Bonus Episode: Reflecting on Episode 135 The Decade Ahead with David Nicholson and Jonathan Isaacson

Hi friends, this is Bobby LeHew, Chief Content Officer at Commonsku. Last year we started a tradition around the holidays by replaying a few of the most popular episodes of the year. This year we have two episodes we're highlighting, and they are from way back in January, which seems like a lifetime ago now. We recorded a series called The Decade Ahead featuring voices from different perspectives in the industry. Now, since this was recorded in January, I had to relisten to the episodes to see if they still held true considering the current climate. And they do, if not more so, because COVID, as you will pick up when listening, actually accelerated many of the challenges and the opportunities. But before we get to the episode, two things we want to share. One, so many of you have registered for SKUCON. The response has been amazing. For those that might be listening for the first time, SKUCON is the virtual conference for distributors and suppliers who want to connect, learn, and reenergize alongside other progressive pros. The conference, held on January 7th, is a unique interactive experience with breakouts, keynotes, and an opportunity to make real connections just like in real life. Come hear Seth Godin, Ann Handley, Fast Company's Elizabeth Segran, Chris Miller from Ben Jerry's, brand strategist Mitra Khayyam, Simon Paulette, Denise Tashiro, and many more. You can learn more and register at skucon.com. And lastly, this week we published a 2020 Year in Review. Which highlights just how far we have all come this year together. The milestones, the advancements, and the changes. Included in the roundup was a letter from Kathryn Graham, CEO of Commscue, and Mark Graham, Commscue's President and Chief Brand Officer. I asked Mark to read the letter here for our listeners, as I really felt it shaped the tone for the SkuCast as well, and it serves as a fitting year-end message to us all. Particularly as we look forward to 2021. Now here's the letter from Mark and Catherine, followed by the episode. And thank you, thank you for listening this year.

Dear SCUMunity, to say 2020 has been a roller coaster ride would be a massive understatement. It started in January when the industry was at a an all-time high, and clients had generous budgets set aside for another year of growth after a strong 2019. At the time, there was boundless optimism for an even better 2020. Then we saw the middle of March. The world was turned upside down within a matter of days. The impact on our industry was immediate. Budgets were slashed, shelter-in-place rules came into effect, businesses started closing, employees were furloughed, and we all buckled up for a ride like none other. PPE arrived shortly thereafter as a lifeline for the Common Skew community and the industry at large. While we often heard people say, "I can't wait to sell another t-shirt again," our industry stepped up to provide PPE to governments, corporations, communities, and individuals at breathtaking scale. We should be very proud of how our industry was a vehicle for getting PPE like face shields, gloves, sanitizers, and masks into the hands of so many people. The supply chain stories we witnessed during this time were nothing short of extraordinary. Beyond PPE, the Commonsku community adapted quickly. Many of you closed your offices and teams adjusted to working from home. You pivoted to selling virtual event kits. You met with clients virtually to truly understand how you could drive their new marketing goals. You embraced new e-commerce tools like Shops as a way to streamline the buying experience. With end clients. You offered new services like virtual event planning to customers who needed new ways to connect with their customers. You moved into different customer segments to make up for lost sales. In our 20 years in the promotional products industry, we have never experienced this degree of resilience, flexibility, and innovation. You leaned into this challenge in an unprecedented way, and the results show. While the pandemic is not behind us yet, business has bounced back considerably since the spring. We hear from many distributors who share comments like, we're having an epic Q4, looking like we'll beat Q4 last year. While we're still in the midst of the battle, all evidence suggests that business is stabilizing and opportunities abound for our industry in 2021. 2020 has been a tremendous time for growth, learning, and innovation for us at Commonsku. When the pandemic struck, we focused everything we had on the success of this community, whether it was the sales team and their educational outreach, the support team and their individual follow-ups and Maximize calls, The engineering team and new feature development, the marketing and content teams and the pivot to virtual events, SCUmmunity social hours, and our expanded online education platform. We are so proud of our entire team for leaning into this crisis with everything they had. Now that we are at the end of 2020, we are proud of where we have come as an industry. The Commenscue distributor network now represents over $900 million of industry sales. The future looks incredibly bright, and we could not be more excited for you, the distributors and suppliers we serve each and every day. We can't wait to take on 2021 with you. Mark Graham and Catherine Graham. Co-founders of CommonSkew. Welcome to SkewCast, the podcast for entrepreneurs in the promotional products industry. SkewCast shines a light on our industry's best work, features maverick personalities, and discusses what's really involved in running a modern promotional products business. SkuCast is the official podcast of Common Skew.

