4imprint (LSE: FOUR)

It’s difficult to make predictions, especially about the future. ― Mark Twain

As of the time of writing , the author held a very small amount of shares of 4imprint, acquired for the purpose of attending the company’s recent AGM. This may have changed since. This post is not investment advice and the readers should do their own research and exercise judgment before making any investment decisions.

About 4imprint

4imprint sells promotional products, items that bring attention to a company – t-shirts, pens, mugs etc. bearing the customer’s logo and/or message. The company operates primarily in the US and Canada, where it generated 98% of its 2021 sales, and the UK and Ireland, accounting for the other 2%. It serves more than 100,000 businesses (with 25 or more employees and/or >$1m in sales), religious organizations, and non-profits who gift these items, referred to as promotional products, to current and prospective clients and employees. 4imprint is one of the largest players in its market – it received ~1.4m orders and achieved sales of $787m in 2021.

How it works

You can place an order through 4imprint’s website or over the phone. There is a unit order minimum varying by product, and 4imprint prides itself on offering low order minimums relative to the competition. Before ordering, you can request a free sample of the blank item. Once you place an order, you are asked to e-mail 4imprint your design. The company can also help you create or improve your design per your request, at no extra cost. A salesperson dedicated to your order will assist you through the order process. The company will prepare an illustration of what the item would look like with your design on it and e-mail it to you for approval.

Once you approve the final design, 4imprint will place the order with one of its suppliers, who will print the design on the product and ship it directly to you. You pay 4imprint (they then pay their suppliers) for the product, shipping, and a one-time “set-up” charge for print-preparation of the design, which you can then use for other orders and items at no extra charge. 4imprint only charges you after shipping.

4imprint offers generous guarantees to assure customer satisfaction – the company guarantees that:

1) it will refund or rerun your order if your order is late, defective, or not to your satisfaction;

2) it will offer you $25 off your next order if you wait more than 60 seconds when you call the company;

3) it will pay you back twice the difference between the price it charged you and that of a cheaper product you find elsewhere within 30 days of your order.

4imprint's Business Model and Financial Profile

While 4imprint does some of the printing and embroidering in-house for apparel products in the US, most of the products are drop-shipped by the company’s Tier 1 suppliers. 4imprint has about 100 of Tier 1 suppliers, who, in turn, source products from more than 1,000 Tier 2 suppliers. Tier 1 suppliers either serve as mere distribution centers for finished (imprinted or embroidered) products or receive blank products and imprint or embroider the customer’s design on those blanks before shipping to the customer. 60% of blanks are sourced from China with the remainder coming from low-cost producers in Central America, Asia, and North Africa.

Since most of the products 4imprint sells are made, printed, and shipped by its suppliers, 4imprint’s primary function is to connect thousands of suppliers to hundreds of thousands of customers. For the products it doesn’t imprint or embroider itself, 4imprint is a sort of an online marketplace with a dedicated salesforce intermediating the transactions. As such, it is a very capital-light business with negative net working capital requirements for its outsourced products and negligible capex requirements (capex averaged 1% of sales over the past 10 years). Marketing is by far the company’s largest investment (though expensed), accounting for about 16% of sales, or 17%-18% including marketing staff costs.

Prior to the pandemic, the business had very thin operating margins of 5%-6%, but the low capital requirements resulted in an astounding 5-year RoIC average of 100% prior to the pandemic (peaking at 117% in 2019) without capitalizing marketing (and what useful life would one use for marketing?). During this period, 4imprint achieved free cash flow to equity margins of 4% ,including the outflows from funding the defined benefit pension plan, and more than 75% of that cash was paid out as dividends. Outside the lease for its main Oshkosh, Wisconsin facility expiring in 2025 and the defined benefit plan, which is currently evaluated to be fully funded, the company is debt free.

