Even a .400 hitter makes three outs in a typical baseball game, so if it seems like the industry struck out a couple times in 2000, that obviously doesn’t rule out an MVP season. However the game turns out after 2001 is history, it was clear from this year’s SOI data that the promotional products industry in 2000 was only a hair worse than the “it’ll never rain again” era of the mid to late 1990s.

The Lowdown On Distributors

There was a slight pause in the good news that was coming from the sales and profit reports of distributors. But just like no one can tell you for sure whether a recession is coming, we can’t say yet if the industry is about to take a trip to the woodshed or continue its double-digit climb into U.S. advertising history.

Sales increased for 72% of distributors, four percentage points less than 1999 and a full six percentage points lower than 1998. And 12% of distributors saw their sales drop – about the same as the last few years. The obvious uptick in the number of companies that aren’t experiencing any growth (16% vs. 14% in 1999) is worrisome, even if that group is still firmly in the minority. Factoring in even mild inflation – along with the inevitable growth in population and markets – it’s the presumption of business to grow, at least a little.

And for those companies that are growing, the growth looks to be substantial. The median figure for distributors who were growing was 20% in the year 2000. (We use the median here – the distributor in the exact middle of the full range of responses – to eliminate the skewing effect of, say, a startup company that has huge increases in sales between its first and second year.) Also, since this was the first year we asked for growth rates for both sales and profits, we don’t know how those numbers stack up to 1998 and 1999, when industry sales were red hot. Still, a 20% growth rate is nothing to sneeze at.

For a lot of distributors that were growing, more meant – well, more. They either increased their client base (19%), expanded into new markets (12%), added salespeople (7.4%) or just found promotional products were being used more (5%). For those wags who claim that the best way to grow is to sell more to existing clients, there was this bone: 12% of distributors said their fortunes were tied mostly to preferred vendor relationships with clients.

Actually, there are some who see an economic downturn as a time to fight the tide and aggressively go after new clients. “If [distributors] are aggressively pursuing new business, they’ll do fine,” says Gregg Emmer, director of marketing and development for Associated Premium (asi/126400). “If they’re depending on their established client base, they’re going to find it a little bit more difficult. I think there are many more users of promotional products entering the marketplace in a downturn than there are when things are going along fine. They’re looking for a better way to advertise.”

It might, says Emmer, take two or three new clients to replace the volume of one existing client who is felled by recession – and it might take awhile for you to earn a margin you’re happy with – but experience shows it can be a way to expand in lean times.

The Chickens Are Back

In 2000, the median rate of decrease for struggling distributorships was 10%, a cause of some concern. Glen Holt, president of Certified Marketing Consultants Ltd., believes at least some of these companies are having troubling with debt and lack of capital. “I think there was a lot of overspending in 1998, 1999, 2000,” he says. “I think suppliers and distributors may have maxed themselves out and are finding it more difficult to be able to obtain capital to continue to grow like they have in the past. So I think some of the slowdown in our industry is due to our own operational and management errors, as opposed to the economy itself.”

Over the last few years, distributors added sales forces, built up their office staffs and gave great commissions without the margins to justify it. Now the chickens have come home to roost.

Of course, you needn’t fear chickens if your profits are going up. And for 63% of distributors, they were. But roughly 25% of firms went through 2000 without any real movement, and 12% of distributors saw their profits drop. The average profit increase was a healthy 31%, while median profit growth – a better indicator of what things were like in the middle of the pack – was a more attainable 10%.

When we look at the many reasons why profits went up, we see a battle between selling more and selling better. For 38% of distributors who saw profits jump, it was because sales increased. But the majority of distributors were doing something better: 36% managed to increase their profit margins; another 19% made their greatest advances because they were selling higher profit products.

Conclusion: If profit margins are ample enough, it doesn’t matter if distributors are simply selling more. But increasing your mark-up and finding ways to switch clients to more lucrative products are skills that will come in quite handy if things get bad.

Of course, bad times were already here for the 28% of distributors that had a flat year – or worse – in 2000. The main reason profits suffered was overhead, a factor cited by 30% of respondents. Another 15% said their volume decreased.

Finally, the most important stat of all signaled good news. Distributors on the whole were able to maintain their gross profit margins at 35%, the same place they’ve stood for the last few years. For many, the 35% profit margin is the point where distributors can fully finance their orders and make sure they can cover all the variables – from careless suppliers to non-paying clients. In other words, 35% is where you start making money.

Where Credit Is Due 

If times do get bad, collections could well be ground zero – the place where distributors will find out if they can stay in business. Even with some dark clouds on the horizon, however, the year 2000 produced relatively good news concerning collections: The average distributor bill was being paid 35 days late. 

This is good news? It is when you consider that’s a day sooner than the previous year’s survey showed. At least things are moving in the right direction.

Still, 35 days late is a lot – particularly because many distributors offer 30 days for clients to pay before the clock starts running. And all those late days add to the financial burden of distributors, who should be paying their supplier bills on time even if they’re still waiting.

