Super Analysts CREATE Super Dealers12 Feb, 2004 By: Bob Sostilio, Lou Slawetsky & Richard Norton imageSource
Super Analysts CREATE Super Dealers
At the beginning of every New
Year, it helps to take a quick look back on the events that occurred during the
past year and evaluate their effect on the industry. The road to success lies
not only in the quality of the products, but in a dealership’s ability to tout
solutions and services that will grow business and increase sales. Analyzing the
market in 2003, we have been able to identify ten unique points of interest that
are affecting the industry as a whole and dealers in particular. Each point
identified should help you to strategically plan for 2004 and get a sense of
what you could or should be doing to prepare for the changes that are occurring
in the our industry.
1. Pricing Pressures and Color
In 2003, hardware margins and profits continued their downward spiral as channel
constriction for copier sales persisted. According to research conducted by
Sostilio and Associates International, one in three independent copier dealers
was faced with the possibility of having his primary hardware supplier open a
direct branch in his own backyard to sell its entire line of digital products.
The copier channel experienced pricing pressures in 2003 with heavy discounts on
newer black/white and color MFPs introduced at lower SRPs. This, along with
lower costs-per-copy, helped drive copier throughput volumes over to printers.
The good news is that for the
first time, we can finally say that 2003 was the year that color took a hold in
the copier/printer market. Several trends converged to make color a reality in
Hardware costs dropped
dramatically. Full color copier/printers operating at 30 PPM in both color and
monochrome modes are available for $5,000 or less.
Color cost per page dropped
below $0.10 with many models offering four color output for approximately $0.08
(five percent coverage per color).
Perhaps most importantly,
the cost of monochrome output on color devices dropped to the level of current
mainstream monochrome-only printers. Companies no longer have to dedicate a
printer to full color output due to the high cost of black/white printing. In
fact, when comparing the cost of full color systems to monochrome systems five
years ago, color is virtually free (until you use it).
This is the best possible news
for dealers who find themselves caught in a margin squeeze because replacing
black and white systems with color is a “no-brainer” and color output
generates at least four times the revenue as a comparable black and white page.
Based on the Copier Dealers Distribution Strategies Report by Industry Analysts,
Inc., color devices also feature a connect rate of more than 85 percent.
Currently, no one dominates the market for these “universal printers” which
gives everyone a shot at the market – at least for now. Expect to see
placements, pages and profits in the color market turn red-hot this year.
2. Direct Distribution Dilemmas
While it may appear that the number of independent dealers is diminishing as
manufacturers and mega-dealers continue their quest to improve their market
presence, brand awareness and profits from the annuity streams created with the
sales of connected copier/printer based MFPs; past dealer owners are coming out
of non-compete periods and jumping into the fray by opening new dealerships
focused on systems and color sales.
The way we see it, the fact that
companies like Canon, Konica, Ricoh and Toshiba are getting closer to their
users and capturing more of the annuities can only help the majority of its
dealers. In most cases, if the manufacturers sell in the same territory as one
of their dealers, it increases brand awareness for both entities. Sometimes the
manufacturer will pre-test its new products and programs within their direct
organizations first, rolling out products to dealers with fewer glitches and
The down side is that in some
cases the branches get a shot at the user base first. Given that 70 percent of
U.S. dealers reside outside major metro areas, many of the advantages outweigh
the disadvantages. While nothing is harder to defend than a branch selling the
same product for less than its next-door dealership, we expect to see this trend
continue as more user support is demanded for systems sales and manufacturers
want shorter turnaround times to correct and improve profit ratios of product
performance in the field. But the biggest benefit of OEMs selling hardware
directly to the end user, is that service contracts and other annuities now
become a profitable source of income.
3. Solutions? What Solutions?
One of the most significant events of 2003 relates more to what didn’t happen
than what did. Despite significant efforts on the part of virtually all copier
and printer vendors to tie their hardware to “solutions,” dealers have been
slow to embrace this concept. Those who have, report a slow process with less
than ten percent of their revenue coming from solutions or services sales.
Interviews with dealers indicate significant barriers to the successful
implementation of a solutions strategy including:
Dealer quotas based upon
hardware revenue (with some parts and supplies thrown in).
Sales compensation based
almost entirely on hardware sales revenue.
OEM training programs focus
on the “how” of the solutions more than the “why.”
Vendor sponsored surveys tend to
rely on asset consolidation in order to demonstrate potential savings to the
prospect or customer. This not only conflicts with user preferences, but it does
little to address the potential for capturing page volume by owning the
solution. In short, the past year has seen a notable increase in partnerships
and alliances between hardware vendors; however, sales representatives aren’t
adequately trained or directed through compensation, dealers are focused on a
box quota and customers are confused. To succeed, dealerships and OEMs must
devote more time to better understanding solutions selling.
4. Xerox Returns to
By most measures, Xerox made a great deal of progress in 2003 posting per share
earnings of $.11 in the third quarter of 2003 and expecting to finish the year
with earnings of $.50-55 per share. Additionally, Xerox has kept its gross
margin above forty percent again in 2003. Xerox has taken an aggressive approach
to pricing and has seen equipment unit sales grow by five percent this year.
