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The year 2001 brought big changes for the country – and the world, for that matter. But the promotional products industry remained on an even keel, navigating unsteady waters with impressive skill. Surprisingly unfazed (for the most part) by outside influences,
suppliers and distributors are holding the line as well as they can, and see things slowly looking up.
By Karen Akers and Kathy Huston
Business As Usual
Someone once said, “The more things change, the more they stay the same.” That principle seemed to hold true for suppliers and
distributors in 2001. Despite the souring economy – followed by the September 11 attacks, followed by yet more of the souring economy – the industry trudged along, some at the same slower pace and others adding staff and expanding operations.
Here’s an in-depth look at how supplier and distributor operations fared in 2001. First, a look at the supplier side:
Supplier Staff Stats
Everyone knows last year was a big year for the pink slip, but the majority of suppliers (46%) say the number of employees stayed the same (down slightly from 49% in 2000). Further, while 33% say their employee counts decreased – and only 20% reported an increase – the average number of employees in 2001 was 55 vs. 50 in 2000. Of note, production employees showed the biggest increase at 54%.
“We’ve been pretty lucky that we haven’t had to lay off any employees,” says
Debbie Mahoney, treasurer of supplier Sacs & Boxes 2 (asi/84430). “We’re able to outsource when our production demands have increased, and we cross-train our employees so we can be flexible. We’re looking to increase our number of employees this summer, so we feel that’s a good sign.”
Pencoa (asi/77040) added office staff in 2000, but factory personnel levels stayed the same, according to Rick Perlmutter, company president. “The need for more office help is mainly due to more frequent use of computers for e-mailing orders, art transfer and pre-press work,” he explains.
Whither Training?
Despite increases in staff among many suppliers, only half say they spent money on training their employees in 2001. But while slightly more distributors (55%) spent money on employee training, suppliers spent an average of $14,763, much more than the distributor average of $2,872.
The top five uses of those training dollars breaks down as follows:
- expenses to attend trade shows (45%)
- subscriptions to industry-related
magazines (36%)
- membership in industry associations (28%)
- rotation through various departments (27%)
- in-house seminars (25%).
“Most of [our] training dollars actually go to paying the new employees to observe and learn until they figure out exactly what it is that we do in the business and they’re able to go it alone,” Perlmutter notes.
And suppliers see plenty of need for information on how to best serve customers. When asked what educational topics are most necessary in the promotional products industry, they offered these as their top three:
- how to market my business more effectively (45%)
- best practices in customer service (41%)
- sales training in increasing customer orders/order sizes (26%).
Home-Made
In last year’s SOI report, stats spanning four years showed that some supplier
manufacturing and assembly has been increasingly moving outside the U.S. This year, however, we find that trend reversed. Suppliers haven’t manufactured so many products in the U.S. since 1998. Specifically, they say an average of 70% of their products are American-made. This represents an increase over 2000’s 65% (and 61% in 1999).
Likewise, an average of 67% of their products were assembled in the U.S. in 2001, up from 62% in 2000 and 62% in 1999. They also say that 85% of products are decorated in the U.S. (up from 79% in 2000 and a slight increase from 1999’s 83%) and 83% of their products were packaged in the U.S. (vs. 76% in 2000 and 79% in 1999).
Production Capacity Status Quo
SOI data indicate that production
capacity seems to be at something of a standstill. Though 34% of suppliers did increase their production capacity in 2001, the majority (50%) kept their capacity the same as the year before. In stark contrast, 60% of suppliers said they increased their production capacity in 2000, while just 34% stayed where they were. And in 1999, 73% of suppliers increased capacity, while only 19% said it stayed the same. Conclusion: The growth and expansion of 1999 and 2000 has slowed considerably.
Suppliers may have been playing it safe last year amidst the economic downturn. And while only 9% said they decreased their capacity, that’s still up from only 4% who did so in 2000.
Of note: We compared changes in production capacity and changes in sales volume for 2001 and found that those who had sales volume increases were slightly more likely (51%) to also increase production capacity than those whose sales volumes stayed
the same (41%). Conversely, only 8% of suppliers whose sales volume increased also decreased their production capacity. For those whose sales volumes decreased, they were overwhelmingly (57%) more likely to keep production capacity the same.
Take a tip from one company that experienced huge growth last year (177%) and was honored with an ASI Spirit Award for Fastest-Growing Supplier as a result. Rob Spector, president of Spector Image (asi/88660), says that “with continued growth in both Canada and the U.S., we’ve been adding production capacity on a daily basis – both in terms of human resources and equipment. More shifts were put on in our factory and, with respect to our Client Care department, we introduced a ‘Team Leader’ concept in order to more quickly address the customer’s needs and
better manage each region.”
