Episode 23: The Promotional Product Landscape (The Next Five Years)

[00:00:00] Intro: Welcome to skucast, the podcast for entrepreneurs in the promotional products industry. skucast shines a light on our industry's best work, features maverick personalities, and discusses what's really involved in running a modern promotional products business. skucast is the official podcast of commonsku.

[00:00:39] Bobby: The business models in the promotional products industry are changing. The industry is now splintering into specialties, and the internet has transformed the way we communicate with our customers and the way we go to market. Where is your business headed? Where are the opportunities? What are the challenges, the threats?

[00:00:55] My name is Bobby Lehew. I'm the Chief Content Officer at commonsku, and together with Mark Graham, we [00:01:00] tackle these questions and more as we discuss the promotional products landscape over the next five years. Mark begins today's discussion by describing how we arrived at this topic.

[00:01:15] Mark: All right. Well, you know, it's interesting. I find, and I think you're a lot like this, Bobby, that a lot of really interesting and quite epic conversations about the industry usually take place inside my inbox.

[00:01:30] Bobby: Right.

[00:01:30] Mark: And it may start off with an interesting article that someone sends you and says, "How do you think this is going to impact our industry?"

[00:01:39] Or, "What do you think of this particular trend?" And then you start on a big essay about where this may impact the business, and then the friend or the friends that are on this particular email thread come back with a couple of different things. And I've always been fascinated by those inbox conversations.

[00:01:58] And [00:02:00] so this is a great example of one of them.

[00:03:38] "Get to it, Mark." All right. Here they are. So, the four segments, as a general rule, are small distributors. These are broadly defined as one- or two-person outfits that sell less than $500,000. It could be as low as selling $25,000 a year, but I would say generally [00:04:00] up to about 4 to $500,000.

[00:04:02] So that's the first segment.

[00:04:03] Bobby: A lot of part-timers in that group too, right?

[00:04:05] Mark: Absolutely. I mean, if you're selling 25 to $50,000 in promotional products a year, you're either brand new or you're doing it part-time.

[00:04:12] Bobby: Right.

[00:04:13] Mark: With all due respect. So the second segment, as I see it, are the pure e-commerce players.

[00:04:19] These are defined as the people who came into this business with e-commerce in their DNA. So this would not be like Robyn, for instance. When Robyn — Bobby, in your previous capacity, when you created your swag expert site, that wouldn't make you a pure e-commerce player.

[00:04:40] That would make you a successful distributor that added e-commerce well into your time as a distributor. Examples that I would use here would be companies like 4imprint, InkHead, Branders, Discount Mugs. The ones that we hear about, and in some cases a lot of people will [00:05:00] complain about.

[00:05:00] If you go to the Facebook Promotional Products group, you'll see a lot of people that are concerned about losing orders to these pure e-commerce players.

[00:05:08] Bobby: Right.

[00:05:09] Mark: Okay. And we'll get into each of these models in more detail in a second. So the third are the agency or niche — or "nitch" — players.

[00:05:19] Depends on how it is that you like to pronounce that. These are broadly defined as distributors who have taken a more creative, consultative, design-oriented approach to their business. And they may be large. They could be a 50-person company, or they could be as small as a one-person company.

[00:05:42] I don't define them as small, medium, or large because the size of them is not what's unique about them. What is unique and defining about them is how it is that they go to market and the product that they offer. I've always felt that with this particular segment, they don't sell [00:06:00] product as much as they sell ideas and solutions.

[00:06:03] Bobby: Hm.

[00:06:04] Mark: As opposed to the group of folks that are really in the business of selling product first and foremost, where price is often the thing that differentiates. And you see that a lot actually with the first two segments that I mentioned — the small players as well as the pure e-commerce players that focus a little bit more on the product side.

[00:06:22] Again, I'm not making judgments as to which segment is better or worse at this particular point. We'll let you do that, Bobby, because you're full of judgment. It's true. For anyone who's listening to this and maybe thinking Bobby is such a nice, swell guy, there is a real...

[00:06:41] There's a lot of attitude below the surface, I can tell you. All right. The fourth segment... Am I doing okay so far, Bobby? I'm a little nervous around you.

[00:06:51] Bobby: Yeah. Yeah, you're doing great. Keep going, man.

