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Marketwise
Edited By Andy Cohen

Third-Quarter Industry Revenues Fall

ASI’s third-quarter industry sales report, released in the middle of October, shows a 1.56% year-over-year decline, translating into a net decrease of $79 million in ad specialty sales versus the same quarter one year ago. The figure stands in contrast to the 3.7% growth reported for Q2. And yet, despite the bad news, there was mild relief that the decline could have actually been worse. “A lot of other people,” says Halo/Lee Wayne (asi/356000) CEO Marc Simon, “are talking about being down 10%, 12%, 15%. … If [a 1.56% decline] proves to be accurate, that would be a very good result for the industry.”

No surprise what the culprit is, as the overall U.S. economy also contracted in the third quarter. The United States Commerce Department reported in late October that the gross domestic product – the broadest measure of economic health – fell at an annual rate of .3% in the third quarter. “All indications are the economy will be down a fair amount, and we should expect to experience some falloff as a result,” says Simon, whose company, a Counselor Top 40 distributor, reported Q3 results that remained essentially flat if mergers and acquisitions are excluded.

Gregg Emmer, vice president and CMO of Kaeser & Blair (asi/238600), another Top 40 distributor, says end-users will curtail spending during tough times and try to “save their way to prosperity, which is impossible to do but still tried by many.”

Distributors also claim that the effects of the pharmaceutical industry’s new self-imposed regulations are beginning to be felt. Greg Muzzillo, founder and co-CEO of Top 40 distributor Proforma (asi/300094), estimates the industry’s hang-ups are more than 90% economy and the rest the beginning of a pharma slump. Adds Emmer, “The psychological impact of an industry dropping what we do had a greater effect. Other businesses and government agencies are likely to follow.”

The third-quarter revenue survey, though, shows that not all companies are down. The number of companies reporting a quarterly increase has stabilized at 40% (a mere 1% fall) after dropping more than 5% in four consecutive quarters. Kaeser & Blair is up 4% for the quarter. Proforma also reports Q3 growth, which Muzzillo attributes to the strength of the print business his members offer in addition to ad specialties. “We’re helping our franchise owners to ask for that print business at the same time they’re asking for the promotional product business,” he says. “And they’re seeing their sales grow through these difficult economic times as a result.”

Many, however, are not bullish on their fourth-quarter expectations. ASI’s survey revealed that merely 27% of distributors feel their sales will be higher next quarter compared to 2007. “I see companies scaling back big-time on gift giving,” forecasts Muzzillo.

And the fallout could deepen if the economy continues to flounder. “If we see an unfriendly stance towards business in the next administration,” says Emmer, “and increased tax burden for those that own and operate businesses in this industry, we will see this downturn persist for a while.” – CJM

Will Hiring Freezes Chill Industry Companies?

Hiring freezes have become a cold reality among manufacturing and service industries, according to a recent report put out by the Society for Human Resource Management (SHRM). Hiring in the service sector slumped 20.3% in October, while manufacturing slipped 17.8%, according to the survey – “Leading Indicators of National Employment Survey” (LINE) – of 1,000 companies.

“The signs of a slowdown were already emerging well before the credit meltdown and subsequent Wall Street bailout,” says Jennifer Schramm, manager of workplace trends and forecasting at SHRM. “Similar to data from the U.S. Bureau of Labor Statistics, which found that the hires rate has been trending down since August 2006, SHRM’s employment expectations index tracked a similar trajectory.”

Beginning this spring, SHRM is projecting the lowest hiring expectations recorded since the LINE survey was created in 2004.

Some suppliers and distributors expect there will be cuts and freezes throughout the industry. This is due in large part to the fact that some businesses are suffering. “My buddy, who is an umbrella guy, is always sending me e-mails complaining every other day, saying, ‘I don’t know what to do,” says Dino Bartolomei, vice president of Adco Litho (asi/31840).

