Quiet Katun Finds 2000 A Year Of Challenges And Changes18 Feb, 2001 By: Brian Bissett imageSource
Quiet Katun Finds 2000 A Year Of Challenges And Changes
After 21 years in operation, the privately held Katun Corporation does over a quarter-billion dollars in business, making it the most successful aftermarket vendor in the copier industry. Yet Katun for several reasons operates in relative obscurity. First, the company is not traded on Wall Street. Second, Katun is in the mundane business of selling replacement parts and supplies for copiers. Third, more than half of the company's business is outside the US. And fourth, Katun has no competitors anywhere close in terms of product line scope or the size of the business.
This is not to say that Katun is boring. The company has for years grown at double-digit rates and enjoyed solid profitability. However, the year 2000 has proven to be something of a watershed. After stumbling financially in the past few years, Katun finds itself today facing new challenges in a market that is increasingly digital and now heading toward color. In June of 2000, Katun's founder and long-time president, T. Michael Clarke, was removed not-so-quietly by a newly constituted board. Questions also continue to swirl regarding the magnitude and nature of Xerox's relationship with Katun.
To shed light on these and other issues, we spoke in December 2000 with Katun CEO Larry Stroup. A personal friend of the now-ousted president, Stroup came to Katun from Xerox in 1981, joining as VP of Sales when Katun was a $7 million US-focused company.
Stroup offered details on an intriguing but often overlooked segment of the MFP market, and also shared his perspective on recent events at Katun and what the future might hold for the company.
REALITIES OF THE PARTS BUSINESS
MFP: Give me an overview of the Katun product line in terms of the number and range of items you sell.
STROUP: We carry over 4,500 products. Our three product lines are photoreceptors, parts and fusers, and imaging supplies, which includes toner, developer and ink for stencil duplicators. Revenues from each of the product lines are roughly equal. However, photoreceptors, parts and fusers are lasting longer today, so fewer replacements are needed. On the other hand, our imaging supplies business is growing somewhat faster as we fill out our product line.
MFP: Are there any copier or hardcopy vendors for whom Katun does not supply parts or supplies?
STROUP: We basically supply products for machines from all of the major copier, printer and fax machine vendors who sell through dealers or other indirect channels. That means we don't make parts or supplies for machines from Xerox, Oce‚ or Heidelberg/Kodak.
MFP: With Danka selling Heidelberg products and IKON now carrying some Oce models, could that change?
STROUP: It's something we're looking at, particularly in the case of the Heidelberg Digimaster, but we don't have anything to offer for these products lines currently. Years ago, when certain Xerox products were sold through indirect channels by A.B. Dick, Katun did sell parts for those machines.
MFP: While we are on the subject, approximately what share of Katun's business comes from IKON and Danka?
STROUP: They're both certainly big customers of ours. I'd say that IKON's and Danka's share of Katun's US business is similar to these companies' overall share of the US copier market. At the same time, independent dealers are a very significant part of Katun's business. Roughly 80% of BTA dealers have bought something from Katun in the past six months. In the past couple of years, with copier manufacturers growing their own direct business, and with an overall increase in competition in the market, we've seen a rise in Katun business with these dealers.
MFP: Is there any issue with customers losing their warranty coverage by using Katun parts and supplies?
STROUP: Most manufacturer warranties on copiers are for 90 days. Any longer warranties are from the dealers who buy from Katun and not from the manufacturers themselves.
MFP: What's been the overall trend in pricing for parts and supplies in the copier business in recent years?
STROUP: Generally, vendors' prices on new parts are lower today than they were on similar parts a few years ago. A lot of this is because customers are more concerned about cost of ownership on these machines. Katun's prices, however, are still lower than those of the manufacturers.
MFP: Is there a certain pricing formula Katun follows?
STROUP: Across the board, Katun's prices are about 10% to 15% lower than those of the manufacturers. And over the life of a particular part, our price advantage tends to increase. That's because smaller suppliers begin to offer particular parts, and the manufacturers themselves reduce prices. So we have to compete by dropping our prices even further.
MFP: Is there any discernible trend in manufacturers' prices for supplies and parts on digital versus analog?
STROUP: No. Some manufacturers, like Canon, are less expensive on their digital parts and supplies than they are on analog. Others, such as Konica, are more expensive.
MFP: Does Katun face any other large competitors?
STROUP: There are dozens of much smaller firms but no large ones. Over time, the competition has tended to focus on particular segments, whether its products like printers, certain types of parts, or specific geographic markets.
MFP: How soon after a new model ships from a manufacturer does Katun try to deliver parts and supplies?
STROUP: Generally, the lag is about 6 months on parts, 12 months on photoreceptors and 18 months on toner. In the last few years Katun hasn't always been first to market with products. We lost some of our focus on time-to-market. However, we are increasingly again first to ship products.
MFP: I would expect that some parts and supplies for older machines hang on forever. How do you manage that?
