Episode 232: Is Promo Headed for a Recession? A Chat with Jonathan Isaacson and Jeremy Lott

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Well, the economy roars out of the pandemic in a state of uncertainty. And as global inflation rises, talk of a recession looms in many headlines. The impact of an economic slowdown on the cost of materials, fuel and transportation, jobs, and importing could potentially affect the promotional products industry, which is why last week we held a live interview with two of the industry's leading suppliers, Jonathan Isaacson, Chairman and CEO of Gemline, and Jeremy Lott, President and CEO of SanMar. If you didn't get a chance to listen to that webinar, or even if you did, it's worth listening to or listening again, which is why we decided to publish that conversation here on SkuCast. Our chat was cautiously optimistic, but also very practical. We talked about the impact of inflation, high interest rates, low unemployment, the potential of a recession, and most importantly, tactical ways we can prepare in a climate of economic uncertainty. Hi friends, I'm Bobby LeHew, Chief Content Officer at Commenscue. I hope you find this conversation as educational and encouraging as I did, and if so, share it with a member of your team. Today's episode is brought to you by Commenscue, the work-from-anywhere platform that powers your connected workflow, enabling you to process more orders and dramatically grow your sales. To learn more, visit commenscue.com. And now, here's our recording of our live webinar with Jeremy Lott and Jonathan Isaacson.

Welcome.

I'm Bobby Lelehu, Chief Content Officer at CommonsQ, and thanks for joining us for today's discussion, Is promo headed for a recession? I'm joined by Jonathan Isaacson, Chairman and CEO of CEO of Gemline, and Jeremy Lott, President and CEO of SanMar, both highly respected leaders in the industry, not only for their incredible, incredible businesses, but for the passion by which they lead. They're both deeply invested in the industry, and we're honored to call them friends. And one caveat before we can begin: neither Jeremy nor Jonathan are economists. I think they would want me to say that at the outset. But the purpose of this conversation is really to consider the current future economic climate as it relates specifically to our business and to consider some tactical ways that we can prepare for the future regardless of the outcome. So we're going to break this down into 3 categories. First, we're going to talk a little bit about inflation, and then the potential of recession and what that means, if any of that means what we think it does. And then the third thing we're going to talk about are some practical tips that we can prepare for just smart doing smart business tactics for our business just to be prepared for any economic crisis whatsoever. So regarding inflation, here's some context before we get to our first question. In June, the Consumer Price Index rose to 9.1%, a 40-year high. Fuel costs shot up, as we all know, nearly 50% from 2021. The Federal Reserve raised interest rates by 3/4 of a percentage point, the most aggressive hike since '94. Canada's central bank raised its benchmark interest rate Wednesday by a full percentage point to 2.5%, the largest increase in 20 years. And from the Financial Times, June's increase in the Consumer Price Index signals expectations for another historically large US Federal Reserve interest rate rise this month. Inflation is such a big topic for us to get our minds around. Can we view the topic of inflation through a smaller lens like fuel costs? To start with, Jeremy, how are you seeing fuel costs impact our business? Or are there some other indicators that you're seeing impact the business as inflation rises?

I think it's a mistake maybe to look at it through just one kind of cost, but I think it's important to look at it over this kind of trend for the last 2 years. I mean, clearly you had this both economic and global shock with a pandemic. You had this economy that was stopped and then turned back on with huge amounts of cash pumped into the economy. Through government spending and through direct giving to consumers and everything that the government did. Huge demand, supply chain constraints, and you have this inflation that has come from that. And this is not, I don't think, a huge surprise. And it's really not a surprise to anybody who's running a business because I think when the Fed was saying this is transitory and we don't see this as real, I think everyone I knew who was saying, well, that's BS. We can see this coming. It's happening with labor rates and shortage of labor, and all of our costs have kind of moved up. So look at it through the lens of just a commodity, I think, is a mistake. But I think you have seen just a real overheating of the economy leading towards price increases and a Fed today that's trying to take aggressive action to slow that down.

Yeah. Part of the reason I ask it, Jonathan, is this difference between consumer fuel costs that we all see at the pump and how fuel costs impact the price of products downstream or down the line or down the future. You mentioned, Jonathan, that nylon and polyester are petroleum derivatives. Do these, like, rampant fuel costs impact product pricing for us downstream?

There are 3 things I think that go into the cost of any of these products, or there's more— actually, there's more than 3 things, but you can think about the cost of the raw materials, the conversion cost, and supply and demand. And so if the cost can be whatever, if there's no demand, then the prices are not going to rise. And what you had is the input costs going up. Jeremy talked about labor. We can talk about transportation. We can talk about other things. The raw material price went up and you have a lot of demand and voilà, you get inflation. It's not really a surprise. As Jeremy said, fuel energy is a unique commodity. And what we haven't talked about, we've talked about what's going on with the pandemic or where we are in whatever phase of the pandemic they call this now, the living with it part, I guess. But we also have the war. And so you have about, I think it's about 100 million barrels a day is what the world uses. And 10% or so of that comes out of Russia. It's a big supply shock that happens in an economy that's roaring along pretty quickly. Oil is fungible. It will move around almost regardless. And but still, that's been part of the impact. And the other piece of this is the investment into new oil over the last few years has not been— it's been a little bit depressed. So I think that there's a lot of reasons we are where we are today. Energy impacts a lot. Including, by the way, food, because it's used to make fertilizer. And so you have the price of food going up. If the price of some of the staples go up, you end up like wheat, you end up with the price of protein going up because these are the feedstocks that go into protein. And you get these cycles that tend to happen where if it's energy, it is a little bit different than other other things. But there is, as Jeremy said, widespread inflation, and this is not a huge surprise.