Bartolomei, whose company is a large industry supplier of buttons, has seen the expected election year sales bump and is optimistic for the future. “It’s been proven in a downturn cycle of the economy,” he says, “that less expensive promotional items like buttons and magnets boom, because it’s a smaller purchase.” Still, Bartolomei says, “You need to stay lean and mean and work employees as hard as they’ll work,” he says.

Craig Nadel, president of Jack Nadel International (asi/279600), expects some will struggle, especially on the supplier side. “I think most will see their businesses fall,” he says. “Some – those with a lot of pharma business – will see it fall dramatically.”

Not exactly the opportune time to staff up. “I do imagine the average promotional products company does feel the effects of the economy,” says Alison Paisley, vice president of marketing at BDA (asi/137616), which is the largest revenue-producer in the ad specialty market. However, despite the current economy, Paisley says her company is not instituting a hiring freeze of any sort.

“We always look at our business strategically, and when we need to hire, we do so,” she says. “We recently added six new salespeople to ensure we’re providing the highest level of service to our Fortune 500 clients. Our strategy is to be with our clients through thick and thin. We want to remain our clients’ number-one choice, and this is the time to show our commitment to them, not head for the hills.”

Nadel agrees with that sentiment as it relates to the hiring of distributor salespeople. “There is always a marketplace for good salespeople,” he says. “I doubt there will be a freeze in other areas, but as far as sales go, so does the need for sales support. We’re looking for an accounts receivable person right now.” – KH

Wal-Mart Toughens Standards For Apparel Suppliers

Wal-Mart has put apparel suppliers on notice overseas, demanding tougher and more detailed quality-control standards. While the retail leader has not announced specifics, the new rules follow a lengthy series of product scares in China. “We expect you to ask the tough questions, to give us the answers and, if there’s a problem, to own the solution,” says Wal-Mart executive Mike Duke, directing his comments toward suppliers.

Wal-Mart will ask suppliers to name the location of every factory they use to make the products that Wal-Mart later sells. There is mixed opinion among U.S. suppliers as to whether the standards will eventually be applied here. There is concern, though, that Wal-Mart’s stance could soon affect pricing. “The outcome of this can’t be price neutral,” says Girisha Chandraraj, vice president of marketing for Broder Bros Co. (asi/42090). “I think it’s a good thing that Wal-Mart is taking this action, but we can expect higher prices from this eventually.”

Mike Rhodes, president of Bodek and Rhodes (asi/40788), has a different view, though. “I do not think this will impact the apparel market in any significant way,” he says. “China is a very small part of the apparel market for our industry. I believe it will have a very minimal effect on our industry, regardless of the country where the product is being made.”

Besides apparel, many other items produced for the ad specialty industry are manufactured in China. It is still unclear how and when non-apparel suppliers will be affected by Wal-Mart’s mandates. China has become increasingly pressed by international agencies in recent months, after several illnesses and injuries were caused by Chinese-made items. Toxic milk, tainted toothpaste and faulty cribs have been cited by government agencies.

The United Nations wants China to create a regulatory bureau to enforce more stringent product safety codes. Wal-Mart has not disclosed its enforcement timeline or the extent of its altered guidelines. – DV

Survey:
Businesses Benefit From Telecommuting

Working from home not only benefits employees but a company’s bottom line as well. That’s the finding of a new Web-based survey conducted by CompTIA, a nonprofit trade association. Survey results show businesses that allow telecommuting are more productive, save significant money and are able to hire and retain more qualified workers.

“With ‘anywhere connectivity,’ faster broadband options and high-quality video and online conferencing choices, the opportunity for virtual offices is greater today and more affordable for businesses of all sizes and types,” says Todd Thibodeaux, president of CompTIA.

More than 200 companies responded to the survey. Three-quarters of respondents said their companies permit at least some telecommuting. The majority of respondents believe telecommuters are more efficient because of eliminated travel time. While results varied greatly, on average companies saved nearly $700,000 per year from their telecommuting programs. The savings are found in fewer mileage reimbursements and money spent in office materials.