Taking care of the financing of a promotional products transaction is one of the main reasons distributors command profit margins that other industries envy. But managing cash-flow is also one of a distributor’s greatest worries. Three-quarters of distributors offer at least some of their clients open terms – you order the product, we’ll worry about payment later. To pay their supplier while clients are dawdling (or even waiting to the end of the legitimate paying period), distributors need to borrow money or have enough extra profits sitting around to keep up.

Some distributors seem to be already looking for ways to clamp down on the problem. Thirty-five percent say they demand full prepayment from at least some of their clients (presumably, their least trustworthy ones). Similarly, a third of distributors let some clients pay C.O.D. Even more are employing less stringent measures: 54% encourage partial payment from some clients, and 57% accept credit cards (ensuring prompt payment, even if they’ll lose a couple percentage points in credit card fees).

In a downturn, distributors need to clamp down on credit. The fact is, credit still comes awfully easy in the promotional products industry. If a distributor has worries about a client, she needs to do something. With so much business in the tech-heavy areas of California, Jack Nadel Inc. (asi/279600) has naturally encountered some crazy credit situations. “It was screwy a couple of years ago,” says Craig Nadel, the company’s vice president of operations. “How much credit do you give to a company that has $500,000 a year in sales and loses $30 million a quarter – but they have $150 million in the bank?”

As noted, getting collections right is going to be crucial if the economy continues to slide. It’s a tricky business, to be sure. If a client refuses a prepayment, it could be because they find it insulting and they could get easier credit terms elsewhere. But it could also be because they’ll have trouble paying – something you’d rather find out before a promotional products order is placed.  Perhaps a partial prepayment – enough to cover the supplier bill – would be most agreeable to all parties. This way, distributors will still need to collect their profits, but they won’t be in hock to suppliers.

But distributors need to get other things right in a recession. None of the really solid firms should go under in the kinds of periodic recessions we’ve had regularly since the 1950s. And the savvy ones can get even bigger.

For example, companies that lay people off during a recession need to motivate the survivors. Businesses that see their sales slipping should up their promotional efforts so they can maintain market share. Corporations that have cut positions need to outsource the functions they cut. Every distributor who’s dry behind the ears can tell you this, but there’s still the nagging feeling that clients won’t do what they should unless they’re pushed. It’s your job to help them see the light “Are clients that smart?” asks Emmer. “They are once you make them think about it. You know, in my time in the industry, every time a client decided to buy something from me, it eventually became their idea. But it’s up to us to help them come to that decision.”

How Did Suppliers Fare?

The industry’s growth rate, as measured by overall sales, is slowing for both distributors and suppliers. The percentage of suppliers who said their sales increased was 70% in 2000 vs. 80% in 1999 and 75% in 1998. In addition, the number of suppliers who said sales were flat has also steadily declined in the past 3 years, from 16% in 1998 to 14% in 1999 to 13% last year.

Consequently, one of the most telling stats to emerge from suppliers responding to this year’s SOI survey is the number who said sales decreased – at 17%, nearly triple the number who indicated declines in 1999. A harbinger of recession? Maybe. But so far 2001 hasn’t been the washout these kinds of numbers would seem to indicate.

Delving a little deeper, the average increase in sales volume, for those who increased at all, was 30.2% for suppliers, compared with distributors’ 36.7%. The median (20%) was a bit more in line with reality, given that it’s less prone to skewing from very high or very low numbers that can affect mathematical averages. “Particular suppliers with really hot product lines saw a great spike in business,” says Mary Ellen Hudicka, MAS, director of marketing for Bodek and Rhodes (asi/40788). “The median of 20% sounds better – we were in the teens. But then, wearables is an over-saturated category [in this industry] right now.”

“Last year was great. We were up about 36%,” says Mark Soffa, executive vice president of Sweda Company LLC (asi/90305). “This year, of course, things are different, but we’re still ahead of the game, considering the economy. We’re currently at about a 20% pace – and if we can maintain that, we’ll be in great shape.”

Conclusion: Suppliers know 2001 isn’t going to be as good a year as 2000. But they’re still not expecting the bottom to drop out any time soon. “Of course, nobody knows what’s going to happen with the economy,” says Soffa. “It’s up; it’s down; it’s a mess! But companies that can establish a certain pace early on and let that momentum carry them through will do fine.”

Perusing Profits

How did sales compare with profits in 2000? Well, 60% of suppliers said their profits went up last year, but just like sales, that figure was down from 1999 (although it was roughly the same as in 1998). The big increase was in the number of suppliers who said profits were flat – 26% last year vs. 15% the year before and 19% in 1998. 

It’s worth pointing out that this doesn’t signify declining profits in the industry, only a decrease in the rate of profit increase. “Such a change isn’t surprising, since no company or industry can expect profits to rise at an increasing rate indefinitely,” says Dr. Marjorie Cooper, professor of marketing at Baylor University and special research consultant for the State of the Industry. 

Moreover, it’s no secret that the U.S. economy began its downturn during 2000 and that many companies began to tighten their belts and reduce expenditures in a variety of areas. Nonetheless, the promotional products industry continues to be a profitable industry and to grow in size – albeit at a slightly declining rate. “There was still a frenzy last year,” notes Hudicka. “We were all riding the economy, and some people took those profits and invested in things that drove the market – such as brand names and product innovation. If they did that, they will succeed. We invested in brands that are recognized nationally, and they’re marketing for us to a certain extent.”