The opportunities for industry become just more dynamic. This is not a fast-moving industry, whether that's pricing, response to product trends, data. I mean, again, this is an industry that we're in the marketing business. People are making investments in these products to get results. Our ability to really be able to track and analyze data is a huge opportunity for both suppliers and distributors. I mean, we know very little about how our products are used or the effectiveness of our products.

Hi friends, I'm Bobby LeHew, the Chief Content Officer at Commscue. We're continuing a 3-part series of episodes as Mark Graham, Commscue's President and Chief Branding Officer, and I visit with some of the most respected leaders of the largest organizations in our industry as we reflect on the changes that have accelerated our success over the past decade and, more importantly, what opportunities and challenges lay before us in the decade ahead. Our last episode featured perspectives from the industry's two largest trade organizations, and we were honored to have Tim Andrews with ASI and Paul Bellantone with PPAI join us. In this episode, we're looking through through the lens of the supplier's perspective. The voice you heard was that of David Nicholson, the president of Top 40 Supplier PCNA, parent company of Leeds, Bullet, Trimark, and JournalBooks. Joining David for our interview is Jonathan Isaacson, president and CEO of Top 40 Supplier, the Gem Group, parent company of Gemline.

There's been better collaboration between suppliers and distributors towards solving the actual needs of customers, the end-user customers, and really a better understanding about what those needs are. If we're doing that, if we're able to do that, we're going to be able to put out more effective products and services. So I see that as a huge opportunity for the industry. We've traditionally been a very product-focused industry. Here's our new widget, isn't it wonderful? And I think that there's a move towards a solutions-based industry in terms of solving a problem.

Both David and Jonathan have long been respected for their critical and honest analysis of our industry, and they provide a unique perspective as leaders of two of the largest manufacturing and importing companies in the business. They are a few of the most intelligent and holistic thinkers when it comes to the supply chain and our place in the economy. In this episode, we talk about how sustainability will become the compliance of the coming decade, the rise of dynamic pricing, the impact of consolidation, the influence of private equity, and much more. Now on to our episode with our special guests and friends, Jonathan Isaacson and David Nicholson.

What do you think was the most single important advancement in the industry over the last 10 years and how it impacted the trajectory of our industry? Jonathan, I want to start with you.

So questions about the single issue are always difficult. It's like asking who is the most beautiful person in the world. There's usually more than one or many that are beautiful. And in this case, there's not one single thing that has impacted the industry. There's a series of stuff. And clearly technology has had a big impact on the industry. And part of what technology has done is to increase the transparency. Going along with that, in terms of transparency, is this whole issue of corporate social responsibility, which is it continues to increase. People want to make sure that their stuff is made in a reasonable manner, however that is defined, and it is defined differently by different people, but there are certain standards that everybody is heading towards. And the other thing is that the sophistication of the industry continues to increase, and this is something that has been going on for a long time, both the nature of the programs that are being sold, how they're being sold, the sophistication of the product that's being sold. And part of the way we see this manifested is in the brands that are now entering the industry within certain supplier portfolios. David, how about you?

Yeah, and I would agree. I think Jonathan's point about the sophistication of the industry is right on. And certainly technology has had a big impact. And I think the way I would see technology really having advanced this industry is in terms of what it's enabled in terms of access to China. And China's advancement in terms of being able to provide a much broader range of product and quite honestly a higher quality product, and it's much more accessible than it was a decade ago. And that's what our industry's been built on.

Yeah. David, on this topic, you gave an insightful and somewhat alarming presentation at SKU Camp on the future of the supply chain and particularly the impact of China on the supply chain. Can you share how you think that will impact the next 10 years?

Sure.

