Promo Products: Eye On Europe

Sales of promo products abroad are improving, but familiar challenges remain.

Nearly a decade after the global recession, Europe’s economy has finally recovered.

According to The International Monetary Fund (IMF), the continent’s 2016 GDP growth was 1.9%, up from 1.5% the year prior. Most of the major European players like Germany, France, Spain, the Netherlands and the United Kingdom experienced GDP growth above 1.1%. Manufacturing has recently exploded according to research firm IHS Markit’s Purchasing Managers’ Index (PMI) as new orders have risen at the fastest rate since 2011. The Eurozone’s unemployment rate has fallen to 9.3%, its lowest level in eight years. As factories raise prices, the European Central Bank aims to bring inflation back to its 2% target ceiling. Outside the Eurozone, Russia has been projected to grow GDP to 1.4% by the end of 2017.

While the numbers look good, they’re not enough to assuage the fears of business leaders and consumers. “A positive economic situation doesn’t mean it’s a positive political situation,” says Michael Freter, managing director of the Promotional Product Service Institute (PSI), which runs Europe’s largest promo trade show in Germany each January.

European countries are still dealing with the refugee crisis as the conflict in Syria pushes hundreds of thousands of migrants to find sanctuary. It was one of the main factors that caused Brexit – Britain’s decision to leave the European Union has caused uncertainty and unrest as everyone awaits its long-term ramifications on the U.K. economy. The vote has caused political turmoil as well, as Theresa May replaced the resigning David Cameron as prime minister. May then called for an early general election in June in which her Conservative Party unexpectedly lost overall majority in Parliament, forcing the prime minister to make a deal with Northern Ireland’s Democratic Unionists to establish a minority government.

New leadership has also taken over France: 39-year-old political outsider Emmanuel Macron became the country’s youngest ever president in May. His victory came six months after another political outsider – Donald Trump – was elected president of the U.S. Trump’s “America First” campaign has worried foreign leaders as they wait to see what impact he’ll have on the global economy. His administration has already discussed imposing tariffs as high as 10% on imports, which would raise the cost of consumer goods in America and possibly spawn trade wars across the world.

Promo in Europe
Despite the political turbulence, the promotional products industry in Europe is healthy. Overall revenue has risen over the past two years, according to the PSI Industry Barometer, a survey on the current state and trends of the industry. In the first quarter of 2016, 68% of suppliers reported a sales increase, up from 62% the year prior. On the distributor side, 59% reported a sales increase, up from 49% the year prior.

“We’ve experienced a couple really good years of growth since diversifying our supply chain,” says John Lynch, CEO of Lynka (asi/254384), a Poland-based promotional apparel distributor. “We went from 3% export sales doing strictly Polish promo items to 80% by shipping all over Europe.”

Expanding service to the entire European market has been a boon for promotional companies, especially PFConcept. Since joining the European arm of supplier juggernaut Polyconcept in 2012, CEO Ralf Oster, Counselor’s 2017 International Person of the Year, has revitalized the organization – replacing the previous sales force with fresh, hungry talent – and cemented its position as an industry leader.

“We had to reverse course from a decentralized wholesale model to market strategies centralized in European countries, and implemented decoration services and value segments that mirrored (supplier firm) Bullet’s strategy for Europe,” Oster says. “We worked to position ourselves as a pan-European warehouse, reduced our carriers in Europe from 35 to seven, simplified the back office and rebuilt our online platform.”

As a result, PFConcept has outperformed GDP growth and expanded its market share by emphasizing the bottom line. The company has targeted growth areas in the industrial segment, service companies surrounding building and construction, automotive – due to entities like Mercedes-Benz, Audi, Volkswagen being in Germany – and online businesses. “We’ve had double-digit growth in the value segment and by mirroring the go-to-market strategy and profitability of PCNA,” Oster says.

Oster carried PFConcept out of the doldrums, steering the organization through a recovering economy and legislative landmines. Other companies haven’t been as fortunate – distributors who specialized in the pharmaceutical market have seen their revenue decrease up to 70% in the three years since the European Federation of Pharmaceutical Industries and Associations (EFPIA) banned the distribution of promotional products in doctors’ offices and at medical conferences.

