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Let’s Examine the Facts

6 Sep, 2006 By: Bob Sostilio imageSource

Let’s Examine the Facts

Every time I undertake a comprehensive Dealer Survey, I wonder whether the
results will unearth some surprising revelation or just show the continuation of
an existing trend. Will the study validate what I advocate or convey that my
assumptions are way off the mark? How do I impart the findings without them
sounding axiomatic? And most importantly, how will the dealers react after
reading the results? Will they see it as a way to validate their strategy or
will they simply utter, “that’s easy enough for him to say.”

Wrapping up the analysis of my Sostillo & Associates’(SAI)2006 Dealer Survey,
I am glad to reaffirm that the US dealer channel is in generally good health
with many respondents enjoying revenue growth and adding more employees. In
addition,a number of dealers stated their intention to acquire another dealer in
2006. It did validate what I espouse. Mainly, the dealer channel is still a
viable means of distribution in the USA.

Some Surprises

Though things sound somewhat rosy, we were surprised by a few of the findings.
One surprise was the shift of the major vendor’s focus where over 40 percent of
the dealers said that they were competing against their own vendor’s direct
branch within their markets. This is up 17.6 percent from our last dealer survey
(2002/2003) and a shift by the vendors from smaller dealer territories to their
mega-dealer’s territories. See the following chart. I wonder just how many bites
of the apple the manufacturers can make.

This finding overshadows some other legitimate issues particularly for the
smaller, under $3 million in revenue dealerships and their current vendors.
Since the mean average of the dealerships in our survey was $10 million, the
findings support the trends of increased focus on color, connectivity and
solution selling. The smaller dealer issues, not always addressed by a survey
such as ours, are revealed by unanswered questions. For example, I noticed that
those dealers reporting 2005 annual sales of more than $5 million tended to
terminate employees less, and have net new resources in sales and service. They
also added customer value such as employing help desks and remote monitoring.
It’s a given that smaller dealers, grossly undercapitalized, are understaffed
with the exception of outbound sales, unable to invest much in technology for
themselves or their customers. So it’s not surprising to find only 45% percent
of the under $3 million dealerships were selling document management software
and their overall connect rates in their customer base was 31.4 percent against
a mean average of 45.3 percent.

And The Advantages Go To

Certainly the digital evolution of office equipment offers many new areas of
growth at all levels of revenue within the distribution channels which, in many
cases, levels the playing field for the independent office-equipment reseller.
When various manufacturers of copy/print engines achieved the same performance
specifications, new sales hinged upon which channel and provider could render
the greater value and not just the piece of hardware. Once again it was the
independent dealers who were quicker to react to local market needs and in
delivering value to their base. And their customers are now responding with
increasing sales.

The Table 2 chart depicts the percentile of dealers by revenue categories who
reported growth in their unit populations of printers and color units. Note that
there were more dealers reporting growth in printers than in copiers. No
surprise that the greater numbers occurred in the larger dealerships. This was
later reinforced when we asked how many customers the dealership added during
2005. The larger quantities were reported by the larger dealerships.

We have said over and over that the office equipment business is a matter of
numbers; the number of feet on the street as well as the number of times the
customer is touched. Our survey supports that axiom with the larger dealers
having more telemarketers and terminating fewer sales reps in 2005.

Although much of the overall copier market is flat, copier/printer dealers
are finding new opportunities in delivering color, print and connectivity. As
previously mentioned, the overall mean average connect rate within the copier
population is over 45 percent. But looking inside that percentile reveals just
how well the digital opportunity has been exploited.

As Table 3 chart indicates, three out of five categories reported a higher
number of connected units in their black and white bases and all in their color
population. Undoubtedly that equates to more clicks, more toner consumption,
larger service agreements, more annuity revenue and higher profits. There is a
close correlation between the size of the dealership and the percent of their
MIF that is connected except with color where everyone appears to have more then
88 percent of units connected. Still the lack of connectivity with back and
white copiers by dealerships with under $10 million in sales indicates that they
have not churned their analog MIF over to digital fast enough, or that they are
still not comfortable supporting connected devices. SAI advocates that providing
connectivity services is pivotal for new business opportunities and growth. The
smaller dealer has to make that commitment of investing in solution selling and
support or else someone in his/her territory will.