Two other key pieces of profit data gleaned from this year’s survey:

• The average profit increase for suppliers in 2000 was 24.8%. The average increase in profits is less than the average increase in sales volume, which indicates that costs rose more than sales.
• The largest single gross profit margin category for suppliers was 21%-30%, with 32% of suppliers selecting this category. 

What’s Behind The Growth?

Of those suppliers that experienced an increase in sales, 30% attributed it to growth in their distributor base. The second most popular reason was increased efforts related to marketing, promotion and/or advertising (18%). Third was “catalog change” – i.e., number of pages, quality, distribution, etc. – at 17%. 

“The main reason for our increase [in sales] was a better strategy in how we marketed,” says Hudicka. “We identified key people who were not only giving us line share, but also potential, and we went after them with a vengeance – with direct mail, but also with timed follow-up. And we set up service teams around those accounts to say, ‘Look, we’re here to make you more profitable.’ And we helped them market themselves. I think suppliers overall are doing more marketing – and that could include e-mail marketing, Web sites, direct mail, whatever.”

For Bodek and Rhodes, the key has been harnessing the power of branding. The firm has recently taken on a number of well known names, capitalizing on the synergy these labels create when it comes to marketing and sales.

“We’re using that recognition factor,” says Hudicka. “If the salesperson is convinced that the brand has value, then he brings that to the buyers. Sometimes the buyers say, ‘I want that Arnold Palmer shirt…’ But even if they don’t, it’s still another tool – more ammunition – if the salesperson believes in it. We’ve been going out to see our key customers and getting together with their salespeople and teaching them how to use these brands to sell.”

And what about the 17% of suppliers who said their 2000 sales declined? Of those who experienced a decrease in overall sales, 36% attributed it to increased competition, and 11% blamed the economy. Other reasons: Distributors sourcing their own products overseas (7%); catalog change (4%); fewer salespeople (4%); and preferred vendor relationships (4%).

Looking at profitability, the suppliers who said their profits increased attributed it primarily to rising sales (35%). In second place was improved management efficiency (20%), while increased manufacturing/decorating capabilities came in third (16%). Those experiencing declining profits in 2000 blamed higher overhead (28%); lower margins (22%); fewer sales (22%); and – strangely – “management efficiency improved” (8%), perhaps a sarcastic comment on the relative effectiveness of new people, policies and procedures. (Who says industry suppliers don’t have a finely honed sense of irony?)

A little over a third of suppliers (36.4%) say their average annual sales per client increased in 2000 vs. only 10.9% who said per-client sales declined. “We’re investing more in overseas markets; we’re promoting ourselves better; it’s make it or break it time…,” says Soffa, discussing how things may change this year when all the numbers are finally in.

Finally, suppliers – like distributors – report the largest quarter for sales was the fourth quarter, just as they did in last year’s SOI survey. Makes sense, but it seems at odds with the Counselor Sales Index, our monthly “MarketWise” figure that shows a steady decline in the number of distributors reporting sales increases, beginning in September and continuing unabated through January. 
Of course, part of it could be a function of the reporting system, or maybe it has to do with when orders are recorded. When we ask, for example, “Did your sales last month increase?” it could be that in the months of October, November and December distributors’ sales didn’t exceed their September peak, even though they might have been quite respectable. Or maybe it’s that all those September sales are delivered and paid for in the fourth quarter. 

Credit, Collections And Conclusions

And how do suppliers maintain their profitability? According to SOI data, it doesn’t have a lot to do with making sure distributors pay their bills on time. When we asked suppliers to indicate their average days outstanding (DSO), the overall figure came out to 40.6 days, much higher than distributors’ 35 days. Conclusion: Distributors are getting paid, but many are hanging on to that cash before turning it around and paying their suppliers.

And it’s not like suppliers aren’t trying to make things easier. Seventy percent say they accept credit cards for payment. Nearly 30% offer some clients the option of C.O.D. A letter of credit is accepted by just over 23%, and partial pre-payment is an option offered by 65.5%.

Another telling statistic to emerge from this year’s SOI concerns a trend toward smaller and fewer orders – if it actually turns out to be anything other than a hiccup in the data, that is. The average number of orders was down from 1999, but by less than 2%. The average number of units sold was also down, but by a much higher rate – over 50%. 

Other related stats:

• The re-order rate was unchanged – roughly 29%
• The average dollar value of an order in 2000 was $6,179.11
• For nearly half of suppliers (48.3%), the average dollar value of the average order increased last year.

Conclusion: Pretty much the same number of orders, fewer pieces per order, but a higher average dollar value per order seems to be (if you’ll excuse the expression) the order of the day. Whether this trend will continue into 2002 and beyond, however, remains to be seen.

Mary Ellen Hudicka sums it up this way: “All I know is, we’re working harder and trying to strategize better. There are fewer marketing dollars to go around, so we need to work harder and smarter.” 

Richard Kern is editor-in-chief and Connie O’Kane is senior writer of The Counselor.