Should Distributors Give In To Cheap Instincts?

Retail’s discounting boom is in full swing – right as the promotional product industry distances itself from its low-cost perception.

It’s no secret that traditional American retail is in crisis. J.C. Penney, Macy’s and Sears, all anchor store giants, continue to close hundreds of locations across the country. Payless ShoeSource will shutter 800 locations in the coming months, and RadioShack closed 1,000 stores in late spring. Due to its foundering retail business, office supplies giant Staples Inc. – parent company of Top 40 distributor Staples Promotional Products (asi/120601) – was just bought by a private equity firm for $6.9 billion despite annual revenues of more than $18 billion.

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In total, more store closings occurred through April this year than in all of 2008, the previous high. Experts point to two primary reasons for the closings: the growth of online shopping plus an oversaturation of brick-and-mortar stores.

But not every retail chain is fighting for survival. In fact, one type of store is especially thriving: discount stores.

The four largest dollar store chains in the country – Dollar General, Dollar Tree, Family Dollar (acquired by Dollar Tree two years ago) and 99 Cents Only – increased their combined annual sales from $28 billion to $42 billion between 2010 and 2015, a compound annual growth rate of 8.5%. And it doesn’t just seem like there’s a dollar store on every street – Dollar General (which specializes in low-cost consumables) will open 1,000 new stores in fiscal 2017, while Dollar Tree (which offers fun items and basics) opened 164 stores in its fiscal first quarter.

Other discounters are experiencing major success as well. Grocery store Aldi will open 900 new stores over the next five years, while warehouse club stores like Costco and Sam’s Club grew their revenue to $420 billion from 1992-2013, a 10.5-fold increase. (By comparison, e-commerce revenue grew 10-fold during that same period.)

So what’s driving the rise in discount shopping as traditional retail takes a nosedive? It’s primarily economic, says Dr. Charles Lindsey, associate professor of marketing at the State University of New York at Buffalo, who studies consumer behavior and branding. He points to “lingering perceptional psychological effects” from the Great Recession of 2008, referring to discount shopping habits forged during a time of employment and wage instability. Online research and purchasing is furthering the price pressure. “Shopping is being affected by e-commerce and ‘showrooming,’ or the ability to instantly compare prices on something found in the store to see if it’s cheaper elsewhere,” he says. “Also, millennials make up a huge number of these shoppers, and they’re price-sensitive and budget-conscious because they’re buying homes and starting families.”

Thanks to the growing presence of e-commerce and buyers’ shifting mindsets, consumers are opting for products that are fast and cheap. With Hollar, the online dollar store that has successfully wooed millennial moms since late 2015, its customers like “the joy of discovery,” COO John Um said in a recent interview with Fast Company. “[Millennials] want deals, they want value, they want convenience,” added David Yeom, co-founder and CEO.

What they don’t necessarily want is to forge deep emotional connections with their discounted products. So what if it doesn’t work as well as the name-brand item? They’ve saved money that can be put elsewhere, like in savings for a future down payment on a house or toward a vacation.

As consumers gravitated toward discounted goods over the past decade, the promotional product industry waged its own internal war over its “tchotchke” roots. A vocal cohort has sought to combat the long-held perception (among end-buyers and recipients) that most branded items are just cheap trinkets, often ordered as an afterthought. In distancing the industry from that view, the focus can be placed on creativity, consultation and premium value. As the thinking goes, distributors become an essential part of the buying process, allowing them to charge more for their high-end creative services.

And yet, the promotional product industry is naturally suited to cater to the massive discounting trend. Bargain hunting, no-frills functionality, quick online transactions, the joy of discovery – the industry can offer it all. It begs the questions: should distributors meet this historic opportunity head-on? Or will large-scale concessions on quality and price cause irreparable damage to the industry?

fter the recession of 2008-2010, the stigma surrounding discount store shopping receded, says Dr. Michael Solomon, a professor of marketing who studies consumer behavior at the Haub School of Business at St. Joseph’s University in Philadelphia. In fact, people now boast about their discount hauls. “It’s a badge of pride,” he says. “There used to be well-defined categories of [shoppers], and now that’s disappeared. So if they can afford it, shoppers will go to Barneys in the morning and Dollar General in the afternoon, or Costco and then Whole Foods. There’s a market for both. It’s the companies in the middle that are struggling because they don’t offer the best value for your dollar.”