One can buy promotional products from any of 4imprint’s thousands of competitors. Although 4imprint is the exclusive distributor for some products and its few proprietary brands, most of its products are also offered by competitors. 4imprint’s value proposition for a small or medium-sized business customer seems obvious – the ease of placing an order, customer support, service guarantees, product variety, price, minimum order quantities, delivery times, and product quality are all sources of value. To maintain and enhance these, 4imprint invests in its website’s appearance and functionality, dedicates a sales-person to each order, maintains the industry’s largest art team (to be discussed later), and guarantees the refunds described in the previous section. The company also needs to find and assess reliable suppliers and retain them to assure product quality and to fulfill its guarantee promises. 4imprint has several teams sourcing and assessing potential suppliers over a number of metrics. On the other side of 4imprint’s quasi-marketplace, the chosen suppliers find value in high-volume orders aggregated from 4imprint’s large customer base and quick and reliable payment terms.

Why It's Interesting/Some Industry Background

4imprint operates in a ~$25bn/year market with 26,000 distributors, only 1,000 of which have annual revenues exceeding $2.5m (this is the US market, where 4imprint derives >95% of its revenues). The 50 largest players control about a third of the market, and the top 10 control about a fifth. 4imprint ranked third by revenue in 2020, dropping from the top spot which it held for a number of years. It had 3.3% share of the market in 2019, lost 60 percentage points in 2020, and recovered to 3.3% share in 2021. The company had 0.5% share when the current CEO took over in 2005.

4imprint’s management estimates that large corporate promotional programs account for about a third of market orders, with the remainder coming from SMBs. In the period 2011-2019, the market grew at a 4.2% CAGR, while 4imprint grew at a CAGR of 17.9%, entirely organically.

Exhibit 1: The products industry and 4imprint’s revenue, rebased to 100 in 2011, and 4imprint's market share (right axis)

Source: Company filings, Advertising Specialty Institute

Promotional products are essentially physical gifts usually presented by, for example, company representatives at trade shows and at product promotion events to prospective customers. The pandemic was therefore the biggest exogenous shock to the industry in recent memory, as lockdowns prevented people from gathering and, thus, destroyed a huge part of demand for promotional products. Sure, promotional products can also be mailed, but mailing a t-shirt bearing your logo to a prospective customer doesn’t seem like a good use of marketing dollars. Mailing promotional products to existing customers as part of retention marketing or to new white-collar hires working from home perhaps softened some of the blow, and the market contracted only 21% in 2020. What certainly propped the industry up was the rapid rise in PPE (facemasks, sanitizers), which amounted to ~$1bn in sales by the top 40 industry players, or 14% of that group’s sales. The top 40 promotional products companies’ sales declined 6% in 2020, but 18% excluding PPE.

The industry offers commodity products to a fragmented customer base, who make choices based on price, product variety, minimum order quantity, delivery times, product quality, and customer service. Scale matters in all of the above. Hence, many small players do not survive demand shocks, and large players tend to gain share or acquire smaller competitors in recessions, and that’s exactly what happened in 2020 and 2021.

Consumer e-commerce companies tend to exclude PPE from their results when presenting growth numbers, but the huge uptick in PPE in the promotional products industry during the pandemic speaks to the perceived importance of promotional materials in the eyes of customer companies. Industry advocates like to quote the huge number of “impressions” that a promotional product generates relative to other forms of marketing or advertising, by which they simply mean that if you use a pen with a company’s logo for a few months, you will have been reminded of that company many more times than by an online ad. For example, Facebook’s cost-per-click in the US was $2.25 in the US in 2021, and for that price, you can find several models of hardcover notebooks from 4imprint, which will deliver significantly more than 1 “impression” or “click.” The US advertising industry was about 10 times the size of the promotional products industry in 2021.

In my view, Stran and Company’s CEO (a 4imprint competitor) described promotional products’ advantages better:

And this industry has historically grown year-over-year because this is a highly effective form of advertising, promotional merchandise, it's the only form of advertising that really gives somebody something rather than takes away their time. Traditional media, traditional advertising takes away from what you're doing, whereas when someone hands you a gift or gives you a gift, you receive something, you have a favorable outlook of that brand as well as really they're giving you something and taking the time, so they remember that. So that's why we consider this form of advertising very effective. And you can't digitize that. It's very hard to digitize that experience. So we feel that this will continue to grow and become more effective as more digital comes in and more alternative forms of advertising, people are inundated with that and overwhelmed.