And I'm not sure Jonathan can attempt to answer what he thinks is going to happen with China and the US for the next 10 years. That's a tough one. But I think today, what the tariffs really have highlighted for us in our business at PCNA, but I think for the industry, is that we've been a bit sleepy in terms of thinking about the risk of the amount of exposure we have with China. In our business, 90% of what we sell comes out of China. I I think this industry, I don't know what the percent would be, but certainly north of 2/3. And for an industry that is highly dependent on a country, and a country that has not only political risks with the US right now and the Trump administration, but structurally has really big issues with its population and its ability to continue to be a low-cost production country, that exposure is real today. And the challenge we have is that there's no alternative. The tariffs have exposed that, which is, as we've looked to try to go to other countries to avoid China, there's no alternative today, and not one that's on the foreseeable horizon.

Do you see that being repaired and adjusted to in the next 10 years? I mean, that's—

10 years, maybe. Certainly not in 5 years. I mean, what China has built in terms of its supply chain is going to take, at a minimum, a decade for other countries to replace.

Right. Jonathan, you want to add any thoughts to that?

I agree with most of what David said. The industry has become very reliant on China. We have actually been worried at Gemline about this for a fair amount of time. And the reason was that structurally China's less interested in our product categories than they used to be. So they're moving up the value chain, or China would like to move up the value chain. And because of that, there's less incentive for people to build the products that this industry sells. I also worry that the China issue is a bipartisan issue so that there is grumblings on both sides of the aisle about China. So even if there is a switch in administrations, we might not see this clear up. And if you look, there's a bunch of issues that are on the table that need to be worked out bilaterally. Issues around the Belt and Road Initiative, Made in China 2025, The issue with the Spratlys and the shipping lanes, there's a bunch of issues that people may or may not be aware of, but this is driving part of the foreign affairs calculus and the current trade tensions have exposed all of this stuff. And part of the issue is that nobody really knows if and when this gets resolved. It could get better, it could get worse. Where we are today really is in ceasefire, but we don't really have a long-term structural fix to this. And if you think about both Gemline and PCNA, we both have pretty substantial supply chain investments out there. And if we're having a problem, then think about people who don't have a big footprint in Asia like both of us do and the difficulty they're going to have to move the supply chain. And keep in mind, you must ensure at the same time that your compliance meets the same standards. And so it's really difficult.

Beyond China, are there one or two significant disruptions that you foresee over the next 10 years that'll impact the industry? Why don't we start with you, David?

I was hoping Jonathan could go first on that one. Yeah, I mean, listen, I think there's been a lot of discussion around e-commerce and what does that mean for this industry? What does an Amazon potentially entering, what does that mean? Yeah, I mean, and those are certainly disruptions. I'm not sure that's overly insightful observation. I mean, I think that's happened to a lot of industries. I think what we often think about is probably not so much an Amazon entering this industry, it's at some point, and whether it's a recession that causes it or someone truly gets big enough that they can wield power, whether that's on the supplier side or distributor side, is that they do decide to kind of break down the barriers. Case of a supplier, start to maybe not go completely direct, but have a direct arm. That's been the model in most industries. Or from a distributor perspective, decide they're going to start to, again, not fulfill all their products, but pick off the top-selling items and decide to do that. That will be a disruption because that will be, I think, once someone breaks that glass alarm on the wall, I think all bets are off at that point.

I agree with a lot of that, but I think again on—

Jonathan's not going to ever give me 100% agreement, are you? It's always a qualified agreement.

It'll always be a B-.

No, no, no, no, no. It's a thoughtful response and I agree with almost all of it, but I won't tell you the parts I don't agree with. So there are a number of other places where I think there is the potential for some disruption. We talked about transparency before. We have these very special codes, A, B, C, D, or P, Q, R, S, and if you want to crack the code, all you have to do is ask Google. So these are not very sophisticated codes, so the customers know the pricing. And so what does that do to pricing over the long haul? And if you also think about the way that the industry is structured, there's oftentimes people complaining that young people don't want to come into the industry. Most young people pick companies, not industries, but take that aside for a second. So if you have a commission split where we say you have debt from college and you're moving out on your own for the first time, and by the way, we're going to give you this job where you eat what you kill, there is no salary, and if you don't hit your numbers, you're not going to be able to eat, pay your mortgage, or pay off your college debt or your car loan, it's not really enticing. So that model over time potentially offers some options for disruption. And so part of what we also have to think about is what is disruption? Is it total disruption where the industry completely changes, or are there areas, individual areas that get disrupted and change in a significant way? One other last piece is that the way the industry is set up today, the smaller supplier, specifically supplier, is now somewhat disadvantaged because of all the requirements around IT, around compliance, around the sales force, around just getting in front of a distributor. Distributors are limiting their time with suppliers, and that could change the nature of the industry and force consolidation, could increase the pace of consolidation on the supplier side.

