Episode 193: State of the Industry with Michele Bell & Nate Kucsma, ASI

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Everything changed in 2020 and everything may change again in 2021. That's a quote from this year's State of the Industry report produced by ASI, the Advertising Specialty Institute. The SOI is a report produced annually by ASI. It was released this week and it's an incredibly comprehensive report which includes rankings of the top 40 suppliers and distributors and also a wide variety of topics. Which categories sold more, verticals, issues facing the industry, and a lot more. Today I'm joined by Michelle Bell and Nate Kuzma from ASI. Michelle is a vice president at ASI. She oversees the editorial, special events, and education teams. With more than 30 years of journalism experience, she's been with ASI for 24 years and is the recipient of multiple Neal Awards, known as the Pulitzer Prize of business journalism. Michelle also covers the overseas promo markets extensively, attending shows around the world to profile for ASI's content platforms. Nate Kuzma is ASI's Executive Director of Research and Corporate Marketing. Nate joined ASI in March 2014. He has over 20 years of domestic and international marketing research experience. Prior to ASI, he worked at Dow Jones, MetLife, and ETS. Now, when I was a distributor, each year I would use the State of the Industry Report not merely as a bellwether for trends, but also I would use it as a counterpoint. I would review the newcomers on the top 40 list. I would look at their value propositions. I would evaluate their marketing, not to copy them, but to build a contrasting and unique business different from them. I would use trends as a way to either double down or counter or maybe identify new verticals we weren't working with. But the research shows that spending is up with those industries in particular. I would watch closely the e-commerce space, not as a way to emulate what was happening in the market, but as a way to put our own unique emphasis. On e-commerce. So for example, Nate and Michelle and I talk about the upward trend of e-commerce, but how few distributors really do end-to-end e-commerce. In this example at CommonsCue, we've seen shops skyrocket in demand. So shops are an area where I would double down on. The SOI was a report I looked forward to every year. Today, I talk with Nate and Michelle about the trends, the impact of PPE, those who focused on PPE and increased sales, and those who didn't focus on PPE and still increased sales. We talk about how the industry feels about work from home, the hybrid office, average order values, supply chain issues, and our overreliance on China, and a whole lot more. It's a really robust discussion, and Michelle and Nate, as you'll soon discover, are not just looking with me at the road behind us, but we're looking out the front windshield, where we're going and how we can move forward. Before my chat with Michelle and Nate, this week we open public registration for SKU Camp. SKU Camp is a bootcamp experience for entrepreneurs that's fun, inspirational, and challenging, but also an event that brings together the brightest in the business to share with each other and learn. On October 27th through the 30th, we're returning to the original location in Palm Springs with not just a reboot, but with a fresh and original vision. I am so excited about the format this year. Community has always been the heartbeat of what we do and the core of our events. And this year, if you want to hear best practices from over 100 of the brightest in the business in an intense 2-day bootcamp experience, come hang out with us. And I know I say this a lot, But if you're thinking about attending, don't think too long. Even though we just launched a few days ago, there aren't many tickets left. This event sells out quickly. You can learn about the topics and the agenda at SkuCamp.com. It is one of our favorite events. I really do hope to see you there. Today's episode is brought to you by Commitscube, the work from anywhere platform that powers your connected workflow, enabling you to process more orders and dramatically grow your sales. To learn more, or to begin your free trial now, visit commonskew.com. Now here's my conversation with Michelle and Nate. And one note, Nate is such a trooper. He's on vacation this week but popped in to join us for this recording. But that's why you hear birds in the background, because Nate's on a beach. Try not to let it make you jealous. Here's Michelle and Nate.

Before we get into the State of the Industry Report, congratulations on bringing back the return of show business last week with ASI Chicago. Nate, let's start with you. What was that experience like? All we heard was this resounding triumph, if you will, from social media and comments and folks that thought it was an amazing success. What did you think, Nate?

First off, it's great to hear that, right? Because when we started this whole process, we did not know what was going to happen. Like, this— we had to make the call on this show back in, you know, early spring. And, you know, the person who drove this— and I, I kid you not— was Tim Andrews. He drove this. He's like, we're doing this show. Everybody, including myself, including Michelle, including Andy, were like, let's see if we maybe just push it off a little bit. And Tim's like, no, we're doing Yeah, that was right. It was the right call. And right, it was like 30, 30, well over 3,000 people that attended the show. That's the largest gathering I've been to since the pandemic started. And I think it's— that was true for just about everybody there. It was an incredible show. People loved it.

Yeah.

Um, nothing, nothing but incredibly good vibes after leaving it.

Yeah.

Michelle, what do you think?