Consumers also spend money on more than expensive products nowadays. Travel and food experiences largely trump physical possessions as financial priorities, so consumers will save money by buying household items at dollar stores and clothes at “fast fashion” retailers in order to save up for that trip to Asia, or Sunday brunch at a new vegan eatery, or Vinyasa yoga classes.

“People want purchases that provide stimulation, whether it’s educational or entertainment,” says Solomon. “They’re buying knockoff brands at dollar stores because they want to spend their money on memorable experiences and trips. These are the markers of status now.”

Not long ago, consumers indulged in conspicuous consumption: the use of luxury brands and oversized logos to signal their worth. But Lindsey says it’s the experiences (and not a mountain of shopping bags) that make for the best social media fodder. “Experiences are being shared and talked about, versus consuming in a conspicuous manner and sharing that,” he says. “The latter is now frowned upon on social media, like you’re showing off.”

Overall when it comes to retail, consumers increasingly want fast and cheap. There is one place that is uniquely suited to offer both: e-commerce. Thanks to their mobile devices, consumers can make quick transactions anywhere, and instantly compare prices from different vendors (something not possible at a brick-and-mortar location). And it cuts across all generations. The 2017 Global Online Consumer Report from KPMG found that members of Generation X purchased online an average of 18.6 times a year, while baby boomers purchased 15.1 times on average and millennials 15.6. In a recent ASI end-buyer survey (see sidebar on page 88), 90% of end-buyers stated they’re comfortable buying promotional products online.

Pete Thuss knows this well, since many of his clients start their merchandise search online before coming to him, if they talk to him at all. “They do their homework on Amazon or Pinterest, and then tell me what they’re looking for,” says the marketing partner at Talbot Promo (asi/341500) in London, ON, where Canadian dollar store chain Dollarama had a year-over-year sales increase of 10% for Q1 2017. “My sales numbers have increased, but fewer clients want to see me. I’m still a handshake, let’s-sit-down-together guy, but we’re going to be forced to keep up with e-commerce or we’ll be left behind.”

“Left behind” is the fear for distributors: play the price game or lose the customer. Distributors who spoke with Advantages believe the discount shopping trend at retail combined with e-commerce has convinced too many sales reps to be product peddlers operating at razor-thin margins.

“Buyers are getting younger, so they’re very comfortable with buying products online,” says Dale Limes, senior vice president of sales for HALO Branded Solutions (asi/356000). “But this has taken the creativity away from the industry and decreased its consultative feel. Good companies still have training in being more proactive and consultative. It has to be part of the company culture.”

The conundrum for distributors is that more customers want the ease and self-service of e-commerce. But left to their own devices, those same customers easily give into their discounting instincts, and don’t pay heed to differentiators like better materials or product safety.

“Customers are often not well-versed on the differences between materials or the importance of product safety. In the online space, you can kick and scream until you’re blue in the face, but most customers just don’t know better than to make a decision on anything other than price,” says Bret Bonnet, president of Quality Logo Products (asi/302967). Bonnet says it’s no coincidence that customers who speak to a sales rep at his company will spend more and be more profitable. “It’s not that we are out to upsell them or steer them in a direction they would’ve otherwise not gone,” he adds. “Instead we take the time to educate them and help them make the best decision the first time.”

Patrick Black, president & CEO at Perfect Imprints (asi/293567), finds that lack of education and understanding about promotional products among buyers is persistent. “Many don’t have marketing experience, and promotional products should be part of a marketing strategy,” says Black, who gets half of his customers through e-commerce. “It might be in their title and they wear the marketing hat, but they don’t understand it.”

With a lack of expertise from buyers and without input from distributors, promotional products won’t be used properly: as an extension of a brand’s marketing strategy. Many feel those failures will continue if the industry continues to tread the unsustainable path of commoditization and an inherent race to the bottom on price.

“The industry needs to reinvent itself,” says Limes. “If we don’t watch what’s going on and maintain relationships with clients, there’s nothing left but for us to be commoditized. People will still pay for higher-end merchandise, for an ad agency feel. We have to get back to that, otherwise everyone’s in jeopardy.”

n a consumer world of commoditization and lightning-fast e-commerce, how can the industry be a true partner in promotional campaigns and branding? It’s going to take no less than a large-scale mindset shift on the part of the sales reps. It must be communicated to buyers that promotional products are a key part of a brand’s marketing strategy, and deserve more than a five-minute conversation on price.

