 supplier Polyconcept North America (PCNA; asi/78897).

While some executives suspect the broader economic concerns will result in distributors’ collective sales being flat in 2020, the majority of industry leaders Counselor spoke with believe that annual sales will again increase, though there’s no consensus on by how much. Forecasts for the rise range from a modest 1% to 3%, to bullish predictions of 5% to 10%. “Promo is very dynamic and continues to evolve,” notes Mike Wolfe, CEO of Top 40 distributor Zorch (asi/366078). “If we can continue to innovate, we believe there’s still substantial growth opportunity.”

2

Price Fluctuations

In 2019, tariffs of 25% on $250 billion in Chinese imports contributed to price increases on industry products like bags, stationery, select drinkware, technology and accessory items. Tariffs of 15% went into effect on Sept. 1 on another $112 billion in China-made goods, impacting products that include apparel, which comprises about 39% of industry sales. As of press time, tariffs of 15% were poised to extend to all remaining Chinese imports – approximately another $200 billion in goods. So, as suppliers replenish stock on tariff-affected items, more price increases could be in the cards. The increases could extend to items not impacted by tariffs, as suppliers spread the cost of the duties around to reduce the potential price hikes on individual products. “It’s safe to say our costs are going up,” says Paul Lage, president of Top 40 supplier IMAGEN Brands (asi/47700/93990).

Industry optimists note that a rollback or removal of tariffs could lead to price decreases, but even that positive contributes to the potential for fluidity on pricing in 2020. “Suppliers need to know what their products will cost landed and delivered to their facilities, so until the trade war is settled and finalized, it will continue to wreak havoc on our industry, especially as it impacts large overseas custom import orders where the prices may change from order placement to delivery, based on the tariffs,” adds Jamie Stone, president of Seattle-based distributor Gifts By Design (asi/205947).

3

Opportunities Abound

Even with price increases, promotional products remain one of the most cost-effective marketing mediums. The cost per impression on a promo product can be as low as 1/10 of one cent – lower than nearly any other advertising medium, ASI research shows. Combine that with other stats like the fact that 85% of consumers remember the advertiser that gave them a branded shirt or hat, and you have an advertising medium that will be attractive to marketers eager to get the most bang for their buck in an uncertain economy.

4

Political Ad Spend Frenzy

A recent forecast from global advertising corporation WPP’s ad-buying unit GroupM estimates that political advertising spend will reach $9.9 billion next year in the U.S. That would be up 57% from the last presidential election year, 2016. It would also represent a rise of nearly 14% from what a GroupM analyst called the “shockingly high” $8.7 billion spent in 2018, the year in which mid-term congressional elections occurred. Promotional products distributors believe the projected increased marketing investment will extend to branded merchandise – and they intend to capitalize. “From national to local elections, the consumption of election-related promotional merchandise will be strong in 2020,” says Gregg Emmer, vice president and chief marketing officer at Top 40 distributor Kaeser & Blair (asi/238600).

5

Tech Arms Race Intensifies

This year, Proforma (asi/300094) launched ProVision, a new business management technology platform for its affiliate owners. The Top 40 distributor spent four years and $12 million to develop the system, which executives believe will help spur robust sales increases in 2020 and beyond. “The goal is to make our owners the most successful in the industry by allowing them to sell more and make more money in less time,” says CEO Vera Muzzillo.

While especially grand in scale, Proforma’s ProVision launch is indicative of the powerful push among both distributors and suppliers to gain a competitive advantage by developing and improving internal technology with the intention of making their businesses smarter, more efficient and more customer-friendly. Industry executives expect the tech improvement efforts to intensify in 2020, including the incorporation of more automation and data generation. “We have some big technology items in the pipeline that are finally about to see the light of day,” says Bret Bonnet, president of Top 40 distributor Quality Logo Products (asi/302967).“Intelligent automation is the name of the game. It’s not about replacing people with technology. It’s about empowering them.”

6

Digital Catalogs Will Be on the Rise

Promo’s days of firm annual pricing appear to be fading – if not faded. To provide the most up-to-date accurate pricing and product information, suppliers will continue to place greater emphasis on their digital catalogs/product-packed websites. Printed catalogs aren’t going away yet, but their relevance will continue to diminish through the 2020s, according to industry executives.

7

Staffing Challenges

With a national unemployment rate hovering at historic lows and a reported gap between the skills many workers have and what employers need, competition for qualified workers has been fierce in the U.S. From high tech to trucking, industries across the board have complained of employee shortages and an inability to hire and retain qualified people. Promo firms have felt the burn too – something executives expect will continue next year. “Labor shortages continue to be a significant problem,” says Matt Gresge, CEO of Top 40 distributor AIA Corporation (asi/109480). “It’s extraordinarily difficult to find and retain the talent needed to maintain growth.” Still, as Gresge adds, it’s doable. Competitive wages, quality benefits, scheduling that allows for work/life balance, a positive workplace culture, and a defined path for advancement can help.