[00:06:53] Mark: Okay, good, good, good. I'm having fun with this. Thank you for having me on the skucast here, by the way.

[00:06:57] Bobby: Hey, you're welcome. Glad you could be here.

[00:06:59] Mark: [00:07:00] So the fourth and final of these very general segments that I'm throwing out here are the company store players. These are the companies whose point of differentiation in the market is their company store offering. So I gave the example of Robyn, your former employer, Bobby.

[00:07:20] They would be a perfect example of a company store player, someone that does extremely well in the space. They derive the majority of their revenue from company store relationships. They're excellent at filling out RFPs. They're great at warehousing, whether that's on-site or off-site. And these particular companies are the ones that are selling to the largest of corporate America — or corporate North America, or corporate global, I should say — all the way down to, I would say, the mid-size companies that just need to have a program that is executed online where there's some sort of fulfillment program [00:08:00] involved. So those are my four segments.

[00:08:01] Bobby: Got it. All right. So now with those four segments, let's talk about threats, opportunities, and options, because even though we've just defined those four, there are opportunities actually in each segment that we're discussing today. So, threats for that first segment, the small distributors — one-person outfit selling less than 500,000 total — what do you think the threats are?

[00:08:25] Mark: Well, I'll throw out what I think, and I'm obviously very interested in what you have to think as well. From my perspective, if these distributors are defined by small operators that are primarily relationship-based and transaction-based sellers — and there's no question you can build a successful small distributorship based on that — the concern is that you've got the e-commerce guys that are [00:09:00] circling. And it's those end clients, particularly if you've got an end client that's in transition.

[00:09:06] So let's say you're dealing with maybe a more tenured buyer, and they're moving to a younger buyer, and that younger buyer doesn't identify with or value the relationship that you bring to the table. And if all you have to go off of is the transaction and the product, well, then they can find that very easily on a site like 4imprint, which does a pretty good job of presenting products at a good price for people.

[00:09:30] So I think that represents the biggest threat: a small transaction- and relationship-based distributor that does not up their game and add more value, because the e-commerce people are optimized for taking that business away very, very easily.

[00:09:47] Bobby: Yeah. Oh, I agree 100%. The online players will continue to nip away at their market share.

[00:09:52] You and I did this sort of similar conversation when we were at one of the regional shows, and we were [00:10:00] talking about how to protect yourself, and we came up with that idea of the moat theory, where you have to basically surround your castle, if you will, with things that your customers are easily finding at their fingertips.

[00:10:12] For example, technology. It didn't mean you have to go into business and compete with 4imprint. What it meant was you had to make technology an easier solution for selling for your customer. But back to the threat: online players, agreed, will continue to nip away at market share. Margins will erode because of online price shopping.

[00:10:29] We've seen that over and over and over again. Everyone's exhausted from getting those links from the online players. Personal bandwidth has always been an issue with that particular model. All eggs in one basket is not just an issue for a lot of the big companies, but also obviously the small ones as well.

[00:10:47] And, you know, from PPAI — I'm reading directly from their industry review — they said the industry increased a modest 1%, this was last summer, [00:11:00] in 2016, and distributors in the 2.5 million-plus bracket were the only ones recording a sales increase. So everyone underneath that 2.5 million was basically declined or stagnant in sales.

[00:11:17] And of course, one of the biggest threats with that model — as with a lot of models, but particularly that one — lose a buyer, lose the account. That's typically the way that goes. So what are the opportunities, as you see it? I mean, that's all bad news, but there is good news.

[00:11:32] Mark: I think that one of the biggest opportunities that someone who's small has is the fact that they're small.

[00:11:40] They've got a leanness and a nimbleness to their model that puts them at a great advantage over some of these larger companies. And a lot of the pure e-commerce players that I just mentioned — the InkHeads, the 4imprints, the Discount Mugs — are very large companies. And [00:12:00] while there's lots to fear from them, there's no way they're gonna be as quick and as nimble as you are.

[00:12:07] And I always find that you wanna take your advantage and you wanna double down, knowing that you can be that much quicker and more nimble. I also think that it gives you a great place in which to focus. If you're large, then chances are the way that you grow is by moving into multiple different categories and multiple different types of products, and you become a generalist.