We talk a lot about consumers or today's consumer being very focused on sustainability and environmentalism. Do you think there's a concern that tomorrow's consumer will just stop wanting to buy our product just because they don't want to buy product regardless if it's from MIR, they choose to buy nothing at all and that becomes a movement.

I mean, my perspective is yes, and Jonathan can answer, but 100%, it is a risk for this industry for certain.

I agree with David, an unqualified agreement that it is a risk. I think it's especially a risk in certain categories. So people have heard me say this publicly. It's now going to be recorded, but I'll pick on one product category, and I mean no offense to anybody in that category, but an item like a stress ball, which doesn't add a lot of utility to society, environmentally it's not very good to make, and environmentally it's very bad to get rid of. And items like that, I think, increase the amount of risk in the industry. And If you look at Europe right now, there's been a much bigger, much faster move towards this whole— the issue of sustainability. Unfortunately, figuring out what exactly is sustainable and sustainability is really hard. There's not a very clear definition. But I do worry that the next generation is going to look at things differently and that we now need to plan as an industry to be able to address some of the legitimate concerns that people have.

Yeah, I made a comment to a distributor I was talking to about this issue that I think in many ways sustainability will be the compliance of the coming decade. So this industry, I think, did— you could argue how effective, but it's certainly a reasonably effective job getting its arms around compliance before compliance was an issue. It has that same opportunity now with sustainability. But I think that's, to Jonathan's point, a much more challenging issue to to identify exactly what should we be doing.

We talked about disruptions. What do you see as the biggest opportunities in the industry? And we'll start with Jonathan this time.

That's a hard one because again, there's never a single opportunity for anything. But one of the things that I've seen happening over time, and it may be nuance, but there's been better collaboration between suppliers and distributors towards solving the actual needs of customers, the end-user customers, and really a better understanding about what those needs are. If we're doing that, if we're able to do that, we're going to be able to put out more effective products and services. So I see that as a huge opportunity for the industry. We've traditionally been a very product-focused industry. Here's our new widget, isn't it wonderful? And I think that there's a move towards a solutions-based industry in terms of solving a problem. And that goes back a little bit to to what I talked about before with the increased sophistication of the wholesaling process. Yeah.

I want to add to that. I think distributors are going to face an interesting challenge and opportunity in crisis if we don't learn— if we're stepping into a new world where the programs are getting more sophisticated and the burden of that sophisticated program is carried under the cost of that ABCD-priced product and distributors aren't learning to price their business in a more sophisticated way that can handle the burden of that, then they're going to have a challenge, but it's also an opportunity. Experiential marketing, as we were talking about, is something that could come in. So I think for the first time we'll see this decade, we'll see promotional products companies who have called themselves agencies actually have to step into that role and bill that way, charge that way, and provide that solution. I think it's a great opportunity, but also a big challenge.

What do you think, David? Yeah, and I think the comment you're talking about pricing, but you could extend that a little bit broader, which is I think the opportunities for industry become just more dynamic. This is not a fast-moving industry, whether that's pricing, response to product trends, data. I mean, again, this is an industry that we're in the marketing business. People are making investments in these products to get results. Our ability to really be able to track and analyze data is a huge opportunity for both suppliers and distributors. I mean, we know very little about how our products are used or the effectiveness of our products.

Looking back over 10 years ago, David, you were one of the architects of the sure-ship program at Leeds. For folks that don't know about that program, it's where you were able to ship out an order that was submitted before, I think, 12 o'clock midnight, and it would ship the following day provided you didn't need a proof. And I think if I'm correct, you were, I think, the first one to come out with this, and it really revolutionized things. Fast forward January 1st, 2020, start of a new decade, Leeds reversed their policy and started charging $50 on a G for any sure-ship orders. Can you talk about that decision and any blowback that you've had for it? And given that we're talking about opportunities, what opportunities does this represent over the next 5, 10 years?

