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News February 24, 2020

Coronavirus Stokes Global Recession Fears

Much remains uncertain and it’s too soon to panic, but some experts feel a slowdown is coming. That could hurt sales in the North American promotional products industry.

By  Christopher Ruvo

Fears that the 2019 novel coronavirus outbreak could negatively impact the global economy and trigger a recession are growing. And, the way some promo products executives see it, the possible dark days ahead could have a significant detrimental impact on the ad specialty industry.

Coronavirus Fears

The economic headwinds gusted into full-blown life Monday after cases of novel coronavirus, known formally as COVID-19, continued to spread in China and as new outbreak hotbeds erupted in Italy, South Korea and Iran. The viral spread from beyond its origin point in Wuhan, a city of 11 million people in China, strained the narrative from global health officials that the virus could be contained. Markets were swift to react. The Dow Jones Industrial Average, for instance, fell by 1,000 points Monday. The S&P 500 was down 3.4%, and the Nasdaq Composite was trading near 4% lower.

Don't Miss: Go Here For Full Counselor’s Full Coverage of Coronavirus’ Impact on Promo.

The stock plunge came as massive global brands that ranged from Apple and Adidas, to industries including airline and automotive, said that COVID-19 was already – or poised to – impact sales performance. According to the International Air Transport Association, the virus outbreak could slash about $29 billion in revenue from the global airline industry in 2020. Similarly, automakers warned of disruption to their supply chains and lost sales. China is the world’s largest vehicle market, and auto sales there were down 92% in the first half of February, a reality that could hurt the automotive trade across the globe.

Meanwhile, tech juggernaut Apple reduced its first quarter 2020 sales expectations, saying its supply of smartphones would be slowed because of COVID-19’s hampering of factory production in China. A drop in demand for Apple products – related to novel coronavirus essentially freezing such commerce – is also going to contribute to the weaker-than-initially-expected performance. Procter & Gamble, a multinational consumer goods corporation, reported that virus-related disruption will affect its quarterly results. And Adidas, the Germany-headquartered sportswear brand, shared that its sales in mainland China are down 85% since Jan. 25.

The examples could go on. They’re all part of what some analysts say is an increasingly grim picture that’s forming on the global economy in 2020.

“The world woke up Monday to the reality that the coronavirus epidemic is going to have a much bigger impact on the global economy than investors and policy makers had assumed,” said Rex Nuttig, a columnist for MarketWatch. “Just how big, no one really knows…Investors are just beginning to price in the possibility of a sharp and nasty global recession that would be followed by a rapid rebound once the disease has run its course. Whenever that will be.”

Ripple Effects On Promo
The promotional products industry tends to trend in the direction of the broader economy. During good times, the industry has often outperformed U.S. gross domestic growth. But as was seen during the Great Recession, particularly in 2009, industry sales are vulnerable to contraction when GDP retreats. In the hard times, hurting companies and industries look to cut costs wherever possible, and branded merchandise can be among the line items susceptible to getting marked with red pen.

“The promo industry is going to be dramatically affected in 2020,” Joshua White, general counsel and senior vice president of strategic partnerships at Top 40 distributor BAMKO (asi/131431), told Counselor. “It’s likely to be a lot worse than folks are anticipating. I expect to see a number of distributors and suppliers go out of business this year. Some of that will be attributable to supply chain and inventory issues. Those issues will then, I expect, be compounded by decreased or delayed spending on branded merchandise attributable to economic headwinds.”

Supply chain disruption for the promo industry could also act as a drag on sales. Potentially leading to inventory shortages for suppliers and possibly higher product prices, the disruption could prevent distributors from fulfilling orders for clients that are still eager to invest.

“We have had several large apparel orders on hold due to the coronavirus,” Steve Flaughers, CEO/President of Ohio-based Proforma 3rd Degree Marketing (asi/300094), told Counselor. “One of them is for a large 150-chain company that is looking to do a rebrand and launch all employee apparel on the same day statewide. Naturally, this now has to be pushed back.”

Of the COVID-19 impact, Flaughers added: “This entire situation is not good for many reasons. I’ve never seen anything like this in my 15 years in the industry.”

Some industry pros think certain channels of the promo business could be especially hard hit. “I feel bad for a lot of the program/custom business – what you might call the more ‘agency’ side of our industry,” Bret Bonnet, president of Top 40 distributor Quality Logo Products (asi/302967), told Counselor. “Those agency-oriented companies do a significant amount of business directly overseas. I think they’ll feel the pinch more than anyone.”

Joseph Sommer described some of the frustration. “We’re feeling the impact severely with new projects, as we’re unable to quote completely overseas,” said the owner of New York City-based distributorship Whitestone Branding. “For instance, if we’re making a tote bag, the canvas factory may be open, but the factory that produces the lining may still be closed. The whole situation is making our whole supply chain feel very unsettled.”

Sommer added: “What’s worrying me is the potential for the epidemic to grow, with whole cities being locked down and quarantined. If that were to happen, the future disruption could be catastrophic for everyone, not just promo.”

Even so, it remains unclear how exactly things will play out for promo – and the economy as a whole. For the time being, suppliers Counselor has spoken with maintain that their inventory levels remain high. Optimists are holding on to hope that the China-based factory ecosystem that supplies the majority of products sold in the North American ad specialty market will soon kick into a higher gear, assuaging concerns about inventory shortages and their related problems.

Furthermore, word from distributors is that most end-user clients aren’t feeling direct impacts from the coronavirus yet, and they’ve continued to look to invest in branded merchandise. Some clients have questioned if the virus can spread via shipments and imported products, which adds a communication challenge for distributors to contend with. Still, smart industry firms have been conveying what leading health officials have continued to maintain: There have been no documented cases of coronavirus spreading through shipments/packages/imports, and it’s extremely unlikely the disease can be transmitted in such a manner.

As for stocks and the economy, a longer-term, “this-too-shall-pass” perspective might be helpful. CNBC reported, for instance, that analysis by market experts indicates that stocks “are usually on the mend” from the fallout of disease outbreaks such as the coronavirus within six months. “Don’t hit the panic button just yet,” CNBC says.