A brand new image

by Stephen White

September saw HP unveil its vision for the future, placing managed print solutions firmly at its centre and heralding a new era in imaging supplies

What have we learned this year as we look back at the series of Sector Analyses in 2009? Hopefully the collection of articles tell you that despite the overcast conditions there is the odd glimpse of a silver lining to be had. Life sure is tough out there, but every now and then we have witnessed the strong glare - a ray of hope, even - brightening up the gloom.  

This issue, OPI turns to the Imaging Supplies sector, and at first glance it shares all the foibles of the wider printer industry. It nestles somewhat uncomfortably in a business environment where new technology investments are expected to demonstrate both cost savings and environmental benefits.

Printers can't help but consume energy, ink, toner and paper. Inefficient use not only has an environmental impact but a financial cost too. In an industry where the majority of revenue is derived from encouraging consumers to print more, the words 'green' and 'print' have a distinctly shaky marriage.

Printing expenditures for desktop and copy room machines, including paper and toner, take up 3 percent of corporate spend says Ed Crowly, CEO of market research firm Photizo Group. He says that printing devices installed in businesses typically are used at just 1-2 percent of their capacity.

Many companies have uncontrolled buying of printer supplies, says Crowley, resulting in "waste lands" of obsolete toner supplies crowding corporate closets.

Looking at the equipment spend, Crowley says the lifecycle for a printer or copier is three years, yet uncoordinated procurement allows for out-of-date equipment to remain in service and operate badly. The problem is exacerbated since "less than 10 percent of total corporate print spend is for hardware", he says; most of the cost is consumables.  

"The ideal environment would have users having as much printing and copying capacity as they need with supplies being delivered only when needed," Crowley says.

The solution being pushed by many in the printer industry is managed print services (MPS) where an imaging fleet is outsourced through a third-party provider that can optimise the imaging environment and document workflows.

Clearly the pain of tighter budgets is not confined to the printer industry - all hardware manufacturers are being hit by a slump in sales as businesses delay purchases. A lot of the momentum in MPS is coming from OEMs who have spotted that the weakening economy may have closed some doors to new hardware sales but it has thrown open other opportunities for printer manufacturers to help businesses maximise their existing investments in printers and also reduce their environmental impact.

OEMs such as Xerox (which recently spent $6.4 billion to acquire Affiliated Computer Services), Canon, Pitney Bowes, Infoprint and Ricoh, along with a bevy of business print services firms that don't sell machines, have all entered the market.  

In September, HP announced it was happy to expand its 25-year "relationship" with Canon and invite the Japanese manufacturer to provide it with multi-function printers under the HP banner as long as it could push its MPS services to customers.

Canon was eager to drive office equipment sales, after its US business took a hit last year when Ricoh bought major US office equipment distributor Ikon Office Solutions - previously Canon machines had represented 60 percent of the products Ikon handled.

Downturn impact

The economic downturn has impacted all printer manufacturers, not least HP, which at the turn of the year saw its Imaging and Printing Group (IPG) revenue decline by 19 percent in the first quarter to $6 billion. Commercial hardware revenue and consumer hardware revenue declined 34 percent and 37 percent, respectively. Relatively speaking HP's supplies arm fared better by falling a bareable 7 percent. A respectable performance in light of increasing competition and the increasingly sophisticated counterfeit copies out in the global marketplace.  

HP has watched its hardware printer sales fall as the weakening economy has stoked the competition with generic ink makers whose products are cheaper. It has also seen its revenue leak away as both businesses and consumers print less to save money. Of course it remains a leader in the field, but when it comes to the hyenas that have been chasing its tail for years, they have managed to gain ground and are having the odd nip at its toes.

The Canon deal had been on the cards for months, but when HP finally showed its hand, it was clear that it may account for more than 40 percent of HP's operating profit, but its printer division is no longer its jewel in the crown. HP will now use the arrangement to bolster its MPS business, which currently stands at 2,400 customers.

"HP will now have the full line of hardware to bring to the customer," said Bruce Dahlgren, SVP of Sales and Services in HP's Imaging and Printing group. "And [Canon] will be able to leverage our managed print service as a way to get their copiers sold.

Unveiling the Canon arrangement, HP also confirmed it has created a new business unit within its imaging and printing group to provide MPS, calling it Managed Enterprise Solutions. The unit under Dahlgren's stewardship will manage the customer's entire portfolio of printing services, from hardware to supplies to support.