[00:12:36] So you think about Walmart. Walmart is a really difficult competitor in the world of retail, but they're a generalist provider. They can't compete with that smaller organization that has decided to focus on a particular product line or a particular theme or a particular category, and it's no different in the promotional product space.

[00:12:57] And I think that the [00:13:00] small distributors that are the most successful, the most profitable, and the fastest-growing are the ones that have really focused in on that unique particular product and particular story that they can tell their customers, because that's what the customer is buying. And that's the reason that a customer is gonna say, "Well, I don't really wanna deal with that generic website, because I can deal with such-and-such a person who's got this extreme focus in this particular area that I need a solution to."

[00:13:34] Bobby: Yeah. It's interesting that you're focusing on a particular part of the story and not service and speed, because I was just talking to a distributor yesterday — and this is a distributor that I'm guessing at this point is a 20-plus-million-dollar distributor — and what they said was something probably anyone under the sub-$500,000 in sales would say.

[00:13:54] "Well, I'm fast, responsive, and I take care of my customers." But here was a multimillion-dollar distributor [00:14:00] who told me — I asked him what the secret to his success was, and he said, "Bobby, this morning I got a call from a customer, and I drove half an hour to go talk with him about a $6,000 order."

[00:14:10] He said, "I was out there. I was in front of them. I probably increased my chances of landing that order tenfold by just doing that." So it's not as if they had... That's not a strategic advantage, is one of my concerns. From a strategy standpoint, in terms of who they want to be and where they want to grow to, they're in a very unique, wonderful opportunity, because there are distributors in that 5, probably 10 million-plus for sure, that are stuck in a UVP even if they don't like it — or even if they decide they wanna shift and say, "We wanna now go online," that's such a bigger struggle for them. So the lean and nimble is definitely a big plus. I think the biggest, most exciting part about this area, if you're in the sub-500,000, is that you have so many options —

[00:14:54] Mark: Yeah.

[00:14:54] Bobby: — of where you can go and where you can pivot.

[00:14:57] Mark: Yep. Yeah, and I think that point about the [00:15:00] geography is a really important point. I don't think that I'm suggesting that relationship selling is dead. I think that there's huge value to getting in front of your customer. And I think about someone like Kirby Hasseman, okay?

[00:15:13] He just came to mind. So Kirby is from a small town in Ohio called Coshocton. For folks that don't know Kirby, he's got a great web show and is a real unique industry personality that has just built a thriving business in what, to me — someone who's from a large market in Toronto — I can't even wrap my head around how you would do any business in a small town like that, because I just haven't grown up that way and have been used to selling into much larger geographic markets.

[00:15:43] So to get back to Kirby: here's someone who has created this incredible reputation locally. He's in front of his customers on a daily basis locally, and he's been able to establish himself as the go-to guy in [00:16:00] Coshocton that is providing these great promotional solutions. He's not just the guy who's throwing the catalog in front of, you know, a church group and saying, "Flip to page seven and tell me what you want. I might give you an end-column price."

[00:16:08] So I think that he's an interesting example of someone who's been able to really lead the charge. He's not the biggest distributor in the industry, but he's certainly a distributor that has grown nicely since he started, and at a profitable rate.

[00:16:26] Bobby: Yeah. And if you ask him — this is the question for anyone in the sub-500,000 or 750,000 category — if you ask Kirby, "What is the unique part of your story?" he would be able to answer that, 'cause he spent a lot of time and energy working on their unique value proposition. And that's what those folks in that category really, really have to do.

[00:16:44] There's also that Forrester Research report. Some people hate this when we start quoting that report, by the way. I was talking with the CEO of a very large supplier and he was really sort of down on this report, but it's a famous report. Forrester Research [00:17:00] reported that by 2020, 1 million B2B salespeople will be out of work.

[00:17:03] This is now an old report; it's been around for about, what, a year or so. Here's the key paragraph: "Firms must adapt by building digitally enabled selling models that put self-serve e-commerce on equal footing" — emphasis mine — "with commissioned salespeople. The effects will be felt most significantly by sales reps who are considered order takers, those serving customers who purchase self-explanatory products in a simple environment."

[00:17:23] Now, the important part of that statement was not the e-commerce. I'm not saying you should get into e-commerce. What I do think the important part of the statement is: those serving customers who purchase self-explanatory products in a simple selling environment.