With this immediate inflationary pressure, are there product categories in our industry that are more risk right now?

Oh, a nice easy question. The answer is yes, but I can't tell you what they are, frankly.

I—

we right now will we have sort of an interesting piece in that you have people very worried about the economy and you have 3.6% or 3.8% unemployment rate. If we're in a recession, as some people thought we are, it's a hell of a low unemployment rate for a recession. And so what we see is people still buying quality and we have people understood that there is inflation. And there's been broad price increases, meaning price increases that have been implemented by many companies across the industry, if not most. And the buyers have understood that this is a factor of all the inputs that we've spoken about. So I don't know that there's a specific category that's at risk because of inflation.

Jeremy, thoughts on that?

Yeah, similar to Jonathan. I mean, it was really interesting. I actually printed it out this morning. I was reading it. So JPMorgan announced their earnings this morning, and earnings were down because they took basically a big reserve for kind of future losses. But they said consumers are increasing their spending on credit cards, they're paying their bills on time. But Jamie Dimon, who's the CEO, said— I'm reading this— he said there's an economic hurricane on the horizon, but he wasn't sure how serious it'd be. And their CFO came out and said, the truth of that is we've looked very carefully into the actual data and results, and there's essentially no evidence of any weakness in the actual results today. The question is about the outlook. So we're all here in this really bizarre time where business is good for the most part, and consumers are spending and they're choosing quality, just like Jonathan said, and they're worried about what the future looks like. So it's a very difficult time. I'll echo him on energy. I mean, This is kind of a— only if you're in the t-shirt world, you might know this, but the second largest input cost to a t-shirt is energy. And so yarn is number one, cotton prices skyrocketed, although they've come down. Number two is energy. And so energy prices are a big piece of kind of what that is. And those June inflation numbers came out and they're as high as they've ever been, but we're starting to see commodity prices come down. Lumber prices are half of what they were at kind of the peak. Cotton prices were at $1.40 not very many weeks ago. They're at close to $1 today. So you're starting to see certainly a big input into the products that SanMar sells. You're starting to see commodity prices kind of come down. So as much as the headline in the news today is inflation is kind of at this all-time high, I think there's some real signs that some of that is waning over time too. I was with a vendor who sells a lot of product to Walmart just the other night, and he said the point of sale at Walmart and apparel is very, very low today, and they're really, they're not ordering a lot of product. Same story at Target too. So you have a lot of retailers starting to kind of build inventory that's not selling. I mean, that's going to put deflationary pressure on pricing. So it's just a really unique time. I think there's certainly signs that you're going to start to see some of this inflation come down.

The eurozone represents 18 countries that use euro as currency that rose to 8.6%. Did that flag anything for you, Jonathan?

This is a— what it says is that this is a global problem. Inflation is a global problem. If you go anywhere, you are going to find inflation because the food and fuel are global products and apparel for sure. These are all global products. If you think we are paying a lot at the pump for gas, go to Europe and you can actually say both kinds of gas, the gas that you put in your car, gasoline and natural gas. And going into the winter, given the war that's going on right now, it's going to be very interesting to see how they keep all the pipelines full, given the issues. So these are very broad forces that are impacting the market. But I do agree with Jeremy. I've seen the same thing, that Target has way too much inventory. They have way too much of the wrong stuff. We heard just today from somebody who sells Target that they're really pushing back on new orders, you can expect a fair amount of discounting. And by the way, this was all— this was predictable. In fact, we had a webinar with Willy Shih from Harvard Business School. It's on our website. And he said, in 6 or 8 months, what's going to happen? Hello, TJ Maxx. I think that was his quote. And it's exactly what happened. 6 or 8— you can— it's up there. You can go look at it. It's just amazing. But this This was all predictable.

There are so many conflicting reports. Some say the Fed's forecast could take a few years to bring inflation down, but just Tuesday, Paul Krugman, the economist, said that today's hot inflation number is already out of date, not reflecting falling gas prices and other factors like lumber that you both have mentioned to me. He was replying to a thread by Josh Bivens, the director of research at Economic Policy Institute, who said this: Today's inflation data showed continued rapid growth in the overall CPI, and a similar reading last month led to a large overreaction by many including the Federal Reserve. Jeremy, do you feel like the Fed is overreaching?

I think the Fed was slow to start, and I think the Fed will overreach. Absolutely. I mean, I think some of it is the limitations to the data that they have, they're working with, but I think absolutely they'll overreach. I think it's why the idea of a soft landing, and I know we'll talk about recession, is kind of a fantasy, because I think the Fed will will overreach and will continue to. But yeah, I think they're already discussing whether we need a full percentage point hike in the next round versus the 3/4 that we got kind of last time. I mean, I think their goal honestly is to bring down slow demand, to increase unemployment. I mean, as crazy as that sounds, but I think that is a key kind of Fed goal today. Until they really see that, I think they're going to continue to raise.

Yeah. Jonathan, how about you? Do you feel like they're overreacting?