Managed Enterprise Solutions will work with HP's imaging and printing reseller partners to provide customers with a portfolio of offerings that help them optimise their infrastructures, manage their printing environments and improve workflows at a lower cost.

Modest growth

One company that it will be working alongside is US specialist IT wholesaler Supplies Network and it's one of a small number of organisations on HP's Collaborative Infrastructure Partners for Managed Print Services.

"Looking at IT consumables, we're seeing modest growth in all categories of laser and ink printer supplies," states Greg Welchans, CEO, Supplies Network. "Certainly MPS is picking up its pace with the number of printers monitored, speed of deals and signed contracts."

Welchans explains that one reason for the acceleration in interest could be that MPS services meet the most fundamental and important needs of modern businesses.

"MPS is important to business for just three reasons: expense control, employee productivity, and the maximisation of resources," explains Welchans. "Businesses want to control the last, major unmanaged area of cost. Employee productivity is directly tied to document output. Businesses are operating with minimal staffing, and are open to outsourcing the management of their imaging equipment, service and supplies."  

Supplies Network offers its CARBON SiX progamme to dealers. Unlike the offering of OEMs, CARBON SiX encompasses multiple brands of imaging supplies, representing major OEM and compatible supplies. Welchans claims the strength of CARBON SiX is its flexibility "offering all the elements either turnkey or à la carte for dealers to choose".

Welchans believes that the successful implementation of any MPS programme requires a dealer to link a vast array of systems, software, processes, products, services, external providers, internal competencies, and people together.

"What many dealers fail to realise is that these elements are not designed to work together, but an MPS programme must find a way for seamless integration to provide end-users the reliability and performance excellence they need to manage their fleets," he says. "CARBON SiX stands out because it is both comprehensive for immediate implementation. Programme momentum is rapidly escalating with the number of monitored printers, the speed of deals and signed contracts."

According to Welchans, MPS savings can come in a variety of ways, including: energy efficient equipment; the right equipment matched to application and needs; longer printer life due to regular maintenance; less printer downtime; no waste in supplies due to obsolescence or misplacement; lower freight costs; conservation of paper; inventory space freed up for other uses; efficiency of automatic ordering; outsourcing tasks previously handled by IT. All of which can be co-ordinated on dealer/customer basis. MPS is about as added value as you can get.
"In today's environment, there is definitely margin erosion as everyone is looking for a deal. At times you have to sell specific items as loss leaders to get the rest of the business, and look at the 'blended' profitability of the customer relationship," says Welchans. "Selling under a MPS programme is the best way for future double-digit profitability."

While he is upbeat about Supplies Network's progress so far he admits that the company has had to change the way it does business because of the economic downturn. The wholesaler is expanding its channel segments that focus on equipment, service and supplies.
"The market is more price competitive than ever. MPS is our solution for dealers for generous margins and gaining a monthly revenue flow," he says.

One of the major spin-offs for the OEMs of MPS is closer coordination with customers over their purchasing of consumables such as print cartridges. The depression in the global economy has been bad for sales and brand loyalty. Ground has been lost to the remanufacturers in the recession and the shift in emphasis to services suggests that they are here to stay. In fact while the OEMs have experienced a downward trend in the past year or so, the remanufacturing sector is experiencing the reverse, whether it's selling its private label or supplying big box own brands.

"All categories in our industry are growing due to the downturn in the economy," says Eric

Martin, President of Clover Technologies Group. "The combination of consumers turning to value and environmental products and the gained market share from our competitors has resulted in our largest growth in history."

Martin believes that companies are continuing to look for a cost savings alternative to the OEMs. "Our gains in market share have resulted in explosive growth this year. Colour laser specifically has been a high growth category."

While it may not have the brand profile of Canon, HP or Brother, it would be wrong to suggest that Clover Technologies is a lightweight competitor in the compatibles and print consumables market. This is a company that boasts $400-plus million in annual revenue, and employs over 3,500 people at 17 locations worldwide. Clover is the largest remanufacturer in the industry, Martin claims, producing over 1.6 million laser and ink cartridges per month. He also says it is the largest recycler of laser and ink cartridges in the aftermarket industry, collecting over 5 million empty cartridges per month.

"Clover's weakness in the past has been our heavy focus on the OP and wholesale/distribution channel, but it is now focused on becoming the leader in multiple channels," explains Martin.

"We collect the empty cartridges, employ our own engineers and R&D team, custom design our own automated machinery, manufacture in-house and then recycle any unusable components so they are not released into the waste stream. This enables us to maintain control over quality, availability, costs and the environmental aspect of our business. Another key strength is the investments Clover continues to make in infrastructure including R&D, the design and manufacturing of its own automation and robotics equipment, manufacturing, distribution and support."