Look, I'll be the first one to admit, and I told Tim, I was wrong. I was, um, the most consistent Bobby, and for sure the loudest, as is my way of pushing that we should wait until the end of September, which is the option that McCormick gave us. And I, not so much from a health standpoint, but I was more worried or cognizant of what distributors and suppliers were telling us that maybe they weren't ready to travel, maybe they didn't have the money or the resources. So I would, you know, offer my opinion periodically and loudly to Tim. And, you know, I think I became, I think I told you, like Charlie Brown's teacher, right? I was like, wow, he just didn't want to hear me. But he finally said to all of us who were saying maybe we should wait. He said, I hear what you're saying. I understand. We're going. So whatever we need to do to prep, we're going. And he was right. I mean, people were very excited. You know, look, Education Day, we underprepared for that. We had to keep bringing in chairs. And Andy and I stood there on opening day and just watched all the people. And I couldn't believe how many people. It was, I will tell you, it was a little unsettling at first. You know, you go from being surrounded only by a couple people to you are right back in it. And you've got 1,000 people around you and everybody that you know is hugging you and kissing you and you're like, I don't know about that. I don't know. But people loved it.

Well, congratulations. It's so cool that you guys brought that back. And kudos to Tim and the whole crew for putting that on, because that also took a lot of emotional energy at this time to do that. Let's jump right into the SOI, because as I stated in the intro, I love the annual issue of the State of the Industry Report. And a couple of things that we want to get right into is that there were some surprises. Some we expected. We thought PPE would make a prominent showing in the SOI. We all expected PPE to rise prominent, but what surprised you, Nate? Start with you about PPE in particular.

First off, I try to go into all of the research that we do without thinking about what's going to happen. But with the SOI, it's kind of hard to do that most years because it's a study that's been going on for decades. And not all that much changes. Yeah, you have new products here, you have some innovations, but not much changes. This year everything changed. We didn't know what to expect. We didn't know, we didn't know what— well, we knew PPE was going to be significant, right? Like, that's not a surprise. But for it to make up like $5 billion plus of the industry, 25%, um, it is astonishing. And so I think that's really what it was going into this year. You didn't really know what to expect when we started this study back in January of '21. Um, but I got— as the data came in and I'm just looking at it, I'm rolling out like from a researching point of view, purely, you know, nerdy researcher point of view, it's fascinating when things change like this because there's not that many disruptive events like what we just had. And this is going to continue into next year because I don't know what next year is going to look like either. But yeah, but the overall breadth of what PPE did for this industry was, um, saved it. It saved it in many ways, and it saved a lot of people's business.

Yeah. Michelle, any thoughts you want to add to that?

Um, just that, you know, I'm surprised that Look, we've all said, you know, how impressive it is that this industry rallied so fast and jumped into PPE. But when you look at the numbers that Nate talks about, and he's right, you don't get many years where things have been turned on their head. You know, we ended '19 with the industry at $25.8 billion. We ended last year with the industry at $20.7 billion, but $5 billion of that was PPE. So if you take that out, we would have been at $15-ish billion. And that is something— I mean, just the magnitude of that, having to make that up. So, you know, I know PPE was a pain in the neck for people to sell. I know it was, you know, that people were aggravated by it and it was very hard to source. But truly, it did save the industry. And what Nate refers to is correct. Next year, again, everything is going to recalibrate because for some of the companies that did extraordinarily well, with PPE, you know, I would expect them to kind of level back to where they normally are.

Yeah, that was probably one of the most shocking things that when you told me that before, Michelle, about how much it represented of the industry sales and how much we really were down without it is actually such a shocking plummet. I don't know, I don't think that we saw even that deep of a cut in the 2008 recession.

For sure not, for sure not.

Um, healthcare, no surprise, was the top market, and education and government followed closely behind, which was a staggering 30% of all spend. Which What category was the sleeper that pulled ahead of any of the others? Nate, you wanna comment on that?

Yeah, you know what? I don't need to go much deeper than what you just said, government, right? Government's never been a big spender in promotional products. But man, they were, right? Especially for some of the bigger distributors out there that had the big contracts. Like, government was a very significant spender because they had to do things. Like, they had to promote health and safety. They had to promote things like social distancing. They had to get the word out there however they could. So, you know, I think that this year specifically really spoke to the value of being diversified with your client base. I mean, if you were squarely only in one industry, like let's say travel, right? You got hit pretty hard. Yeah, hospitality not down as far as I thought it might be, but it was down. So like if you were only in that or you were only in education when all of that money dried up in Q2, you got hit hard. So just being diversified really spoke to it, but definitely government, I would say. Was the one that jumped out as me as by far the biggest surprise.

