Yahoo Finance Supply or Demand- What threatens SME’s ?
In the UK alone over 20,000 people are employed by the supply chain of the promotional product sector and they form a vital part of the economy, with so many being from the SME sector which is the life blood and growth of GDP in every mature nation.
Since the inception of the industry in the 1960’s, many of those we see around at trade shows have demonstrated experience working with distributors and supply partners on design, manufacture, import promotional products, premiums for major brands and personalised products for the fast-growing online gift sector.
For three decades the marketplace has faced numerous challenges from recessions to the saddest and most shocking of terrorist events that changed the world and the way we lived.
(Chart with kind courtesy of www.asicentral.com)
Yet the industry and usage kept growing, it took some stumbles and trips, but it recovered each time as the chart above shows.
SME’s (of which most businesses that operate in the promo and personalised space) are widely thought to be the backbone of any healthy economy; they drive growth, provide employment opportunities and open new markets.
According to a study carried out by Santander, SMEs generate more half of all turnover generated by the private sector without which we would have no growth in GDP, and yet despite the soon to end and costly help that some companies have had from the Government by way of loans to keep unemployment low and the economy on life support, we now find ourselves looking at the Supply Versus Demand equation once more, and industry talk is that it’s changing again.
We chatted with Martin Varley on the topic to get his view based on his 40 years of experience in the global promotional products sector as founder of what became Brand Addition, as well as a Founding Board member at 4imprint Group Plc and more recently as a Non-Executive Director with the Parent Company of Aim Smarter LLC, the $2 billion distributor network in the USA.
We have edited his comments for brevity and readability. but none of the opinions have changed.
Interviewer- What is your take on a recovery?
MV- I don’t see a recovery per se, I see some areas that are remembering the value of branded products have in the overall marketing mix, but it is highly skewed to online retail and personalisation rather than the traditional event or giveaway market. I don’t see any meaningful recovery in the “I need 500 pens for an exhibition” market that has been the bedrock of the global industry for so long.
Interviewer- So when will things change?
MV- As you might know I spend most of my time in aviation now with the Helicopter school where we are training pilots of the future, and we are fully booked due to a shortage that is estimated to be at 2,500 in three years.
Consider that there are only about 1,500 UK licensed helicopter pilots in the UK today and it gives you a scale of the opportunity and challenge. We pass a student a week and we are the largest school in England. So, the ‘rate limiting factor’ for fast and efficient travel in a few years (and yes, we can blame BREXIT) is instructors and pilots.
I mention this because we had a plan to deal with this and step up our availability, add more instructors of a high calibre and extend our 30,000 foot facility further, and then just a few days ago, our main supplier of Helicopters announced that due to shortages of materials and labour, they are instigating a price increase in a week of $20,000 per machine (you could have the old price if you placed an order in 48 hours) but also estimating next deliveries for new orders to be in the UK in May/June 2022.
We went from worrying in the first lockdown whether anyone would come back to fly, to having the demand increase due to the number of retiring pilots and the investment in VTOL electric transport and then we find that we can’t get more helicopters to expand.
Interviewer- What does the shortage of pilots have to do with the normalisation of the $30 billion promo industry?
MV- I think what I am saying is that every industry is facing the same issues, from the ‘pingdemic’ affecting the availability of team members to the increases of raw materials and then to the cost of freight.
We have gone from worrying that nobody wanted our products to a position where there is a shortage of supply and the price increases on some items are as much as 200% due to raw materials and sea freight that has increased 500% for a 40ft container in 6 months alone.
It’s the same for construction with cement and steel in short supply, the same in food service with shortages of fresh foods and in online shopping where Amazon have literally offered to pay every HGV driver in the UK an extra £6.00 an hour to leave their existing employers.
We [promo people] are not unique in any way, we are a reasonable indicator of the strength of the economy but right now we have another inversion going on.
Interviewer- What do you mean?
MV- Well back to the first signs of COVID, I was in China and unknown to me at the time had taken a train that stopped in Wuhan, a place I had never heard of.
January came and went, and during February I spent time in the USA and as I read more and more and started to see this was not a China problem, I connected the dots (way too slowly) and while doing some flight training in Florida early March I had a moment of clarity and realised that the world was about to stop for a while.
On the 6th of March I flew home fresh from a ‘sign off’ and in chatting to suppliers learned that everyone was increasing purchase orders, rushing containers in as the great fear was that with China in lockdown post their Lunar New Year, products would become scarce.
By June 2020 it was clear that demand and not supply was the issue, and those same suppliers shifted positions so that they cancelled what they could and delayed what they couldn’t, there simply was no demand, with UK distributors reporting sales down by 90%.
Tracking forward to today, it has all inverted again, we have demand being created by retail promotions, back to work/ school packs, branded food service clothing and sports and social club clothing, but supply is constrained by time, and that is before we even get into the issue of price.
Interviewer- So with these shifting sands, if you were running a distributor today, what would you do?
MV- That’s the billion $ question and I am going to steal an answer that a highly respected veteran of the USA told me yesterday.
“When a customer calls asking for ideas for a ‘fall promotion’ and for price quotes, tell them that the world has changed and this is what you can have and I need to know now as the inventory might be gone in an hour”
It’s sobering and maybe excessive but not far off where we need to be until after CNY [Chinese New Year] in 2022 when the balance might…well…. be balanced again.
Interviewer- So, with all these headwinds to pinch a pun from your aviation passion, if you were starting a business now, would it be a distributor or supplier.
MV- I am excited to say that I am soon to become a grandfather and the incumbent babysitter, so there is more chance of me being offered a role as a pilot on Marine One than there is of me doing either.
If we are going to be truly honest with each other then the answer is that it makes no real difference, as both sides of the supply chain are drifting over the extremely fuzzy line and ultimately just as with Deliveroo, Amazon and Uber Eats, the multi-vendor channel attracts too much attention from the cost saving private equity opportunists.
Interviewer- Congratulations on the future arrival, but are you saying the structure is going to collapse?
MV- Not at all, its just going to evolve. Look, 30 years ago Bic decided that hotels could buy their pens direct and not through a distributor, it made sense I suppose that the distributor added insufficient value to warrant a 40% cut of $5 million of pens for Marriott, there was uproar, it died down and then they added other verticals to that policy.
But nothing collapsed, distributors found new ways to deliver value, they left the commodity items alone and sold concepts and packages and service alongside creativity and relationships.
That hasn’t changed, but we all know that a ‘loyal customer’ of a UK supplier is only loyal right up until the order is big enough to go to China themselves and take all the margin, (after using the supplier to get samples free). It’s no different to Bic and no different to so many of the UK suppliers that have distributor arms, the only frustrating part is those that pretend they don’t do it while admonishing those that do.
It’s a free market economy, and the science of buying behaviour and misplaced loyalty is something we could talk for hours about, but what we know is that right now warehouses are emptier than ever, prices are going up and loyalty is going to be very important for the foreseeable future as the power has shifted for a while to those with decent inventory and in house print, and that includes quasi supplier/distributors.
Interviewer- So who will be the winners?
MV- I can’t predict that any more than the weather in London tomorrow but the big differentiator has been technology adoption and innovation and I see the only route to being able to serve customers efficiently and effectively and to work with suppliers efficiently is through technology adoption.
The winners will be the distributor groups that can afford the investment, and by proxy, their affiliates, alongside the suppliers that offer true integration of systems that are open to the most widely used shopping carts and web platforms that distributors want to use.
Interviewer- Thank you, I hope we can chat again soon and good luck with the new arrival.
MV- Thank you.