“The consultative approach is being drowned out, and the industry is to blame for letting that happen,” says Robert Fiveash, co-president of Brand Fuel (asi/145025). “The customer wants a $2 item and the sales rep isn’t pushing back, so they’re perpetuating it.”

Instead, reps should shift the focus off the products and onto the message that the client wants to communicate. “Clients want to get the best bang for their buck for their campaign,” says Limes, “but promotional products can help them build a stronger brand in their marketplace and achieve more market share in their industry.” He adds that reps will have to take buyers’ attention away from the price of the product and place it on the advertising need and how the product can enhance it.

What about end-buyer pushback, some distributors may ask. Black says most end-buyers actually want to be educated on creative ways to use products and why they should steer clear of cheap. “We won’t suggest 13-cent pens, ever,” he says. “We want to see fewer products with a more selective distribution. Ask them, ‘What’s the impression of your brand if a cheap pen doesn’t write or leaks all over?’”

Other times, when a customer comes to Black with a low-cost item and asks if he can match it, he’ll turn the tables. “I’ll ask them why they didn’t just buy from the other company, and usually it’s something like they couldn’t get through to them,” he says. “So then I remind them that there’s value in working with me because here I am, taking the time to talk with them. They don’t even think about those value adds.”

Perfect Imprints also differentiates itself from e-commerce sites and other distributors by offering robust graphic arts services. They’ll create an imprint to a client’s initial specs, and then have an in-house artist add extra oomph to a second version, and present both. “They brag about us to others, and it’s all because our artists spent an extra 10 to 15 minutes on their art,” says Black.

While not all end-buyers will be convinced of the value of a consultative experience, distributors must position themselves as experts rather than peddlers if they want the industry to thrive. “Of course, the customer is always right,” says Andy Thorne, sales & marketing director at Outstanding Branding (asi/288519) in London, home to a discount store chain called Poundland that saw £1.31 billion ($1.7 billion) in revenue for 2016. “You can show them case studies and they still say, ‘We don’t care.’ But you have to have conviction about the products. If you only put forward cheap and cheerful, they’ll only buy cheap and cheerful. They would go for a product that’s twenty times the price if they knew they were actually going to get a wow from it.”

oday’s consumers value experiences over conspicuous consumption. Marketers are intensely sensitive to that and have become vigilant of the brand experience they offer — what’s called experiential marketing. They’ve become that way out of necessity, for brand missteps are disseminated globally at lightning speed thanks to social media (see: United Airlines). “This new age of the brand is driven largely by social media,” says Lindsey. “Millennials in particular are very sensitive to brand authenticity and experience. Perception is very important.”

And that perception is shaped by marketing campaigns, including promotional products. Brand loyalty is not built with pens that leak or power banks that fry mobile devices. Promotional products should be positioned to bolster that loyalty – something dollar store items can’t do. How often do discount shoppers remember the off-brand they bought for so cheap? The promotional products industry, by contrast, is powered and sustained by people instantly recalling the advertised brand and the connection they’ve established with it.

“If something is obviously just a throwaway or tchotchke, people don’t value it,” says Solomon. “But if it’s presented as, ‘We got this especially for you,’ people want to know the history. They want to be part of the experience. It’s personal and emotional versus commoditized.”

That’s especially true when promotional products play a significant role in the larger brand experience. “Being seen at events is a huge initiative for brands,” says David Walker, vice president of field sales at Top 40 supplier Hit Promotional Products (asi/61125). “In every photo, there’s a branded cup, T-shirt, tent or hat, and then social media takes those impressions and spreads them for free. It’s been a total game-changer.”

And people flock to merchandise that come with an experience. At a recent trade show, Perfect Imprints had a large banner for their booth and six different types of high-end products as prizes. Then they distributed scratch-off cards to give booth visitors the opportunity to win a prize. “They loved it,” says Black. “Visitors were telling other people about us and we were flooded. We offered an experience: ‘What will I win?’ You have to tie emotions to it.”

Fortunately for end-buyers’ wallets, an experience doesn’t have to be a day out on a yacht with JAY-Z to impress people, says Thorne. The convenience of having a power bank while on the go is an experience, he says. “If you’re welcoming guests on a special trip, they might be tempted to take the robes in their rooms,” he says. “The buyer can say, ‘Don’t take those! Here’s your own!’ That’s an experience. They come in all shapes and sizes. A brand’s item should be high-quality so people will say, ‘Wow, I wanted one of these! I love it!’”