There are little markets, you know, that we all noticed because we all pay attention to markets that, you know, who would have guessed, you know, the Peloton people and, you know, outdoor activities, you know, the biking, the rollerblading, you know, all of that stuff. The other one I would say, and it didn't quite bubble up to hit Nate's radar yet, but I kept asking him, what about the pets? Because the pet market did phenomenal because, you know, there are all those articles about people adopting and, you know, um, chewy.com was up 40%. Last year because of that. So that is one that is definitely tied to the virus and the way we all behaved and sheltering in place.

Made in USA searches. This is interesting. What, what happened and what was revealed in the State of the Industry Report, Michelle? It seemed as though it didn't spike like we thought we would, or what was, what was it that you saw that was surprising?

So historically, Bobby, whenever there is an incident that kind of the world shudders, right? Whether it be 9/11 or the recession or the dot-com bubble, people in the United want to support our own economy and they want to support small USA-made businesses. And I get that. And we saw that in the beginning of the pandemic. So Nate was able to tell from looking at ESP data that people were doing more searches for made in the US. You know, they didn't want to have to deal with importing things from China. They wanted to support, you know, Americans and small businesses. So we saw that and then we saw it drop off. And, you know, look, you've been in this industry selling for quite some time. And I think what we saw happen was the, the lovely loft lofty idealistic notion of supporting Made in the US met hard with clients realizing that it's a little bit more expensive, in some cases a lot more, to buy Made in the US than it is to import from China. So we saw the interest, and I don't know if it quite bore out the way that we thought it would. Postscript to that is, you know, with all of the inventory and importing challenges right now, you know, it could be the spoiler story of the year that the Made in the USA people could be the big winners in this, because with things not coming in easily from China, you know, will buyers say, okay, I don't care that it's going to cost me more to buy made in the US, I need my product.

Yeah, yeah, great point. Nate, let me pause for just a minute or pan back a little bit, and can you tell us more about the study from a macro perspective? Like, what is it that you— you're the researcher on this— what is it you go through? What kind of pool are we looking at? What kind of data are we looking for?

Yeah, so basically, this is, uh, this is probably— this is without a doubt, not even probably, definitely the most comprehensive study that we do throughout the course of the year. You know, we get excess of 1,000 people, 1,000 distributors answering this survey every year, and an excess of about 300 suppliers answering this survey every year, which any market researcher will tell you is more than enough sample when you're looking at a specific audience. That's what we're doing. The survey itself is quite long. I mean, you're talking, you know, 50, 60 questions and a lot of detail that we look at, look to ASI members to provide. It's a 12-month effort, and that is not an exaggeration because we start looking at the questionnaire in September for next year. So it's fielded in the first quarter into the beginning of the second quarter every year, about 2.5 months, and it starts in September and we don't wrap up the previous years until well after we've already started doing the next wave of this study. So this is a I mean, we take a lot of— I mean, I personally, and I can speak for ASI in this, we take a lot of pride in this effort. Because it is formidable. And when I joined ASI a little bit over 7 years ago, I remember took this on, said, and I've been in research my entire career, I'm like, this is something, this has been going, this is quite the effort. And you see the talent that is around us at ASI and the editorial group, because I give them a PowerPoint deck.

Right.

That's what I give them. Like, hey, here's your PowerPoint. Godspeed. And they turn it into industry. And it's, it's, it's absolutely amazing.

Top 40 distributors and suppliers. This is always interesting to me. Another way I would use it is look, I would look at these top 40 suppliers and distributors and see what they do. And I'd go to their websites. I would see how they're marketing themselves, things like that. But there were some really new surprises to the list. Michelle, are there similarities or differences in these? What was it that surprised you about some of the newcomers?

So there were 3 new distributors to the list, uh, The Image Group, Strand Promotional Products, and, um, Eagle Promotions. Um, you know, the list overall, Bobby, I think what's interesting is that some stalwarts fell off the list. Some people who always dominated the top for imprint, you know, fell. And I think with very few exceptions, you can tie it to people that dove, you know, headlong into PPE.

You—

it's really a list of the correlation between who had a successful year and who did a lot of PPE. Now, there are some exceptions to that rule, Touchstone being one of them. I think is a fascinating story. You know, Derek Block's company, they went up, I think, $30 million with doing, as he says, and I quote, if he said, if I did $50,000 in PPE, I'd be shocked because it just didn't feel right to him to do PPE. It was just not his wheelhouse. And yet they went up $30 million because he looked at his book of business. He looked at markets that were these little markets that perked up that were bubbling up and devoted resources to that. And he had some alcohol brands and things like that were also doing well, but just laser-focused on that. So he did quite well without doing any PPE. But to your question, the companies that really had a tough year, and again, I expect them to kind of bounce back as things recalibrate. They, for whatever reason, chose not to do PPE. And that was a real differentiator.

Yeah.