Holding all the brand trump cards, OEMs are pushing incentives and rebate programmes to drive dealers to push OEM consumables, but Martin suggests that the remanufacturers pose a major threat in terms of sales in the channels.  

"The educated dealer understands the potential of the remanufactured category for growing their sales, providing their customers with a better environmental solution, lowering their customers' costs and enhancing their overall profitability," he says. "We cannot predict when a recovery will be seen in the overall market but we do see this category as the largest opportunity for dealers in the upcoming year to grow their business and enhance their profitability. Based on consumers looking for costs savings and environmentally friendlier products, the aftermarket industry will continue to provide a value-add solution to dealers."

Other than price, the added value attraction of remanufactured cartridges and consumables is their environmental benefits. Some studies claim that remanufactured cartridges have a carbon footprint that is 30-50 percent lower than that of an OEM equivalent.

"Our dealer and distributor customers are receptive to products and services that ensure a healthier environment," suggests Carlyle Singer, Katun's President and CEO. "From our perspective, there is no drop-off in interest or importance...in fact, quite the opposite is true."
Growth in emerging markets

There are a number of factors that can affect an end-user's decision on who to purchase from, including their relationship with the dealer or reseller, the product type, or whether they've developed a level of trust with the brand's product quality, says Singer.

"We believe these decisions are often based on the total value provided by the product - where price is certainly an important component, but true cost savings, the value of the services and the relationship with the seller are at least equally important."  

Singer explains that while its core markets have remained steady the company is enjoying a period of growth in some emerging markets, unsurprising when remanufactured products can be far more competitive than, say, an OEM equivalent. "In parts of Latin America, central/eastern Europe, as well as areas in Africa and the Middle East, we are making significant gains as we develop strong customer relationships throughout these regions," he says.

Katun is one of the world's largest suppliers of OEM-compatible imaging supplies, photoreceptors, and parts for the office equipment industry. The  Minneapolis-based company serves more than 18,000 customers in more than 150 countries. Despite the in-roads made in emerging markets, OEMs remain the opposition to beat for the company, but Singer welcomes the competition.

"Obviously, the OEMs are our main competitors. However, we don't really see it as an 'either/or' situation," he says. "Our product offering is, in many ways, complementary to what the OEM offers a dealer. Katun products are available if a dealer faces OEM backorder issues, or if the dealer carries secondary OEM lines, or where products are required to service older machines."

Singer doesn't expect dealers to give all of their business to Katun, but it says that the company can help customers (OEM dealers) to become more competitive in situations where they are competing directly against OEMs and need a cost advantage without loss of performance, or where they need to improve profitability for a certain machine line.

"Fundamentally, we believe competition strengthens this industry and benefits everyone - our company, the aftermarket in general, the dealer, and ultimately, the end-user."

Errata: OPI September's 'Pushing the envelope' - Curtis 1000 is headquartered in Neuwied, Germany. Both Envego and Sheltos are sold into the OP market and distributed through the office suppliers like Office Depot, Staples CE, Lyreco etc. It is not targeting consumers directly.

Inkchemy: Turning ink into cash

Alan Maher, OEM Connect, VP of Sales and Marketing, is not quite an alchemist but the wholesaler does have a unique proposition for companies looking to release their inventory - and quickly.

The company has handled some of the largest liquidations in the recent past. When both Circuit City and CompUSA went out of business OEM Connect bought all their inventory.

"The concept behind OEM Connect is that we look to help people turn inventory (Ink and toner) they no longer need into cash," explains Maher. "Our everyday 'buy from' customer is an office products reseller."

OEM Connect buys at "fair" but below market prices. Its long list of customers includes SP Richards.

"We purchase their discontinued inventory on a regular basis," says Maher.

"There is no minimum amount that we would consider," he adds. "In our business, it is clear that as the technology grows and changes imaging supplies become obsolete.

"The front row destitution players in the OP channel get caught in that inventory vacuum," he continues. "These resellers cannot sell the inventory they might find on their shelf because it no longer appears in the catalogue they put out on the street, or the machines their end-user used to have have been upgraded to something else.

"We can buy that inventory from them and relieve them of that inventory cost and burden.
"The economic downturn has only helped our business. Dealers want to get rid of dead inventory and we want to buy as much as we can," Maher affirms. "We are privately owned and financially solid. We pay instantly for the inventory we buy. There is really no one like us."