God only knows. We'll know in a year if they're— you know, this is— this is— that's one of the worst jobs in the world. You know, if you figure— you know how they figure out the CPI? They have these people who go out and shop. I think they have like 800 people who go out and shop a standard basket of goods. Including real estate. And, you know, then they concoct answers and guesses from all of this. And what we have is a little bit of a stochastic process. It's all probabilities. And it's a little bit like the weather forecast. There's a 50% chance of rain on Tuesday, which means there's a 50% chance that there isn't. And there's an infinite amount of inputs. And so I don't know if there's going to be a hard or a soft landing. If I was to guess, I'd guess a softer landing. And for everybody should mark this date and time that it may be. I'm a little bit more bullish than Jeremy is on that. And the only reason is the unemployment rate, that as long as unemployment stays high— I'm sorry, as long as employment stays high, unemployment stays high, it's a different animal. If employment stays high, the consumer is in better shape today than they were going into 2007, 2008, and probably going into 2001, or, you know, the dot-com bust. I'm not quite sure about that one. And I think business, a fair amount of businesses are in decent shape even after the pandemic. And so I suspect that we're in for a slowdown, but maybe not as sharp of a downturn. And I very much think it depends. The nature of the downturn will depend on what industry you're in. So, you know, a recession is really about how does it affect me, the individual consumer, right? And there are some industries that will accelerate very quickly into a downturn. If I work at Target today, it may feel really ugly. And if I work at ExxonMobil today, we may be flush for the next few years. And so it may feel quite different to those two people.

Yeah, great point. Regarding high interest rates, for both of you, what's the immediate impact, or you're feeling on your business? Is there an immediate impact? Jonathan, start with you.

We're privately held. We're not sitting on a boatload of debt. It's sort of, for us, it's really around the margin. I think that there's companies in the industry that are institutionally held that may have a lot more debt. And I'm not really sure, maybe Jeremy knows more about this than I do, and he's clearly privately held as well, in terms of how that debt is structured. But I think it's going to, for us, it's really, it's not a huge impact at this point in time.

Okay. I wanted to add, I have a private equity question I wanted to ask you later on here too. Jeremy, how about you? Is there an immediate impact on high interest rates to you?

No, I mean, I think John had said it. I mean, Today we have almost no borrowing, so it really has very little impact. I think that the more highly leveraged you are, the higher impact it is. And so when you look at, there's certainly companies that have an effect, but I want to make sure we're clear. If you look at today's interest rate, it is certainly higher than maybe it was 6 months ago. It is still low by historical standards. I don't see that we have even some of the more highly leveraged companies in the industry. I don't think they're looking at today saying, "I have a really existential threat in this near-term for my business because we have really high interest rates." I'm not sure anybody's looking at it that way today.

One question I had, Jeremy, for you is that, can we talk about a topic that almost no one talks about and it's certainly not in the headlines? Can you speak to the topic of deflation? And how some inflationary pressure on some categories is kind of overdue?

It's really interesting. So from 1990 till maybe 2020, we saw apparel, we saw really deflation in apparel pricing. And it was because trade barriers really largely went away, whether it was NAFTA or China joining WTO or other things, quota systems going away. I mean, we saw that we were able in the apparel world, we moved to cheaper labor markets. So we moved to Mexico, then we moved to China, then we moved to Bangladesh, kind of et cetera. And so you saw deflation, that's a tough business in many ways to be in because every year if you have, you're selling the same number of shirts and making less money when everything else goes up and becomes kind of more expensive. So in my mind, a small amount of inflation is actually healthy, kind of for a business and an economy. If, you know, if we are raising prices by, you know, 2 or 3% every year, our customers are raising prices, you know, that I think is actually a positive. The level of inflation that we have today, I think certainly is not something that that is sustainable or that is positive kind of for the industry. But, but I will tell you, and, you know, in being totally transparent, I mean, if you look at a lot of the growth that we have had over the last— as a company over the last year, it's been driven by the fact that products are more expensive today than, than they were. And so I believe that many of our customers have been able to pass through the price increases that have come in the industry. And I think this has actually driven some profitability in the industry that was different than maybe that was there before.

Jonathan, you want to comment on that before we move on?

I think Jeremy said it well. I mean, if you want to look at countries where they haven't seen enough inflation, Japan's the poster child for this, where for a long time they were stuck in this rut. Where you're looking for the Goldilocks zone, not too much and not too little. And we'll see where we end up. I'm not sure I have much to add on that except the only other, I guess, insight that I would add, and it goes back to energy costs. People look at a gallon of gasoline and there's a very funny YouTube video that I'm sure people can find on how to make a TV news story about the price of gasoline.. And it is dead on about all the stories, including, you know, a shot of the board with the prices on and then somebody leaning against their car depressed about the pricing. But what nobody does is adjust the price of gasoline to inflation. So if you go back in time and you adjust the price that we're paying per gallon, you know, everybody got used to this very, very low price of gasoline, which was lovely but not real. And inflation adjusted, I'm not sure that gas is historically that expensive. And I actually watched a guy on the local news cheer when the price of gas fell a penny. If you put 15 gallons in your car, he saved 15 cents. And I don't know, I didn't realize he was that tight as a newscaster, the 15 cents was so exciting. But I think people— gas is clearly an issue when you're filling up your car for $100 or $120 or your, your F-150, but I think you have to adjust it for inflation.

Jonathan, something you said to me once, and I don't recall if it was inflation or recession, but either way we're getting into both topics. You said that once that inflation or recession in our industry is a relatively new phenomenon, but historically, how have you seen inflation impact our industry?