What surprised me was that the company stores and warehousing suffered double-digit percentage point drops each due to the cost of running these programs, according to the study. Perhaps I shouldn't have been surprised, except the headlines are full of warehousing fulfillment consumer increases, but also probably likely cost increases because they were driving the demand. We know warehousing had become a shortage or real estate had become really high.

Was that—

that was the first time I recall seeing anything like that on the list.

Yeah, I think it really is really just like companies circling the wagons, right? So if they would dabble in some of these ancillary services, they decided, listen, if it's not profitable, they can't do it right now. I mean, that's really what it is. A lot of these businesses, when they start up, they are, you know, when they start up these new services, they have to pull from their more profitable parts of their business to expand into those. And honestly, if those parts were I mean, maybe it was shortsighted, right? Maybe if they could have sustained it a little bit longer, they should have. But, you know, I think it was companies just cutting costs. And if you cut— a lot of companies cut costs very aggressively right at the beginning. So as all of a sudden the things like the kitting and the warehousing and such started to become more important, the fulfillment, they might have already decided we can't do this right now. We need to cut back. We need to concentrate on our core competencies. I think that that's really what might have— what very well might have caused that to happen.

Yeah, Michelle, were there any surprises from the list of top 40 suppliers on the list?

Oh, for sure. So we had 4 new suppliers: Sportsman's Cap, Cap America, Tech Weld, and yeah, World Emblem actually. So what surprised me there— so quick side note about that, we noticed early on, Bobby, that the numbers were just all over the place when it came to PPE, and I knew that we were going to have to do very deep due diligence into some of these companies. So I'm going to use SunScope as an example, you know, their sales doubled because of PPE. And, you know, they went from 90 to 180, something like that. So I knew early on that we were going to have to call these suppliers. And, and in many cases, I did it personally because I know these, you know, Trevor or whoever. And I said, I need the names of your top 10 biggest purchasers on the distributor side of PPE because I need to call them. And they did it. They gave them to me without question. And I called me personally every single one of them. So, so I'm confident that, that those numbers are accurate. But again, they'll kind of recalibrate. But I think the biggest shock to me, the companies that have been on my list for years and years that did not make the list this year, and we're kind of like, oh, it's a gut punch. And then there's, when you look at the top of the list, the rankings didn't change, but there's some interesting stories there. I mean, I'll talk about Polyconcept. That's a conversation I asked the new CEO. I said, can you and I have a discussion? Because You guys in '19 were at about $800 and something million, and now you're at $500 and something. They dropped $305 million, which is a staggering number for the industry's largest hard goods supplier. And the new CEO, his name's Neil Ringel, and he was very forthright. And he said, look, I just didn't want to do PPE. And that to me is a very interesting decision. He knew he was going to take a hit, but just wanted to stick to their core. But when you look at that deficit number, I mean, it's shocking. Yeah, it really, you know, my big line that I've told everyone, you know, the whole list was like putting a blender and pureed. And that's, that's right. Now it'll, it'll shuffle back. But I love the story about how these CEOs made very specific decisions. You know, I would be curious in a year, in retrospect, if they think they made the right decision.

Right.

Yeah, that will be fascinating to see how that plays out as we move forward. Switching over to distributors for a minute, e-commerce has always been increasing. It's always been a factor in the State of the Industry Report and in our industry. But there we saw pronounced lost adoption from buyers in last year. No surprise. Distributors— one note that was made was distributors who had some form of e-commerce fared better than those who had none at all. Is that correct, Nate?

E-commerce is one of those subjects with the state of the industry where distributors make— distributors say that they do it, right? But it has been quite slow, especially when you consider what I would consider to be real e-commerce, right? You know, yeah, like, sometimes I think in our industry, there's a misperception that if somebody, you know, looks at something online and then sends you an email, that counts as e-commerce. Doesn't, right? Or it should. But it does. Now, we're not talking about like end-to-end e-commerce here. There tends to be a lot, a lot of, you know, one-to-one interaction. So while the consumer, you know, the desire and appetite for it from a consumer point of view is very, very strong, I think that there's still a lot of movement that needs to be made on the business side.

This is a number that Nate and I every year just shake our heads at. So, you know, Nate will ask the question of distributors, you know, do you have an e-commerce platform? And 50% or so will say yes. And the word I use is one that my grandmother taught me: that's a bunch of gobbledygook, right? It's not true, because by all of our definition of e-commerce, we're thinking of a true, you know, um, where I can place an order and I can decorate a product and I pay for it and then it gets, you know, all of that online. And that simply isn't true. I would be shocked if that number is 10%, and I think I'm being generous. And our point is that, you know, the companies that did well throughout the pandemic, you know, people were stuck at home, everybody shopped online. Certainly younger buyers are leading that charge, that this industry would do well if you have the wherewithal to look into a true e-commerce platform.