While telecommuting boosts business, the survey shows it has health benefits as well. Respondents think working from home is a major factor in reduced job stress. The survey was sent to professionals in several industries, including IT services, manufacturing, health care, education and entertainment. It was conducted in August and September of this year. – DV

Online Distributors Buffered Against Economy

Distributors who rely on the Internet for a large percentage of their revenues may be better cushioned against a sharp decline in sales as the industry faces its first recessionary period in years. “The State of Retailing Online 2008: Profitability, Economy, and Multichannel Report” from Forrester Research found that nearly three-quarters (72%) of online merchants said they believe they will fare better than their off-line counterparts in the months ahead.

In fact, two-thirds of the 60 businesses polled were expecting either an upturn in business or steady sales. One of the report’s authors, Sucharita Mulpuru, says Internet-based businesses have momentum on their side. “Dollars are shifting to the Web. It’s still a young channel. People are still adopting it, so there is still growth there.”

Despite the economy, “online retailers are more resilient,” says Mulpuru. “The channel is still growing. It just would have been growing at a faster rate.”

Distributors on the Web feel that shoppers’ ability to compare products and services gives them an edge. “It’s the ease of saving time,” says Rachel Goodman, vice president of sales at Farfromboring.com (asi/192001). “We’ve been doing great. If I lived in these four walls, I’d have no idea that there was anything wrong with the economy.”

Mark Yokoyama, director of marketing at ePromos.com (asi/188515) agrees. “Our industry is very well suited for the Web,” he says. “It allows us to have a broad catalog of products that are easy to find.”

Plus, unlike distributors that rely on local business, online players have access to a varied customer base. “Being on the Web exposes you to more people who are buyers versus a mom-and-pop business that is exposed to a demographic in a small area,” says Goodman.

Catherine Lalanne, president of Cal Promotional Products (asi/154697), believes that off-line businesses can succeed just as well, despite the current climate. “I like to have a Web site to show people what I have, but I get most of my business through referrals,” she says. “Business is pretty good in this economy.”

Lalanne, like many distributors, feels utter disdain for online competitors that survive by undercutting the rest of the industry. “It’s just awful,” she says. “Some end-users just don’t value customer service. They are anxious to save a few cents and maybe look better to their superior. Discount Web sites are a bad subject for me and a lot of people.”

However, both Farfromboring.com and ePromos.com stress their service as a selling point versus price. “There are companies that exist solely as discount providers,” says Yokoyama. “They don’t offer the services we do and put their phone number on every Web page. Some don’t have phone numbers at all.”

From a price standpoint, the Web allows ePromos.com the chance to combine close-out offers and discounted products. “We aggregate it in one place for people looking for bargains in a way that mom-and-pops can’t when they’re working with suppliers’ paper catalogs.” – KH

Large Retailers Boycott Uzbek Cotton

Two of the world’s largest retailers are joining in an effort to ban the use of cotton harvested in Uzbekistan. U.S.-based Wal-Mart and U.K.-based Tesco have told their suppliers to stop sourcing Uzbek cotton, in response to allegations of forced child labor in the former Soviet country.

“We have no desire to hurt the Uzbek cotton industry and economy, the Uzbek people or our suppliers,” says Richard Coyle, Wal-Mart senior director of international affairs. “Our goal is to put a stop to these unacceptable child labor practices.”

Several trade groups, including the National Retail Federation, have worked to organize the boycott. The groups recently sent a letter to the Uzbekistan Embassy, calling for an immediate end to the current labor practices. Additionally, advocacy groups like the Environmental Justice Foundation want apparel manufacturers to specifically label their clothing so buyers know which country produced the cotton used.

“Consumers deserve to have this information. If a consumer could choose between a cotton T-shirt made using Uzbek cotton, picked by school children forcibly taken from their classes by their government, or a T-shirt made with ‘clean’ cotton, I’m hoping that they’d choose the latter,” says Continental Clothing (asi/46410) spokesman Mariusz Stochaj.