And just to make sure listeners are clear, it also includes Bullet. So Leeds and Bullet.

Charges everywhere.

Charges everywhere. Yeah, so thanks for the softball question. We— listen, I think we rolled it out because we recognized over a decade ago that this was an industry that typically this was the last thing buyers thought about when they were planning an event, and the ability to deliver quickly was a competitive advantage. I think at the time, we really— we were still young, relatively young in the industry and growing, and we looked somewhat like Southwest does it, could we offer this for free and have it really be a compelling part of our value proposition? And clearly, as history has demonstrated, it has almost now to the point where at points in the year, 50% of our volume is SureShip. And that creates some very real operational challenges. And so what we took a look at is we have to find a way to moderate that business. Because the alternative is to simply turn it off, which is not a great alternative. And that was the situation we were in. And so we made the decision after a lot of thought, the surest way to be able to provide it consistently is to charge for it. And I think most distributors get that. There's very few— and in industries or markets, whether it's going to Disney and getting a FastPass or shipping overnight with FedEx, you don't get it at the same price as shipping ground. And so people conceptually get it. It's a change, but I think people get it.

How much do you think that's going to diffuse the demand for this?

We hope it cuts it to about half. I mean, that's been our estimate.

Okay.

I led a supplier distributor panel at SKUCon, and I asked the room of distributors who's going to be turning around now to their clients charging rush fees to their customers, and lots of people raised their hand. I called them all liars. But Jonathan, are you going to do the same?

So I am a tad bit hesitant to comment on pricing with my competitor sitting here. I don't think either of us would look particularly good in orange. Here's what I would say to you. We've been talking about trends in the country, and we talk a lot about costs out of China, but think about what's going on in the US right now. We have very tight labor markets. You have labor costs going up, you have healthcare costs going up, you have a lot of ancillary costs going up. And so we have been fortunate in this industry to see many years where pricing was very, very stable. And I think that what we're seeing certainly in this area is— in this industry is areas, inflationary areas. And you're going to see different suppliers and distributors react in different ways. So as I look over the supplier base and I see people making decisions and Gemline will make decisions also about various things. You know, we don't do everything exactly the same as everybody else. PCNA does not do things exactly the same as everybody else, but we are going to have to respond to these changes in the marketplace. And what I would say is that the industry benefits from having profitable suppliers because suppliers who are not profitable cannot invest back into their business. And they tend to make bad decisions, bad decisions about compliance, bad decision about technology investments. So, you know, what I can say is that it is not a surprise to me and shouldn't be a surprise to anybody else that there are changes that are coming down the pike from a variety of suppliers.

David, one last question about this announcement because it is newsworthy. We're at the first day of the PPAI Expo right now. Any surprising conversations that you had in your booth about this policy change?

You won't let it go, will you?

Too many softball questions at SKU camp. Now it's hardball.

Yeah.

No, again, I think, listen, in full transparency, this was part of a number of changes that we rolled out January 1st. And just to build on Jonathan's comment, I think you have not only a tight labor market, most suppliers would tell you they have seen an increase in small orders. Over the last few years.

Yeah.

MOQs have dropped. MOQs have dropped. And listen, there's reasons for that, but the reality is in a tight labor market where you don't have unlimited capacity and you have a lot of small orders coming in, something's got to give. And so the sure-ship change, I think, generally has been well received. Where we've probably gotten more pushback has been on some of the other policy changes we've made in response to both the labor market issue we're facing and the rash of small orders. And we'll work through that and figure out a path forward. But again, to build on Jonathan's comment, we're committed to make changes to ensure we remain healthy. We think that's the best thing certainly for our business, but ultimately the best thing for our customers.

And just so you don't think I'm picking on you, David, I will put my, I suppose now, former distributor hat on and I'll tell you that when I first heard this news, I think it's a good thing for distributors, by the way. What I think it does is forces the distributor to start thinking about planning further ahead with their end clients. That's of course what you want. That's a benefit to the industry because it means that if I'm going to my client in advance and I'm thinking about what their promotion's going to be, I'm going to show up more strategically and more creatively. I'm going to give you hopefully a bigger order, and I'm going to be able to do it in a way that is not stressful for us. I can certainly remember in the many sure-ship orders that we sent you at Right Sleeve back when Catherine and I owned the company, Those orders are stressful for us too. And I know they're stressful for you as well, but I'd much rather give you a 2-week turn. Gives us flexibility and allows us to, I think, run a more stress-free business in a very stressful industry.

