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The Dealer Channel: Are they Making the Transition?

15 Jul, 2003 By: Rick Clayton imageSource

The Dealer Channel: Are they Making the Transition?

Currently, BTA
dealers face enormous challenges to be successful in today's competitive
environment. The structure of the industry has changed dramatically over the
past ten years forcing dealers to adapt and evolve rapidly. Many of the dealers
that have not faced these challenges are struggling to survive. As one dealer
succinctly put it, "The greatest challenge for the dealer today is making a
profit!" While this has always been the goal for all participants in this
industry, it has become increasingly more difficult with declining copier
volumes, margins and service revenues.

In order to assess
how office equipment dealers are doing at this point in time and how they are
facing these challenges, CAP Ventures, in conjunction with imageSource magazine,
conducted an extensive survey that covered most aspects of the dealer business.
This report focuses on the key areas covered in the survey and provides summary
and analysis of the findings.

A Look At The Past
Prior to the analog to digital migration experienced in the late 1990's and the
early part of this decade, copier sales, for the most part, consisted of a short
selling cycle that was hardware focused. The introduction of network printing
forever changed the sales and service landscape. What was once a single person
sales call has transitioned into a team sales approach. In addition, the
"install, train, and move onto next customer" approach was quickly
changed to longer selling cycles that focused on applications and solutions.
Network print enabled MFPs and solutions required skilled systems engineers and
service technicians that conducted extensive training and constant post-sales
support. As a result, dealers experienced increased overhead costs associated
with the new copier/printer technologies and were forced to look at all aspects
of their business in order to remain profitable.

The analog to
digital migration also created a change on the account side of the buying
equation. From the introduction of the typewriter, administrative departments
and purchasing agents were primarily the contacts for all equipment related to
the office environment. The introduction of the PC, networks, and digital
migration in the copier industry resulted in a change in the buyer profile. For
the most part, technology (IT) departments are now involved in the majority of
office equipment purchases. This has caused a considerable shift in the level of
service expectations from both a sales and support standpoint. With the sales
cycle shift from a commodity perspective to solutions selling, the gap between
the customer and salesperson has widened. Organizations continuing to pursue
customers from a hardware perspective are finding many doors that used to be
wide-open are rapidly closing. In addition, hardware that is currently installed
in those locations, is at risk of being replaced with products by new
competitors, such as printer-based manufacturers who are reviewing the
opportunities to expand their product portfolio by incorporating copier
functionality and solutions.

In order to compete
in today's office equipment market, it is simply not enough to have the best
product at the best price. Manufactures and dealers must be able to deliver
quality hardware and software solutions, service, and post-sale support beyond
end user expectations.

So, how is the
dealer doing in regards to addressing these rapidly evolving changes in the
office equipment market place? That brings us to the next part of the
report-reviewing the survey findings.

Survey Statistics
The CAP Ventures/imageSource study was conducted in the first quarter of 2003
with 165 respondents. Sixty percent of the respondents were office equipment
dealers, 11.5 percent were direct sales and the remainder fell into categories
such as wide format printing equipment dealers and computer VAR/integrators.
Eighty-five percent of the respondents were from senior management; being either
a CEO/Owner or a Vice President. Senior management response is important because
it aids in providing an accurate snapshot of the business.

Of the companies
responding, 56.4 percent had less than 20 employees while 43.6 percent had above
20 employees. The mean number of employees was 92.8. This was a good mix in that
we were able to access large establishments as well as medium and small. The
mean gross annual revenue was $16.6 million with 55 percent reporting revenues
under $5 million and 45 percent with annual revenues over $5 million.

The mean number of
years that the companies had been in business was 17 percent indicating a fairly
mature group of respondents. Only 23 percent had been in business eight years or
less. The mean number of active accounts per establishment was 2,821. The survey
showed that 45.6 percent of respondents indicated that they had less than 1000
active accounts. Keep in mind, active accounts are defined as any customer who
has made a purchase within the last twelve months. Therefore, their actual
customer base could be much higher.