Uzbekistan is the third-largest exporter of cotton in the world, producing a crop worth more than $1 billion annually. Coyle says Wal-Mart will only reconsider its position after it receives proof that Uzbek leaders have changed their child labor policies. – DV

Economic Necessity: Ramp Up Customer Loyalty Efforts

As times get tight, distributors can ill afford to lose any of their key clients. Customer loyalty, while always an important part of any business, now becomes critical for survival. In order to maintain a strong client base, experts say businesses need to start by creating a consistent message.

“If a business isn’t clear on what its mission and goals are, then it can’t very well expect customers to understand it, either,” says Cher Murphy, president of Cher Murphy PR in a statement. “Successful companies have a recurring focus that has been well defined from the beginning.”

There are a number of steps distributors can take to fine-tune their company communications. First off, business owners need to ask themselves a series of questions, says Lyn Mettler of Mettler Public Relations. “I start with a core positioning statement,” she says. “I sit down with the core people at the company and ask them, ‘What are your strong points?’ What differentiates them from the competition? Can they give me specific examples to back those up? What is their history? What are their competitors’ strong points? How do they believe people perceive their company? And, is there anything they’d like to change about that?”

Once these questions are answered, the businesses need to determine “who they want to be” and what their brand is, says Linda Prophal of Strategic Communications. While end-users ultimately define the brand, “businesses need to put a stake in the ground in terms of how they would like to be perceived.”

Once this process is over, business owners need to capture the company’s meaning in writing and create some talking points, says Murphy. “Keep the talking points authentic.”

Whether it’s a slogan or a creed or just an overall mindset, distributor owners must make sure everyone who comes in contact with a client “understands and consistently performs to organizational quality and timeliness standards,” says Mario Barrett of The Barrett Center for Leadership Development.

This message must be carried through in all marketing materials, from business cards and direct mail to catalogs and even the signature on each e-mail. “Keep in mind that your mission should be clear and specific,” Murphy says. “Once you can pinpoint why people would care about your business, you’ll be able to formulate the perfect message.”

Once a message is settled upon, however, that doesn’t mean it is set in stone. “Revisit and evaluate your objectives often,” Murphy says, “to ensure the company is hitting the target.” – KH

Chinese Exports Slowed By Global Economic Woes

Even China isn’t immune to the world’s economic hangover. The country’s export growth in September was 4.2% less than for all of 2007 and 11.2% less for exports to the U.S., specifically. In fact, China will see its economic growth slowed by .3% in 2008, compared to a 2.6% jump in growth in 2007.

Economists Jeff Rubin and Benjamin Tal, of CIBC World Markets, argue that China’s trade slowdown can be attributed to fuel and shipping costs. In their piece titled “Will Soaring Transport Costs Reverse Globalization?” they point out that a standard 40-foot container shipping from Shanghai to the Eastern seaboard of the U.S. cost $3,000 in 2000, when oil was at $20 a barrel. As the price of oil soared earlier this year, the cost to ship that container jumped to $8,000 – and will cost $15,000 should oil ever hit $200 a barrel. Oil prices have since come back down ($57 a barrel at presstime), but the economic alarm has hurt China in the short term and portends greater damage in the long term.

“Ultimately,” write the economists about past oil shocks, “soaring transport costs were borne by consumers, and markets responded accordingly, substituting goods that could be sourced from closer locations than halfway around the world carrying hugely inflated freight costs.”

Counselor Top 40 Supplier Broder (asi/42099) does less than a quarter of its private-label business in China. The company, which also works with the rest of Asia and both South and Central America, says lead times (10 days for South America compared to 30 for China) also play a factor in where it does business. “The increases in price are all over the place,” says Cheron Coleman, director of global sourcing, “so it doesn’t matter where you go, you’re still going to have an increase in costs, just because of the fuel situation.”