“Companies will be recovering from the pharma ban for a long time,” Freter says. “It’s because the politicians view promo items as bribery, but from the perspective of marketing, it’s not. They just need to be educated on what our industry does and has the potential to do.”

Nonetheless, European promotional companies anticipate continued success, with 88% of suppliers and 85% of distributors expecting sales to grow over the next five years.

A Disruptive State
Similar to the promo business in the U.S., there has been a shift from the gift market to the value segment in Europe. Distributors are now offering a wide range of capabilities, such as decoration and creative services, in order to resemble a one-stop shop for customers. Meanwhile, suppliers are investing in operational efficiency to provide more options, more accessibility and quick delivery on a consistent basis. The transition has proven particularly successful for the U.K. and Ireland: In 2016, the market grew to €966 million, indicating seven consecutive years of growth, according to Sourcing City’s Promotional Merchandise Industry Market Report.

However, there’s growing concern among smaller distributors in the European market, a threat quite familiar to U.S. distributors. In 2015, Vistaprint launched a website to sell promotional merchandise to the U.K. and Ireland, and its presence has greatly increased over the past two years. Other e-commerce platforms have followed suit throughout Europe, disrupting the traditional supply chain and gobbling up market share. Additionally, larger distributors (with more than €500,000 in revenue) continue to grow faster than smaller distributors, forcing mom-and-pop shops to either merge, go out of business or transition to an online model.

“The cake is still the same, but shares of the cake are being re-organized,” says Marcus Sperber, owner of Bavaria-based supplier Elasto-Form. “Most of our companies are family-owned now, but there will be more private equity-run companies in the future. It used to take 10 years for a major change to affect the industry, but the internet has really sped things up.”

European companies have been slow to react: only 43% of suppliers and 44% of distributors have e-commerce capability, according to PSI data. It’s vital for them to adapt as soon as possible because consumers already have. Worldwide online shopping has hit $1.9 trillion, KPMG reported in its 2017 Global Online Consumer Report. Motivated by flexibility and cost savings, consumers are spending online and as millennials increasingly enter the workforce, e-commerce is poised for exponential growth.

One of the most notable effects of e-commerce has been the decrease in average order volume. Whereas the minimum order of promotional products may have been 100 pieces, Vistaprint and other online outlets have catered to smaller orders, even customized one-piece orders. It’s prompting suppliers to reconsider their production capability, Sperber says. “We have a fragmented market. Customers want different things than what our industry has been providing,” he notes.

Product Safety Issues
In an alarming similarity to the U.S. industry, many European players have taken a laissez-faire approach to product safety. In 2016, 44% of European suppliers and 71% of distributors reported that they took no steps toward becoming certified or obtaining proof of sustainability, according to PSI data. It’s a major issue in Western Europe because the compliance and safety laws are much tougher than in North America. “Our industry is facing more issues than ever, and companies are not really aware of what’s coming,” Freter says.

Starting May 25, 2018, the General Data Protection Regulation goes into effect. It’s a combined measure by the European government and authorities to strengthen data protection across the European Union. The legislation will unify data privacy laws across the continent and extend the scope of the regulation to all foreign companies processing data of EU residents. Companies who don’t comply face a maximum fine of €20 million or 4% of their annual global revenue.

“We have to be compliant. It’s not an issue – it’s a must,” Oster says. “It’s also become a competitive advantage. We offer certifications and documentation online so distributors are prepared when dealing with the customer.”

In an effort to cultivate a more socially conscious, eco-friendly mentality throughout the European promo industry, PSI has instituted annual sustainability awards recognizing certified companies for their compliance. Freter says there has been increased documentation and engagement since the awards began in 2015. However, the advanced regulations have become a burden on smaller companies. “The number of companies that can provide those clean, green products is going down because you need so many certifications,” Freter says. “It costs a lot of money to match all the legal requirements.”

Because many companies can’t afford the certifications, they continue business without them. It’s a safety risk for consumers and a financial hazard to the entire industry, but in Eastern Europe, many regional governments don’t step in. If world leaders don’t care, why should business leaders? “It’s like the Wild West,” Freter says. “As long as they’re selling products, they’re fine.”