Promotional products tap into humans’ reciprocation tendency (see Robert Cialdini's Influence) – even a $0.50 pen, presented as a gift, can trigger a subconscious need to reciprocate by politely listening to a pitch (which might be worth thousands of dollars) about the company whose logo is on the pen.

All this may seem fuzzy and soft to the touch, but the resilience of the industry is borne out in the numbers – in 2021, a year when the largest corporate event organizer, Informa, saw revenues at ~60% of 2019 levels, the promotional products industry recovered to 90% of its 2019 levels.

Back to 4imprint, the company’s revenue declined 35% in 2020. I suspect its relative underperformance was a function of its customer base: SMBs for whom promotional products were not really top of mind during an existential crisis. 4imprint also didn’t generate meaningful PPE revenue, which might be a function of its customer base or of its own fault if it failed to recognize the potential for PPE and was too late in procurement.

Many companies in the Top 40 list seem to focus on large enterprises, who tend to have more predictable and more sophisticated marketing campaigns. There are few publicly traded companies – Stran & Company (STRN), Deluxe Corp.’s (DLX) Promotional Products Division, a few Cimpress (CMPR) divisions, and BAMKO, a division of Superior Group of Companies (SGC) – and, with the exception of Cimpress (I’ll discuss Cimpress later), they focus on large enterprises’ promotional campaign business, of which promotional products are only a part. These companies offer other services as part of the campaign such as loyalty award programs, online marketing campaigns, packaging etc. 4imprint is the largest pure product distributor and does not compete for the business of large enterprises. It looks like the company is positioned to continue to gain share from subscale competitors in a very resilient, albeit mature, industry.

And this is what makes the company interesting. A month ago, 4imprint published a brief trading update stating:

During the period January to April 2022 total order counts in the primary North American business were 11% above the 2019 comparative, (the most recent 'normal' year). Average order values were 14% above 2019, resulting in overall demand revenue of 27% above the same comparative. New customer acquisition has remained encouraging, and the retention statistics reliably reflect the growing customer file. This building momentum in trading means we are now on track in the 2022 financial year to achieve our long-held target of $1bn in Group revenue. This places our revenue expectations for the year above the upper limit of the range of analysts' forecasts, and well above analysts' consensus. Management's expectation for full year 2022 operating profit is also now above the highest analyst forecast in the market, driven by: (i) the revenue volume gains noted above; (ii) the productivity of the reconfigured marketing portfolio; (iii) relatively stable gross margins; and (iv) operational gearing relating to semi-variable and fixed costs in the business.

I don’t have a Bloomberg terminal or FactSet, but there are 8 analysts covering the stock, and, according to TIKR, the mean estimates for 2022 are $976m in sales and $52m in EBIT. I don’t know where the high end of the range of estimates is, but it’s probably safe to say that the company expects to deliver $60m+ in EBIT. The company’s defined benefit pension plan is due for its triennial review in September, and, though the plan is currently in surplus, the revaluation might require management to make another payment to assure they’re on track for a full plan buyout by 2024. But I would guess this payment is unlikely to exceed a few million dollars. Assuming neutral net working capital and, say $5m in capex and maybe $4m-$5m of depreciation, and a 21% cash tax rate, and even a $10m pension fund contribution 4imprint could generate at least $35m in free cash flow. It approved a $0.45 dividend, the payment of which will result in a ~$13m cash outflow.

This would leave 4imprint with about $64m in cash (it exited FY21 with $42m) and about $10m in lease liabilities, so a net cash position of about $54m. The company’s current market cap is $914m. So it’s essentially valued at ~$890m in EV ($903m if using FY21 net cash), or ~15x FY22 EBIT and a 3.9% unlevered free cash flow yield (based on the assumptions in the previous paragraph).

