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To call 2001 a challenging year would be a vast understatement. After years of remarkable growth the recession finally caught up to the industry, giving it its first genuine slowdown in a decade. Coupled with a staggering national tragedy the effects could have been devastating. Thankfully, they weren’t.  Sure, we took our lumps, that can’t be denied, but overall sales were up and many distributors and suppliers have begun to make that needed adjustment.

By Matt Histand and Tonia Cook Kimbrough

Are We Still Recession Proof?

For years the promotional products industry has held tightly and proudly to the moniker of “recession-proof.” And perhaps to a certain extent – given that overall industry sales are up slightly despite the ailing economy – it can continue to claim that title. But a closer look at the dollars and cents of distributors and suppliers shows some struggles in 2001. Many still came out on top; but statistics also show that many industry businesses, more than in years past, lost some ground.

All in all, it can be said that distributors had a pretty decent year in 2001 … considering. On average, they rated the industry’s health a 3.4 (compared with 3.9 last year) – 1 being “ailing,” 3 being “fair” and 5 being “robust.” Though the average rating did drop slightly, it’s worth noting that 47% gave the industry’s health a “3” and 40% rated it a “4.” Conclusion: The majority felt the industry was doing well enough despite the recession.

Volume, Profit And Margins, Oh My!

The good news, in terms of sales volume, is that an impressive 50% of distributors reported their sales actually increased last year, while an additional 18% said they stayed the same. Combined, this means that nearly 70% of the industry maintained a healthy sales volume in 2001.

But with the good news comes some bad: When you compare the figures of those distributors whose sales increased with similar numbers from last year, you find a steep, 22-percentage-point drop (72% in 2000 vs. 50% in 2001). This descent follows three years of steadily smaller decreases, starting with 78% in 1998 and 74% in 1999. So while 50% of distributors with sales increases seems pretty healthy, there is a pallid underside – more than likely a reflection of the sluggish economy.

Also in 2001, more distributors reported declining sales than at any time in the past four years. Only 11% reported decreases in 1998, followed by a tiny uptick to 12% that held steady through 2000. This year the figure ballooned to 32% (for calendar 2001). Not surprisingly, 46% of distributors pointed to the recession as the main reason for declining sales. Competition (at 15%) was second, followed by a smaller client base (9%).

When sales volume is compared to profitability, the same overall picture emerges: Forty-five percent of distributors reported a slight increase in profits, but a higher-than-normal percentage (29%) showed a decrease. In addition, the number of distributors reporting increases was down from 58% in last year’s SOI, and those reporting decreases were up from 11%. One positive: The 26% that said profits “stayed the same” in 2001 compares favorably with the 23% that reported the same in 2000 – not bad, considering adverse economic conditions.

The leading reason for profit increases was “mark-up on product increased,” cited by 28% of distributors; “volume increased” was the second most popular reason for profit increases, noted by 23% of respondents.

“If distributors are tinkering up, I think they’re doing the right thing,” says John Levine, CEO of The Image Group (asi/230069). “I think if they’re not recognizing the value they bring, being a price-cutter will eventually put them out of business. We won’t cut prices. 

We won’t reduce what we value as our services. I think [distributors] have to show what value they bring to their clients and insist upon recognizing that value through the pricing.”

This may be easier said than done. Though statistics point to higher mark-up as a move in the right direction for many, some distributors found it too tempting to drop their product margins slightly in the hope that it would stimulate buying. Eighteen percent said they lowered their margin, the average decrease being 7% and the median 5%.

Was it helpful? Consider that the second most popular reason for profit decreases among distributors was “decreased mark-up on product,” cited by 21% of respondents, while the leading reason (cited by 42% of distributors) was “volume decreased.”

To be fair, most distributors kept product margins up; 46% of respondents held the line and 36% actually increased product margins. These numbers seem favorable in light of current economic conditions – perhaps even bold.

Extra Credit

The topic of credit and collection becomes an important issue in any market downturn because it can mean the difference between staying afloat and sinking under the weight of debt. 

The average number of days sales outstanding (DSO/accounts receivable) increased to 37 in 2001, up two days from 2000 – well beyond standard 30-day terms. The increase adds to distributors’ carrying costs and ultimately limits their cashflow, which could be disastrous in lean times.

Perhaps in response to the economy (or due to increasing acceptance), payment by credit card was up again. This year 62% – nearly two-thirds of distributors – indicated they accept credit cards. Open credit/payment terms still remains the most common method of business at 75%. Prepayment percentages migrated this year, with full payment up two percentage points to 37%, and partial payment down one percentage point to 53%. Cash/net due on delivery remained the same at 34%.