One of the key areas
of interest was the current product portfolio and what their intentions were
regarding future products and services. Not surprisingly, the majority responded
that they currently sell office copiers under 90 ppm (pages per minute) and the
associated consumables. Most of the respondents also sold fax machines.
Seventy-nine percent of the respondents sold black & white laser printers
under 45 ppm. A smaller number, 64 percent, indicated that they were selling
black & white printers in the 45 to 90 ppm category. The high percentage of
printers being sold by dealers indicates that they recognize the need to compete
in the printer arena as well as the copier market.

When we look at the
key areas identified for future growth (solutions, color, and production
copying/printing) we see that dealers are doing pretty well in the area of color
but not so good in the areas of solutions and production copying/printing.
Although the manufacturers are heavily promoting solutions, we find that a
fairly low percentage of the dealers are actually selling print related
solutions and document management software. This is a strong indicator that many
dealers are still hardware focused. More than 46 percent of the respondents
indicated that they did not sell print related software and 58.5 percent said
that they currently did not sell document management software. In regards to
color, 78 percent are selling color laser printers in the speed range of 23 ppm
or less, 72 percent copier/printers less than 24 ppm and 70 percent color copier
printers 24+ ppm. This is a positive sign that dealers have recognized the value
of selling color and have implemented programs to address this important area of
the market. In the production area, only 34.1 percent of the respondents
indicated that they were selling copier/printers in the 90+ ppm class. This is
probably due to the fact that many manufacturers have just introduced or have
plans to introduce products in this range.

When dealers were
asked what product or services they might sell in the next two years, production
copiers/printers ranked highest with 34.1 percent. This was followed closely by
document management software at 32.3 percent; networking and integrated services
at 29.9 percent; wide-format printers at 28.7 percent and finally print related
software at 25 percent.

When we probed a bit
deeper regarding solutions and document management software, we found that 44
percent of the respondents felt that document management software does not offer
any real competitive advantage and did not sell it. (See
Figure 1
) This is somewhat alarming in light of the fact that all of the
manufacturers are promoting document management software as being one of the key
differentiators for their products. Without offering document workflow
solutions, the dealer puts themselves into the situation of selling a commodity
that results in the declining margins that we discussed earlier.

Revenue and
Profitability The next area that we wanted to look at was how the dealers were
doing regarding revenue and profitability. When asked to break down their
revenue by category the respondents indicated that 33 percent was hardware, 29.2
percent supplies and 30 percent service. Only 7.8 percent of revenue was
attributed to software, support and professional services. (See
Figure 2
) This mix indicates that the dealer is still highly dependent on
the traditional copier model of hardware, service and supply. Based on CAP
Ventures forecast of little or no growth in the copier market over the next five
years coupled with a declining install base, it is obvious that a higher
percentage of revenue must be derived from software, support and professional
services. If this does not happen, revenue growth and profitability will be

According to the
survey, the hardware only portion of a dealers business consisted of 51.6
percent copiers/ copier-based MFPs; 25.2 percent printers/printer-based MFPs;
9.5 percent fax machines; and 13.6 percent other equipment or computer hardware.

Taking a look at
gross margins, dealers indicated that the majority of margins were derived from
service (42.7 percent). This was followed by supplies, professional services and
finally equipment. (See
Figure 3

When asked about the
trends in each area, the dealers responded that equipment was taking the hardest
hit with 56.1 percent indicating that margins were decreasing. Service and
supplies seemed to show a positive trend with 76.7 percent of the respondents
indicating that margins were increasing or stable for service and 71.4 percent
for supplies. Professional services margins, although a small percentage of the
dealers overall revenue, was reported to be increasing by 37.3 percent of the
dealers and stable by 47.6 percent of the dealers. These stats point out that
hardware sales for copiers and printers has, by and large, become a commodity
business with ever declining margins. While service and supply margins are
higher, there needs to be a shift of more revenue to professional service where
opportunity exists and margins are increasing.

