Sales increased, but growth slowed and concern over a potential recession’s impact was rife.

Those are some of the key takeaways from a complex first quarter of 2023 for the promotional products industry, according to the just-released Distributor Quarterly Sales Survey from ASI Research.

The positive: Distributors collectively grew sales, on average, by 3.3% in the first three months of 2023 compared to the same period the prior year. It was the eighth quarter in a row that distributors accelerated total revenue, following five consecutive quarterly sales declines amid the COVID-depressed days of 2020 and Q1 2021. Encouragingly, promo outpaced the United States’ gross domestic product (GDP) increase, which reportedly eked out a 1.1% gain in the first quarter.

Still, distributors’ 3.3% growth was the slowest rate of increase since promo’s recovery began – two percentage points less than the previous low experienced in Q1 2022. Sequentially, the first quarter of 2023’s rise was nearly 8 full percentage points lower than Q4 2022, when distributor sales jumped 11.1% on an annual basis.

According to Nate Kucsma, ASI’s senior executive director of research, industry sales may have been flat or even declined last quarter if not for inflation.

“Q1 was still strong, but rising prices over Q1 2022 certainly pushed results in a more positive direction than they otherwise would have been,” explains Kucsma, who spearheads the quarterly sales survey. “Overall, sales growth from Q4 2022 has definitely slowed in the industry as end-buyers appear to be more cautious with their spending as concerns about a possible recession continue to grow.”

End-buyers aren’t the only ones worried about an economic slump. More than 90% of distributors expressed some level of worry that a recession will affect sales in 2023, ASI Research shows. Nearly a quarter (23%) were “very concerned,” while 42% were “somewhat concerned.”

Amid rising interest rates and instability in the banking sector, jitters over a possible sputtering GDP and its potential to impact promo spending appear to be one reason the Counselor Confidence Index dropped five points from Q4 2022 to a reading of 104 in Q1 2023. While that was the lowest tally in nearly a year, the level remained above the baseline of 100 and far exceeded readings of 54 and 76 in 2020’s middle quarters – the lowest scores in the survey’s history, which includes two-plus decades of data.

The Q1 performance of the index, which measures distributor financial health and optimism, seems to capture the present sentiment of many distributors: There’s leeriness over economic headwinds, but so far current business and sales pipelines have remained ample enough to prevent outlooks from plummeting. And in fact, several distributors that spoke with ASI Media reported encouraging early returns in Q2.

“Obviously, a significant shift in the economy is always on our mind,” says Liza Sachs, director of sales and vendor relations at Ohio-headquartered Top 40 distributor Kaeser & Blair (asi/238600) and a member of Counselor’s Power 50 list of promo’s most influential people. “But while we’re always keeping our eyes on the market, our business growth has lessened our immediate concerns.”

‘Good’ Yet ‘Challenging’

BrandCo Marketing powered by Top 40 distributor American Solutions For Business (ASB, asi/120075) was bustling in the first quarter, kept busy by an inpouring of rush orders and other business with manufacturing and service industry clients. The team’s energy expenditure was worth it though as the Bakersfield, CA-based distributorship increased sales about 7% year over year in Q1. “It was just lots of volume for us,” says company President Brandon Kennedy.

BrandCo’s sales gain mirrored that of many distributorships in Q1 but not a majority: 46% of distributors engineered year-over-year sales increases in the quarter. While that was comparable to last year’s Q1 (47% of distributors grew sales then), it was down sharply from Q4 2022 when 71% of firms achieved a gain. Relatedly, a third of distributors reported a sales decline in the first quarter of this year.

Firms were split when asked to describe Q1 in a word, using a roughly equal mix of negative terms (“cautious,” “uncertain,” “challenging,” “slow” and “difficult”) and optimistic ones (“healthy” “encouraging,” “positive,” “busy” and “good”).

Q1 also marked a shift when looking at growth by distributor revenue size. While the largest distributors grew the most in 2022, it was the smallest distributors (those with annual revenue below $250,000) who led the way in Q1 of 2023 with a 5.2% year-over-year increase. These distributors also had the fewest businesses reporting a sales decline of any revenue category – 28% (by comparison, 47% grew sales).

Brooklyn Made (asi/146698), a New York-based distributor in the $250,000 and below annual revenue category, increased sales upwards of 20% in the first quarter.

Founder/CEO Gary Gattullo says that strong marketing, including showcasing creative design work on social media, helped open the door to opportunities that Brooklyn Made turned into sales.

Active networking and a post-pandemic return to in-person meetings with prospects and existing clients also helped build business. Gattullo was a chef before entering promo, which partly explains why the primary market Brooklyn Made sells into is hospitality. But of late, the business has been expanding the breadth of its client types, adding customers like lawyers, doctors and a moving company. All that has added up.

“It was just a combination of factors that helped us have a good first quarter,” Gattullo says. “There’s a lot of negativity buzzing about the economy, but so far I haven’t seen a drop off.”

Florida-based Blue Monster Promotions (asi/466761), another distributor in the same revenue category, increased sales in the high single-digit percentage range. Owner Mark Kozak has struck a sweet spot by providing healthcare businesses with marketing collateral that helps them stand out at health fair events, especially those held between January and April. He says satisfied clients referring Blue Monster to others in the healthcare space led to new sales opportunities upon which the firm capitalized.

“Referrals contributed to a good start to 2023,” Kozak says. “I know it will be a positive sales year for the rest of 2023, but we need stay aggressive with being in front of our clients and offering creative ways for them to market themselves.”