Yeah, yeah, we're conflating, I think, a couple of ideas— a search engine website versus the true e-commerce end-to-end versus the company stores and shops. Those are all different experiences, but I think people answer in the affirmative just because of those three things.

Yes.

Michelle, you noted something important, and I think it's vital for us to reference here, and that is moving forward You see that as a, as a big hallmark for distributors in their future success?

I do. So when distributors ask— Nate and I just did a session in Chicago, and, you know, distributors say, well, what can we do? I mean, if there were a few things I would say, that would be at the top of my list, you know. And I understand that not everybody has the resources of a, of a foreign print or a custom ink or whoever, but there are steps you can take. And certainly in this industry, there are platforms you can use. But that's really where I would be laser focused, is looking at at shoring up e-commerce.

Yeah, something that shocked me from, from the report was that the average value of orders— it's always a fascinating marker for me, um, because I think the order average tells you a lot about your operating costs, you know, and, and how much your burden of overhead is attributed to how many times you have to process those orders. Obviously, if you're processing a lot of $30 orders, that's very expensive. But the average value of orders slipped dramatically from, from $1,240 to $941, a staggering drop, especially when you consider that PPE on the whole were these pretty sizable orders. So when you, when you factor in the fact that PPE was, was large orders and we dropped, do you see that as a trend possibly continuing, Nate?

No, I just think it's going to be a one-time thing. I think next year you're going to see the order number start to, start to increase, maybe not all the way back, but pretty significantly back where it was.

Yeah, good to hear. We've also kind of, as an industry, done it to ourselves in terms of average order because we've dropped MOQs for so much through the industry over the past several years.

And Bobby, keep in mind too, one other point, early on in the pandemic, or midway, Nate, poor Nate, you know, who I just drove crazy pulling data, you know, the fastest he can go is about every 2 weeks by the time he puts a survey into the field. And like I tell people, like, I think when he would see my name pop up on Teams or something, he would just be, oh, One of the surveys we did early on showed that 30% of distributors were not doing any PPE, and they're the ones I worried about. So to your point, it wasn't— keep in mind, it was not everybody who had the wherewithal to do PPE.

Here's something we're all going to have a strong opinion on. What did the report reveal, the verdict on work from home or hybrid? Michelle?

Um, I think it revealed that, you know, it's interesting, I think it it revealed that utilizing technology in ways we never have across the board showed that it could be done, right? So if you take out the argument about culture and what that does to people communicating, it can be done and people can work very efficiently, even more so maybe. There's no commutes involved and things like that. I think the problem that a lot of companies are having right now— spoiler alert— ASI more than anybody probably, is that people maybe don't necessarily want to go back to the office. Office. You know, Tim has Nate doing surveys all the time, and people have settled into a groove. You know, in the beginning of the pandemic, the people that you would expect, Bobby, who you know at ASI— me, Nate, Jake, and Joe Haley— did not want to leave the office. We were like, this is where we work, we work in the office, right? Now, you know, Jake and Joe Haley are like, you know, they're like border collies. They're used to hopping around to people's offices and saying hi I mean, you know, we were just used to that. And now we all work very sufficiently and very autonomously from home and are doing quite well at it. So I think where people are headed is going to be some sort of hybrid. What strikes me is the companies that are taking a very hard line, you know, I would be concerned in this climate of, you know, that it's very hard to find staffers. If you say everybody's got to come back, you may lose people. I mean, and I think that that's That's a roll of the dice for some companies.

Yeah. Nate, what did the report reveal in terms of industry average? Were there folks that were returning more so?

It depends. I mean, here's the thing. A lot of supplier companies have never stopped going to the office, right? Yeah.

Right.

Of course.

They need to go into the office. Distributors, no, it's been a little bit different here. They have— there's been sort of— and it depends a lot on geography too, right? There were some states that completely shut down, and Pennsylvania being one of them. Where if you were not an essential business, you could not go into the office. But then there's even, you know, other ASI companies, ASI Computer Systems in Iowa, they never actually closed. So they've been going into the office the entire time.

You know, Bobby, some distributors have locations, multiple locations, in very expensive areas in the US, you know what I mean? And even in Canada as well. And, you know, do they give up their brick-and-mortar offices now that they know it can be done? You know, we have colleagues you and I both know who have offices in downtown Manhattan and in LA and, you know, in Chicago and some of the priciest real estate in the United States. And, you know, that's a really interesting business call to make that I know a lot of top 40s in particular are, are making now. I know a lot of people have given up their space.

Okay, no, I think that's going to be— I think that up until recently I thought that that was going to be a movement where people were going to be pulling people back into the office And now that you see this new variant coming out and you have a lot of cities that are now pulling back on their plans, I think it's going to just get more and more complicated.

The next topic is another one that we are all going to have a strong opinion on and that we're all concerned about, and it's inventory. We know the supply chain is quite a clusterfuck right now.

