The good days may end up being short-lived.
Following COVID-induced revenue doldrums in 2020 and 2021, promotional products leaders in the United Kingdom and continental Western Europe say that overall industry sales were generally the strongest of the pandemic era in the first half of 2022 in their markets.
However, looming recessions, continued supply chain challenges, Russia’s war against Ukraine, and soaring inflation driven particularly by skyrocketing energy prices are a witch’s brew of interrelated challenges that could slow growth in the second half of the year and potentially threaten contraction in 2023.
“Whilst the industry has delivered against the pent-up demand with events and conferences crammed into the last four to five months, supply chains are creaking and costs are rising in every corner, coupled with an overall increase in cost of living,” said Carey Trevill, CEO of the British Promotional Products Association (BPMA), a trade body serving the U.K.’s promo industry. “As such, we’re expecting a slow down.”
A Great Start to 2022
While darker times may lie ahead, the first half of 2022 was much brighter for promo firms in the U.K. and key Western European promo markets compared to earlier in the pandemic. The recovery from coronavirus-caused sales struggles seemed to begin earlier in the U.K. than on the continent, but was soon felt in mainland Europe too, certain executives said.
The easing/lifting of societal restrictions, coupled with the return of events and a sense of confidence among merch buyers that better economic times were taking hold, helped drive swag sales.
“Spending has been buoyant over the last two quarters,” said Trevill. “It’s been driven by a desire to get back to business as usual.”
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Vicky Kinasz, managing director of GeigerBTC, the U.K.-based subsidiary of Lewiston, ME-headquartered Top 40 distributorship Geiger (asi/202900), said that “generally 2022 has started well in the U.K. market, and compared to a year ago, it’s a lot more positive.”
Kinasz continued: “The easing of lockdown and restrictions in the U.K. and Europe drove companies back in to planning activities and events in 2022, which resulted in recovery in the industry at the start of 2022.”
Alexandre Gil painted a similar picture for continental Europe.
“The first semester of the year in Europe was quite busy, with all markets registering significant growth when compared to the same period of 2021,” said Gil, chief strategy officer at Portugal-headquartered supplier Stricker (asi/76459). “I would predict that most of the organizations are already performing above pre-COVID levels. It’s a result of macroeconomic rebound. The economy was under artificial restrictions for roughly 18 months and now we are still living the effects of a consumption boom.”
“The first semester of the year in Europe was quite busy, with all markets registering significant growth.” Alexandre Gil, Stricker
Promo firms in the U.K. and Europe have also propelled the growth by adapting to meet evolving end-buyer demands, including the intensifying desire among clients to purchase products made with earth-friendly materials in a sustainable way.
“It’s no longer enough just to offer a few eco goods in a range; the expectation of top-to-toe best practices is paramount,” Trevill explained. “The good news is that so many companies already have a fantastic story to tell and are discovering ways to turn their best practices into an even more profitable enterprise.”
Meanwhile, in places like England and Germany, the rising cost of imported products from China, and other factors like a growing preference among buyers to procure items made closer to home for environmental reasons has led to a surge in interest in domestically made goods and items produced in nations nearer the end-market. Distributors and suppliers are capitalizing.
“The demand for Made-in-Germany products is increasing because of the exchange rates and supply chain issues,” said Marcus Sperber, CEO of Germany-based supplier Elasto GmbH & Co.KG (asi/51817). “Our factory headquarters is fully booked. More and more clients want to switch to local production.”
Adds Kinasz: “We’re finding now that the gap between locally produced goods and China-supplied products is becoming less and less, so we’re adapting our supply chains to include other regions.”
A Downturn Portends
Despite the strong 2022 sales and the encouraging adaptation on sustainability and sourcing, promo Europe is anxious about the second half of the year. “Frankly speaking, we expect a really rough time in front of us,” said Sperber.
One reason for the concern is fallout from the Russian invasion of Ukraine.