Service and Solutions

There has always been a relationship between the number of net additions to the
sales force and the growth of sales. In 2002, dealers were optimistic with 68
percent stating that they were adding additional sales reps; today 83 percent
stated that they were planning to add additional sales reps, with 69 percent
adding additional service technicians.

Service is the wellspring of the dealer channel and perhaps its strongest
identifying feature, but carrying more vendors, longer maintenance intervals,
customer replaceable modules, software support and networks have changed the
skill set requirements and business models. Over 47 percent of the dealerships
in our survey maintained a help desk to address their customers demands for
network support, printer support and system integration. More than 80 percent of
dealerships with $11 million or greater in annual sales have software support
while only 27 percent of the under $3 million size dealers indicated they have a
help desk. It was almost the same percentages when it came to employing remote

Software is concomitant with digital hardware and offers unbounded
opportunity for dealers to expand their profit horizons. A software help desk
can facilitate dealers selling software services and is an opportunity that all
dealers should seriously consider. Even vendors should fund or co-op such a
service given that their profitability in the long run will depend upon
increases in software sales revenue along with the hardware revenues.

The Competition

And what would a survey be without asking dealers to list their major
competitors. Of course we asked for all categories but for briefness just the
copier data is charted. The following chart shows the shift that has occurred
since 2002/3. No longer is Xerox considered a primary MFP competitor, nor IKON
having dropped from over 50 percent to just over 20 percent.

IKON, the megadealer, was mentioned frequently (by 56 percent of dealers in
2002/3) as a major competitor, but just 22 percent in 2006 which implies IKON is
no longer considered the 800 pound gorilla in the room. It seems the competition
is now spread between Canon, Ricoh, Konica Minolta and Toshiba; mentioned about
equally in this year’s survey indicating that the major manufacturers have done
a good job in covering their dealer’s territories and becoming their own
competitors. Xerox’s absence in the workspace (read dealer space) obviously has
gone unnoticed as it shifted its focus to hi-end color. The dealers in our
survey no longer consider Xerox a competitor as much as they do their own
vendors and their mega dealer. As for color copiers, 24 percent of dealers
mentioned Konica Minolta as its primary competitor followed by Canon (22
percent) and Ricoh (11 percent). HP was the major competitor of both categories
of printers.

The Message is Consistent

As mentioned in the very beginning of this piece, the dealer channel is in
remarkably good condition. And after seeing the responses to 76 questions it is
obvious that the differences in the behavior of the various size dealerships
trying to grow their business is striking and that there are some underlying
issues. The fact that 33 percent of the responding dealers reported they were
considering acquisitions in 2006 and that virtually all the smaller dealers
(under $3 million) had no such intentions means that survival is now becoming an
issue for larger dealers. There is no magic to this business. It’s a matter of
managing the sales and service staff you have and looking for means to add new
clients to expand the base as rapidly as possible. But to do it without
acquisitions takes too long and allows others to penetrate the existing
business. How many of the smaller dealers realize this? Most noticeably printer
companies such as HP and Samsung are making inroads and should not be overlooked
either as a secondary vendor or competitor. So the message in our survey is that
dealers of any size should be looking at acquisitions as one of the better
options to realize continuous growth in their market.

US dealers who have done well in maintaining healthy growth from 2002/3
through 2005 may well be challenged in the near future. Some of their
traditional strengths, such as technical service, supplies, and facsimile sales
may be experiencing serious challenges. Overall more owners have to come to an
understanding of how each element of their business contributes to revenue
growth. The more successful and larger dealerships have determined that and have
implemented ways to create new revenue streams that help to retain clients.
Those additions were help desks and remote diagnostics, and now help in
generating greater annuities with additional sales of color printers and MFP’s.

The digital revolution opened a window of opportunities for the dealer
channel in a market that some said was dieing. But even though it continues to
show growth in certain segments, I don’t believe it will stay open forever.
Color, document management software, network printers and network services are
clearly revenue generating possibilities that all size dealerships should be
implementing. And as more dealers offer such services, the playing field is
going to get leveled once again. So next year’s successful dealers will have to
rework their business models in order to get the most out of evolving markets.
Those that have opted to put their trust in a business model of just selling and
servicing black and white copiers and facsimile may not be around for our next

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