[00:17:37] Now, we've been saved as an industry because we are not a simple selling environment. You can't go to Amazon and just easily, with one click, get what you want, because of the complexity around the custom order factor. But it is getting easier for customers, and we're seeing a little bit of disintermediation happen with outside industry players that are nipping away at categories — T-shirts or things like that.

[00:17:57] But those serving customers who purchase [00:18:00] self-explanatory products, that's probably the key, right? Where the creative agency does not have a unique value proposition problem, because they have this tremendous value in what they're doing with that product.

[00:18:11] Mark: Right. Absolutely. All right, next one.

[00:18:15] Bobby: So, number two, pure e-commerce players. What's the threat? I mean, these are the folks who are really growing, so is there really a threat to these folks?

[00:18:25] Mark: I mean, I think they're in an enviable position, but I do think there are some threats.

[00:18:31] So why don't I list them off in no particular order. One thing that I would be worried about if I was a pure e-commerce player is, A, Amazon. I'll say that again: Amazon. If Amazon decides to really get into the promotional products business — and they're kinda kicking the tires right now.

[00:18:55] There's, you know, the Amazon Customs site, and I know that you do [00:19:00] see some of this around right now. It's hard to tell whether they're really serious about the B2B space or whether they want to be a little bit more B2C. But the bottom line is that they've got seemingly infinite resources and the ability to throw money at this particular problem, and they are the best at e-commerce.

[00:19:17] Like, 4imprint, they're pretty amazing. Amazon? Ten times better, a hundred times better. And I say that with all due respect to our friends at 4imprint. So you're competing with a formidable, terrifying competitor. I'd much rather be competing with Robyn, who's a great distributor, but could probably be outwitted — well, particularly when you were there.

[00:19:43] But not now. Not now, but when you were there, definitely. But in all seriousness, I don't wanna be competing with Amazon. I think the next point that I would say is lack of differentiation. You [00:20:00] think that customers are not loyal right now to distributors? Well, it would be interesting to get the opinion of someone in the e-commerce space — if you were to have someone from 4imprint or InkHead weigh in on this.

[00:20:14] But I imagine that customers are googling and price-comparing those sites all day long, because they make it so easy to price-compare, and they don't really take a lot of effort to differentiate themselves beyond price and product.

[00:20:31] Bobby: Yeah.

[00:20:31] Mark: So that right there is a concern, and I think the lack of ability to differentiate is a real issue.

[00:20:37] Bobby: Yeah.

[00:20:37] Mark: And I think the other piece of it is — I'm gonna let you say the third piece. What do you think the third piece is?

[00:20:47] Bobby: Margin erosion. I'm just sort of clarifying what you said, but margin erosion I think is one of the biggest challenges because of the competitiveness. And we have to keep in mind, too, that [00:21:00] for the e-commerce players, the gate — the front door — is their website.

[00:21:04] So they also have this infrastructure like the traditional distributor, where they're trying to build out a consultative sales force. I know Jim Franklyn's been really big on talking about this hybrid model, because he's seen it work at InkHead, where you gain the customer through the transactional front door of the digital website, but then you keep them through actually more traditional methods.

[00:21:26] But you still have all of this tremendous amount of operating costs in terms of the technology, plus all the traditional challenges of a normal distributorship with margin erosion, plus probably commissions and such. So profit's gonna continue to be, I think, a challenge in the long run —

[00:21:42] Mark: Yeah.

[00:21:42] Bobby: — for those folks.

[00:21:42] Mark: Yeah, no, for sure. So those are the threats, but obviously moving over to the opportunities: it's nice to be in a segment of the industry that is growing at a faster rate than really any other segment in the business. Certainly. And in a 20-ish billion dollar [00:22:00] business, that's not a bad space to be in.

[00:22:02] And I also think you're seeing a lot of investment — some VCs that are certainly coming in and putting some big money into it. And I think everyone's also looking at Amazon as to whether they're gonna take a real run at it. And I think they do. If Amazon takes a legitimate run — which, at the time of this podcast, and I hope Jeff Bezos isn't listening to this, because I'm not trying to encourage him to get into the business.

[00:22:23] But when they take a run at it —

[00:22:25] Bobby: I don't think he probably is gonna... I don't think we have to worry about that. Go ahead.

