Promo Is Growing Slower Than the Economy. Why?

During the post-COVID recovery, the industry has typically expanded at a faster rate than gross domestic product. Here’s why the trend has reversed.

Sometimes, numbers keep me up at night.

Not the calculus formulas that haunted my dreams senior year of high school, though they sometimes still elicit a shudder. I’m talking economic numbers. Promo industry sales numbers. Stuff like that.

The late-night brain ticking was underway again this week after the U.S. Department of Commerce released a revised estimate for the nation’s third quarter gross domestic product growth.

The federal number crunchers now say that GDP – the widest measure of the United States’ economic output – grew at a year-over-year rate of 5.2%, up from the previously-issued estimate of 4.9%.

That piqued my interest from a promo perspective.

Consider: The Distributor Quarterly Sales Survey from ASI Research shows that promotional products distributors collectively increased sales year over year, on average, by 2.4% in Q3. That was the slowest rate of growth since the industry’s recovery from COVID-induced declines began – and less than half the rate at which GDP accelerated in the same quarter.

While #promoproducts industry growth slowed in Q3, especially for the largest distributors, there were positives to report -- including a healthy level-headed optimism about Q4. Stats, graphics, and lots of insights from distributors.https://t.co/omwsy8HS3Q

— Chris Ruvo (@ChrisR_ASI) November 1, 2023

Just like the Grinch, my puzzler started puzzling till it was sore.

What gives? Why did promo grow at such a slower rate than the economy? After all, the industry has routinely outpaced GDP growth on a quarterly basis over the 10 consecutive quarters in which distributors have increased sales during the continued post-COVID recovery.

After considering conversations I’ve had with distributors and suppliers over the last couple of months, I think there are a number of issues, some industry-specific, that hip-checked promo’s topline growth a bit, even as the broader economy prospered. Here, as I see it, are a few of the main factors:

Promo’s 2022 Q3 was especially strong. Nancy Schmidt, CEO of Top 40 distributor AIA Corporation (asi/109480) and a member of Counselor’s Power 50 list of promo’s most influential people, recently had great perspective on this point. She noted how many distributors, especially the industry’s biggest, had an extraordinary performance in 2022 – so good, in fact, that an industry annual sales record of $25.8 billion was matched.

“As the world started to regain a sense of normalcy, companies ramped up their investments” last year, Schmidt said. “Comparatively, end-buyer budgets are now representing a more typical level.” As a result, some distributors experienced a slowdown in growth in Q3 as the market normalization firmly took hold.

Anxiety over what’s to come fueled greater promo spending hesitancy. There has been a steady flow of dour economic predictions over at least the last year. So-called experts have been predicting a recession is just around the corner for months on end. There’s some recent macroeconomic data (cooling hiring and consumer spending in the U.S. in October) that suggests they may one day soon be right, but so far GDP growth has continued.

Nonetheless, the predictions of an economic slide, combined with things like continued high inflation and other factors, have colored the perceptions of decision-makers at some end-buyers. Concerned and uncertain about what lies ahead and facing top-down pressure to keep costs in check, some tightened the purse strings on their promo spend or, at the least, didn’t increase it in Q3 – even if their businesses were still in a relatively strong position.

Some clients are ordering lower quantities and/or less expensive items. This factor is really related to most others mentioned here in some way. It’s being driven by everything from the aforementioned recession concerns to already manifesting business struggles to higher shipping costs that drive down available budget for spend on items. A sales rep at a Top 40 distributor recently told me: “Companies are still cautious of a recession. Budgets across the board have been slashed. Those with money to spend have a lower budget and have been requesting lower-priced items.”

End-buyers are allocating dollars differently. One phenomenon that helped drive promo’s rebound from COVID-era lows was that, especially during the earlier parts of the recovery, end-clients weren’t investing as heavily (or much at all) in things like business travel and in-person company events/experiences. Now the balance has approximately returned to a pre-pandemic norm. Business travel and those face-to-face happenings – hello holiday parties – are back. This has probably contributed to a leveling off in some promo budgets.

Interest rates & other inflationary factors could have tempered spend. Businesses and organizations may be growing. Still, given the high interest rates in play, costs on borrowing/debts have accelerated, spurring a rise in the cost of business – a phenomenon further fueled by factors like higher labor costs, looming insurance rate hikes and rising prices for the technology necessary to compete.

Some industries aren’t doing great. GDP may have grown 5.2%, but that doesn’t mean every company or industry is hunky-dory. For instance, the manufacturing market has reportedly been in a state of contraction, according to the Institute for Supply Management. The technology sector, including firms that boomed during the pandemic and then came back to earth in the recovery, has experienced challenges this year, with widespread layoffs at some high-profile organizations. Such factors can ultimately chip away at spending on promo – something certain distributors have said has indeed impacted sales.

Despite all these downbeat variables, it’s important to not lose sight of the fact that promo still grew in Q3. How Q4 will go remains to be seen, but the early anecdotal word I’ve gotten from industry companies is that it’s not poised to be a quarter of major growth. Sales that are flat, down a bit, or up low single digits appear to be what more than a few firms are experiencing.

Will Q4’s collective performance be enough to build on the year’s first three quarters of growth to set a new industry annual sales record? ASI Research’s Q4/full-year distributor sales report is due out early in 2024 and will reveal the answer.

For now, distributors must keep grinding, emphasizing the near unmatchable return on investment that promo products offer, acting creatively to devise solutions that really work for clients, and proactively prospecting with existing customers and potential new ones to keep the pipeline pumping. Here’s hoping for a stellar December.