The 9/11 Effect

In the corporate world, 9/11 colored all transactions for the remainder of the year – and into 2002. Our industry was no different. Still, distributors ranked the event fifth in terms of its effect on business, many noting a general “slowdown” in the weeks after the attacks.

“Our clients told us specifically the reasons they were not ordering,” explains Kristine Kurey, owner of the Kurey Company (asi/246590). “They had budgets allocated to them, [but] once 9/11 happened their bosses said everything is on hold. It became really apparent that promotional merchandise was the last thing on our client’s minds.”

On the flipside, in the weeks following 9/11 many distributors experienced a jump in sales resulting from the sweeping, nationwide demand for patriotic products – though these may have simply replaced what companies might have spent on other types of imprinted products.

Top Trends And Events

We found it surprising that 9/11 only ranked fifth in terms of the top events and trends of 2001 according to distributors. And the recession wasn’t the biggest influence either. Actually, electronic art transfer received the highest marks from distributors for 2001. Slightly more than half rated it as having a moderately strong or strong effect on their businesses, showing just how valuable a tool it has become, helping to cut turnaround time and reduce costs.

The recession/economy ranked second, with 41% of respondents reporting it had either a strong (17%) or moderately strong (24%) effect on their businesses. For many, the economic downturn meant trimming costs, reducing branches and generally tightening their belts.

For some smaller, one- or two-person distributorships with low overhead and less dependence on corporate programs, the recession seems to have been kinder. The majority of Patti Hyland’s customers are local businesses like banks, schools and car dealerships, rather than huge corporations whose budget cuts can mean millions in lost revenue. 

Her company, Park Promotions Inc. (asi/290560), never missed a beat in 2001: “I did a lot of reorders, and they don’t seem to be going by the wayside at all. I can’t say that I’ve been affected much,” she admits. The same can be said for Patrick Flink, president of CFS Enterprises Inc. (asi/154849), who not only retained his previous year’s business, but also predicts he’ll double it in 2002.

The third-ranked trend/event distributors said impacted the industry was the “growth of wearables.” This perennial favorite had ranked first the previous three years. Its drop two places shouldn’t send anyone scurrying for a new product line, however. The lessening of wearables’ impact probably has more to do with the increasing adoption of electronic art transfer – to say nothing of the all-encompassing effects of a national recession – than it does with any dark cloud settling over promotional apparel. The fact that the second most popular price point distributors sold was the $10.01 to $25 category actually reflects favorably for the apparel category, which tends to fall in that range.

Still, the promotional apparel market has changed. With alterations in legislation regarding China and Pakistan, cheaper garments are entering the U.S. Some distributors are using this as a reason to cut prices, which is in turn creating a domino-effect in pricing across the industry.

“I think that’s partly why some people have seen a drop in their sales,” explains Levine. “They’ve been working on margin percentage instead of margin dollars, so as costs have come down they could sell repeat orders to their clients … if they’re working on margins, they’re actually reducing their sales.”

What They’re Really Thinking

New to this year’s survey is a section that should help distributors and suppliers better understand each other’s needs. Both groups were asked what were the biggest problems faced by distributors that suppliers could help them solve. The top two slots on both lists were “maintaining a profit margin” and “meeting tight deadlines” – in that order for distributors, but reversed for suppliers.

This seeming agreement is a good sign that these two groups are trying to achieve the same ends; whether they’re addressing the same issue, however, is the real concern. And a relatively low score for “fast response” suggests that distributors are looking for more than just quick turnaround times when they face tight deadlines.

Maintaining a profit margin is an interesting choice because “competitive pricing” barely warrants a mention, indicating the problem encompasses more than just a simple case of better pricing from suppliers. Other options, such as “retaining current clients,” “measuring the results of using promotional products” and “customer service” – things that help contribute to maintaining clients and, therefore, profit margins – were generally overlooked. Do distributors and suppliers fail to realize the connection, or do they believe they’re under control?

One answer may be a cutback in client budgets. “Our tried and true clients aren’t going away, but their spending has dropped so much that for us to maintain we have to build new business,” says Kurey. “We have increased hard costs: Our rent has gone up, our health care has gone up. There are things that I can’t change, so I still have to bring the dollars in to pay for them.”

Distributors were also asked to weigh in on the biggest problem clients face that distributors could help address. “Justifying the purchase of promotional products” and “measuring the results” were the top finishers, and each echoes the other. This is not a new problem, of course. The need to establish baseline figures to measure exposure and impact of promotional products remains the industry’s Holy Grail. Yet, as noted earlier, neither distributors nor suppliers ranked “measuring the results of using promotional products” high on their list of problems that distributors need help solving.