While executives said the war has had relatively little direct impact on promo sales outside Ukraine, Russia and Belarus, secondary effects are sending shockwaves through western European economies. Among those ills are soaring costs for energy – an inflationary pressure spurred, in part, by sanctions and Russia’s cutting of fuels like natural gas to European economic powerhouses that have relied disproportionately on the Kremlin-controlled country for their supply.
“The current situation with the war in Ukraine and its consequences lowers business expectations,” said Sperber. “Nobody knows how the energy crisis will develop and whether or not governments will implement restrictions to save energy. There’s uncertainty about what’s coming next,” and that’s not good for business, he adds.
“Frankly speaking, we expect a really rough time in front of us.” Marcus Sperber, Elasto Form KG
European countries, including the U.K., are contending with inflation on more than just energy prices. The Bank of England, for instance, believes overall inflation there will peak at 13.3% in October and remain elevated through much of 2023, before falling to the bank’s target of 2% in 2025.
To help cool inflation, the bank on Aug. 4 again hiked interest rates, something that when combined with the already higher costs for just about everything is expected to weigh on the economy.
Indeed, the bank’s Monetary Policy Committee forecasted that the U.K. will enter recession in the fourth quarter of 2022, and that the recession will last five quarters as real household post-tax income falls sharply in 2022 and 2023 and consumption begins to contract. None of that bodes well for promo, whose fortunes tend to rise and fall with general economic performance.
“We think the second half of 2022 will be much slower than the first half, and Q4 is likely to be slower than normal years,” shared Kinasz. “The U.K. has a level of uncertainty politically and economically, with changes in leadership in government and the continued aftermath of Brexit. Add to that inflation and the cost-of-living situation, and we think that there will be more caution in the market, and potentially businesses may hold off some major spending decisions.”
Looking at Europe more broadly, Gil believes that the promo industry will experience tempered revenue growth in the second half of the year – with some of that compelled by demand that he believes will still be better than in 2021 and a portion of it powered simply by the higher price tags buyers are paying for promo products in an inflationary market.
“Through the rest of 2022, we’re going to continue to grow but at decreasing rates,” said Gil. “In 2023, I expect a bit more of the same – growth driven by inflation but at an even slower pace.”
As promo Europe deals with potential lessening in buyer demand relative to earlier in 2022, there’ll also continue to be other complicating industry issues in play. Many will sound familiar to North American promo pros: Rising production costs. Greater expenses to transport product from Asian factories to domestic markets. Staffing issues. Supply chain fiascos that make it take longer to replenish inventory and produce orders accurately and on-time for end-buyers. Even higher product prices too, which can make promo items a tougher sell.
“I expect that in September all suppliers will raise their prices within the range of 10% to 20%, depending on the segment,” opined Gil.
“Some of the drive to keep a brand front of mind will continue to fuel spend even during difficult times.” Carey Trevill, BPMA
Despite the headwinds and hurdles, Trevill also sees positives. For one thing, she believes the challenges of the pandemic have made surviving promo businesses stronger and more adaptable.
“On the back of some unprecedented trading conditions of the last few years, we’re probably more prepared to ride out what is predicted to be a spending slump in October and November,” she said.
Furthermore, Trevill articulated, client businesses may not be so quick to slash spending on marketing and advertising as they might have been in previous downturns. Businesses that drastically cut spend on promo/advertising during the pandemic are analyzing how they fared: Did they lose visibility with customers? Did more aggressive competitors that maintained a marketing presence gain on or outpace them? The answers to those questions could continue to inspire investment in promo, Trevill said.
“Some of the drive to keep a brand front of mind will continue to fuel spend even during difficult times,” she said. Trevill continued: “The question for our industry is going to be how to keep clients motivated, reminding the end-buyer audience of the efficacy of the investment they make in promotional merchandise alongside other spend. The BPMA is providing more and more support in this area, honing down the needs of members, whilst we promote the industry and its fundamental role in effective communication.”
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Following a Bright Start to 2022, Clouds Gather in UK, European Promo Product Markets - Advertising Specialty Institute
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