China’s exports to the U.S. may have taken a hit in the short term, but they could jump noticeably once the existing import caps on Chinese textiles expire at the end of the year. The limits were put in place by the Bush administration three years ago to prevent an influx of cheaper Chinese textiles from sabotaging the domestic market. Textile trade associations and a bipartisan group of 73 U.S. representatives have sent letters to President Bush and the U.S. Secretary of Commerce to urge that those caps be extended.

“Definitely our government has to put some type of program in place just to monitor the situation, just because China’s going to start devaluing the price of their garments,” says Coleman. “It’ll be like what happened a couple years ago when the quotas were lifted, and everyone flew to China just to get the decrease in costs.” – CJM

The Power Of Nonprofit Promo Products

Promotional products bearing a pink ribbon for breast cancer awareness or an autism puzzle piece carry more power than regularly branded items, according to cause marketing experts. Eighty-five percent of people surveyed for “The 2008 Cone Cause Evolution Study” said they have a more positive image of a company when it supports a cause they care about. The same percentage said it was okay for companies to promote their affiliations with these organizations.

“Promotional products offer an opportunity to tell the story,” says Alison DaSilva, executive vice president at the research firm Cone, which is based in Boston. They offer the opportunity to explain “what they are doing to impact a cause as well as where recipients can get more information. Cause marketing can be extended to giveaways as long as the company’s commitment is authentic.”

In fact, people will spend 49% more time viewing a marketing message that is cause-related, according to a second study, “The 2008 Cone/Duke University Behavioral Cause Study.”

“You absolutely should expect to get a more favorable response to a cause-related item,” says Duke marketing professor Gavin Fitzsimons. This carries over into using items made from recycled materials and other eco-friendly products, he says. “If you’re using a recycled cup or shirt, there is a certain amount of pride. … I can think of examples for myself where, because I’m associating myself with a cause, I believe I feel like I’m starting my day on a positive note by wearing a cause-related shirt.”

Suppliers have embraced the power of cause-related marketing by offering a percentage of profits to Susan G. Komen for the Cure and other reputable organizations. A portion of sales from Alpha Shirt’s (asi/42099) Devon & Jones Pink Label garment line, for example, will go to fighting cancer. While Leed’s (asi/66887) will make a donation to American Forests’ “Global ReLeaf” program for every Eco-Smart imprint order produced.

“People dig that,” says Dan Broudy, COO of Clayton Kendall (asi/162948). “They love hearing that, by the way, it’s not only a good shirt, buy it and a percentage goes to a nonprofit organization. It definitely has an influence.”

The Cone study found this was definitely true among consumers, as 79% of the 1,100 respondents said they would switch brands (if quality and price were similar) to the one associated with a good cause. “Our research has always found Americans have stronger favorability to companies that support causes,” says DaSilva. “For employees, it creates a stronger sense of pride and morale. For consumers, it goes beyond the transaction or the purchase. It shows that companies care about something in addition to the bottom line.” – KH

Mergers & Acquisitions
Adidas Announces Intent To Acquire Ashworth

In a move that will merge a global sporting goods giant and a major player in corporate apparel, Adidas has reached a definitive agreement to buy Ashworth Golf Co. (asi/37128), based in Carlsbad, CA, the two public companies reported in October. Adidas will pay $1.90 per share for Ashworth stock. The deal is worth $26.5 million and includes Adidas assuming $46.3 million of Ashworth debt. “It provides us an opportunity for growth and gives us a partner that has deeper pockets than a smaller company like us,” says Tim Cronin, vice president of Ashworth’s corporate division. “I only see positives from the deal.”

Cronin says the Ashworth label will remain separate from Adidas. He would not speculate on how much Ashworth’s corporate division would be affected by the pending acquisition. It is also unclear if Adidas will take an increased role in the corporate apparel business. An Adidas spokesman said it is premature to discuss the issue, but stressed the significance of the deal. “Ashworth is an authentic golf brand that will complement our signature fabrics and complete our clothing portfolio,” says Adidas’ Scott Leightman.