I think Jeremy said it there, that inflation on apparel has been, for example, nonexistent. And I think in hard goods there were also at times these step function changes where China enters the WTO, prices drop. You had the opposite when you had the tariffs put on a few years back where all of a sudden there are all these tariffs on China and you had to make an adjustment the other way. But the other piece of this, which doesn't get factored into anything, is if we look at, for example, electronics, the quality of what you're getting for the price, uh, you're getting a lot better stuff, uh, for less or the same money, especially in electronics. And the improvement has been dramatic. That is measured nowhere. And so once again, we end up in this place where you've got these very complex sets of issues. And part of it is that inflation is driven by expectations. If everybody thinks there's going to be inflation, then there will be inflation. If everybody thinks there won't be inflation, then there won't be inflation. And that's part of how this is driven by sentiment.

One question about unemployment from Heath: Isn't the unemployment number low because so many have run out of unemployment benefits and those numbers are not considered?

What do you—

what are you seeing, Jeremy?

Well, I can tell you, we're still seeing a very tight labor market. I mean, so from my perspective, like, when I'm trying to hire, am I having to raise wages to do it? Or am I able to go out into the market and, you know, hire kind of at will? We're still seeing a pretty tough market. Now, I will tell you that it is— our wages are up significantly from where they were, let's say, 12 months ago. And but we are being more successful today than probably we were 12 months ago in terms of kind of some of our hiring. Different markets for us, we're in 10 states, different markets have different dynamics. For example, the Reno market is exceptionally hard for us to hire in today. It's just a really, really tough labor market. Some of our other markets we're having more success, but I still believe you have the, the unemployment rate, the low unemployment rate is real based on our ability as a company to continue to hire kind of the people that we need to do the job.

Jonathan, you want to add to that?

The reality is that if people really want to find a job, there are jobs to be found, versus in 2008-9, during that downturn, if you got laid off, there was no expectation that you were going to quickly find new employment. Today, there's— your industry may be impacted by this and you may have to switch industries, switch jobs, and I'm not minimizing the impact of that. But today, if you want to find a job, there are good jobs that are out there in a lot of different places. So I, I don't— I have some guesses, but I'm not sure of where all the people went for these jobs. But there seems to be a lot of jobs still chasing people.

We had a question about where on the Gemline website is the Harvard case study or the interview that you had.

We'll link to that. Go ahead. At the bottom of the— and we can send something out afterwards to everybody. But if you look under Gemline webinars, it's a gentleman named Willie Shih, S-H-I-H. And he's a supply chain expert. And he talked about this thing called the whiplash effect and how it does exactly what we're seeing right now. And by the way, a lot of suppliers in the industry will likely be suffering from the same thing at some point in time.

Okay. We'll also have a follow-up post where we'll share at community.comskew.com any of the resources we mentioned in today's conversation will be posted there as well. Let's talk about the potentiality of a recession. Simply put, recession is when the economy stops growing and start shrinking. So some say that happens when the value of goods and services produced in a country, the GDP, declines for 2 consecutive quarters or half a year. And according to the National Bureau of Economic Research, a recession is significant decline in economic activity that's widespread and lasts several months. Typically, that means not only shrinking GDP, but declining incomes, employment, industrial production, retail sales. Some say we're already in a recession. Others say the warning signs have slowed. Jeremy, you mentioned that what the Federal Reserve is doing is trying to thread an evil by raising interest rates and taking money out of the system. But the reality is that they could overshoot because they're really blunt instruments. Do you see any markers for recession in the near future?

Well, I've been talking to a lot of our customers, and the interesting thing is that they talk to every kind of business in America. I mean, so it's this pretty interesting, like, survey that we can do in this industry. And there are clearly some industries today that are being impacted in a negative way. I mean, Jonathan talked about it, but for the most part, the sentiment that I'm hearing from our customers is that they are, they're busy, that they are, their companies are still spending money, and they're still that. So I'm not Sitting here today, I don't believe that we are in a recession. But I guess my view is that the Fed will continue to raise in a way that will slow demand. I don't see it as a 2007, 2008 recession. I do see it as much shallower than that for a lot of reasons. And Jonathan spoke to them. I mean, I think the health of the consumer is in such a better place. I think there's not going to be a liquidity crisis the way that there was in '07. The banks are stress tested in a much stronger way. The housing market then, the level of the people who had 2-year arms that adjusted crazy and lending standards. I mean, there's so many things that I think have got better economically today from then. I don't see that type of recession. But I do think that we will technically have a recession towards the end of this year and into next year. And I think there will be a slowdown in our industry for sure, but it won't be broad. And I don't think it affects everyone, certainly not everyone equally.

Jonathan, what do you think? I'm in complete agreement. When we talk to customers, by and large, what we hear is not only a fair amount of activity, but a lot of optimism. They're busy. There's a lot of optimism. They're grumpy, I think a number of them about some suppliers are still having trouble, which is understandable given everything. So you still see a little bit of grumpiness and distress about how hard things are. And there's a lot of stuff that is broken in the economy. I get on an airplane, it's fun for nobody at this point in time. Nobody looks forward to going to an airport. These days. And it's even worse in Europe where it is in complete and total meltdown. But they're busy and people have to do more work. It's true. And there are some suppliers that are still struggling to hire in some places, but everybody's working hard to do their best in a very complicated environment. And I hear people talking about the holidays and talking about new business and talking about opportunities. And I think there's a fair amount of segments that are really doing well out there in the market. I— if there is a slowdown, I do think it's a slowdown. I don't know that if we get into a technical recession, I don't think that this industry will go into a recession. So here's another perspective. As long as it's hard to find people, this industry probably will continue to do well. Because if you want to thank your employees, you can look at Jeremy's shirt and what do people tend to do? They tend to send them stuff that they want to have that builds affinity, that creates that community with their employment base. And so to the extent that that's still difficult for people, HR will be a bigger buyer than it has in the past, and that's opportunity for our industry. So all of these, uh, challenges are opportunities for the industry.