Short-term guidance/consensus is of little importance to a long-term investor, but the strength in this guidance suggests that the industry is recovering and that 4imprint is gaining share, with the contribution of each development difficult to assess, but I would bet on share gains being the main driver. If the industry returns to low single-digit growth, 4imprint gains about a quarter of a percent share a year, and the economics remain intact, one could envision the company growing free cash flow at 9%-10% over the next 5 years. If history is any guide, this would be a significant deceleration from the company’s achievements in 5 or 10 years prior to the pandemic, when FCF more almost quadrupled and more than doubled, respectively.

Relative to those periods, the company appears to be on a much stronger footing. The pension plan will not be a burden for much longer. The business model of a sales-intensive marketplace doesn’t seem to allow for much operating leverage – ~2/3 of 4imprint’s cash costs are for purchases of its products from suppliers, which, volume rebates notwithstanding, are essentially variable costs. Together with staff costs, they make up 3/4 of the company’s cash costs. There is a limit to how many orders an employee can handle without customer service suffering, so staff costs are also somewhat variable.

However, there are perhaps two potential sources of margin improvement. I imagine there is a certain point of market share, where the company becomes salient enough that returns on marketing start to diminish, and organic customer acquisition becomes a bigger part of the acquisition mix. This would mean higher marketing returns or, inversely, a lower marketing/sales ratio. The gross margin could benefit from the growth of in-house manufacturing in the revenue mix. 4imprint’s internal manufacturing is focused on the largest promotional products category, apparel, which had been (at least prior to the pandemic) underrepresented in the company’s revenue mix (19% vs the industry’s 35%). It’s made a strong recovery in 2021, but there might be further scope for above corporate-average growth of internally manufactured apparel, which almost certainly is more profitable than externally sourced.

So, this back of the envelope projection for the company’s longer-term prospects doesn’t seem outlandish but rather conservative unless one has serious doubts about the prospects of the industry and/or 4imprint’s competitive position, which I’ll briefly review below.

Finally, the company seems interesting because it seems relatively unknown. This could be a function of market cap, but there are plenty of small- and micro-cap managers who could be intrigued. There are 8 analysts covering the stock, yet, not counting directors and executives, there were only 11 people at the company’s recent AGM, including the author of this post. I didn’t meet all of the attendees, but there were I think one or two institutional investors or analysts, two individual investors, and a few current or ex-employees.

4imprint's Competitive Advantages

Scale

The advantages of 4imprint’s massive scale, relative to other pure distributors, are fairly straightforward when the business is framed as a quasi-marketplace. The aggregation of customer demand allows for a low minimum order limit on a wide variety of products, which benefits SMBs who don’t need hundreds of promotional mugs, while still providing sufficient volume to Tier 1 and Tier 2 suppliers. The volume is sufficiently large for 4imprint to receive volume rebates, which in turn allows 4imprint to offer low/competitive prices even on small orders. All this aggregation and product variety is made possible by 4imprint’s software infrastructure and its procurement teams, who work to vet new suppliers. These assets are also difficult to replicate by subscale competitors.

Then there is 4imprint’s marketing spending. 4imprint spent $157m on marketing in 2019, when the 10th and 15th largest promotional products companies generated revenues of $211m and $151m, respectively.

That spending also seems to have been quite effective during the 5 years prior to the pandemic (see graph below). The return on marketing also increased during the recovery in 2021. The graph also assumes all marketing spending goes towards customer acquisition, and that’s not the case. Management points to the cruder measure of revenue per marketing dollar, which has averaged about $6 revenue/$1 marketing for the past decade.

Exhibit 2: 4imprint’s customer acquisition costs (CAC) and revenue/new customer

Source: Company filings

4imprint also spends on retention marketing (they don’t disclose how much) in the form of their Blue Box™, which is a small box containing a couple of free samples of 4imprint products and a catalogue. The company eats its own cooking and sends this box of its own promotional products to existing customers monthly. I know someone who made an order in March of 2020 (more on this later) and still receives those boxes. The company stopped disclosing the number of Blue Boxes sent, but the latest data point was >2.5m units in 2019. I imagine the cost of each is somewhere between $5-$10, which would mean the company spent about 8%-16% of its 2019 marketing budget on Blue Boxes. These might at least partially explain the optically high CAC.