[00:22:28] Mark: Well, I actually think that he may be a subscriber. I heard that. I did hear that. Not yet, at least. Right, right. But the thing is, if he takes a real legitimate run at it, then I think it's going to signal that there is a huge opportunity in our industry.

[00:22:50] Because Amazon only goes after the big opportunities.

[00:22:54] Bobby: Yeah, very true. By the way, an interesting article to read in the context of all of this — or at least a resource — is Mary Meeker's Internet [00:23:00] Trends. If you're interested in this model — maybe you're in that sub-$500,000 category — we know some distributors who are taking a run at this.

[00:23:06] We know distributors who are trying this model. So definitely stay in tune with Mary Meeker's Internet Trends. Okay, number three: agency or niche verticals. I'm getting my pronunciations correct here today. Agency or niche verticals. So Mark, you're this model — so Rightsleeve is this model, I should say.

[00:23:24] You can better describe this than me.

[00:23:28] Mark: Okay. So at least the Rightsleeve model — defining it from an agency perspective — is any distributor that goes to market where product, while important, is often surrounded by other things. So either by ideas, or design, or branding, or concepts, where the [00:24:00] agency-oriented distributor is able to go into a client and have a higher-level discussion about that particular client's challenges and marketing objectives.

[00:24:12] Bobby: Yeah.

[00:24:12] Mark: And it's the agency's job to go in and suggest some creative solutions that are made up of design and product. So from a Rightsleeve perspective, I think what we learned in the evolution of the company is that we looked out into the market space and said, "Well, do we wanna be competing on product and price?"

[00:24:37] And at the beginning, when I first started in the late 1990s, that was all I knew, so sure. But it was interesting, because you would've defined me as a very small distributor at the time. It was one person. I think I sold, like, $200,000 in my first year. So certainly not big numbers.

[00:24:56] And I found that [00:25:00] playing that product-and-price game was not necessarily a road to continued growth from a sales and profitability perspective. So it was at that time — you know, 15, 16 years ago — that it allowed me to look at the model and say, "What does the market really want from us, and where can we make a difference?

[00:25:24] Where can we differentiate ourselves from all these other people that are competing on the same things?" And growing up in the Toronto market, you've got a lot of competitors that are right in your backyard, so that was just basic Business 101.

[00:25:39] Bobby: Right.

[00:25:40] Mark: I think, as I realized that, I'd always been interested in the art of marketing and the art of branding, and that became a really interesting way to evolve that model and then go to market where design and branding was really what we were selling, with a product backend. [00:26:00]

[00:26:00] Bobby: So the threat, then — am I wrong in the threat? — I think the threat is the fact that they have customers pulling them in multiple directions, and it's not necessarily their unique value prop. So stores are a good example, right? Would that be a threat to them in terms of watering down their mission and their objective?

[00:26:20] Mark: I mean, it would be interesting. We could certainly talk about the threats as well as the opportunities, but I think that —

[00:26:25] Bobby: And by the way, I need to clarify something. When I say it's a threat, I don't think a company store is that old traditional description we have.

[00:26:32] So you can be an agency model and build a really cool solution for a customer and not be pulled into the direction of serious overhead with fulfillment, all those things. So we kinda gotta be fair with our descriptions a little bit. But I've always wondered about that agency model.

[00:26:48] I mean, obviously it seems like a rich model to be in. The threat might be to be all things to all people, which is what you're seeing larger distributors struggle with as well.

[00:26:56] Mark: Yeah, I don't know so much about that. I [00:27:00] think that the threats are around pricing — like, there may be a perception that as an agency you're way more expensive than a traditional promotional products distributor.

[00:27:12] I mean, that certainly comes up from time to time. And you know what? At times you are more expensive, because you likely have more overhead — because you've got design personnel, you may have an account layer within your company, you may not just be working all by yourself. You've got additional resources, so you need to cover your costs.

[00:27:31] So as a result, your prices may be more expensive. Although it's funny — I think there are certainly some times where your prices aren't as expensive, so I don't know that that's necessarily a general rule.

[00:27:40] Bobby: Yeah.