It's a great point. Um, so the economy's showing signs of shrinking, but unemployment is still very low. The New York Times reported strong wage and jobs growth, and many distributors and suppliers are having incredible years, as you both mentioned. I have talked to so many distributors who are saying it's amazing here today. Um, how is the low unemployment rate affecting your business, Jonathan?

We, we have— Jeremy and I have talked about this offline, but we are very fortunate in that we have been able to hire. We run— we are running 3 shifts right now, uh, in our plant, and there are some jobs that are harder to find than others, you know, specifically in, you know, certain tech jobs are just harder and they take longer, and there are other jobs, but And it is certainly, it takes longer than it did before, but we are just through luck and a little bit of planning, we ended up in the right place at the right time. So we right now we're in great shape and we have been all that we in March of 2020, we smelled that there was gonna be an issue and started planning around it. And it sort of has taken us through today. And so we, we have not been perfect, but we've been okay. We've been pretty good. In fact, I would change that. We've been pretty good. And we've been able to scale up without a problem.

Okay. Any other comments on that, Jeremy, before we move on?

No.

Okay.

This is from The Economist. America's last big debt crisis in 2007 to 2009 was in housing. But now some are pointing to corporate debt. And this doesn't apply to you two, but we do have a larger representation of private equity in the business than we probably historically had. A steady decline in interest rates over the past 30 years encouraged many companies to borrow record amounts. And now the cost of servicing and refinancing that debt mountain is climbing. Profits are being dented by rising costs, and inventories are piling up at some firms as demand slows. Does a corporate debt meltdown loom? And do you feel like the sentiment is related in our industry? So Jeremy, there's far more private equity than there was in the past. Could certain sectors of our industry face stronger headwinds because of this?

It's kind of what we talked about before. I think you have a segment of our, of our customer base and of our competitors that are much more highly leveraged because of private equity. They might have 5 or 6 turns of leverage on their business. That's pretty significant. I think if you are in an industry today that is not faring well or doesn't over the next 12 months because of the economy or where we're going, I think that higher interest rates could put you in a really challenging place. But like Jonathan, I am relatively optimistic about our segment, our industry, the value that we provide to people. I think his point on HR and what we mean to kind of people is spot on. And so I am not expecting in our industry significant bankruptcies because of kind of corporate debt. There might be industries that you will see that happen, but I think it's more going to be around the cyclical nature of those industries and how they are faring. And higher interest rates makes it very difficult for them to be successful. There has just been too much exuberance in private equity. I think valuations were really high and there's so much money that were chasing these deals that companies sold for a lot and they were able to put a lot of debt on their businesses based on really optimistic assumptions. And some of those assumptions won't happen. I'm just not sure I see that in our industry.

Okay. Jonathan, how about you? Any thoughts on the comments on the private equity?

First of all, there are always bankruptcies in our business. There hasn't been a major that has gone out. I mean, those tend to be much more public. I have seen companies— in fact, every— almost every competitor we have when I got in the business is gone, but they just sort of melted away. It was like the air coming out of a balloon. Over time and it wasn't an implosion. We have had major suppliers go through bankruptcy multiple times with no impact. I mean, you know, they go through bankruptcies, they— creditors get reorganized, you know, reorganized, stuffed, whatever you— where do you want to use for it? And, you know, Monday morning starts and lawyers get very wealthy. I don't know if that's going to happen with a major. I can tell you that none of our competitors have offered to send me their balance sheet. I can give an address if somebody wants to send it in our direction. But I think that people have become very adept at managing debt in this country. I'm not hearing a lot of overhang. Interest rates on a relative basis are fairly low. And I just— it's not something that's big on our radar screen. And we certainly don't have any distributors that we look at, sort of if you think about the majors that everybody would know, that we have any concern about at this point in time.

Okay.

One last question on recession data and what you look at in your business. Mitch asked this: What specific data from your businesses will you be looking at to determine if we are indeed in a recession? Are there specific data points that you gather? Jonathan, start with you, then we'll go to Jeremy.

First thing is bookings. I mean, what's coming in? And it's both the dollars and the number of, you know, how many pieces of paper are coming over the transom, the backlog, is it going up and down? And then how are people paying? And then you go into the sentiment, which is, you know, sticking a finger in the air and saying, oh, people feel good. It's hard to measure, but you can, if you talk to enough customers, you do hear feedback. That, oh, things are slowing down. Or if we see some increase in order cancellation, and we have seen zero increase in— we, you know, there aren't a whole lot of orders canceled, or not more than what would be normal because of, you know, whatever reason.

Jeremy, how about you? Any other indicators?

No, I agree with everything Jonathan just said. I might just emphasize payments. I mean, I think we've seen that in the past with people start to pay slower because their customers are paying them slower, and, and, and that can be an indicator. And like Jonathan said, we haven't seen that at all.