While Spector continued to buy equipment, the most popular answer to our question about the main reason for equipment purchases and capital improvements during 2001 was “not applicable.” Presumably, this means that 28% of respondents didn’t buy anything. However, the second most frequently mentioned reason (27%) was “new technologies replacing outdated models.”
Third, at 18%, was “keeping up with growing demand for our products.”
Suppliers Take Stock
Moving on to blanks, stock and importing, the largest group of suppliers (38%) say they made about the same amount of product to keep in stock as they did in 2000. About 19% say they made more, and 18% say less. Those who made more product made an average of 31% more (median 25%). Suppliers who made less to stock made an average of 20% less, with a median of 15%. Further, the average percentage of orders that were outgoing blanks was 15%, up slightly from 14% last year.
The amount of products that were imported increased for nearly half of
suppliers (48%), decreased for 18% and 31% said import levels stayed the same. Additionally, suppliers said they imported 52% of their sales volume (median 40%). This means that, on average, more than half of their sales come from imported products that they have to inventory and plan for well in advance. And more than half (53%) say they use an import broker.
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Location, Location, Location
Some suppliers say that their location does impact their success:
- “Being in the New York area, our labor costs, energy costs and real estate costs are higher than many other parts of the country. Right now, the best place to have a
factory may be in China, but the shipping costs may raise a few
eyebrows.” – Rick Perlmutter, Pencoa
- “We’re in the Midwest, so we have a real advantage servicing both coasts. We also have distribution points all over the country so we can meet our customers’ needs quickly and efficiently.”
– Debbie Mahoney, Sacs & Boxes 2
Other suppliers, however, say location doesn’t matter; it’s more about relationships:
- “The personal relationship that’s built on the telephone when our Client Care department speaks to our customers on a daily basis builds a very strong relationship. So whether we’re down the street or across the country, we take advantage of every situation to continue to build a strong relationship with our customers. We also strongly believe in having our Client Care presence at every trade show. This strengthens the relationships that have been built over the telephone.”
– Rob Spector, Spector Image
- “We only have one facility. But today, with wireless communications and electronics, it seems
location is no longer an issue for suppliers.”
– Kathi Adkins, Kathi Adkins Inc.
After looking at regional location for suppliers by sales volume, our data show more small suppliers located in the Pacific region than in any other, more mid-sized suppliers in the Mid-Atlantic region and more large suppliers in the East North Central region, followed closely by the West North Central region. However, this information is based on relatively small groups of respondents, so it’s only a generalization. |
Outside Influences
A slight majority of suppliers (53%) note they didn’t experience increased demand for American-made products following September 11, although more than a third (36%) say they did. And an overwhelming number of suppliers (80%) say they incurred no “unusual expenses” as a result of 9/11.
Be that as it may, the largest group of suppliers (58%) rated the health of the industry a “3” (on a scale of 1 to 5) for 2001. By comparison, in last year’s SOI the largest group (46%) rated industry health a “4.” This year only 23% did likewise. And depending on who you talk to, suppliers are “cautiously optimistic” for 2002.
“We see things slowly turning around, and estimating has picked up dramatically,” Mahoney says. But she’s quick to add, “We’ve seen collections expenses increase. We have cautious customers placing smaller orders. We’ve increased our print advertising, trade show attendance and Internet presence. We try to offer our customers creative options for serving their customers. We’re partnering with other suppliers to increase our production capabilities.”
Perlmutter offers this account: “I feel the economy in general was due for a ‘readjustment,’ but people have used 9/11 as the reason for it hitting so quickly. It probably was the trigger mechanism for the change in spending habits.”
When asked for specifics, he notes that, “Our piece count is up, but the average value per piece is down severely. We deleted a few higher priced items from last year’s catalog and added more
‘budget’ priced goods. I think this will be the trend for another year at least.”
Others agree. “We’ve actually received more orders, but the quantities are
smaller,” says Kathi Adkins, president of Kathi Adkins Inc. (asi/31973). “I can see the advertising dollars have shrunk. We’re keeping a strong presence in our market by actually doing more shows than last year. Suppliers that I keep in touch with feel very cautious about [2002] – as do I. There are good weeks and then slow weeks. There’s no consistency as in previous years. I do believe the economy will pick up and smooth out, but it will take time.”
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DR. COOPER’S SOI NOTEBOOK
Does Focusing On Promotional Products Give You An Edge?
We looked at those who do most of their business in promotional products (90% or more) and compared them with those companies that have diversified their marketing channels.
In terms of gross profit margins, suppliers who do 90% or more of their business in promotional products appear to have a slight edge over those who do less than 90% in promotional products. What the numbers say: 54% of suppliers who do 90% or more of their sales in promotional products have gross profit margins of more than 30%, while only 49% of suppliers who do less than 90% of their sales volume in promotional products report gross profit margins of more than 30%.