4imprint’s other marketing channels are primarily focused on search, e-mail, and physical catalogs (which apparently are still effective). The company also started developing its brand marketing through local radio station and TV ads a few years ago. At the AGM, a director told me that these ads actually provide fairly good attribution data, as they are aired on fairly small local stations with limited geographic reach. In the little communication with investors the company has provided, management is adamant that the marketing is very data-driven. This is about as much I know about the marketing strategy, but it seems to be profitable. Whether that profit can be optimized further is beyond my company-specific knowledge.

But intuitively, it seems that at a certain point of customer growth, 4imprint will accelerate its organic customer acquisition. Over the past decade, the company has acquired 2.2m customers (summing up the number of customers acquired each year). The company counts individuals rather than companies as customers. Churn seems quite high, as 12-month retention4 has averaged about 35% and 24-month retention about 45%, but bear in mind that these are people working for small businesses, whose survival rate is quite low. Maybe that’s why the company counts individuals as customers rather than often failing businesses, which would skew its retention numbers. I would speculate that a good portion of retained customers made the repeat order on behalf of a different business to which they have moved.

SMBs employ about 60 million people in the US, and there are about 12.4m businesses with 1-4 employees, 1.9m with 5-9 employees, and 0.8m with 10-19 employees. 4imprint does not target these businesses, maybe because it aims for larger orders with better unit economics. I don’t know the distribution of employees/business in these cohorts, but even assuming all businesses in each cohort employ the lower bound number of employees, there would be 30m employees in businesses that 4imprint doesn’t target. I would guess that at any given point in time, 4imprint has a target audience of 20m-30m people. Of course, there is a lot of movement in and out of that pool – people move to larger companies, go back to school, die, younger people enter the workforce, employees of large companies start their own business etc.

The point is that, at a certain point, a significant percentage of small business employees responsible for promotional product procurement will have made a purchase from 4imprint. At that point, if they were satisfied with the service and products, they will be willing to make a repeat purchase next time they need a promotional products order or they will share their experience with somebody and recommend 4imprint to a potential customer. This should result in organic customer acquisition and retention that would obviate the need for some portion of marketing and marketing ROIs would improve.

The pandemic probably worked in 4imprint’s favor on that front, as smaller competitors might have struggled to survive and/or decreased their marketing spending.

However, for this favorable future scenario to unfold, customers have to be really pleased with their 4imprint experience, and I think the quality of that experience is a function of 4imprint’s culture.

Culture

Many investors talk about culture, and it often sounds nebulous, but in 4imprint’s case, I can think of one instance when a decision exemplifying the company’s culture yielded concrete benefits to shareholders. In 2020, management made two important decisions that prioritized employees over shareholders. The company decided to cut the dividend but keep making contributions to the defined benefit pension plan. Secondly, and more importantly, management decided to not cut any headcount. That decision was made early on in the pandemic, when sales were down 85% year-on-year.

In sort of an instant karma scenario, the second decision has already proven correct, since the company has been able to quickly ramp up production in the recovery and spare itself all the labor shortage troubles that competition has had to deal with. Those sorts of decisions are driven by the company’s core principle, which management refers to as The Golden Rule: treat others as you would wish to be treated yourself.

Having a huge selection of competitively-priced quality products that can easily be ordered online is obviously crucial to 4imprint’s success but wouldn’t be sufficient without great customer service. In the past few years, I estimate a 4imprint sales employee handled about 15 orders on an average day, or roughly 2 orders/hour, assuming an 8-hour work day. Customers are typically contacted by two employees5: employee number 1 handles the order, and employee number 2 introduces themselves to the client saying that the client should contact them in case they have any grievances with employee 1’s handling of the order.

The order process seems to be quite automated, so I guess the sales representative is mostly there to hold the customer’s hand through the process if needed, resolve any problems with suppliers and shipping, address any customer questions/issues, and generally provide the customer with the peace of mind coming from the knowledge that you have somebody at your disposal. The company’s guarantees then provide the ultimate peace of mind.

