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In the Trenches with the Office Equipment Dealer

15 Aug, 2002 By: Tim Teasley imageSource

In the Trenches with the Office Equipment Dealer

office equipment sales distribution methodology has changed in the last three
decades and continues its metamorphosis. Are the present actions of
manufacturers a defensive reaction to the mega-mergers of the nineties or
a signal of a major disruption to come in the independent office equipment
dealer distribution channel? What can the independent dealer do to combat the
continuous changes in distribution?

the past, the demographics of the office equipment dealership community in the
United States have changed dramatically over the last 25 years. Xerox owned the
business in the 1970s, with a virtual monopoly. In the early 1980s, this changed
as a multitude of Japanese companies joined the ranks of office equipment
manufacturers. The quickest and most inexpensive route to distribution in the
United States was through the local independent dealer. In the 1980s, industry
conferences designed to recruit dealers were huge events. Manufacturers invested
multi-millions in the conferences to attract local dealers, to carry their
product lines. The gross margin of equipment sales was high enough alone to
support a substantially growing business. The independent dealers became very
successful and owned the new market through Japanese manufacturers.

the 1990s, major publicly traded companies discovered that “rolling up” the
independent dealer community into a centrally controlled corporation was a great
investment. Many successful independent dealers accepted the offer and
temporarily remained with the company. When they could no longer withstand the
bureaucracy of a major corporation, most of them left the publicly traded
companies that had purchased their dealerships.

publicly traded companies that acquired vast dealership networks established
strong nation-wide distribution channels. These distribution channels were
comprised of a wide variety of manufacturers. After the distribution channels
were in place, the rapid growth of revenue was diminishing. The emphasis of
these publicly traded companies shifted to profitability, amidst weakening stock
prices. In order to improve profitability through increased efficiency,
decisions were made to concentrate on particular manufacturer lines. Practically
overnight, manufacturers were ousted from prized distribution channels developed
over the past twenty years.

The Present

In the 2000s, the perfect storm has formed for the office equipment
manufacturer. The publicly traded companies that control such a large portion of
the distribution channel are the primary customers of several major
manufacturers. The gross margins on equipment sales have slipped so low that
establishing a new dealership from equipment sales alone is virtually
impossible. Also, the initial investment to start a new dealership has
dramatically increased. A single demo room, properly inventoried, is now over a
quarter million dollar investment. Add a soft economy to the equation, and
success seems unachievable!

manufacturers, in the quest to protect distribution, have taken calculated risks
in the independent dealer market channel. Some manufacturers have set a minimum
requirement of two dealer channels in each market to protect their long-term
interest. Also, manufacturers have started purchasing independent dealerships
and establishing direct sales and service operations to protect distribution.

the office equipment industry is migrating back to where it was in the 1970s,
with huge organizations controlling the market rather than small strong
independent dealers. However, there are several fundamental differences. The
gross margins on equipment sales are thin. Since more businesses have already
purchased their first copier, the market has become replacement/maintenance
based. The equipment is now more compatible between manufacturers. As the age of
connectivity arrives, a new dimension is added to the equation.

manufacturers’ strategies now appear to concentrate on the largest dealers
with field support. As one of our manufacturers’ personnel informed me, any
dealer ordering less than fifty thousand dollars per month was risking
cancellation. This comment reflects the lower margins and the high cost of
personnel to support a dealership. Now that the industry has matured, the
independent dealer must have a volume level and growth level high enough to
attract and keep strong manufacturers. Factories are now more efficient.
Therefore, increased distribution is the key to the manufacturer’s success.

dealers are looking for a single “silver bullet” to solve the ails of a
rapidly changing business environment. Sorry, it simply does not exist!
The issues are too complex and varied for one single solution. Quantum leaps in
changing or improving a dealership are rare. The emphasis should rather be
focused on improving the dealership’s operations and financial strength on a
daily basis.

are the independent dealers’ best defenses to remain successful?

certain of your leasing arrangements.

