4imprint

Industry disruptor

4imprint is a classic case of industry disruption as explained by Clay Christensen in the Innovator’s Dilemma.

· It allows for smaller orders from smaller customers, including individual customers in larger organisations, thereby meeting previously unmet demand or providing greater convenience at the lower end of the market;

· It was profitable at lower volumes because it did not have the fixed cost base of outside sales like traditional distributors;

· As it captures more volume and as it scales, it is able to improve its offering and work its way up market. As Stran & Co discloses in its 10-K, most of its own revenue is transactional and not protected by minimum volume guarantees or exclusivity and therefore 4imprint has a large, penetrable market to go after.

The market is estimated at $25 billion and 4imprint is now the largest single provider at 5% market share. The industry is very fragmented and larger competitors like Halo – backed by PE money - are adopting the twin track of consolidating smaller players (but around the wrong business model) and buying adjacent businesses like employee incentive scheme providers. I think any such strategy of ‘cornering’ customers – ie eliminating competition without any concomitant material scale benefits to share with customers and attempting to increase customers’ dependence on you by offering adjacent products and services – is doomed to fail against 4imprint’s business model, which can use its increasing scale to provide customers with better products and service levels more cheaply.

It is not easy to project how much of the existing market would become addressable to 4imprint but it currently has no major competitor operating the same ecommerce sales business model. I believe it most likely that 4imprint will capture a much greater share of the market as it becomes more known and tried by end customers and smaller players with higher cost bases just cannot compete on price and service.

4imprint requires very little capital to operate and to grow. Its operating margins have expanded to 10% as it has scaled in recent years and its turnover has doubled in the last 4 years. If it doubled again in the next five years and on the same operating margin, then as almost all earnings converting to cash, that would be a 15% return from growth and say 8-9% from distributions (as it is currently trading at a 10x PE factoring in net cash). Any improvement to margin would enhance that. It could very well continue to grow for a good many years after that – it is conceivable it could reach a 30% market share with its superior scaled e-commerce model (and could re-rate accordingly in the short term).