It would be very difficult for the customer service promised on 4imprint.com to be delivered by unhappy employees and suppliers, so 4imprint’s success starts with management’s treatment of its employees and suppliers. The company appears to care a great deal about its employees, and this attitude trickles down to the customer. The fact that more than half of 4imprint new employees are usually hired through referrals is some indication of employee satisfaction.

Finally, the culture seems to also permeate management compensation arrangements – key management compensation in 2019 was only $2.85m, including share-based compensation, while the company’s staff costs were $65m. In 2020, staff costs remained unchanged (helped by $4m in government aid), while management took a 53% pay cut. In 2021, staff costs bumped up to $66m due to wage increases, while management compensation only recovered to $1.52m. In fact, the CEO, Kevin Lyons-Tarr, and directors took pay cuts and received no bonuses in both 2020 and 2021, with the CEO bringing home only about $530,000 in 2021.

The CEO only holds 0.95% of the company’s shares, worth $8.6m. This might seem like an incentive misalignment, but it seems Mr. Lyons-Tarr is very much invested in the company’s future. He’s been with the company since 1991 and headed the Direct Marketing business in the US in 2004, which, after several divestitures, is 4imprint in its present form. It looks like he is 57 years old (based on dubious Google results), meaning he is pretty much a company lifer, who grew the business from $73m when he took over to $1bn in 2022, entirely organically (with divestitures along the way). He just might not have been very savvy when it comes to his own compensation arrangements and investments in the company, but he has proven himself as a capable capital allocator as CEO, and 4imprint is his life’s work.

In short, it seems 4imprint has a strong employee-centric culture, which underpins the customer value proposition and ultimately drives shareholder value.

Montanaro Asset Management, who own 7% of the stock, have published a report on some of its portfolio companies’ supply chain management: https://montanaro.co.uk/wp-

content/uploads/Montanaro-Supply-Chain-Investigation-November-2018.pdf. The report starts with 4imprint, and judging by its findings, it appears 4imprint’s culture also permeates its procurement and relationship with suppliers.

Competitive Threats

Gifting-as-a-Service

Large companies are increasingly focused on sustainability and their environmental impact, and their promotional products are part of those issues (see 4imprint’s environmental efforts in its annual report and Montanaro’s supply chain management report). Companies such as Alyce and Snappy are aiming to exploit this by launching “Gifting-as-a-Service” platforms. The idea is that the recipients of corporate gifts (including but not limited to promotional products) will be able to choose their own gifts, which would eliminate the waste from unwanted items and lead to better conversion and retention because customers consider personalized gifts and experiences more valuable (which I guess would elicit a stronger and even more disproportionate reciprocation response).

At first glance, it seems that if GaaS takes off, 4imprint and its competitors will be the intermediaries who fall victim to this disintermediation trend or, rather, who would be replaced by new intermediaries such as Alyce and Snappy. 4imprint will simply be relegated to the role of one of the personalized promotional apparel manufacturers to whom orders are routed. There are large enterprises who are adopting GaaS currently (see the customer list on Alyce’s and Snappy’s websites).

However, upon further inspection, it looks like these GaaS start-ups are offering more holistic marketing services, of which personalized promotional products are but one component. In this respect, they are more directly competing with 4imprint’s competitors targeting large enterprises such as BAMKO and Stran.

It also seems to me that, while there is certainly marketing value in allowing customers or prospects to choose their own personalized gifts, there is also value in the surprise of a gift, and its face-to-face gifting.

Furthermore, the promotional products part of the GaaS business is enabled by technological advances, which I would consider a more disruptive industry change, namely digital direct-to-garment printing.

Digital Printing and Cimpress

In apparel printing, digital printers do not require garment pre-treatment prior to printing, as compared with analog screen printers, resulting in much higher throughput. This obviates the need to accumulate inventory of finished goods in anticipation of demand and enables low-volume production as demand comes in, or “on-demand” – hence the term print-on-demand used to describe printing services for very low volume or even single item orders. Digital printing, thus, reverses economies of scale, but to a degree – you still need to ensure sufficient unit demand from many low-volume or single unit customized orders. Entire businesses have been built around demand aggregation for print-on-demand (Redbubble, Society6, Zazzle etc.)