So I'm not sure I agree that people are going to be better at planning because of this. What I think will happen is people will decide if they really need it urgently or not, which is different than planning. And the other thing I will say, part of this is What does everything look like? What did everything look like and what does everything look like? And part of what's coming up here is just the nature of a dynamic business environment that the situation changes and so policies are going to change. And, you know, in the presentations I've done in various places, one of the things that I talk about is that no business model stays the same over time because the environment changes. And this is just a factor, all of these changes that we're seeing, and it's a whole bunch of stuff including pricing around tariffs and all sorts of other stuff, and even putting in pricing multiple times a year based on tariffs. If you think about it, this was an industry that had a giant catalog with one price a year, and if anything changed, it was like the sky was falling down. And in most businesses, they've already moved to dynamic pricing. And so ultimately, the business model will change. I can't predict exactly what it's going to be, but None of this should be a surprise.

And in reality, some of these fees are the result of the fact that we still have a very inflexible pricing model. I mean, the fact that EQP exists, which is— you can blame us for sure, Chip, but whoever invented EQP is really the one.

And on that one, I completely agree. I don't understand it.

The reality is running for the economics for a supplier to run a 12-piece order versus a 500-piece order are just fundamentally different and we give the same price. It doesn't make any sense.

Moving on here to another topic, how do you see technology impacting the future of the supplier and their business the most? In what area?

Maybe Jonathan? Again, there is not an area. So one of our board members who taught IT talked about the fact that there are 3 companies in the world, 3 types of companies, not 3 companies, Maybe eventually there'll be 3 suppliers, but 3 types of companies. Digitally native companies, and when you think about that, you think about people like Google or Microsoft who were always digital. Industrial companies that are turning digital, and the walking dead is the third type. And what you're seeing is that technology is going to fundamentally alter most parts of a business. So we're going to be transacting business in a more digital way. Our access to data. We hear a lot about AI, and I think that's further off. I mean, and I don't even think that people understand AI and machine learning or what really the difference is. But there's going to be a lot of stuff, even in terms of how orders are processed from when they come in to the gate, not just transmitted, but there are optical scanners who can read orders. And it may be that people can still handwrite orders and send them in, and some machine will be able to read them in the future and make things more productive. We don't know. What we do know is that it's going to touch everything.

Yeah. I mean, we certainly are looking at a few areas. So I agree with John. I think order capture is one area where for suppliers, it's still beyond just the cost, it just creates a bunch of errors in the process. We I think there's huge opportunities for technology and digital with printing. We're still very much an ink-based, still manual screens, dyes industry advancements, and they're not quite yet commercial, but pretty close, that are going to radically change our capability to run small orders and run multicolor. And then I think to the labor issue, China's dealing with this now, but I think Robots and automation really are going to change how we deal with fulfillment and decoration, loading equipment, packing boxes. Those are some of the areas that we see technology impacting our business.

Tim Ferriss: There's been a lot of talk about an upcoming recession, and the question I wanted to ask you is, what advice would each of you give to folks that are trying to navigate a recession, to come out of it alive?

Suppliers, distributors.

I'll be more specific. What is the conversation at each of your companies about an upcoming recession in terms of how it is that you're going to continue to grow and come out healthy on the other side?

Yeah. So I think we've talked about it. I think we don't necessarily see signs today that it's around the corner, but it's certainly a very real possibility. Where we've spent most of our time and effort thinking about are what are the areas of the business where we would need to contract quickly in a recession to remain healthy and starting to make preparations. So whether that's not necessarily signing agreements for as long of a term as we might have, certainly more thoughtful about inventory that we're buying at times. Those would be the areas again that I think I would advise. Look at the areas where you have some flexibility or at least that you know you need to contract quickly. There are areas that we can outsource and again, not have to hire people that again gets expensive if you need to cut.