We have—

we do— we have a sense, Michelle, on when we might be able to see a return to some semblance of normalcy.

So, you know, look, by everybody, everything I read and everybody I talk to overseas, you know, I know I have a lot of contacts in China. And certainly the suppliers, right? The biggest suppliers. Why do I always end up being the one that sounds like the black cloud of doom, by the way? It's all me. So I hate to break it to everybody, but it's going to be a tough holiday season. So by all accounts, this is not going to rectify itself until probably Q1 and certainly until after the Chinese New Year, which is in February. So, I mean, end of Q1, beginning of Q2. You know, there's just so much backup.

Yeah. Nate, what did the report reveal in terms of supply chain issues and inventory?

90% of distributors are concerned about it. Like, it's an astonishing number. Anytime you get to 90% in anything, right? Yeah, it's unbelievable. That's— yeah, it's— I, I was just doing— I was in Chicago. I— one of the things I do is I talk to— I talk to our distributors, I do focus groups with them, and I said, what's your number one business challenge? I asked that of 4 groups, 100% of people said it was supply chain issues. It's such an incredibly daunting challenge with honestly no resolution in sight right now. Like, you know, Michelle's saying Q1 of 2022. Sure, I can see that. I can also see it getting worse before it gets better right now. That's the thing that's terrifying. I mean, I have distributors that were saying to me in these research sessions saying, I'm talking to my customers right now saying, I need to know what you want to do for Christmas or for the holiday season or for like, or for late Q4. Like, what do you want to give your employees? Because they're saying, if you don't tell me by the end of, you know, July, early August, I can't guarantee it. And that's insane.

Another best practice has always been to simplify your supplier pool, your manufacturers that you're working with as a distributor. And for the first time in my life, I'm actually thinking that we should now diversify our supplier base a little bit because, Michelle, to your point earlier about made in the USA, heading into these seasons, we might have to have a much more open mind about where we're sourcing.

For sure. And look, the best advice that many suppliers are giving to the distributors is order as early as possible. Yeah. But I think that even that, you know, we're gonna— once you get into the real crunch time, which saved the industry last year holiday season, right? We got a nice bump from that. It's going to be very interesting to watch that unfold this year.

Yeah.

Another supply chain issue. Over half of our suppliers are actively exploring sourcing from new countries in the last 12 months due to uncertain trade with China. What are the primary concerns with resourcing? I don't even know if that's a word with this project, Michelle.

So look, I am thrilled, Bobby, that people are starting to look because to your point earlier, when it comes to sales, house, you never want to have just one client, right? You never want to rely on one client or one market. This industry relies basically on one country. So for all of the suppliers who source, like 95% of their products are coming out of China. Like that's not smart for anybody. On the flip side, it's because China has figured out how to do it better than anybody. I mean, there's a reason they're the world's workshop. You know, they're faster, they're cheaper. They have, you know, this labor pool that's amazing. And there's all that. It took this instance of COVID for many different reasons for people to look elsewhere. So yes, there are some great alternatives. People are talking about Mexico, people are talking about Bangladesh and India. That's all wonderful and I love that we're heading in that direction. None of those places have the infrastructure that China does. So it's kind of a catch-22 that we're in.

I think apparel is a little bit easier maybe. It's a little bit easier to diversify there. But my God, if you're in hard goods, it's— and here's the thing, like, these types of diversification take time. It's not something where you can just push a button and it's all right. That, I think, is the biggest challenge. So while you have these supply chains, this isn't the first time we've had supply chain disruptions from China. And what happens is, oh, we're going to look, we're going to look, we're going to export. Well, now shit's hitting the fan a little bit here. If you had a diversified supply chain right now, you're looking really— you're looking out, you're looking much better than otherwise. But again, here's the thing about that, that costs money and it takes time to do. And it's sort of like now you're trying to put out the fire when the fire is already starting to spread. It's hard to do that. So I think it's something that even once this current supply chain shipping order crisis passes, I hope to God that it doesn't all of a sudden revert back to, "It'll be fine again." Like, continue the momentum. You're looking, continue to look and actually find something. Yeah, it's going to be more expensive, but you know what? Everything is going to be more expensive. I think that if that's not completely clear right now, it should be.

I just saw a prominent supplier send a newsletter about increased price costs. How systemic are the price increases we're seeing? That sounds like a dumb question, but Michelle, are we seeing this everywhere?

