At first glance, it seems a bit of a paradox.

In the second quarter of 2022, North American distributors increased sales, on average, by 13.5% compared to the same three-month period the prior year, according to the just-released ASI Distributor Quarterly Sales Survey.

The performance marked the third highest year-over-year quarterly gain of at least the last decade. It was especially impressive because its 2021 comparative quarter saw a big return of spend from end-clients as society’s reopening expanded following COVID-19 restrictions. The promotional products industry Q2 sales growth was also a win sequentially, far outpacing the average distributor revenue rise of 5.4% experienced in the first quarter of 2022.

“Our sales were up 37% in the second quarter,” says Todd Wallace, vice president of marketing and business development at Billerica, MA-based distributorship SourcePromo (asi/260722). “New customer acquisition and increased sales from existing customers drove the rise.”

But for all the undeniable positives, the Counselor Confidence Index, which measures distributor financial health and optimism, fell five points in the second quarter of 2022 compared to Q1. While the tally of 103 remained three points above the baseline reading, the index was at its lowest level since sitting on 100 in the third quarter of 2021.

Which begs the question: What explains sales rising robustly but confidence retreating?

“Distributors capitalized on strong demand for promo in Q2 and engineered an impressive sales increase, but with economic headwinds blowing, there’s concern about what lies ahead,” says Nate Kucsma, ASI’s senior executive director of research and corporate marketing.

“As such,” continues Kucsma, who spearheads the quarterly sales survey, “distributors on the whole weren’t feeling as confident as you might expect given the industry’s revenue acceleration in the second quarter.”

Confidence Amid Concern

The headwinds Kucsma mentions have been mounting.

While inflation cooled slightly in July, it remained elevated and has been running at 40-year highs for months, prompting the Federal Reserve to aggressively hike interest rates, a move designed to slow economic activity to help bring prices down.

During the first two quarters of 2022, the United States’ gross domestic product contracted year over year, leading some analysts to say the nation is in or entering a recession. A June survey by think tank The Conference Board found that 60% of global CEOs believe a recession will occur before the end of 2023.

The economy may be facing challenges, but Marc Simon, CEO of the industry’s biggest distributorship, HALO Branded Solutions (asi/356000), believes promo’s future looks “exceedingly good,” he explains in this Promo Insiders podcast.

Promo-specific issues tied to supply chain challenges like inventory gaps and production/fulfillment delays have also created unease in the industry. While hiring in the U.S. was robust in July, certain high-profile firms in spotlight industries, like big tech, have initiated layoffs, spurring widespread media coverage that’s further stirred marketplace jitters.

Then there was the recent report in The Wall Street Journal in which a CEO said it was time to cut back on swag-spending – an assertion that put voice to an industry-wide anxiety: When the economy weakens, so do swag sales.

It’s all got some distributors feeling uncertain about what lies ahead, with the promo pros using words like “cautious,” “unpredictable,” “challenging” and “unknown” to describe how they believe the second half of 2022 will go, ASI research found.

“July was really slow for us,” says Renya Nelson, CEO of Salt Lake City-based Brand+Aid (asi/145193). “I heard the same thing from fellow business owners in vastly different verticals. A few customers told us that they were having a hiring and spending freeze. The energy in Q3 is that people are taking longer to close. It makes me think they’ll spend less per head this holiday season.”

Nonetheless, many distributors are also frequently using words like “optimistic,” “hopeful,” “exciting” and “growth” to characterize the industry in the final six months of 2022. And even though the Counselor Confidence Index declined, its reading of 103 is still the third best of the pandemic-era and suggestive that while the mood has dropped, it’s not in the doldrums, even if there are worries.

“As a leadership team, we do have our concerns from what we’re hearing and reading in the news,” says Liza Sachs, director of sales and supplier relations at Batavia, OH-headquartered Kaeser & Blair (asi/238600), a Top 40 distributor that increased sales about 30% year over year in Q2. “We do anticipate a possible slight slowdown, but are working to enable our sales network to position themselves to maintain, if not grow, Q3 and Q4 revenue relative to 2021. We’re already seeing good momentum: After a small slowdown in July, August is back to the double-digit growth we’ve had for the balance of the year.”

While aware of potential broader economic issues, Ed Levy is feeling upbeat too, saying that business is picking up in the third quarter and will continue to do so for the rest of the year, barring “unforeseen economic and/or humanitarian exceptions.”

“Our client base has not been deterred or altered their marketing plans and we’re getting new clients every week,” says Levy, president of Chicago-based Edventure Promotions (asi/186055). “We expect sales to remain strong because recruiting is still an important part of clients’ operations, which is perfect for our custom kits/kitting and fulfillment services.”

Wallace noted: “I think sales will slow heading into 2023. Even so, for us, they will still be better than 2021, but possibly the same or slightly less than what we’ll see in 2022. As of now though, we’re actually growing faster. I don’t think the existing 2022 budgets of our clients have been cut yet due to economic factors.”

Q2 Successes

No matter what comes next, Q2 2022 was, by and large, a success for promo.

Overall, 60% of distributors increased sales compared to the same quarter the previous year – up from the 47% who accelerated year-over-year revenue in Q1 2022. Notably, 54% of distributors report that second quarter sales exceeded their expectations, while 28% say sales were as expected.

“Percentage-wise, our sales rose double-digits last quarter,” says Bill Feldberg, executive vice president of Nashville-based Top 40 distributor SomethingInked (asi/329822). “Business related to live events and sports were the main drivers of sales in the second quarter and first half of the year.”

SomethingInked was among the 87% of distributorships that produce $5 million or more in annual revenue that reported that sales grew in Q2. Others included powerhouses like Top 40 firm 4imprint (asi/197045), which powered a 58% global revenue increase during the first six months of the year along with a $33.37 million after-tax profit.

The results at the other end of the revenue spectrum were a little more measured: Just over half (52%) of those with annual revenue of $250,000 or less increased year-over-year sales, with nearly 30% reporting a decline.

The phenomenon of a greater percentage of larger distributorships reporting growth than smaller ones continued a trend seen in Q1.

Meanwhile, education and healthcare remained the top two markets for promo sales. Construction, nonprofit and manufacturing rounded out the top five. Of course, every distributorship’s experience is somewhat unique. SourcePromo, for instance, primarily works with education, retail and quick service restaurants (QSR). “Our sales were up in Q2 because these clients were back to doing events and sponsorship activities,” Wallace shares.

Mark Lenox, vice president of creative and marketing at IMS (asi/215310), says the Top 40 distributorship generated strong sales across its portfolio of customers. “Most of our clients are in the QSR, energy and consumer-packaged goods verticals,” Lenox explains. “All have had activity.”

Elsewhere, Edventure had a massive order with an automotive industry client hit in June. That helped spur a 162% leap in Q2 2022 sales relative to the same quarter the prior year. “It was/is a work in progress for 10 months and could make 2022 our best year ever,” Levy says. “It’s a completely custom, overseas project.”

The tales of second quarter success could go on. Even if business slows in the second half of the year, as colleagues in the European promo space fear for their markets, promotional products leaders here believe that the industry, which has proved so resilient through the challenges of COVID, will find ways to adapt and ultimately prosper.

Says Lenox: “In an increasingly competitive marketplace, clients are looking to save money, but still require the same or more marketing executions in order to protect their market share.”

“I always feel secure in our industry,” adds Kelly Moore, the solo-operating owner of independent Florida-based distributorship Moore Promotions (asi/601617). “It never goes out of style.”