So, okay, um, let's say for practical tips, to get to our last section of the interview, talk about some more practical tips. Like the HR tip was a great example, but to provide some context for this next question, the value of what we sell as an industry is higher now than in years past. The average order size is growing in this industry. We have a more robust selling toolkit than we've ever had before. Clients are spending more money purposefully, and they're willing to pay higher premiums for quality merchandise. We have an industry that is, from a sustainability perspective, at least awake to the idea that we should be selling more conscientiously, and many are doing so. We've weathered a pandemic, something we never would have imagined. So the question is, compared to recessions in the past, the 2008 housing crisis, the 2000 dot-com bubble, is it naive to say that we as an industry, though we're not immune, are perhaps more prepared to weather a recession than in past years, just Jonathan, let's start with you and then we'll go to Jeremy.

We may have been more able to handle a recession. I don't know about a pandemic. I mean, when the pandemic first came, I was thinking, ah, the end of times. Who's gonna be buying our product during a pandemic? And it turns out a lot of people will. Right. I think everybody had that first response of pan— I remember saying to my wife, oh great, a pandemic. What next, a zombie apocalypse? I thought I had done the financial meltdown. Now I got this. And it turned out that if you were positioned well and moved fast, that you could turn, you know, lemons into lemonade. And I think a lot of people did with this. And it was certainly a hard time and a lot of people suffered. And I'm not glad that it happened. But the industry— and this I will say that if you, if you include inflation, this industry was impacted pretty significantly by the pandemic, especially ex-PPE. And there would have been a lot more damage outside of PPE to a lot of firms if that wasn't there. But today there's still a lot of optimism and most of the major players are still there and people are looking forward. And the people who are here, I think, are better prepared to fight a good fight going forward.

Jeremy, you want to add to that?

You know, if I look back in 2001, we had a, you know, segment of our customer base, it was, you know, Bay Area tech firms who, you know, are supplying, you know, kind of that tech firms who got really hurt. The rest of our customers, or many of our customers, had very little impact to the 2001 recession. If you were in Dallas and you were selling to the oil industry, it just was like not an impact. In '07, '08, it was certainly broader. But if you looked at our business in terms of how many quarters our business actually declined before it started to grow again, I mean, our business, I believe, and I think representative of the industry, weathered that recession much better than I think most industries. Our customers had to learn how to sell again. They had to diversify their customer base. They found out who was doing well in those times. They were selling, you know, they became a little bit broader in what they were doing. If you lived in Las Vegas then and you just sold to the housing sector, your business was really hurt. But if you were, if you had a broader customer base and maybe you had some schools and maybe you had some other things, like you were you weathered that relatively well. I'm even more optimistic now, given, A, my expectations for this recession, and I think, Bob, your point earlier, the value of our product and what we do, I think has really come through in the last 2 years. I think HR recognizing how important we are to people, businesses recognizing how important people are to their success. So I think there's a lot of really positive kind of tailwinds. So I do think if I look back historically, our industry has weathered recessions well, and I do think we are really in a pretty good place going into a potential recession here.

Let's say we head into this slowdown in third or fourth quarter, first quarter of next year, whatever this time period is. Let's talk about some practical suggestions for distributors. Then I'm going to ask you for suppliers as well, but for distributors, are there ways that we can be preparing now? Like, Jonathan, you mentioned to me focusing on certain industries or looking at your industries and the verticals you serve, or shoring up our value proposition. What else, Jonathan, would you advise distributors to do?

Well, the first thing I tell people, if they're preparing for a downturn, that cash is always king. I mean, it's the old thing that the balance sheet is more, much more important in downtimes than it is when things are, you know, just moving along happily. So understanding what your cash flow is and preparing around that as best that you can. I will also say that if you get into trouble, the one big mistake I see some distributors making is not to communicate with suppliers. Most suppliers will understand and try to work with distributors. There's nothing that gets an AR team their antenna up faster than somebody who just goes dark and doesn't communicate. Because instead of you getting to tell the story, they're making up their own story and it's never a good one, right? But ultimately, it's all about— in any time, and it's harder, and sometimes God knows, in 2008 it was really hard— finding places to find value to your customer. And when you can show them how they can drive retention, drive sales, open new markets, drive affinity, drive community, whatever it is with the product, that's when you really stand out. And so being able to, as you think about what may come, having a plan. And one of the things that we did there in the beginning of the pandemic is we just called our distributor customers up and just said, how are you doing? And just checked in with them. And that sort of, we weren't selling anything at that point in time, but we were just touching base. So just being there as a resource for customers also in a downturn, can be a very useful thing.

Jeremy, you want to add to this for distributors specifically?

I agree with everything Jonathan said. The only thing, and I always like to caveat that I've never been a distributor, so I've always like, whenever I give advice to them, like, I've, I've never done the job. But I think what I hear from people is when, when times are good, they are so busy servicing their existing customers, they stop prospecting because they're like, I just don't have time. And I think it's really important, even in good times, to make sure you're looking for new customers and that you are diversifying your customer base. If you are just heavy in one segment, I think that puts you at much bigger risk than if you have diversification across kind of, you know, types of business segments that you sell to. So I would always have that as a goal. We look, whenever we do planning at Sandmarc, we plan one recession every 5 years. Sometimes we don't get it. 7 years, 10 years. We put one in, we plan one every 5 years, and we do it to just kind of stress test our business. Okay, great. What happens if in year 3, business drops by 15%? Jonathan's point, what happens to cash? How do we manage that? How do we look at what's the line of credit that we need? What's the borrowing capabilities that we have to have? That just makes us feel better about our business. We're thrilled if it doesn't come, but we're always planning for that.