The effect on distributors was slightly more pronounced: Those who did 90% or more in promotional products have an average gross profit margin of 40%. In contrast, those who do less than 90% have a gross profit margin of only 33%.
These findings suggest that firms specializing in the promotional products business are somewhat more likely to have higher profits than those who are dividing their efforts. The advantages may be due to greater operational efficiencies, more in-depth understanding of customers or simply less multi-tasking among competing initiatives.
Despite the edge, there will always be competition. Distributors cited “other distributors” as their most significant competition. Next was “crossover distributors,” followed
by “mail-order distributors/catalogers” and, finally, “price cutters.”
Interestingly, “suppliers that sell direct” were mentioned by only 6% of respondents, despite the high levels of paranoia about this
phenomenon. Could it be we’re spending too much time worrying about the wrong things?
Even more interesting are the responses from suppliers: Similar to distributors, the largest group of suppliers selected “industry suppliers in my own product category” as their most significant source of competition. Second was “industry suppliers expanding their lines to include products similar to mine.”
Roughly 41% of distributors admitted having some type of in-house capability, whether it was screenprinting, embroidery, heat transfer, etc. Yet suppliers don’t seem to regard distributors who do likewise as a significant source of competition, if we’re to believe their list of key adversaries. |
The Skinny On Distributors
Much like suppliers, distributors seemed to be holding the line when it came to staffing in 2001. The majority of respondents (62%) reported their staff size
didn’t change between 2000 and 2001. Still, 21% of distributors indicate they added staff in 2001; 15% say their staff size decreased.
New Clients Inc. (asi/282470) found the need to add staff after successfully instituting a new business philosophy in early 2001.
It added three new salespeople and two support staff, increasing its total employment by almost half – from 11 employees to 16.
“We now have nine ‘brand detectives,’ which are salespeople out on the street,” explains Jeff Hall, president. “They’re basically told to go out, research the company, research the industry, have much more of a consultative approach of learning about the client’s business – not necessarily their product needs, but their needs and desires and what we can do to make their business and job easier.
“From there we’ve created a sub-layer within the organization where we’ve got four product specialists [who] come in at
a later date and make specific product recommendations based on the needs and desires and goals of not only the client, but [also] what the brand detectives say.”
Lots To Learn
Traditionally, distributors spend less than suppliers on training. And this year was no different, although we did see an increase in training expenditures over 2000. Overall, distributors spent a average of $2,872 on training employees in 2001, up from $1,388 in 2000.
The most popular form of training/support among distributors was “expenses to attend trade shows” (62%), followed closely by “subscriptions to industry-related magazines” (60%). Other training/support reported by a significant
number of distributors included “membership in industry organizations” (51%); “field trips to vendors/decorators” (33%); and “in-house seminars” (32%).
Training is an important part of employees’ success at Scarborough Specialties Inc. (asi/319940) says President Jack Scarborough. The company offers its employees in-house training on products and systems, as well as encouraging them to take advantage of industry shows. “We provided incentives for our sales reps that, if they could do a certain volume, we would assist them in going to industry shows. We encourage that because that’s where you stay current,” Scarborough says. “We feel like if we have an edge, it’s probably in our training. It’s money well-spent. I wish I could spend more.”
While A to Z Promotions Inc. (asi/101588) encourages its employees to learn as much as they can at industry trade shows, it also turns to industry
publications and nonindustry seminars to supplement their learning. “It benefits employees to know the industry, whether it’s done through reading or attending class or by going to things that are outside our industry,” says Russ Remaley III, A to Z president. “By going to [seminars] that are outside the industry, it gives [employees] a different view of what’s out there. For example, a local women’s group does a seminar that has nothing to do with promotional products. They put on a seminar on women in management. You get more diversity if you go outside the industry.”
When asked which educational topics should be addressed more in the promotional products industry, slightly less than half of distributors (45%) replied “how to market my business more effectively.” A number of distributors also mentioned:
- “sales training and lead generation” (41%)
- “sales training in increasing customer orders/order sizes” (41%)
- “program selling” (32%)
- “best practices in customer service” (27%)
- “management decision-making/strategic planning” (23%).
Distributors Doin’ It In-House
The majority of distributors (59%) report not having any in-house production or decorating capabilities, which means the number of those who do is declining – although only slightly (from 46% in 2000 to 41% in 2001).
As far as actual imprinting, only 29% report buying blanks to imprint in-house. But it’s important to note that many of these distributors are acting like distributor/supplier hybrids: Just under half (42%) say they do 50% or more of their businesses’ decorating in-house.
Other distributors are still testing the waters to see if imprinting in-house works for them. After seeing business for its existing embroidery services increase, Scarborough decided to add screenprinting in 2001. The combination works well for the small-town Texas distributor. “It’s been a real selling tool. Lubbock is not
a metropolitan area, and a lot of our customers are very small, so we don’t always need 500 shirts,” Scarborough explains. “We have in-house graphic design so we can be very specific and we can turn things very fast. Plus, we can control our quality a lot better than when we were sourcing it to other vendors – and we can do spec samples. We can do so much more than if we were going through a factory.”