Jonathan? We also don't see signs of an imminent recession. And one thing I would point out, the US right now is running about a trillion-dollar deficit. And so we're essentially in stimulus, Keynesian stimulus right now. And nobody seems to be talking about this, but This is a fairly large stimulus when you're talking about a trillion dollars. A trillion dollars is a fair amount of money. It's larger than most economies around the world. So given the amount of stimulus, I just don't see it right now, but it doesn't mean it won't happen. These things sometimes sneak up on you. And so it is possible that things will sneak up. And I think David outlined a number of things which comes down to ultimately it's about cash and making sure you have the cash and the reserves to get yourself through whatever is going on. And each business has different economics, distributors different than suppliers. Some suppliers are much more capital intensive than others, but managing that cash and planning for what you're going to look like when the recession ends, Because a lot of people, you can cut yourself to profitability and then you don't have the ability to do anything when the economy picks up again or you've completely lost focus. So I guess that's the only advice we would have.

More and more retail brand offerings like Mere with Gemline and Herschel with Leeds are entering the marketplace. And this is likely a trend that we will see continue. Do you think this is having an impact on the growth of the industry and do you expect this trend to continue? Drive change and growth?

I don't necessarily have a perspective on whether this is creating new business for the industry or just trading dollars that were going to non-branded product before. What I would say is a very clear trend is end-user demand for brands. I think companies are, if they're going to spend the money today on promotional products, increasingly you're seeing brands that want to make an investment in something that the recipient's going to recognize, and that's something they're typically going to have seen in retail. And so that's a broad trend. And again, I think it's also an opportunity for distributors and suppliers who are supplying them to differentiate, right? Offering a product that you have some level of protection that others can't go out and knock off.

Yeah. I also don't know if it's additive in terms of total sales to the industry. I definitely see a trend towards brands. It's clearly understandable for the reasons that David articulated. There aren't that many companies that can manage brands because you have to be able to be a good brand steward. You have to understand what the brand goals are. You have to understand what they are and what they aren't willing to do. You have to understand what their product cadence is. You have to understand how it fits into your product assortment. So brands are important, but they're not important to everybody. There are plenty of companies around this industry that brands are just not going to be important to them. You have to have an assortment that supports what a brand is. And there's a couple of things. One is that if your assortment doesn't match, if your current assortment, your promotional assortment doesn't match something, doesn't match the brand, it ultimately doesn't work. It also talks about the disruption going on outside the business. So in part what's happened is that the brands have looked at retail. Retail is getting squeezed at every angle. There's the Amazon effect. There's— you talk about consolidation up, you look at the 4 or 5 big stores. In some categories, there's 2 or 3 outlets that you're selling through, and you've got Walmart with a third of your business or something like that. And so all of a sudden, this business looks a lot more attractive to a lot of the brands, but they need to find the right brand partners, and there just aren't a lot of suppliers who can do that.

Let's talk about consolidation. This is something that we've talked about a lot on this podcast, but since this is a podcast about the next 10 years, in 10 years, are we going to see Poly, Hit, Jem? I should come up with a better— I should rephrase this, but some funky amalgamation of all the biggest players right now, and we have 7 suppliers. Do you see that happening?

Yeah, I think it's a very real possibility. And there's two factors. One is that there's been an increase in outside money coming in. This is still an industry that I think for the outside at least looks attractive for private equity. So you've seen over the last two years a number of private equity transactions, and that naturally will drive consolidation. But I think the bigger macro factor over the next 10 years is that I agree 100% with Jonathan. I think it will just be increasingly difficult for small suppliers. I mean, there's just the demands, whether that's sourcing and difficulty in sourcing, technology, compliance, all the things that distributors ask for. It's just, it's very hard if you don't have the resource base. And so I think their, you know, size will increasingly matter.

When I got into this business, it was filled with $20 to $50 million family-owned businesses. And by and large, those businesses have been taken out. They've either been consolidated up or they just haven't cleared the trees. For one reason or another. So it is clear that there's consolidation. I could identify off the top of my head right now 10 private equity companies who have some platform company in the industry right now, and there's probably more than that. And if you look on the hard— apparel is clearly consolidated up. There are some players in apparel that I think are going to stay non-institutionally owned and as they are for a while, So I'm not sure there's more consolidation there, but you've got 3 or 4 really big players and then everybody else. And on the hard goods side, there are only 2 or 3 larger hard goods suppliers that are left non-institutionally owned. And there are good reasons for this if you look just at the economics of the business. So I agree, it becomes increasingly difficult. There will be some niche suppliers that do very, very well on both the hard goods side and the apparel side. So I don't know I think there's 3, but are there 3,500? I'm not so sure. And I'm not sure there's an economic justification today for the number of suppliers that we have in certain categories. I don't know what the value add is. And so ultimately, this may be the market clearing.