It is. It's across the board. Every day I hear from suppliers, um, large ones, you know, small ones, mid-size, they all have to. And here's why, Bobby. Let me give you an example. I talked to a supplier yesterday and he gave me a really good anecdote that may help explain, right? So last year he got a container shipped from Ningbo to New York and it cost $4,000, which is about average for a container of product, right? So he just did the same order, the same route, Ningbo to New York, and it's $20,000., right? So when you're talking about a price jump that much, and that's just the container and getting it over here, then there's raw material costs are going up, right? And the price of staffing, because to get people, you have to compete with Amazon facilities and things like that. So you have to pay people more. So these 3 things are really is what's driving suppliers. And, you know, every supplier that I know, and I'm sure you know, Bobby, they, they try to hold prices as, as much as they can. But when you're dealing with a differential for one container to go from $4,000 to $20,000 You know, it's— that's just unsustainable for them. So in answer to your question, yes, it's, it's happening across the board.

Yeah, I've always been amazed at suppliers and, and the fact that they have to have this crystal ball. Their, their, you know, their ability to look out and see and try and predict these kinds of things, it's, it's a very, very difficult job.

It is. They're so good at it. They really are. I mean, I feel, I feel for suppliers because, you know, I was talking to CJ Schmidt, right, in Chicago, and he said, you the orders have come back and I'm having a hard time, as we all are, all the suppliers filling them. So, you know, it's the champagne problem of we've got— no, we're getting orders now, but it's so hard to fill them because of the inventory and the lack of staff.

Yeah, yeah. And I, I, you know, from what I've been, you know, not only from the research that we've done, because the researchers showed that, you know, it's like, you know, you can always say, oh yeah, rising prices are always a concern. No, now it's a legitimate concern. Now it's a worry. Now it's Now it's like, you know, you can feel it coming and you can see it all across the board. I mean, you know, all you need right now, you know, the supply chain is always a very tenuous thing, right? As long as everything's working fine, it's great. But if one thing breaks down along the supply chain, everything kind of goes to hell. And now what you have is you have multiple touchpoints along the supply chain that are all of a sudden starting to come under incredible pressure. And to get them all back into alignment again, alignment again, I don't see that happening for quite a while.

Yeah.

Now that the dust has somewhat settled over the big surge in PPE, we are going to see that remaining as a category in the future. Are there any other trends that you saw? Nate, let's start with you. Any other trends in the product category space that you think might continue on through this year and next?

As far as trends go, yeah, like, you know, drinkware has been a huge, been a huge, huge growth category because it has had a lot of innovation over the last couple of years. Yeah, right. That's certainly been one. I think you're going to see all of a sudden with the education sector sort of primed for a rebound, that will certainly all of a sudden start coming back. As far as things that I think you're going to see a big decline on, I'm not going to tell you health and safety, right? I mean, PPE, that was 25%, 26% of the industry next year. It ain't going to be in 2021. But, you know, so I think you're just going to sort of see a reallocation of those categories.

Something we haven't talked about yet is eco products. What did you see happening with eco products, and what do you think is happening in the marketplace right now?

Michelle, let's start with you. So what I would say is, Bobby, they've— eco has always been a little bit like made in the USA. So in theory, it's, it's, you know, a wonderful idea. Everybody wants it. Who wants another plastic straw that's going to be up the nose of a turtle, and we're all going to have to look at it, you know, on the nightly news, and, you know, it's going to be on the Dodo and break our hearts? So in theory, it is, it's a great concept, right? But when it came to the price points, people, you know, it was a little much. I think that we're getting away from that. I think that eco is really not just having a moment. I think it's really come into its own. And once again, just like with e-commerce, I think it's being driven a lot by younger buyers. Moreover, I think you're seeing, you know, a bigger breadth of product. You and I have been around a long time, Bobby. We remember when, you know, there were maybe 5 eco products in the industry and You know, were they really eco? Who knows? Now, you know, the slate of eco items that are available, the price points are, are certainly more palatable. So I think that you can see we're gonna— we're heading to where Europe has always been ahead of us when it came to eco and embracing eco. I think we're really catching up, and, and I think that that's a good thing. I think that's a great thing.

Yeah, I, I read in one study in Consumer Report that, that younger buyers now equate value as on same par with values. And so we're seeing them drive this value equation and these values equation. So let's wrap this up with some action points. Let's help folks put some sort of shoe leather into this and do something with everything that we've learned here today. What would you recommend distributors and suppliers both do in terms of general action points? I know, Michelle, one of the things that you mentioned to me, and this is so painfully obvious to a lot of us, but we have to talk about it because we don't want to talk about it And that is that as an industry, distributors in particular have largely been order takers in the past. And so we have been resource agents, if you will, for our clients. And if there's anything that's going to define our success moving forward, it's going to be this proactive selling. And that's a muscle that we haven't really developed as strong as we have the sourcing side because we're largely a reactive business. What other recommendations would you have? And in addition to what you've learned over this year's study?