[00:27:40] Mark: I think the other threat to it is that you may be so niche — or "nitch" — that you become irrelevant in the marketplace, or that what you focus on is just way too small, that your ability to grow is not there. Now, I could flip that around and also [00:28:00] say that with focus comes great potential to grow as well. But let's say you're selling into a very limited market, like scuba diving shops in Oklahoma City, okay?

[00:28:13] Like, it's a huge, dynamic market for scuba diving shops in Oklahoma City, right? And you could be the guy — you're the person — and you may be so focused on that channel that you don't have the ability to focus on any other type of business. Well, you may reach a certain limit, even though you may be the person and you can charge whatever you want because you're so good at it.

[00:28:35] Bobby: Yeah.

[00:28:35] Mark: It's a stupid example, but you know what I'm talking about.

[00:28:37] Bobby: Well, and what I think, too, of a threat: you know, when Ted Church spoke at skucon — and here's a prime example of the agency model — Ted talked about actually being in the same room practically with other distributors who were basically providing the cheapest item possible, and that wasn't their focus.

[00:28:57] And I thought it was interesting that they [00:29:00] would live almost simultaneously under the roof of the same customer, and yet be so focused on their niche that they could say with confidence, "Yeah, that guy's welcome at the table," because we're so focused on creative merchandising, that's what we do extremely well.

[00:29:15] I was really encouraged by that. I mean, there's a lot of opportunity, obviously, in this model. Do you see other opportunities that maybe folks in that model aren't chasing?

[00:29:24] Mark: I mean, just from a lot of my own experience in this industry, I see that there are way more opportunities than threats in this particular space.

[00:29:33] Let's look outside the promotional products industry here for a second. If you look at any of the great iconic companies of our day, whether they're in B2B or B2C, almost all of them have started or got their start with a strong focus in a particular channel, and are specific in a particular niche.

[00:29:59] And [00:30:00] usually brands that have got a strong creative brand core as well. So I'm thinking about companies like Nike and Starbucks — and Google's another good example. And I'm not trying to necessarily relate agency distributors to Starbucks, but there are some commonalities in terms of companies that put branding, and the customer, and community, and a bigger picture in front of the product. I think that you see some very interesting things happen there.

[00:30:38] So that has definitely been a model that I have seen, and I've seen lots of others. If you use Ted Church as an example, with Anthem Branding — I mean, you can go to Ted and get 150 pens from whatever pen supplier you want, and I'm sure he'd be happy to do the business, but that's not really the magic of his company.

[00:30:58] The magic of his company is [00:31:00] going to a brand and helping them tell their story through beautifully designed merchandise. And he can do that at a level, for a certain kind of client, that most other people in this industry cannot do. They wouldn't even be welcome at the table, because they don't have the chops. And I think that's fascinating — that he, and companies like his, are able to come to the table with these very discriminating clients — very picky clients is the better word that I would rather use — and he's able to have a conversation with them that's rooted in loyalty, as opposed to a conversation that's rooted in "what's your best price."

[00:31:48] Bobby: Right. And they're building many experiences on behalf of their customers. And experiences — when you were talking earlier about the branding and how critical that is at the forefront, I immediately thought of the coffee industry in terms [00:32:00] of unique branding, when you look at maybe somebody like Blue Bottle in San Francisco, who's no longer just the tiny little coffee shop around the corner, yet they were built that way. Their DNA is that service, and there's this whole experience around just the commodity — 'cause coffee's still a commodity. You can still obviously go down to the grocery store and get coffee very cheap, but it's more about the experience.

[00:32:22] Mark: For sure. And I think you and I spoke about that on a skucast almost a year ago, when you were speaking at skucon Chicago, and we talked about the difference between experiences and products. So I think that, as we close this one off, the agency or niche type distributors have got a tremendous opportunity to continue growing through focus.

[00:32:48] And their opportunity is not only in sales growth, but in margin growth, and also a strong, strong loyalty from a very large segment of the [00:33:00] market that is looking for those kinds of services, that is actively not looking to buy something off a website. Because buying something off a website is great — and to be clear, is a huge market as well — but agency companies and e-commerce companies are not... It's almost like they're not in the same industry. They really are very, very different in terms of who they appeal to.

[00:33:23] Bobby: Yeah, right. Okay, last segment: company stores. What are the threats?

[00:33:30] Mark: You don't need to hear from me on this. Why don't you start?