The office equipment industry is a repeat business. Realize that he who
controls the customer also controls the dealership’s destiny. Do not give in
to the temptation of accepting the absolute lowest rates available today, just
to be faced with high residuals and poor service tomorrow. Develop a business
relationship with a leasing or financing source. To protect your interests, have
a master financing agreement in place, detailing the obligations and
responsibilities of each party. With many leasing companies today facing major
financial challenges, require them to provide your dealership with an annual
audited financial statement. Also, periodically run a credit check on your
leasing source. It may surprise you!

Control the service contract and maintain excellent customer service
Informal surveys reveal that most end-users of office equipment do not know
the brand name of the equipment. They know the dealership’s name. Even on
national    account
business, write the service contract on your dealership’s own documents.
Become so important to the day-to-day operations of your customers’ business
that you become indispensable and a true partner in their success.

Limit the knowledge that third parties have of your customer base.

Be cautious of targeted programs that are sent directly to your sales
representatives. This includes prize line contests that require the customer’s
information be provided for verification of sale. National account business and
third party advertising mailers should be cautiously utilized.

non-compete agreements from your manufacturers’ personnel who have access to
your customers. Limit the information and/or customers that they have access to,
in your dealership.
With the
recent shake out occurring with manufacturer personnel, the last thing your
dealership needs is a former manufacturer field representative competing against
you armed with customer knowledge that they obtained from you.

Consider being a dual-line manufacturer dealer.

History has taught us that office equipment manufacturers’ success runs in
cycles. First, the manufacturer invests heavily into research and development.
The results are great products. Second, the manufacturers’ focus shifts to
market share. Third, as market share is attained, the focus turns to
profitability. This is an over-simplified description of the process. However,
the key point is that manufacturers’ successes are cyclical.

manufacturers develop popular products at different points in time. Being a
dual-line dealer increases the probability of carrying the most sellable
products. It should be cautiously noted that not all dealerships are able to
afford or support more than one manufacturer line at a time. As with all
business decisions, many individual factors need to be considered before making
a prudent decision.

6. Stay current on the rapidly
changing environment of the office equipment industry.

Independent dealers need to unite with other dealers through networking, trade
shows, and mutually beneficial cooperative groups. With the photocopier market
merging with the computer and printer industry, staying current on connectivity
is crucial for your dealership’s success.

Be highly involved in your local community’s politics and civic

This is a relationship business and relationships are developed one-on-one.
Our company has defeated the large public companies, as well as manufacturers,
countless times because of the relationships we have with our customers and our
community. In fact, we have defined the process as being “Home Cooked!”

Generally, Independent Dealers should own the property that their
dealerships occupy.

Renting property is typically a short-term strategy. Ownership is a
long-term strategy that protects the dealership’s location and builds the
wealth of the dealer. With today’s low interest rates, this opportunity should
not be overlooked!

To be successful, Independent Dealers must operate at a high level of
efficiency in every area of the company.
This includes staying current in asset management, personnel
management and training, as well as new technology that would increase operating

To be successful, Independent Dealers must strive to be free of
operating debt.
The Bible
offers clear insight on this subject. Proverbs 22:7 reads, “The borrower is
servant to the lender.” A certain amount of debt is unavoidable and is
advantageous when properly used. However, debt limits your choices and your
flexibility. It should be approached with a high degree of discretion. For
example, acquiring long-term assets such as real estate is generally a wise
utilization of debt.

The End, Remember

The largest difference between a manufacturer’s business model and a
dealer’s business model is the volume of business per customer. A manufacturer
generally has a limited number of dealers with high purchasing volume, compared
to a dealer who has many customers with low purchasing volume.

the 1970s, Xerox had gross margins in the triple digits. However, the
Hewlett-Packard (H/P) distribution methodology of today, has equipment gross
margins in the single digits. It is virtually impossible to operate an outside
sales force with this level of gross margin.

the history of the industry is imperative to plan your dealership’s future.
The reality is that change tends to be incremental and is guided by many issues.
One thing that a dealer can count on and plan ahead for is the certainty of
change. Dealers who understand this concept and plan for it will be the
mega-dealers of the future! The key is… “Don’t get bitter. Get better!”

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