Meanwhile, the largest distributors (with revenue in the $5 million-plus range) had the lowest percentage of companies reporting a business increase in Q1 – 43%. As just one example of that result, Top 40 distributor BAMKO (asi/131431) recently reported a quarterly year-over-year decline of 16% (an approximately 12% drop if PPE sales from Q1 2022 are excluded). Client layoffs and hiring slowdowns definitely impacted the company (and large distributors as a whole).

“In Q1, we saw many clients, particularly those in the tech space and gig economy, which represent an outsized portion of our customer base, engage in widespread layoffs,” says BAMKO President Jake Himelstein, a Power 50 member. “As a result, we saw fairly extensive freezes on marketing budgets, delays on marketing spend and a pause on employee gifting programs.”

Not all large firms had the same results in the quarter. “We have been very pleased with the start to 2023 and have seen a double-digit increase through Q1,” says Sachs of Kaeser & Blair. “The Q1 sales increase comes from organic sales growth with our existing sales team members and from an uptick in distributor partners selling with K&B.”

Despite the difficult start, some of the clouds have started to clear for BAMKO in Q2. “While there are doubtless a number of economic headwinds that we’re up against, we are starting to see leading indicators of re-emergent marketing spend,” Himelstein says.

Distributors in the $1 million-plus to $5 million range posted the lowest average sales increase of any distributor revenue category at 2.3% (essentially flat to down if you factor in inflation) and also had the highest percentage of firms reporting a sales decline, at 40%.

North Dakota-based Go Promo (asi/211824) was among the distributors in the $1 million to $4.9 million range that saw sales slip in Q1 compared to the prior year. Even so, Go Promo partner Casey Glandt isn’t sweating it. He tells ASI Media that last year sales were especially strong, so the number was always going to be tough to match, despite what was still a solid Q1 this year. Also, there was some spending hesitancy among clients earlier in 2023 that now appears to be abating.

“In the first quarter, clients were probably a bit worried about a potential recession, so they held back, but now seem to be purchasing again,” says Glandt. “We’ve already seen an uptick in sales in the second quarter and feel we’ll still hit our year-end goal of close to $5 million in sales.”

There’s similar optimism at California-headquartered Team Phun (asi/342550), another distributorship in the $1 million to $4.9 million range. The loss of two customers who were more interested in what executives described as bottom-dollar pricing than the white-glove service Team Phun provides contributed to a quarterly sales decline for the firm.

It may have been a blessing in disguise.

“I’m not happy we had two larger customers move their business, but at the same time, it’s allowed our team to better service those clients who value what we do, and we’ve seen an increase in their business,” says Team Phun principal Jesse Goodwick, adding that Q2 business has been brisk, with pre-existing clients spending and the distributorship adding new customers.

“Everything is already getting better,” continues Goodwick. “We still anticipate overall annual growth in 2023 from last year, even being down in Q1 year over year. The new accounts we’ve brought in Q1 while expanding our fulfillment, print-on-demand, digital and overall service is bringing our business to the next level.”

The End-Market Perspective

Distributors listed education, healthcare, construction, manufacturing and nonprofits as the most fertile end-markets for promo industry sales in Q1. Still, the percentage of distributors characterizing these and most other markets as “robust” for business declined virtually across the board. That’s telling, says Kucsma.

“When distributors were asked to select their most robust markets for Q1, what’s interesting is not that specific ones were down, it’s that nearly all of them were down, which indicates that there was a broad-based pullback that extended across industries, rather than affecting just one or two,” Kucsma states.

While more lukewarm than perhaps distributors would like, the overall marketplace still offered opportunities. For instance, Illinois-headquartered Top 40 distributor Overture Promotions (asi/288473) noted that a few customers started the year slow in terms of spending but that didn’t derail the quarter as sales hit the firm’s target. “I don’t know if the slower start for some clients was the economy or timing issues, but we still tracked to forecast in Q1,” says CEO Jo Gilley, a Power 50 member.

Kaeser & Blair accomplished what Sachs described as significant sales gains in the automotive, healthcare and education markets. “We’re absolutely seeing more drop-shipping of individual kits or projects for product launches, sales incentives and employees working from home to increase engagement,” says Sachs.

“With so much talk of a recession in the news, we’re concerned it can be a self-fulfilling prophecy. Thankfully, our customers appear not to be listening to the nightly newscasts.” Steve Levschuk, Talbot Marketing

There were success stories north of the border, too.

Talbot Marketing (asi/341500) well outpaced the industry average with its Q1 performance. The London, ON-headquartered firm increased sales 18% year over year, a jump propelled in part by the fact that the average order size leapt 15% and overall volume increased, as did order count.

“Customers were buying more brand-name products, which come at a higher price point,” says Steve Levschuk, president and CEO and recipient of the 2021 Counselor Lifetime Achievement Award. “The other contributing factor was large kitting orders.”

Recession worries are on Levschuk’s mind, but so far so good, he says. “With so much talk of a recession in the news, we’re concerned it can be a self-fulfilling prophecy,” Levschuk states. “Thankfully, our customers appear not to be listening to the nightly newscasts.”

Kennedy expresses a similar sentiment. “We’re always concerned about economic issues that could affect sales, but I haven’t heard from clients wanting to pull back,” he says.

Regardless of how things go the rest of the year, distributors must remain nimble and adaptable. Sachs sums up the imperative for promo pros in 2023: “Our sales team will need to find ways to add value and problem-solve to act as an extension of end-buyers’ marketing teams,” she says. “We’ll need to continually find ways to increase the exposure for the brands we’re representing for our clients.”