The deal is expected to be finalized before the end of this year, but could still face opposition from shareholders. At the beginning of October, Ashworth stock traded at $3.75 a share. The stock price has dipped significantly since, falling below two dollars a share. Ashworth’s financial struggles have burgeoned this year, with the company already realizing a loss of $16 million, amid a slowing sales pace.

Adidas is the second-largest sporting goods producer in the world, trailing only Nike. If Ashworth shareholders approve the proposal, Leightman says Adidas will complete the sale with cash.

InnerWorkings Acquires Origen
Counselor Top 40 distributor InnerWorkings Inc. (asi/231438) has acquired Origen Partners (asi/287747), an Atlanta-based distributor specializing in in-store displays, signage and other point-of-sale merchandising materials. “Origen Partners has an excellent reputation in the marketplace for its expertise in procuring and managing in-store merchandising collateral,” says Eric D. Belcher, president and COO of InnerWorkings. “Origen will be a valuable addition to the InnerWorkings family. Its entrepreneurial culture and successful track record make it a good strategic fit with InnerWorkings.”

The Chicago-based distributor initially approached Origen about a buyout, which was completed in October. Financial terms were not revealed. Origen has 35 employees, including nine sales representatives, and is expected to generate revenue of approximately $36 million in 2008. “Our partnership with InnerWorkings will allow us to further develop our existing customer base and approach new clients with a comprehensive print management offering,” says Origen CEO Michael Stoecker.

According to Belcher, Origen will keep its name in the short term but may eventually be re-branded to Innerworkings. Stoecker and the Origen management team will remain in place. The deal allows Innerworkings to expand its geographical presence. “The acquisition furthers expands our presence in the southeast region,” Belcher says. “It also adds to our expertise in in-store displays, an important product category for us.”

InnerWorkings acquired Top 40 distributor Corporate Edge last November, and the combined operation reported North American ad specialty revenues of $83 million for 2007.

Motivators Acquires R&R Productions
Long Island, NY-based distributor Motivators Inc. (asi/277780) has acquired R&R Productions (asi/303795), a privately held distributor located in Rockaway, NJ. “We’re very pleased with this deal and this opportunity,” says Ken Laffer, CEO of Motivators. “It will allow us to increase our growth potential as we continue to bring on board quality people to service our clients.”

The sale was completed in October, but financial terms were not disclosed. Laffer expects to acquire more distributorships in the future. He also has the goal of continuing to add industry-savvy sales professionals to manage some of his leading accounts. “It’s about quality and experienced people. We don’t want to leave any business on the floor,” Laffer says.

R&R Productions was established in 1986. Its founder, Rhonda Blum, describes her recent business as “flat.” She will join Motivators, working in its managed accounts division. “I’m so excited to be part of Motivators I can’t put it into words,” says Blum, who before the sale worked alone at R&R. “This has regenerated my batteries, and I’m really thrilled to be working with Ken and his team.”

Motivators, which is celebrating its 30th anniversary this year, employs 53 people and was recently named to Counselor’s “Best Places to Work” list.
 
Innovation Line Buys Out Interlink Innovations
California-based supplier Innovation Line (asi/62660) has purchased all the assets of Interlink Innovations (asi/62697) of Riverside, CA. “It expands our product line in the trade show and identification categories,” says Eddie Blau, president of Innovation Line/Innovation Specialties. “It also gives us a new line of products we can control and produce in our facility in the United States without the need to go offshore.” Financial terms of the deal were not revealed.

The Interlink name and ASI number will be retained temporarily. None of Interlink’s employees or ownership will be imported into Innovation Line. Interlink first approached Innovation about the deal because the company thought it would be a natural fit for Innovation’s product line. The deal was closed in mid-September. Says Blau: “Our strongest goals are to continue to build an exciting and useful product line for our distributor customers while we continually improve our internal operations to make it easy and gratifying to work with us.”

 
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