Xerox must continue its hard line approach because the office market is mature;
any growth a company gets must come from beating the competition. Xerox is
banking on its color technology, its ability to know its customers’ needs, and
its ability to bring a range of solutions to customers in support of its
5. Konica/Minolta Merger
On January 7, 2003, Konica and Minolta announced that they would merge
operations during 2003. The aim of this merger was to create a stronger market
presence and share than the sum of the two companies individually. While both
companies individually have some very good products, (Konica with high-speed
black/white digital engines and Minolta with color products) these alone cannot
win the competitive battle anymore.
It is our impression that
neither company really got behind the other company’s products and that dealer
management and distribution are the keys to success in this merger.
KonicaMinolta management will need to reconcile a variety of commitments made
over the years to individual dealers and cope with a variety of other issues
facing the mature copier/printer market including the sale of
Konica-manufactured engines under the HP label. Compounding the problem is the
delayed communication about the merger which has left U.S. management in a
difficult position as they develop policy for the newly established dealer
All of this puts KonicaMinolta
in a delicate position. On one hand, they should proceed very quickly in
combining the two distribution operations to minimize the defection of dealers
and customers to other brands. On the other hand, KonicaMinolta management will
need time to put into place a management team and a system of policies that make
sense during this transition time.
6. HP Moves to High-End MFPs
In August, Hewlett-Packard announced that it would be selling high end
black/white multifunctional products manufactured by Konica on a private label
basis under the HP name. Then, in November, HP announced that it would sell
these units through a national reseller agreement with IKON. Although HP had
ventured into the copier-based multifunctional products arena in the past, it
was met with very limited success.
This agreement should produce
more success for HP and should give IKON access to IT managers in their customer
base. From there, IKON will undoubtedly sell more professional services to their
customers. While it is not IKON’s intent to sell HP products at the expense of
their current suppliers, it would seem inevitable that sales of Canon and Ricoh
products through IKON will decline—exactly how much is the question.
7. Toshiba Acquisition
Toshiba Business Systems – TBS (nee Toshiba Office Products Acquisition
Company – TOPAC) made its fourth dealer acquisition of 2003 and the 19th since
starting its acquisition plan in 1994. The name change in mid-2003 came about as
TOPAC transitioned from a holding company to an operating company with 12 core
companies and a CAGR in revenue of approximately thirty percent. In 2003,
Toshiba’s acquisitions expanded their coverage into Northern California, North
Miami Florida, Kansas City, San Antonio and Hawaii. These acquisitions amount to
approximately $280 million in gross sales and add to Toshiba’s overall growth
and brand name recognition.
8. Canon Expansion
Canon continued its direct distribution expansion in a “bricks and mortar”
fashion by starting new sales operations in territories previously not covered
by direct operations. In mid-2003, Canon opened the Portland Oregon branch
bringing the total direct coverage to 26 major US cities. The expansion now
gives Canon three regional coverage areas with an Eastern, Central and Western
sales subsidiary. Increased direct sales efforts provides Canon with direct
control of its digital support programs and generates feedback from end
users—something that was lacking by many of the Japanese manufacturers.
According to the latest financials, Canon’s direct operations account for over
twenty percent of its pretax revenues and are expected to grow in 2004.
9. Ricoh Mergers Continue
Ricoh’s strategy of merging its wholly owned subsidiaries (acquired Ricoh
dealerships), Savin branches and Ricoh branches continued in 2003. Unlike
Toshiba, Ricoh has acquired its own dealer installed base to perhaps remove the
dealership as a target for acquisition by a competitor. By the end of 2003,
Ricoh had a total of 17 sites covering 24 geographical areas in the US. These
sites will account for over thirty percent of its annual revenues. In 2004,
Ricoh has stated its intention to evaluate acquisitions in cities where they
already have representation and where they will market only Ricoh branded
products through its direct operations.
10. Noteworthy News
Not to be ignored in 2003 are the acquisition activities of other companies
including Danka, DEX Imaging, Global Imaging Systems, Inc., and IKON. Global was
the most active in 2003 with the addition of four dealerships to its union of 61
businesses with 144 locations throughout the U.S. Organized into 15 core
organizations, Global, with estimated revenues of $616 Million in 2002, declared
an income from operations of $70 Million in 2002.
did not announce any
acquisitions in 2003; instead spending most of the calendar year reorganizing
its corporate structure with a new chairman and new board members. Danka kept
struggling in 2003 to manage its debt, convert its analog base to digital, and
pay off early investors at par value. Suffering from declining sales in its
enterprise division, Danka announced that it would reduce headcount by hundreds
of employees in its back office. Imagine Technology Group did not add any
acquisitions in 2003 but will continue to evaluate market conditions in 2004 and
DEX Imaging (Dan Doyle’s new company) with offices in Florida and Tennessee
will more than likely continue its expansion activities in 2004.
Although 2003 brought the office imaging market into a mature phase with one
less major OEM and stiff competition, there are still opportunities—in color,
software and solutions sales, and the aftermarket associated with them—that
can be mined. It’s a matter of knowing where to look and how to exploit these
opportunities. The time is now for dealers to get on track and make the
transition to prosperity.