STROUP: We have sales thresholds we look at regularly, and we cull our product list every quarter. However, you have to look at this internationally. It varies by market.
MFP: What role does the transition from analog to digital copiers play in this process?
STROUP: It varies by geography. In the US, the migration from analog to digital is well underway. The installed base is about one-third digital and two-thirds analog. The transition has been even faster in Europe. Digital now accounts for more than half of the installed base there. We've also seen digital speed up the rate at which machines are replaced, although this might change as the economy slows. Outside the US and Europe, there's very little digital equipment and a lot of used analog. In a country like Argentina, for example, over half the copiers sold are remanufactured.
MFP: What's Katun's split between analog and digital?
STROUP: We don't explicitly track revenue that way. Many parts used in digital copiers are also used in analog models. Where there is a difference between analog and digital is in the photoreceptor and toner. We are definitely seeing toner for digital models sell in higher than expected volumes due to the greater quantity of pages being output.
MFP: Looking head, what happens to Katun as vendors such as Konica and Minolta shift to chemical toners?
STROUP: It's an area Katun is working on with partners. We know we will have to supply chemical toner.
MFP: Color would also seem to present a whole new set of opportunities - and challenges - for Katun.
STROUP: It does. Currently, color is a very small part of our business. Katun supplies some parts for color machines but no color toner. However, color does represent a very large part of Katun's R&D investment today.
TROUBLE IN PARADISE?
MFP: There's been talk about a weakening business at Katun the past couple of years. What exactly happened?
STROUP: Katun's revenue has been relatively flat for the past four years, largely due to international events beyond our control. First, there was the Asian Flu, which just dried up our business in Asia. Then, just as that was improving, we were hit by the declining value of the euro.
MFP: Could currency hedging or arbitrage have helped, at least in the context of the declining euro?
STROUP: We see that as a form of gambling. It's great if it works but can also be disastrous. We just don't do it.
MFP: How big is Katun's international business?
STROUP: Katun's products are distributed in over 160 countries. Despite some problems, Katun's international sales are still growing faster than in the US. A few years ago, the split was about 55% international and 45% US business. Today, international sales are about 60% of our business.
This is all the result of a very focused strategy Katun has undertaken since the early 1980s. That's when we bought a company called Bedford International in New Hampshire. At that time, Katun was mostly focused on the US, and Bedford focused on parallel markets internationally. The combination made Katun into a global player.
MFP: Where does the international business come from?
STROUP: It's split about evenly between Europe on one hand, and then Asia and the rest of the world. Our Asian business is growing quite strongly now, as those markets emerge from the crisis a few years ago. Latin America and our rest-of-world markets are also showing solid growth.
MFP: Is Japan much of a market for Katun?
STROUP: No. We have very little business there due primarily to the nature of the copier sales channel in Japan.
MFP: How is Katun organized for global sales?
STROUP: Our US headquarters is here in Minneapolis, and then we have four regional distribution centers around the world. They're in Iowa for North America, Holland for Europe, Uruguay for South America, and Singapore for the Pacific Rim. In addition, we also have three country distribution centers in Brazil, the UK and Canada. These are primarily to address large national markets where it is to our advantage to be located closer to those customers.
MFP: Does Katun own any manufacturing capability?
STROUP: Most of our manufacturing is contracted in Pacific Rim countries. The only manufacturing facility actually owned by Katun is a fuser roller plant in Colorado Springs. However, Katun does maintain a large research and development facility here in Minneapolis.
MFP: What does the current financial picture look like?
STROUP: Katun's current fiscal year ends in April 2001. Our growth rate this year looks to be better than it has been in the recent past. For fiscal year 2002, we expect a return to our historic rate of double-digit revenue growth. Profitability is still down from our highs, but Katun has never lost money.
MFP: Help me understand what happened earlier this year with the ouster of Michael Clarke as President.
STROUP: The Board was looking for a new direction after four years of issues with revenue and profit growth, even though some of these issues were beyond Katun's control. There were also challenges looking forward for Katun.
MFP: Were there any particular problems?
STROUP: There was a feeling that Katun was too focused on the BTA channel. We also believed Katun needed to look more at printers and at other parts of the channel.
MFP: ... might we see Katun supplies in superstores?
STROUP: It's not something we're currently working on, but we are looking at expanding into other channels.
MFP: Where does Xerox fit in the picture at Katun?
STROUP: Xerox has been a minority investor in Katun since 1987 and has two seats on our board [out of five], but Xerox is not actively involved in Katun. Xerox will probably liquidate this investment over the next 1-2 years, when their Katun stake should be worth more than it would be today.
MFP: Does that time coincide with Katun going public?
STROUP: Not necessarily. Katun has sufficient liquidity and access to the capital for expansion over the next 2-3 years to achieve the kind of growth we have in mind. For us, it's more important to seek out other relationships and ways to leverage Katun's unique global capabilities.