We have an article too on the website, community.comiskey.com, with 10 tips for distributors in the case of recession, so we can share that as well. We'll share that in the follow-up. Um, what about suppliers? Uh, Jonathan, what advice would you have for other suppliers right now? Are there 2 or 3 things you can suggest?

It depends on the supplier, and in part, I mean, it's the same fundamentals, I think. For distributors and suppliers, with the one caveat that suppliers are carrying a lot of inventory. And so thinking about what your risk tolerance is for inventory and dividing up the more risky from the less risky product. And it partly goes to what people's risk tolerance— and, you know, I'll pick the apparel business because it's something I know nothing about. I suspect that having a t-shirt in stock is less risky than, you know, some plaid placket shirt, you know, that's very trendy today. So Jeremy might decide to go deeper in the t-shirt with less worry that he won't be able to sell, you know, a navy or a black or white t-shirt later on than, you know, some pick the fashion item that he has in the apparel business. And so thinking about that as you stress test because ultimately it comes down to balance sheet at the end of the day. And interestingly enough, on the supplier side, receivables stayed pretty good even during the Great Recession. And that was the mother of all tests. So if that holds, it's very helpful in terms of suppliers who, you know, cash— the capital investment is pretty significant for larger suppliers. In terms of inventory and receivables and all the CapEx that you need to run your business, and especially on the IT side. So if that holds up, it makes it a little bit easier to make it through.

Jeremy, how about you? Advice for suppliers?

You know, yeah, everything Jonathan said, I agree with. I think maybe for us it is continue to communicate with both ways. I mean, I loved what you said about AR teams, when I— because I love that when somebody doesn't return my call, that's when I get nervous, you know, when they're telling me their story, you know, that's when it's like, how do we partner? You know, I think recessions are an opportunity for us as an industry to figure out how do we continue to partner together, talk to your distributors, distributors talk to your suppliers, How do you— who are the key partners that you're going to work with to get through challenging times together? I always think that's just an important strategy to have.

Let's talk about mindset for a little bit. When I was a distributor, we went from $10 million to $3 million in 2008 in a very short amount of time. I think it was a matter of 3 to 6 months, and it was a staggering step back, and there was a lot of negative energy around that. Of course, course, because it was a devastating recession. But headlines now are raging with inflation news, and imminent recession news, unemployment, yet unemployment is low. And many distributors, as we said, are seeing incredible growth. So suppliers, speak to that young entrepreneur about navigating news headlines, being surrounded by bad news, but also seeing conflicting indicators that are actually positive. Jonathan, let's start with you. How would you encourage them to maintain the right attitude, sober to reality, but Very positive.

I'd switch from the news to The Onion or something that— I mean, it's very, you know, the reason that I brought up that YouTube with how to make a commercial about rising gas prices is that there's a reason that these people hyperventilate on TV during the news about these stories because they're trying to sell milk and bread in between the news segments and they want you to tune back in. And, you know, it's very easy to get caught up either in the exuberance or the, you know, the stress of the times. And I think that for anybody, whether they're established or new, it's about focus on your business and what's in front of you. And you got to look for your own indicators. You know, Jeremy didn't say that he read it in this news periodical or he picked it up out of The New York Times or The Wall Street Journal. He talked to customers, got a sense of the market, and makes your own decision. And even in 2008, there were companies, including in this industry, that really exploded and did quite well. 2008 was not my favorite recession, I have to say. I've been through a number of them, and of all the recessions, that was probably on the bottom of the list in terms of favorites. Um, we got through it, which is, you know, I think the happy thing I can say about it. And I have a fair amount of my stomach lining back after going through that. But, you know, we got through it, and I've learned to be a little bit, um, to sort of tune some of this stuff out and make my own picture up.

Jeremy, how about you? Mindset, what would you say to a young entrepreneur?

Yeah, I mean, the reading the headlines is really, really, uh, important to understand the details. I mean, it was that quote I gave you earlier from Jamie Dimon saying there's an economic hurricane and then his CFO saying there's absolutely no data that shows any weakness in our results. And the dichotomy between those two things, I think, is just really telling. I mean, the challenge is headlines are designed to get you to click and to get you to read the article. And we all understand that our mentality, once we get scared, that's when we start— well, we stop spending money, we stop hiring, we lay people off, we act fearful and we can create our own recession if we're not careful around that. So again, it doesn't mean that you're not sober to the rest of the world and you just have this exuberance that you shouldn't have. But I do believe it's really important to have a— I was thinking of a neutral mindset on some of these things and to be able to tune out the headlines because that isn't the reality.