8

Hiring & Retention Will Present Sales Potential

Of course, promotional products can help assuage staffing headaches, too – and that’s something upon which executives at distributorships large and small expect to capitalize on next year. “Many employers have turned to promotional products as a cornerstone of recruiting, retention, and rewards programs,” says Gresge. “Increasing knowledge and capabilities about how these programs work, and can be optimized, should create many new opportunities for distributors.”

9

Greater Cybersecurity Threats

Earlier this year, Top 40 distributor DiscountMugs.com (asi/181120) admitted that hackers infiltrated its website with malicious code in a cyberattack aimed at siphoning off customers’ credit cards and other personal information. Then, in October, the industry’s largest supplier, alphabroder (asi/34063), suffered a ransomware attack that temporarily crippled the Trevose, PA-based company’s ability to process orders. Sadly, these are among the mounting number of high-profile hackings besetting firms inside and outside promo. “Continued phishing and security hacks are a major challenge and disruptive,” says Jo-an Lantz, CEO/president of Top 40 distributor Geiger (asi/202900). Promotional products leaders expect the attack attempts to increase in 2020, making data protection efforts paramount. “A firm can engage an outside third party to diagnose points of vulnerability in systems,” says Lantz. “That will lead to areas to focus on first.”

10

More Retail Brand Offerings

Within the last 12 months, Top 40 supplier BIC Graphic North America (asi/40480) started offering more retail brands, including popular Tervis drinkware. In October, Leed’s (asi/66887), a subsidiary of PCNA, announced it had earned exclusive rights to provide Herschel Supply Co. items to promo. Sold in 94 countries, Herschel is one of the hottest backpack brands in the world. These are just a few examples of suppliers bringing more retail offerings to the promotional products marketplace. Expect the retail influx to continue in 2020. “We’ll be launching several new brand partnerships,” says PCNA’s Nicholson. Distributors believe the right retail brands can generate ample sales potential. “When competitive pricing is part of the offering, great things can happen,” adds Emmer.

11

Amazon-Like Expectations

As younger buyers gain decision-making power at end-client companies, they’ll bring their expectations for extremely rapid fulfillment on order quantities of all sizes to the world of branded merchandise. That’ll put additional pressure on distributors and suppliers to deliver at ever higher service levels. “A significant factor impacting suppliers will be the move to smaller orders and faster delivery expectations,” says Nicholson.

12

PE Firms Increasingly Invest in Promo

In October, Utah-based Tower Arch Capital recapitalized SnugZ USA (asi/88060), becoming the majority owner of the Top 40 supplier. No less than 10 private equity firms were interested in investing in SnugZ. The deal – and heavy PE interest in SnugZ – are emblematic of the sharp focus private equity companies are placing on promo. Principles in promo and PE expect more private equity entities to seek to buy promotional product companies, and for equity firms currently in the swag space to try to expand their reach. “It’s a great sector to invest in with long-term positive growth drivers and opportunities,” says David Colclough, a partner at U.K.-based Elysian Capital, whose promo investments include industry partnering organization Facilisgroup and distributorship Brand Addition (asi/202515).

13

Acquisitions Accelerate

Private equity investment is one factor that’s accelerating another development that many industry executives expect to quicken in 2020: consolidation through acquisition. Recent years have seen a lengthening list of headline-grabbing acquisitions on the supplier and distributor sides of the aisle. For instance, Top 40 distributor HALO Branded Solutions (asi/356000) bought former fellow Top 40 firms CSE and Sunrise Identity. In 2017, alphabroder purchased Prime Line (asi/79530), making the one-time Top 40 outfit into alphabroder’s hard goods division. Meanwhile, HUB Promotional Group (asi/61966) recently acquired Origaduio (asi/75254), HandStands (asi/59525) and others. “The consolidation is going to continue,” says Wolfe. “The industry is still very fragmented, and there’s an opportunity to continue to improve efficiencies.”

Some, though, think that if the economy takes a hit, then the rate of acquisition could start to lumber. “There could be a slowing of significant supplier consolidation as companies wait and see how things shake out,” says Lage. “If there’s a recession or significant uncertainty about supply chains, it would be a prudent time to pause. However, even if that happens, there will probably be some distressed acquisitions, as there will be those who are hurt in these times.”

14

Centralized Purchasing Power

Acquisitions will contribute to a consolidation of spending strength – but they won’t be the only factor in that phenomenon. On the distributor side, purchasing power will become increasingly consolidated as more small to medium-sized distributorships look to join industry buying groups and supporting organizations – think Proforma, AIA and iPROMOTEu (asi/232119) – to stay competitive as the price of doing business goes up. “As the industry matures, the cost of innovation is becoming exceedingly expensive and cost prohibitive, making it difficult for smaller distributors to compete. Scale and efficiencies are the name of the game,” says Bonnet. Adds Gresge: “Larger players will continue to gain talent, resources and profits, while smaller players will struggle to keep pace. Distributors who are aligned with larger organizations will benefit in both the short term and the long run.”