Kornit Digital (KRNT), which produces digital printers and embroiders, can be credited with much of the progress of digital printing over the past two decades. Digital embroidery has been another technological breakthrough analogical to direct-to-garment printing (I don’t fully understand how this works). The table below illustrates the cost advantages of digital printing and embroidery.

Exhibit 3: Cost and throughput comparison of analog vs. digital printing and embroidery

Source: Kornit 2021 Analyst Day

Digital printing on apparel was preceded by digital printing on various kinds of paper. Advances in digital paper printing gave rise to the concept of mass customization, which underpins the business model of Cimpress, which I would consider 4imprint’s largest competitive threat.

Exhibit 4: Cimpress’ illustration of Mass Customization

Source: Cimpress' Annual Report

Cimpress’ original business, Vistaprint was founded in the late 90s, based on the premise that it could economically print small volumes of flyers, wedding invitations, business cards etc. initially through process standardization but later taking full advantage of the cost benefits of digital printing. Today, it owns more than a dozen mass customization printing businesses. Its Vistaprint division is a $1.4bn business producing “marketing materials,” including promotional products competing with 4imprint, for businesses with 10 or fewer employees. It has average order values of $50 (4imprint’s average order value is ~$540) and operates in North America, Europe, India, Japan, and New Zealand and Australia. The other Cimpress business directly competing with 4imprint is National Pen, which produces promotional products for SMBs globally. It has average order values or $200-$300 and is a $314m business. The Advertising Specialty Institute estimates that Cimpress’ US promotional products sales in 2020 were $429m.

Cimpress has been around for a while, and 4imprint’s in-house manufacturing and its suppliers are no strangers to digital printing – Kornit has acknowledged 4imprint as a large customer in the promotional products industry. Any further cost improvements brought about by advances in digital printing technology will likely be enjoyed by 4imprint as well. I think there is also a reason Vistaprint targets businesses with 10 or fewer employees, while 4imprint targets those with 25 or more. Digital printing and embroidery make producing low unit orders economical but don’t offer relief in logistics costs. Vistaprint has gross margins of about 60%, compared with 4imprint’s ~30%, and I would bet 4imprint’s Tier 1 suppliers’ gross margins are below 30%, so Vistaprint wouldn’t have much scope for competitive pricing.

99designs, Fiverr, and Upwork

I think the real competitive threat could come from Cimpress’ acquisition of 99designs in October, 2020. 99designs is a marketplace for graphic, brand, and website designers. 99designs is being integrated into Vistaprint, and it looks like the endgame is to offer an end-to-end service of designing a logo and/or slogan, a website, and printing the logo on marketing materials, including promotional products. Sure, this does not seem much different from hiring a designer from 99designs to create your logo and then going to 4imprint to have it printed on your promotional products. But 4imprint usually takes a day or two to come back with your mock-up design illustrating how the design will look on the blank you selected. Vistaprint can probably fully automate the process ordering products imprinted with a logo created by a designer on 99designs.

4imprint already has a design team, which “might just be the largest in the industry” (per 4imprint’s website), and its services are free if bundled with the purchase of promotional products bearing the logo. However, when compared with the number of designers on marketplaces like 99designer or other freelance marketplaces like Fiverr, or Upwork, 4imprint’s art team is certainly not the biggest and does not offer the widest variety of design styles. 4imprint also does not offer website design services.

Fiverr and Upwork are also potential competitors. There are freelancers on both Fiverr an Upwork offering logo design and set-up of print-on-demand websites with fulfillment from digital printing companies like Printful and Printify, which suggests that there are already some integrations between these platforms. The Prime Time Lion logo was designed by a designer on Fiverr for a very modest sum, and the website was built on Wix, but if Fiverr offered me a bundle of logo and website design services and printing of a few t-shirts or mugs with the Prime Time Lion logo, I’m not sure I would have gone through the trouble of comparing the bundle’s price with the sum of the costs of the disparate services offered by three different companies. The value of such an integration to the marketplace, the printing company, and the customer seem quite obvious.

