Strategy Development Wraps Up What Worked This Year, What’s Ahead2 Dec, 2013 By: Tom Callinan, Strategy Development
According to Tom Callinan, Principal, Strategy Development, Inc., 2013 was another good year for the larger dealers in the imaging industry.
Says Callinan: Low lease rates, buying equipment at phenomenal pricing, optimized service operations, and the continued opportunity to buy smaller dealers at low multiples are contributing to very high operating margins for this group of (large) dealers. Those high operating margins allow this group to continue to invest and expand, and many are expanding both geographically as well as in market share creating large regional dealers; this is different from years past when most dealers stayed in the city where they were started. Although few dealers leveraged an MPS strategy to move upstream into larger accounts, these larger dealers have focused on capturing total output in their core of accounts adding thousands, if not tens of thousands, or printers to their service portfolio. Many in this group have also launched a managed services business focused on their current customer base and adding even more reoccurring revenue to their service portfolio. Finally, software products tied to paper are also gaining traction with this group including advanced capture, document management, and variable data.
The smaller dealer has not fared as well. Although they too benefit from the low lease rates, they are not experiencing the same opportunities to buy their equipment at highly competitive prices, have not focused enough on their service department operations to maximize contribution from that revenue stream, haven't been as organized about going after printers, and are selling their dealerships rather than buying their competitors. I realize that my comments about large dealers and small are blanket observation and that companies will fallout of the description in both categories; there will be large poorly run dealerships that aren't experiencing high operating profits and there will be small dealerships that are experiencing high margins. But I'd stick to my observations for the majority in both groups. I'd also note that small dealerships fall into two categories: High market share dealers in rural areas and low market share dealers in densely populated areas. The former has a greater possibility of achieving strong profits and a high valuation when and if they sell; they also have more money to invest in maintaining that high market share.
I believe you will see an acceleration of the aforementioned trends in 2014. All of our larger dealer clients are focused 100% on healthy growth; not a single one of them ever mentions selling their company, at least not over a five year horizon. The overall "dealer count" will continue to be reduced as the smaller dealers are bought up; being in a mature industry there are very few start-up dealers to replace those being bought. This will make the larger dealers even more important to vendors as there will be fewer companies to use a vendor's leasing; fewer companies for an equipment OEM or software company to authorize as a dealer, and fewer companies for aftermarket companies to sell their parts, supplies, or accessories. For the near term, this puts these large dealers in a very good position to negotiate favorable terms from their vendors. It also makes it critical that vendors focus on providing true value to relationship besides price. The problem with price is that somebody else can always be cheaper. We do see vendors working to add value to the relationship with their dealers.
The elephant in the room that everybody seems to be ignoring is that paper usage is dropping rather dramatically; my belief is that the trend will accelerate. A few years ago the analysts in the industry were saying that paper usage would grow, using what I considered an outdated model that based paper growth on some formula with GDP growth and employee growth as the foundation. We were coming out of the recession and these analysts expected paper usage to grow; but back then I wrote that I thought they were wrong. I didn't base my hypothesis on any research, other than the fact that when I got on a plane everybody had some type of tablet, when I was at a client they came to the meetings with their tablets, and when I discussed a presentation or schedule we did it electronically. All of these examples were using paper just a year before I wrote that, maybe three or four years back. I said then and I still say today that people are reducing their paper usage without even trying! In other words, it isn't like somebody has some six sigma project to reduce paper usage people just find it more convenient to live without it. That outdated model forgot to factor in the iPad! My current conjecture is that K – 12 will be the first industry to go virtually paperless followed by health care. Think about it….can you see a fifth grader in five years doing everything they need on some type of tablet: Tests, homework, studying, even on-line tutors, everything? That is scary for our business.
The other issue for the industry is that growth in color as a percentage of total output is slowing rapidly. For many years the industry experienced a revenue boost as people shifted output from black to color. Even as color pricing fell from double digits to five cents or less per page it was replacing black images at less than a penny a page. The price per color image will continue to drop, everything does, but that shift from black to color isn't going to be there to boost overall revenue. That is going to be a problem for the industry. There are still a lot of printers out there to put under contract so there is revenue offset core business declines, but that space is getting competitive as well.
The largest challenge for our industry, "the copier industry," is not moving away from an outdated business model. The copier industry is a great business model: You effectively lock a customer into a five year contract with a highly profitable annuity stream with built in annual escalators and significant switching costs. What's not to like? The business is going to shrink dramatically. The great news for "the industry" is that you aren't in the copier business: You are in the providing technology products and services to businesses. In 1987 I named the dealership I started CopiFax because we sold copiers and fax devices. Today I'd call my company "No Paper" and I'd work with companies to eliminate their use of paper. I'd still sell copiers and printers, as well as various software products as people would still need output as we worked toward an end state five, seven, ten years down the road, but eventually I'd get them to 10% - 20% of today's paper usage. I'd get paid for that consulting as well as all of the products, both hardware and software, I implemented within their business. I would absolutely do everything I could to retain and grow my core business—my copier business—because that is what is paying the bills. In Boston Consulting Group terms that is my cash cow business that provides the money to invest in my future businesses. But I'd have as much of my management time dedicated to developing my future as I was milking my cow.
Unfortunately, what I see too often in the copier business, and hence my legacy remark about the business model, is that dealer principals sacrifice their future growth businesses to protect the copier business. They don't want to do anything to upset their core salesforce so they tip-toe around launching new business models within their copier dealership. They tuck the investment business under some middle manager, or in the wrong department like service, and wonder why two years later they have no traction. Our business needs to get serious about change and with business planning, including putting a true business leader in charge of our investment businesses and giving them the authority to make decisions that grow that business. We need to get serious with sales management, ensuring our critical front line managers are hiring the correct type of sales employee and that they have the correct focus on developing those employees.
Nobody is going to look back at 2014 as the year the industry went through a sudden and dramatic change. Nevertheless, in 2020 there are going to be a lot of former "copier guys" that say they wished they started to transform their businesses 10 years ago and committed more time and managerial resources to effect that change. If you're really progressive, maybe your dealer friend says they wish they followed your lead in 2014, as you're wiring the money into their account when you're buying their company.
Tom Callinan is Principal of Strategy Development, Inc., a leading consultancy for sales & management training across multiple platforms (MPS/managed services, etc.) for dealers and vendors in the office channel. For detailed company information visit http://www.strategydevelopment.com. Callinan is also a featured presenter at ITEX 2014 in March in Las Vegas, NV. Info at wwwhttp://.itexshow.com