[00:33:34] Bobby: All right, I'll start this one. I think we're gonna differ a little bit, just because of the perspective — not the first time, and it won't be. So I kinda see this model as a little bit insular from the threat of competition. They won't be disrupted, but rather their threat is from within.

[00:33:52] And I actually think the threat is real, but it's not from without — the threat is from within. It's chasing low-margin business. It's agreeing to [00:34:00] low-margin RFPs. If you contrast a low-margin RFP with high commission structures, yet the need for continual investment in service and technology — that's what's never gonna end with that model, because Amazon has already disrupted our business from the standpoint of driving customer expectations for this model.

[00:34:19] I know when I was with Robyn, we would have a little inside joke. The inside joke was we waited to see how long it would take for a customer or a prospect to drop the A-word, and the A-word was Amazon. And with prospects, it was really fast. They would say, "You know, like Amazon."

[00:34:34] And so there's this continual investment in technology. So the threats are really more so from within — not organizing and structuring the business properly, and then losing it. Because they're providing this tremendous value for customers — tremendous value in terms of solving business solutions and answers — but really, I think the threat's from within.

[00:34:58] Mark: I agree [00:35:00] with you, and you have spoken about this a number of times. And, you know, I've known you for, what? Too long. Too long for you.

[00:35:08] Bobby: Too long.

[00:35:08] Mark: But we've definitely talked a lot about this — you explaining as to where the business is to be had and where the profitability is.

[00:35:17] I think, from my perspective, where I see the threats, I see a few. A: it feels to me like it is a mature space. It's a mature product that you're selling. And what I mean by that is you've got large companies — these are companies that are usually RFPing for million-dollar-plus programs.

[00:35:42] Bobby: Right.

[00:35:43] Mark: They've been around the block many, many times. They're run by the purchasing department, who are very, very sophisticated when it comes to putting together these negotiations. And price — price is tops.

[00:35:57] Bobby: Yeah, I agree with that. It is a mature model. I do agree with that.

[00:35:59] Mark: [00:36:00] Totally mature, right? And so that's kind of threat number one: you being able to make margin, where you can go and win a program by being substantially more expensive than the next guy — I think those days are over. So you're chasing business that is low margin, and if you don't have your internal act together, you're dead.

[00:36:17] As you say. I think the other thing that worries me about this space is that, while you may not have a lot of competition for this — like, if you go back to the first segment where we talked about the small distributor, that segment has got a ton of competition because of very low barriers to entry; it's very easy to get into the space.

[00:36:38] By contrast, the company store space does not have nearly as many competitors, but there still are a number of competitors in the space. And it means that if, let's say, IBM, just to use as an example, is going out to tender, and they've gone to tender to 10 very good company store providers —

[00:36:58] Well, that's 10 people you've [00:37:00] gotta go to bat with on a cost-plus program. Sure, there's more to it, but that would worry me, going against 10 other people who are gonna sharpen their pencils. That worries me. And there are way more than 10 really good company store providers out there. So that's a worry of mine. I think the third worry that I have, Bobby — not to get everyone all depressed here, because we're gonna get into the opportunities in a second with company stores, of which I think they're vast — is that you generally tend to be a larger distributor as a company store provider.

[00:37:34] Okay? So let's say you're a — I'm gonna pull this out of my hat here — $15 million distributor that does company store business. And let's say a good chunk of your business — let's say 30 or 40% of your business — is derived from company store business. So that could be an RFP that you've won where you've got a portion of that that is [00:38:00] fulfillment-based, and then a portion of that is drop-ship.

[00:38:02] But the point is that a large part of your business can be traced back to that contract that you've signed. So let's say you're a $15 million company, and let's say, for the sake of our math, 5 million of that is spread between three or four programs. And let's say you lose a program, and that program is $2 million.

[00:38:23] Well, now you have built up a warehouse, let's say — or let's say it's contracted out. You've still built up a head office, you've built up overhead, you've built up staff, you've built up technology, you've built up infrastructure to service that business. And so at the first sign of you potentially losing that business, you'd be much rather inclined to cut your price in order to retain the business than to lose it, because then you don't want to have to fire these people.

[00:38:51] And, I mean — sure, it's easy to fire people, but you certainly can't downsize your office and the technology spend that you just spent on, because that's a fixed cost.

[00:38:59] Bobby: Right.