But in-house imprinting is only one of the many services that distributors are offering to their clients these days. Most distributors say they have “art, design & layout” services (87%). Other services include “company store/catalog programs” (42%), “fulfillment” (40%), “warehousing/inventory management” (34%) and “complete sales promotion agency services” (25%).
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Distributors Say: ‘Rent It!’
Unlike suppliers, distributors are more likely to rent their facilities than own them. The only exception is a home-based office, which more respondents own (56%) than rent (6%). As for other facilities:
- company offices (53% rent; 32% own)
- warehouses (34% rent; 25% own)
- manufacturing/assembly areas (23% rent; 21% own)
- showrooms (40% rent; 30% own)
For Brian Abrams, president of Corporate Imaging Concepts Inc. (asi/168962), the main benefit of renting office space is the ease of expansion. And he should know: Corporate Imaging Concepts has expanded its space twice in the past two years. “Renting allows us bigger flexibility to grow, to add space,” he says. “You can always own and then grow and acquire new space; however, that would also entail selling the old space.”
Suppliers Say: “Own It!”
Among suppliers, it appears that ownership is in and renting is out. Most own their plants (54%), their main offices (54%), their warehouses (48%) and their showrooms (37%). All of these numbers show an increase from 2000.
Suppliers renting decreased as follows:
- plants (in 2000 – 39%; in 2001 – 37%)
- main offices (in 2000 – 50%;
in 2001 – 44%)
- warehouses (in 2000 – 44%;
in 2001 – 39%)
- showrooms (in 2000 – 31%;
in 2001 – 25%)
It seems suppliers who can afford to would rather own their facilities. Notes Rick Perlmutter, president of Pencoa (asi/77040): “We’ve owned our building for the last 16 years. You might as well pay a mortgage instead of rent. At least you’ve got an asset to show for it when all is said and done.”
In a related area: While the majority of suppliers say demand for inventory services hasn’t changed, 22% note an increase, while 6% say demand was down. The average length of time suppliers held finished goods in inventory was 3.6 months. Suppliers’ average percent of sales based on holding inventory for distributors’ clients was about 9%. |
Staying Local
Suppliers will be happy to learn that fewer distributors bought product overseas in 2001 than in either of the previous two years. Only 23% of distributors report sourcing products overseas last year, compared with 26% who did so in 2000 and in 1999.
But considering other countries’ shaky economies – in addition to the general instability that resulted from the events
of September 11 – it would actually be surprising if imports didn’t shrink. But that’s not the whole story: Of distributors who do import products, 80% said the amount of products they imported either increased (40%) or stayed the same (40%). The top three products that distributors imported from overseas in 2001 were: caps/hats (14%), bags (11%) and lapel pins (8%).
World events didn’t affect the demand for imports among Corporate Imaging Concepts
Inc.’s (asi/168962) clients, says Brain Abrams, the company’s president, noting that the amount of products it imported in 2001 was about the same as in the previous year.
Better pricing and flexibility of design is what keeps Abrams buying overseas. “We can control the design [by importing products], since most products in this industry originally come from overseas and are then merely imprinted domestically,” he says. “If we go overseas we can custom-design any number of products to fit our clients’ needs.”
    
Distributors Discuss Suppliers
Are distributors dissatisfied with some suppliers? You might think so from looking at the data: Nearly all of our distributor respondents – 93% – say they decided not to do business again with at least one supplier in 2001. The top reasons:
- “customer service was not helpful” (33%)
- “poor quality products/imprinting” (32%)
- “orders arrived late/later than promised” (16%)
- “inaccurate orders” (13%)
- “found better prices” (11%).
Translation: Suppliers looking to hold on to existing clients should first think about improving customer service rather than slashing prices or other short-term fixes. Says Abrams: “I’m willing to pay more money if I can assure myself that my product’s going to arrive on time, that I don’t have to [get put] on hold waiting to find out if it shipped or not.” In a nutshell: “Customer service to me is number one; pricing is somewhere way down the line,” he says.
Finally, it wasn’t just one bad apple that distributors were weeding out: Of
distributors who cut suppliers in 2001, 70% say they dropped between two and five suppliers, 21% dropped only one and 8% dropped more than five.
And we’re not talking about chump change here. The amount of business that’s being lost by these suppliers
was substantial: An average of $48,968 worth of business was moved to other suppliers in 2001 because of distributor dissatisfaction.
Add it up, and the need for better communication and relationships becomes crystal clear.
Karen Akers is associate editor/multimedia of
The Counselor and Kathy Huston is editor of Strategic Promotional
ADvantages.
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