Product Utilization
Trends In this section, we will cover the dealer's perception of end user
trends. Asked if they agreed or disagreed with the following statements,
respondents' answers yielded interesting indicators for the market. o Fax
volumes are declining due to e-mail. 72.7 percent agreed o Office output volume
is migrating from printers to MFPs. 65.2 percent agreed o Users are scanning to
file or email. 59.7 percent agreed o Pages are migrating from black & white
devices to color. 51.6 percent agreed o Average monthly copy volume per machine
is declining. 40.8 percent agreed

One area that is
interesting to note is connectivity. (See
Figure 4
) The respondents indicated that, on average, only 43.5 percent of
the placements were connected. This is well below the 80 to 90 percent that
manufacturers are reporting. Connectivity is an important aspect to building
print volume and the fact that it is so low could certainly account for the 40.8
percent response average copy volume per machine was declining. The volume on
connected products is usually as much as 30 percent higher than unconnected
products. This low connectivity rate could also be a result of a focus on
hardware rather than solutions and applications that would result in connected

Two areas that are
typically difficult to ascertain from the manufacturer is the utilization of the
fax and scan to e-mail functions on MFPs. The dealer respondents indicated that
the mean percent of MFPs with fax function enabled was 29.2 percent. They
reported that only 13.5 percent of the connected users were using scan to
e-mail. (See
Figure 5
) This is interesting in light of the fact that the manufacturers
are promoting this capability in their demonstrations and marketing materials.
This certainly could be one of those functions that demonstrates well but has
limited utility outside of large corporations.

From an acquisition
aspect, we were interested in the percentage of deals that were cost per copy
where supplies, services, and equipment are bundled into a per page price. The
responses indicated that over half of the Segment 4 to 6 copiers were sold as
CPC contracts. Color copier printers were somewhat lower at 36 percent. (See
Figure 6
) This points out the fact that dealers still favor CPC contracts
because they help protect margins and make it easy for the customer to manage
their copying and printing costs.

And finally we asked
the respondents what was their outlook for 2003 for both their business and the
overall market. Thirty-five percent of the dealers felt that the market was flat
but only 13 percent felt that their business was flat. The majority thought that
their business would grow in 2003 at a faster rate than the overall market. Only
three percent expressed that their business would decline in 2003. This
obviously expresses the optimism that is characteristic of the dealer community
and is one of the factors that has let to the success of the dealer channel.

Conclusion It is
obvious from the survey that many of the dealers are still tied to the old
copier sales model that is focused on hardware. The time of change is upon us
and the mentality of selling hardware-based solutions should be retired to the
copier time capsule. In order to remain a key player in the channel of the
future, dealers must recognize the necessity to propose bundled software and
hardware solutions to their expanding clientele. Despite the challenges and
conditions of the market, many in the industry believe that the dealer channel
has the best opportunity to make the transition to selling, installing,
supporting and servicing digital, connected copier/printers and solutions. One
reason for this is the dealers' close contact with their customers. They can
listen to their customers and change the levels of service and programs that
they offer in a lot shorter period of time than larger corporations. In other
words, the dealer is more flexible in responding to the changing requirements of
the marketplace.

To ensure continued
success, dealers should take advantage of every opportunity offered by
manufacturers for training-including connectivity, solutions and software
applications. They need to do more than just replace hardware and upgrade
leases. By evolving from a box provider, dealers can become a professional
service firm by providing consulting, solutions and support for their customers.
When this happens, additional profit opportunities will become available through
fees charged for projects, installation, and networking time. As was said
earlier, there never was a better time for those dealers that take advantage of
the situation.

Rick Clayton is a
Senior Consultant for CAP Ventures. For more information on the joint CAP
Ventures/imageSource Survey, "The Dealer Channel: Are They Making The
Transition" contact CAP Ventures at 781.871.900 or visit www.capv.com or

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