You both stated—

go ahead. One of the things that I do is I give a talk to a bunch of high-tech startups, probably twice a year. I know it sounds kind of funny given that I'm not in a high-tech startup, but it's this group called Mass Challenge, and this is the Israeli group, and it's— the talk is around managing crisis. One of the things that I say to everybody, and it's true as you think about going through any of these, is you have to manage your— find a way to release the pressure. That there's a reason why you put on your own mask first and then the person or the kid next to you. And if that means going for a run or exercising or reading a book or sitting and looking at the ocean or going for a walk or doing whatever, it is— whenever this news comes along, taking care of yourself and understanding your own stress level and not letting it eat you up is one of the really, really critical things. And you can't tell people, especially today, you know, here's an app and you can meditate for 10 minutes. And, you know, that might work for some people. For most people, you're gonna have to figure out what it is, um, and whether it's just tuning out and watching a movie, you know, some— even an idiotic movie or a TV show. You have to find a way to bring down the stress to get some clarity. And, and During 2008, you know, I would come up with my own narratives, especially in the middle of the night, like, you know, you start thinking and you can drive yourself bananas by doing that versus if you're going to have anxiety, you want to use that to drive the planning process, but not to make the plan based on the anxiety. And so for me, I've always exercised and, and especially getting outside It clears my head and allows me to come back much more focused.

Okay, thank you. And one thing I would say to distributors too is that distributors are so diverse, they serve such a diverse client base. Just to look, as you both said in this interview, is look at your own numbers. You know, are you 30% in energy, 30% in healthcare, 30% in sports merchandising? Looking at your own numbers also keeps you from buying into a negative echo chamber that can easily happen in an industry as large and as small as we are. Um, we have, we have time for a few more questions, and I want to ask you both this. We're in 2022. Now, it's 2027. Jeremy, let's start with you. It's 2027. What's the biggest thing that's changed in our industry?

Jeremy? It's got to be technology that is enabling us to all do business in a much more efficient way than we have today. I mean, and I probably would have said that 4 years ago, too, and probably 4 years before that. But I really believe that it is coming, where so much of the, the friction that and challenge around how hard it is to process orders to do things is, is really eliminated through a lot of kind of technology that's coming. We're seeing on in decoration, there's so much innovation and so many cool things happening in product. There's so many interesting innovations happening, whether that's around technical fabrics or sustainability, or, you know, I'm wearing a watch that like measures my— it's like just an Apple Watch, but it measures my heart rate. And it has a new feature. I don't know if you've seen this, it tells you when to stop washing your hands to make sure you wash your hands for, you know, 20 seconds. I mean, it's amazing, kind of some of this. So in an Internet of Things world and smart apparel and like all of the cool— I mean, there's so much kind of cool innovation coming that I think our industry will embrace and that's exciting.

Yeah. Jonathan, how about you?

So I agree on tech and I like the fact that it's not just the transmission of orders, but everything from decoration to, you know, what we do on a day-to-day basis. The other two things I'd add, Jeremy mentioned sustainability. I think in a world of climate change, sustainability is going to be increasingly important, especially with the younger generation. And we're going to see more and more focus on sustainability in this industry. And the products that aren't sustainable are going to be problematic 5 years from now, I believe. And then the other thing is, and this is a much more complex topic, which is this sort of reframing of globalization, that this industry especially was very China-centric on the hard goods side. And I think the whole globalization paradigm is going to get shifted. And there's, you know, in a country with 3.6 or 3.8% unemployment, I don't see all those sewing jobs moving back here. But I do see a whole reframing of what globalization really means. And that's a topic for a different day.

We have time, we may have time for these last— this last question. And that is, Jonathan, I want you to ask a question of Jeremy. And Jeremy, we did this last time back in December, and I really enjoyed this. Jonathan, you ask a question of Jeremy, Jeremy, you ask a question of Jonathan, no holds barred. Jonathan, what would you ask Jeremy?

Jeremy, what was the big lesson that you learned from the pandemic, something that you didn't know going into it, that you've figured out today?

Yeah, it was definitely The biggest lesson for me was, and maybe I probably should have known this, places where you need to invest in partnerships in good times, because that's when they— when you need them and when there's tough times, that's when you're able to lean on people. And there's areas of our business that we had done a good job of that, and we were able to lean on partners, or, but there's areas where I had neglected kind of building partnerships. There's areas where, you know, I had, I, you know, there's times in your business where you are in the, you know, driver's seat and you can squeeze an additional cent out of this person or that person. That's not always the right thing to do in the long term. And that was a a really great lesson for me. And so I, I really have refocused our business on really trying to make sure that we are a great partner, whether that's to our vendors, to our banks, to our carriers, to everything else, because I know that there will be tough times in the future and that I'll need to be able to rely on them. And that's definitely a huge lesson for me.

Jeremy, we have 2 minutes left. How about to Jonathan, what would you ask? Make it a hard one.

So, uh, I don't know, Jonathan's my friend. I can't, you know, I'm not gonna like, but, uh, you know, uh, Jonathan, you and I both decided, um, not to attend, um, a lot of the big industry trade shows in January last year or this year. Well, will we see you in Las Vegas in January?

So here's the answer, which is a little bit nuanced. We are planning on going back to Vegas, but it's probably a kind of a buzzkill way to end this thing. I'm not sure we're done with the variants. And so who knows what January is like anyway? So we're— and I think that the nature of what trade shows are, we don't want to go back in exactly the same way that we did before. So we're planning on going back, but going back differently than what it is that we did before. And if you want to know what that is, you'll have to come see us.

Yeah, stay tuned. All right, everybody, thank you so much. Jeremy and Jonathan, thank you so much for sharing your insights with us today. And we appreciate everyone for being here. This is an amazing industry and I hope everyone has an amazing third quarter.

We'll see you soon.

Thanks, Bobby. Thank you, Bobby. Thank you, Jeremy.

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