So here's what I would say. You know, I think it's, you know, when it's the great halcyon times of orders coming in and you have so many orders coming in, you don't know what to do with them. It's very easy to fall into that habit of, you know, the business is great and I just have to sit here and take orders. I think to get out in front of what is coming our way during the holiday season because of the inventory problem, you might want to put together— and sure, it's going to be time-consuming, but on the flip side, Bobby, for the creatives. And truly, I think that that's what distributors in our industry are— they're super creative. You're going to have to start putting together calendar ideas for your clients and saying, here are some, you know, promotion ideas based on holidays. Maybe not popular holidays or well-known, but maybe kooky holidays, but things that we can do that I can start planning for you now. And you may not have thought about it, but I'm going to think about it for you, and let's talk about that. And by the way, we won't have to worry about inventory stuff because I've already got some made-in-the-USA people lined up, or I've already talked to some of my biggest suppliers or my most creative suppliers and they have a little bit more of this in stock. It's going to take some more pre-planning than maybe this industry is used to, but there's the opportunity, right? Like, maybe there's a ton of opportunity there going after markets and clients and holidays and promos that they've never thought about.

Yeah. Nate, what about you? Action points that we should consider based on this report?

Diversify whatever you And I mean, diversify your client base, right? Work now. Identify where you, where you need to, where you, you know, where are you most vulnerable. If you got 100% of your business in two industries, you need to change that. You need to focus on that. Diversify your product offerings, right? Diversify, you know, building exactly what Michelle was saying. We're going to know in the industry what products are more, are going to be more available than our clients going to know, right? So feed them ideas. Don't wait for them to come to you and say, I want this, because then you have to go back and say, sorry, we can't get it. Say, here's what I can get you. Do that. Diversify that. Diversify your supply, your supply chain. Diversify your supply lines. Work on that. Talk to people. Try to figure it out. It's going to be hard. Diversification is difficult, right? That's why not a lot of companies do it. And if they do it, they don't necessarily all do it well. So you need to spend the time that you have, um, right now and moving forward, like, learn from this. Learn— if you're not diversified in any area, learn from it and, and change it. Because again, you're going, yeah, it's, it's easy, right? As Michelle said, when orders are flying in, you're like, ah, business is great, I don't need to change this, it's always going to be like this. No, it's not.

Yeah.

And, and that's what happened, I think, to a lot of people. They got caught sort they got caught being very, very, as you saw, reactive. They also, when they were forced to change, they did it. They didn't identify these early on. I think that's what you need to do. So diversify whatever in your business you can, diversify your clients, your products, and also your offerings as well. Look for things that you can do that are complementary to what you currently offer and start pushing those out because the more diversified you are, the less at risk you are when something doesn't go right.

You know, Bobby, what you did too, when you started off and you told Nate and I what you used to do with SOI, and you would look for markets that maybe you weren't in, like, that's excellent advice. Like, if anybody's not sitting back now and targeting home improvement companies, plumbers, electricians, I mean, I, you know, these people have more work than they know what to do with. And, you know, these are, these are burgeoning markets that you maybe wouldn't have been 18 months ago. So really, you know, you took the time to look you looked at our report, others' reports probably, and you looked at news and you did some due diligence and looked at where markets were growing. And to me, that's where the smartest distributors like Derek Block, for example, at Target, I mean, at Touchstone, he took the time to look and see where business that had been turned upside down because of the pandemic was still growing and went after that.

I want to add to all your right points that we typically used to be able to detect trends by looking at, as leaders, at our business on a monthly basis. On a— I'm sorry, on a quarterly basis, on every 6-month basis, and that's how you would detect trends. The trends are being set as we are moving along. And so those presale activities are something that I would be monitoring closely, looking at, is our supplier diversification strong enough? Is our client diversification strong enough?

Where—

not where have we been so much as where are we going? And getting closer to those presale activities is going to be really important moving forward because this is still such a volatile situation.

It is indeed. Mr. LaHue, buckle up, my friend.

And I want to add, to close this out, if any of this sounded like, oh my gosh, this is overwhelming, as I sit here and look at these two smiling faces, and I know our industry, the one thing that we do know is this is an amazingly resilient industry. I think that's something that the report really pointed out well, is that look at what we've done positively. So yes, there's a lot of negative news. There's a lot of bad things happening. But look at what this industry did to transform where they were standing and grow. So it's just a pleasure. It's a pleasure to be a part of this. And I have to add this, Michelle, you and your team have done such a stellar job reporting on what was going on. You have always been the masters at understanding supply chain in this industry. But to you, to your writers, to your whole team, what an incredible job. Thank you for keeping us all abreast of what was going on. And not only that, but helping us think forward.

I really appreciate that. And on behalf of them, who, you know, they, they render me speechless with their talent every day, thank you.

Good to see you guys. Nate, go enjoy your vacation.

Bye guys, take care.

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.commskew.com. Until next time, friends, thanks so much for listening.