The Supplier View

Suppliers were less kind than distributors in their assessment of the industry’s health, giving it an average 3.04 rating on a scale of 1 to 5 (1 being “ailing,” 3 being “fair” and 5 being “robust”) as opposed to the distributor average of 3.42. Last year, the largest group of suppliers rated the industry’s health a “4,” whereas this year only 23% saw it that way.

Why the downgrade? You only have to look as far as overall sales. This year more suppliers were reporting decreases in sales volume (42%) than reported increases (39%). This continues a trend from the past few years in which the percentage of suppliers reporting increases has steadily declined – 80% in 1999 vs. 70% in 2000, and all the way down to 39% in 2001.

Like their distributor counterparts, small suppliers were more likely to show an increase in sales, while mid-sized suppliers were more likely (and large suppliers the most likely) to show a decrease – though large suppliers were also the most likely to have held steady. However, bear in mind that it’s easier to significantly increase upon a smaller portion of the sales pie (i.e., going from $100,000 to $200,000 is a 100% increase, but for a million-dollar firm that $100,000-increase is only a gain of 10%). 

Secondly, the declines being reported follow a real hot streak for the promotional products industry. “Remember that 1999 and 2000 were exceptional years by most everyone’s standards,” notes David Stacks, marketing director at Augusta Sportswear (asi/37461). “And 2001 presented its own truly unique challenges. If you’re looking at statistics, don’t forget how many growth years we saw in the mid- and late-1990s before the quick upward spike and downward plunge that followed.” 

Also, take into account a certain measure of success: Consider that 58% of suppliers managed to either increase sales or hold them steady, despite 2001’s volatile economy. And of those that reported a sales volume increase, the average was a respectable 27%, closely mirroring distributors’ average sales increase of 28%. Though supplier sales increases were down slightly from 2000 (by 3-percentage points), this is still a healthy average.

Looking closer at the makeup of sales, it appears that order frequency wasn’t a major issue. In fact, the median number of annual orders in 2001 was 1,562, up from 1,032 the year before. The median number of units per order, however, was down (from 400 in 2000 to 250 in 2001). Some of the suppliers we spoke with supported this trend in their comments. “Since late 2001, Augusta Sportswear has received generally smaller orders – but we are getting more of them,” Stacks says. Ira Neaman, president of Top 40 supplier Vantage Custom Classics (asi/93390), says it’s the same way for Vantage: “Order sizes are smaller, but also more frequent.”

Challenging Times

So what were the challenges of 2001 that affected business on the supplier side? Generally speaking, they cited events outside the industry as having the biggest impact. In fact, four of the top five fit this profile: 

• recession/economy (#1)
• September 11/anthrax attacks (#3)
• war on terrorism (#4)
• corporate downsizing (#5)

Not surprisingly, those with sales volume decreases were most likely to pin the drop on the national economy. But even suppliers that didn’t experience a decline said there was an effect. “The present economic conditions have affected promotional suppliers because corporations that are downsizing are less likely to spend money on items with high visibility,” Neaman explains. Translation: Some corporate buyers have shied away from the perception that they’re spending money on promotional products while cutting jobs or belt-tightening in general.

And 9/11 certainly served as an exclamation mark at the end of an already uncertain economic year. “For the promotional products marketplace, the attacks exacerbated an already faltering economy,” Stacks says. “The positive note is that the economy bottomed out faster because of the attacks. We hit bottom sooner, which means distributors and suppliers now are bouncing back more quickly.”

But, how fast was the rebound? “Everything just came to a screeching halt,” says Pam Proctor, vice president of marketing/product development at The Martin Co. (asi/68915). “Usually at that time of year we would be entering the ‘high’ selling season. Just the reverse took place, and only in February [2002] did we begin to see the light at the end of the tunnel.” 

Not every product category was hit hard, however. “The biggest season for headwear is really in the spring, and by September cap sales have usually leveled off considerably,” says Dan Saferstein, president of Sportsman Cap Network (asi/79924). “However, patriotic-themed decoration became a major trend. I think we are still seeing some effect of that in the popularity of our patriotic merchandise. But on the whole, headwear wasn’t affected all that much.”

Internal Influences

There were some trends that did seem to positively affect suppliers – if not their sales volume, then at least their efficiency (and therefore perhaps their profitability).

Electronic art transfer, with the second highest rating, was the only trend in the top five with an internal slant. “E-mailing embroidery discs and artwork has saved tons of time and increased order efficiency,” explains Saferstein. “We also guarantee a fast turnaround time to our customers; this technology makes it possible.”

Neaman notes a growing number of distributors taking advantage of electronic art transfer, listing additional applications: “A significantly higher percent of artwork is coming in via electronic means. Vantage also uses ‘electronic swatching’ to speed up the logo approval process and to provide customers with an easy way to manage and store their logos.”