[00:38:59] Mark: So [00:39:00] to me it feels like the threat for a business that's grown large on company store business is that they could lose 25% of their business fairly easily if they don't play ball on the pricing side, and then they're stuck with this huge overhead — and what the heck do they do?

[00:39:18] Bobby: Mm-hmm.

[00:39:18] Mark: So with that, let's get to opportunities. But those are three serious worries that I have about this space.

[00:39:24] Bobby: Yeah.

[00:39:24] Mark: And I look forward to the hate mail from this podcast.

[00:39:31] Bobby: Well, opportunity. So, for that model — exactly right on your threats. I think you're exactly right. I think that faces every one of these customers that are providing the stores.

[00:39:39] It did for us, for sure. So Danny Rosin once told me that good salespeople love complexity, and this is the most complex model in the industry due to all of these different challenges. They have an opportunity to grow widely, so they can actually explore new segments. They can create safety awards programs, they can create employee programs, they can do all kinds of things to [00:40:00] grow with an existing customer, because they usually have deep roots or deep anchors with the customer.

[00:40:04] So their opportunities are typically to grow wide with existing clientele, and I think their opportunities are to chase new ideas even with an existing customer, because you have a built-in R&D opportunity if you've got good contracts and good relationships with your existing customers.

[00:40:25] So they've got a lot of opportunities in terms of wide growth. And print, I think, is a good example. You see a lot of promotional folks trying to do print, a lot of print folks trying to do promo, and a lot of that is anchored — and the research and development is provided — by those customers that they have contractual arrangements with.

[00:40:41] So I think there's a lot of opportunity with the model. Certainly your threats are valid, but I still see tons of opportunity with folks in that model.

[00:40:48] Mark: Well, and I think that, at the end of the day, where this is a very exciting space to be in — specifically the company store space, to your original point — is the [00:41:00] companies that you're seeing winning in this space. And I think he'd be fine with me referencing his name:

[00:41:06] I was speaking with Larry Cohen the other day, from Axis Promotions. And Larry — for folks that don't know much about Axis, it's one of the absolute leaders in the company store space in this industry, handling a number of very large company programs.

[00:41:25] And he was telling me that in the last seven or eight years, his company has grown faster than it's ever grown. And this is a classic company store provider distributor. And I think the reason for it — if you were to talk with Larry about how it is that he's been successful — it's been that internal side.

[00:41:45] Making sure that he's got great leadership, he's got great systems, he's got great warehouse relationships, whatever the case may be, so he can fulfill those programs in a profitable manner.

[00:41:55] Bobby: Right. You know, I will say this in closing: I do think it's very important for us to keep [00:42:00] having these dialogues, for one simple reason.

[00:42:03] I like the fact that we might be encouraging one person — somebody in that sub-$500,000 category — that said, "You know what? I hadn't even considered all the options, and I think I'm gonna grow in this way." And that's what's fun about doing something like this. I hope we encouraged you today. I hope it's been a good episode for you, and we will see you next time.

[00:42:19] Mark, any final words?

[00:42:22] Mark: I have no final words other than I agree that it's important to have these discussions. Actually, I will say a final word. I think what I've learned from this discussion is that, with these four models, what we have addressed is that there are problems with each of these models, but there are also phenomenal opportunities. And I default to being an optimist, in life as well as in this industry.

[00:42:53] And I'm a firm believer that this industry will continue to grow at a very healthy clip over the next three to five [00:43:00] years. There's no question about that. And I'm really excited to see how the different players evolve of these four. I don't know that necessarily any of these particular categories will be dead, but I certainly believe, if left unchecked, there are some bad habits that will get some of these players into hot water.

[00:43:21] But I think it's really exciting, and I think it makes the industry a better place to have these different players and different models, and I think you have to pick the one that's right for you.

[00:43:28] Bobby: Yep. And it's a great segue. The next episode, we're gonna talk about the rise of the folks that do not necessarily fit into these four models, and there are some surprises in there as well.

[00:43:38] So stay tuned to us for next time, and I'm glad you tuned in today, folks. Mark, take care.

[00:43:43] Mark: You bet. Take care, Bobby.

[00:43:48] Outro: 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 [00:44:00] community.commonsku.com. Until next time, friends, thanks so much for listening.