[Speaker:BRYAN_LAWRENCE] Well, I think the other factor that will drive that is as distributors consolidate, suppliers consolidate.

Do you see distributors experiencing the same kind of consolidation in the next 10 years that suppliers have, that are now and have?

Yeah. And I don't necessarily— the economics and the rationale for distributor consolidations, I'm not close enough to their businesses to probably provide an accurate perspective. But what I would say is, I think even if it's not direct financial consolidation, I would argue you've seen a lot more consolidation on the distributor side when you look at buying groups and you look at groups like Commscue and Facilis. That are aggregators of some type. And the rationale is exactly the same, which is it's tough for a small distributor. The resources that Commonsku offers is really important.

Although the one difference is that I want to be a small supplier, I still have to deploy a fair amount of capital. I have equipment, I have inventory, I have design. It's hard to be completely virtual as a supplier. There are some people who I'm sure are trying, But it's a very difficult thing to do. If I live in a smaller city, if I'm in Oklahoma somewhere, in Tulsa or whatever, and working out of my house, I can have a very low overhead and I can survive on my own potentially with potentially, again, the assistance of providers of various kinds, whether it's technology providers or various types of groups. So I think you'll get distributor consolidation. I actually think that for suppliers, the economics are just— it's much more difficult on the supplier side. It's also the integration on the supplier side to get these things to work is a ton harder because you've got lots and lots of processes. And the good news is we haven't done it yet. Other people have, but you can look around at how some of them have gone and It's hard. It's hard. It's like a lot of things, but it is hard.

Yeah.

So we know that we pulled you off the trade show floor and we promised you that this would be 45 minutes in and out. So we'll ask one more question. Again, looking ahead 10 years, how big is the industry in revenue in 10 years? Why don't we start with you, David?

And just define industry for us. Distributor sales or promotional product sales?

Right now, PPAI defines the industry at around $24 billion. So if we're going to be using that definition, are we at $50 billion or are we at $25 billion in 10 years?

Yeah. And so we could have another 45-minute session just on the data of this industry. I would argue that the industry's far bigger than $24 billion today, right? That's measuring distributor sales and you could argue how accurately But that's a different discussion.

Yeah, maybe answer the question from a percentage growth perspective.

Yeah, I think the industry— you're asking, does the— I don't see this industry growing extremely rapidly. I think it still is going to be a viable industry, so I don't see it shrinking at the same level. But I think you have— listen, you're going to have some factors that are going to continue to propel this industry forward. But the sustainability issue is the reality is there are going to be some companies that just stop spending money on this. This type of product. So I think it's going to be a bit of a trade plus and minus to where it probably still grows in line with the economy, but not faster.

I completely agree. My guess would've been GDP plus or minus so that if the economy's growing at 2%, maybe you're 2.5, maybe you're 1.5. If the economy's shrinking by 2%, maybe you're 3, maybe you're 1. It really depends, and it depends on the category that you're in. I do think that David has a point that the nature of the industry and how we define it is going to change over time, and that it's actually one of the opportunities for the industry is, what exactly is a promotional product? What is the solution that we're providing here, and where are we providing that solution? And therein lies the opportunity. And no matter what happens, in a good economy, some companies aren't going to make it. And in a bad economy, some companies are going to thrive. And that's just the nature of the beast.

Well, we can't thank you enough for taking this valuable time out of your schedule. Maybe in 10 years we'll have a reunion. David, you jokingly said it was unlikely that you would be sitting down and having a podcast with us in 10 years, but maybe we'll wrangle you off the slopes of Jackson Hole at the time to have a revisit.

Thank you. Thanks. Thanks for the opportunity.

Awesome. Thanks so much for your friendship.

Thank you.

Thanks so much for tuning in to this episode of SKU Cast. Be sure to keep up with our latest content by subscribing to SKU Cast on iTunes or to our blog at community.commsku.com. Until next time, friends, thanks so much for listening.