While suppliers didn’t put them in the top five, there were a few other noteworthy trends. “Buying networks, preferred vendors and the like are positive because they promote business,” Stacks says. “In particular, Augusta Sportswear’s sales via online consortiums have picked up a bit, because more promotional products distributors are learning how to take full advantage of buying programs. This hasn’t bumped up our bottom line in a big way, but perhaps it will in the future. I’m optimistic.”

Cutting Back Vs. Pushing Ahead

So exactly how did suppliers react to the economy? Some began last year with a wary eye on the landscape. “We started fairly early in 2001 taking a hard look at our operating expenses and where we could conserve, combine and/or cut,” Proctor says. “Simple things like going with a DSL modem vs. individual lines for e-mail access, renegotiating with our long distance service company, combining our packaging needs – lots of everyday expenses that took time and persistence to investigate for a better way resulted in significant savings. Thank goodness this had taken place or we wouldn’t have faired as well after September.” 

Post 9/11, a drop in order volume prompted additional cost-cutting measures. “During those really slow months, a decision was made to cut down the work-week hours for everyone vs. possible layoffs for a few,” Proctor continues. “Fortunately, the short work week was only for a brief time period.” 

That’s not to say the Martin Company remained stagnant during the economic downturn. In fact, over the past year it has been restructuring and preparing a more aggressive internal sales force vs. its previous use of multi-line reps. That, combined with a more optimistic business environment, has proved effective. 

“In my opinion, sales are coming back strong because corporations are finally loosening their grip on their budgets,” Proctor explains, adding, “I’d like also to think the aggressiveness and extra effort of our sales force is beginning to pay off as well.” 

A proactive stance has appeared to help others as well. “Sportsman has responded by maintaining a strong infrastructure, as well as increasing our marketing and advertising,” Saferstein notes. “We’ve also restructured our business by becoming a cap network and distributing many different headwear niches. I think other companies have used distributor relationships as well in order to band together and give everyone a bigger share of the market. The result is you’re going to see a lot more partnerships and consolidating.”

Some suppliers planned well in advance. “We saw [the economic downturn] coming in 1999 and prepared by increasing our whole advertising and marketing budget by 25% and investing in even higher-speed printing and assembly equipment,” explains Charles Reichmann, CEO of Dri Mark Products Inc. (asi/50840). “With low interest rates, they were easy to finance. We also hired a national sales manager to work closer with our sales representatives and distributors.”

These measures mirror what suppliers reported in SOI statistics. Actions such as “growing distributor base” and “increasing marketing/advertising/promotion” were considered the impetus behind sales volume increases.

Pursuing Profitability

What actions were attributed with boosting profitability? Twenty-seven percent of suppliers said “sales increases,” while 23% said “management efficiency improved” (similar to the steps taken by our supplier interviewees previously mentioned). Another 22% said “products sold at a higher margin.”

Indeed, overall, gross profit margin on products either held steady with 2000’s numbers (see “What Was Your Gross Profit Margin?” page 16) or for a lucky few even grew into the 41% to 50% range – more suppliers fell into this higher profit margin category in 2001 (17%) than did in 2000 (10%).

Small and mid-sized suppliers were most likely to have gross profit margins in the 21% to 30% range, whereas large suppliers tended to be grouped in the 31% to 40% range, suggesting that it may be easier for larger suppliers to be more profitable.

Credit And Collection

Of course, maintaining profitability wasn’t the only issue on suppliers’ minds. Cashflow appeared to be something of a challenge as well. Average days’ sales outstanding (DSO) increased slightly over 2000, with suppliers of all sizes averaging 43 days when collecting from distributors in 2001 (vs. 41 days the year before). Despite the fact that distributors’ DSO were also up a couple of ticks (37 days in 2001 vs. 35 in 2000), there was still a significant delay before distributors paid their suppliers using those funds.

Suppliers continue to encourage distributors to pay on time with an expansion of credit/payment options. For example, more than 80% say they accept credit card payments, up from 70% in last year’s SOI.

A Look Ahead

With 2001 behind us and 2002 halfway through, what are suppliers experiencing and what do they predict lies ahead?

“[This year] we’ve found business to be extremely erratic,” Reichmann says. “We have days that are extremely quiet and then the next week we may find it necessary to work overtime to keep up with the enormous volume of orders taken. ... The number of orders is fewer. The order quantities are larger, though, and the percentage of repeat business has increased.”

Others see it differently. “With a few exceptions, I believe suppliers’ businesses are already moving at a quicker pace,” Stacks says. “When I put my ear to the rail, I hear a growing optimism that smart people are still finding ways to cut costs while growing their businesses.” 

Matt Histand is associate editor and Tonia Cook Kimbrough is contributing editor to The Counselor

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