Companies Put Billions into Promo 'Freebies'

BOSTON ( TheStreet) -- If you are a doctor, or ever worked for one, odds are you haven't bought a pen in years.

As part of the marketing blitz waged by pharmaceutical companies and medical device makers, pens imprinted with the logo of their wares are ubiquitous and, until recently, were doled out like Halloween candy.

The education sector spent $2.2 billion for branded merchandise last year, topping the spending list for the first time and hinting at the sector's new competitiveness.

The items may be small, but there is big business as companies, large and small, buy and pass along freebies -- all those pens, mugs, caps and T-shirts intended to build or reinforce name recognition.

The Advertising Specialty Institute estimates that companies spent $17.4 billion on logoed business giveaways last year, an average of $56.13 for each person in the U.S. Although the cost isn't shared equally, of course consumers are on the hook for paying back, item by item by item, what companies and institutions spend on promo products.

The industry grew by 9.1% last year, with businesses and organizations in the South leading the nation in terms of money spent on logoed promotional products by region -- $5.9 billion last year.

Northeast distributors and suppliers sold $3.1 billion in specialty, logoed merchandise, much of it to companies in the health care, insurance, banking and education industries. Distributors of promotional products based in the Midwest sold $4.3 billion worth of imprinted items; their counterparts in western states sold $4 billion.

For the latter region, the West is home to four of last year's top five promotional product suppliers: American Apparel ( APP), Tri-Mountain/Mountain Gear, Sweda and Sunscope. With tech heavyweights such as Apple ( AAPL), Microsoft ( MSFT), Google ( GOOG), Twitter and Facebook based in California and Washington, many promo product companies in the West focus on that sector. Among seven major metro markets, more people in Los Angeles own promotion products, an average of 12.7 items, ASI says.

But last year, the education sector -- schools and universities -- topped the list for the first time, bypassing health and medical companies and hospitals. Educational institutions commanded 12.4% of the total market, generating $2.2 billion in revenue for the 3,200 manufacturers and 23,000 distributors of logoed items throughout the nation.

Timothy Andrews, ASI's president and chief executive, credits increased competition for the rise in school-centric giveaways. Traditional colleges are in a recruitment battle with for-profit and online universities such as those owned by Apollo Group ( APOL), ITT Educational Services ( ESI) and Corinthian Colleges ( COCO).

"You've also got a lot of veterans coming back home, and there is a really big push to get them to pick your school because there are benefits to that," he says.

More people are also considering a return to school, particularly among those who are unemployed and want to take advantage of the time on their hands and government programs that encourage and defray the cost.

Fierce competition makes businesses susceptible to the data in ASI's survey of 3,332 businesses and businesspeople, in which 83% in the U.S. say they can identify the advertiser on a promotional item they own. An imprinted pen is used an average of 18.2 times per month, partly due to the "pass-along rate" of those "borrowed" items that never actually get returned.

Others who are convinced: financial and insurance companies, which were responsible for 9.6% of spending, or nearly $1.7 billion last year. Government agencies, which accounted for 3.8% of the spending, spent $661 million.

Climbing for the first time in years was promotional spending of this type by auto companies and dealerships. The GMs ( GM) and Fords ( F) of the sector represented 6.6% of the tchotchke and swag market, shelling out $1.1 billion to plaster their logos far and wide.

"We do tend to be a leading indicator," Andrews says. As companies get their post-recession bearings, the low cost of these promotional items offers an affordable way to once again ramp up promotional efforts.

"Because of the price point they will buy these items sooner than they might more expensive things, like radio, TV or billboards," he says.

The key to a successful freebie, Andrews says, is to give people something useful, "something that they would otherwise have to buy for themselves." For example, when flu fears ran rampant in 2009, logoed bottles of hand sanitizer surpassed pens as the most popular item.

While anyone could and did slap their name on sanitizer, that approach helped the health care sector, including doctors and hospitals, spend $1.8 billion for 10.4% of the market. Pharmaceutical company freebies, itemized separately, commanded 1.1% of the market, spending slightly more than $191.4 million to draw attention to products that are, in turn, marked up to account for promotional expenses.

All those drug-branded pens and calendars have become something of a hot-button political issue.

Last month, the Massachusetts House of Representatives voted to repeal the state's 2008 gift ban, which regulates interactions between physicians and the pharmaceutical industry.

The American Medical Student Association is among the vocal supporters of the ban and, as part of its PharmFree campaign has advocated "the elimination of all pharmaceutical marketing gifts including meals, coffee mugs, pens and anything else that unnecessarily increases the cost of health care."

Though the future of the Bay State ban on "gifts" remains undecided, pharmaceutical companies have tried to head off other restrictions with voluntary ban. In 2008, member companies of the Pharmaceutical Research and Manufacturers of America established voluntary, self-policed guidelines that prohibit sales reps from providing most of these items. Among those member companies were Abbott ( ABT), Bristol-Myers Squibb ( BMY), Eli Lilly ( LLY), Johnson & Johnson ( JNJ), Merck ( MRK), Novartis ( NVS) and Pfizer ( PFE).

"When the pharmaceutical company guidelines went into place, between $700 million and $1 billion in sales went away," Andrews says. "I think they were offering that as a way to avoid more, potentially restrictive legislation. We are now seeing some cracks in that. Some companies are not necessarily following it, because there is no law that says they have to, but more importantly our distributors and suppliers have been creating products that do fit within the guidelines."

"Those guidelines, though restrictive, do allow items that are educational in nature or informative in nature," he adds. "So things like patient kits, digital photo frames, anatomical charts, these are some of the many kinds of unique promotional products that can still be given for a physician to either give to his patients or use in their office. The stringent guidelines have certainly reduced ink pens and some of the more casual kinds of things. But it actually brings everything up another level. Having the ability to be educational or informative has created an opportunity for us."

Nevertheless, Andrews says his organization is "trying to convince lawmakers that promotional products are advertising, not gifts."

"If I give you a mug with your name on it, is that really going to change what prescription you write for somebody? It puts the drug's name and proper spelling out there, with maybe some drug interaction stats and educational material for you to be informed as a physician," he says. "That is important. But these truly are not gifts and shouldn't be judged as such. These items are a lot different than a two-week vacation in Tahiti."

-- Written by Joe Mont in Boston.

>To contact the writer of this article, click here: Joe Mont.

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