15

Production Shifts

As a consequence of the trade war, suppliers have ramped up efforts to move some production out of China. At certain firms, the shift was underway before import tariffs went into effect, but the duties have hastened the sourcing diversification. Even if tariffs are abolished, industry executives expect the movement beyond China to increase in 2020 – and the next decade. Still, it’s a complicated, typically lengthy undertaking that hatches a plethora of challenges. “Some production is being moved to other countries such as Myanmar or Vietnam, but they don’t have the same infrastructure as China, so moving production isn’t easy,” says Lantz. Jonathan Isaacson, CEO of Top 40 supplier Gemline (asi/56070), adds that “systems around product and social compliance have the potential to get tested. For companies such as Gemline, who have robust systems and processes, this can be managed. For those that don’t have the people and processes to verify, this could increase the risk to the industry around compliance-related problems.”

16

Sustainability Rules

In recent years, more promo firms have focused on conducting operations – and producing products – that are more sustainable. Geiger, for instance, began powering its headquarters with the largest business solar array in Maine. In September, Top 40 supplier S&S Activewear (asi/84358) opened a new, LEED-certified distribution center packed with earth-friendlier features. In August, Grossman Marketing Group (asi/215205), a $35 million distributor, launched SwagCycle, a startup initiative that recycles or donates no-longer-wanted branded merchandise. In the autumn, Redwood Classics Apparel (asi/81627) began using a biodegradable ink to print on garments. Many promo executives expect the emphasis on sustainability to shift into a higher gear in 2020. “We will likely see sustainability as an increasingly important issue for many companies,” says Isaacson.

17

‘Brexit’ Impact

The United Kingdom’s planned economic decoupling from the European Union may disrupt global markets, sending ripple effects across the Atlantic to end-clients that promo firms serve, potentially detracting from their marketing spend. “If the U.K. leaves with a deal on the table, there’ll be a short period of chaos while people become familiar with new processes and tariffs, but this should be outweighed by the collective ‘sigh of relief’ that will be felt across Europe,” says Matt Franks, CEO of Fluid Branding (asi/195718), one of the U.K.’s largest distributorships. “The promo market will see an increase in domestic and cross-border demand.” But, if the U.K. exits without a deal, then the period of uncertainty will be considerably longer, notes Franks. Still, he adds: “General confidence within end-user brands should increase with market stability, and therefore end-user spend should increase after the dust settles. The amount of dust created just comes down to which type of exit we see.”

U.S. promo firms with European operations are also dealing with potential Brexit fallout. Geiger, who has subsidiaries in the U.K., has tried to remain ahead of the disruption. “We set up a logistics center in Rotterdam (Netherlands) as a point of distribution for imports into Europe,” says Lantz.

18

E-Commerce Upswing

About 80% of respondents to Counselor’s 2019 State of the Industry survey say they believe that e-commerce revenue will overtake “traditional” distributor/end-buyer sales by 2025. Both supplier and distributor executives say they anticipate the march toward that model shift to quicken in 2020. These pros expect that the percentage of distributors who offer e-commerce will rise from the current 4-in-10. They also believe that the portion of sales distributors collectively derive from web origination will increase. “I expect e-commerce transactions will accelerate exponentially as more promo companies invest in the online experience and leverage data to predict customers’ preferences and simplify the buying process,” says Sai Koppaka, CEO/president of Bel USA, parent company of DiscountMugs.com, which originates all of its sales online.

19

Savvy Firms Will Get ‘Leaner’

From Top 40 suppliers like SnugZ to mom-and-pop distributorships like A&P Master Images in Utica, NY, forward-thinking suppliers and distributors told Counselor that they’ll be looking to reduce waste and redundancies in their operations, while quickening speed. The aim is to not only increase the efficiency and efficacy of fulfillment, but to boost profits. “You should be evaluating your company from head to toe on pricing, production, buying, payroll, supplies and more to see where you can improve,” says Howard Potter, CEO of A&P Master Images. “Every penny counts if you can save it and redirect it to bolster another part of your company.”

20

Ops in Niche Markets

Even if some sectors struggle in 2020, promo executives think there’ll be exciting chances to build sales in particular niches. Bonnet, of Quality Logo Products, says businesses involved in everything from computer engineering, counseling/therapy, scientific research and data management to tax SaaS providers, veterinarians, management consultants and more could increase their promo product purchasing next year. “Distributors must leverage technology, automation, analytics and human capital to achieve success here,” Bonnet says. Added Emmer: “Thriving businesses generally want to maintain their momentum, which requires proper staffing, happy employees, strong marketing and customer loyalty. All these areas are prime markets for promotional specialty advertising.”