4imprint’s response to this still only hypothetical threat could be to add a website design team, but that would be extra cost that I don’t think the company’s already thin margins can bear. I don’t think the company could offer website design services for free if bundled with promotional products purchases like it does with logo design, and, like with logo design, I don’t think they can compete with the breadth of design style offerings of these online marketplaces.

To be clear, this is indeed a hypothetical threat. I’m not that familiar with these online marketplaces or Cimpress, and I might be imagining something completely unreasonable in the context of their businesses. Additionally, these marketplaces are much more hands-off – the quality of the service is dependent upon the selected freelancer and (hypothetically) printing company. 4imprint’s focus on customer service (including its guarantees) and, hence, culture, might prove a very durable competitive advantage if, indeed, this hypothetical threat materializes.

Amazon

There are small 4imprint competitors selling on Amazon, but Amazon itself does not currently offer promotional products. Amazon is Kornit’s largest customer, but those digital printers were purchased for the Merch by Amazon business, which offers print-on-demand services for independent artists, thus competing more directly with the likes of Etsy and Redbubble. Merch by Amazon has a design upload tool, so all the infrastructure is in place for Amazon to offer promotional products. Assuming its Merch business has spare printing capacity, it could probably easily launch an experimental promotional products business with little incremental investment. If it considers the promotional products market opportunity attractive enough, it could surely invest in more capacity. Needless to say, it will most likely have a significant cost advantage over 4imprint and other competitors, and their margins will be Amazon’s opportunity. The promotional products industry is also relatively small and mature by Amazon’s standards, so it might not be worth the effort.

Amazon is also even more hands-off in dealing with customers. I think it’s unlikely it will hire a large number of graphic designers to address the design part of the customers’ needs. It also seems unlikely it will launch a freelance designer marketplace to plug that gap. Its customer service currently seems to be almost entirely automated, which works perfectly for consumers, but that probably won’t suffice for businesses buying promotional products.

So, again, 4imprint’s competitive advantage against potential competition from Amazon seems to again be its customer service, and, by extension, its culture. That said, it would be foolish to ignore Amazon, and 4imprint can only hope that the market is too small and mature to whet Amazon’s appetite.

Other Considerations

I have so far argued that 4imprint’s main competitive advantage against smaller players is its superior scale, while the company’s culture drives a level of customer service that poses a moat in front of potential new entrants and disruptors.

It’s difficult to assess culture from the outside. If my reasoning is correct, you could evaluate the culture by the customer service, but 4imprint processes 1.5m orders a year from hundreds of thousands of customers, each accounting for a miniscule percent of revenue, so obtaining a statistically significant sample through any sort of due diligence or survey work is impractical or at least, very expensive.

So, one could then rely on customer retention statistics, NPS scores, and customer and employee reviews. As already discussed, customer retention is not a good indicator in 4imprint’s case, due to the fact that its customers are small businesses with low survival rates. I couldn’t find any publicly available NPS scores for 4imprint although the company conducts customer surveys and compiles NPS scores (per its annual report). The fact that it doesn’t share those is a bit odd and maybe concerning (public companies with high NPS scores tend to brag about them).

There are a few customer and employee reviews that I found on websites such as Glassdoor and Yelp, and the majority weren’t flattering. But how representative are those samples? There is probably a good amount of bias in that sample – what kind of people leave customer and employee reviews? People with extreme enough experiences to feel the need to share them? Very disappointed and/or very delighted employees and customers? I’m not sure. The sheer number of reviews I found wouldn’t pass the test of statistical significance.

One could also argue that the financial results are evidence enough, but there are companies, whose customers really hate dealing with them but have little choice because of switching costs or other factors. I couldn’t think of any particular factor that would force customers to do business with 4imprint instead of a competitor.

Still, the negative reviews and the optically low retention rates should be kept in mind.