IS ANYONE GUARDING YOUR COLOR PROFITABILITY? Another trade show, another convention, and another industry roundtable…I may be just imagining it, but it seems these things get smaller every year. The MPS Advocate has arrived and now has the floor. I must admit, I didn’t fully understand him when he first started to speak at these things years ago, but what he says today makes sense…I’d better listen to him intently now. The Digital Doctor is in attendance as usual, though his message has long since become stale. I give him the courtesy nod to acknowledge that he’s here and certainly wasn’t entirely wrong when he had the podium over a decade ago. Meanwhile, the Printer and Copier guys are arguing over what’s left on the snacks and refreshment table…I see Commander Convergence is attempting once again to get these guys to work together. They all really should pay attention to this MPS guy. It’s relevant. By the way, has anyone seen Professor Paperless? The office equipment industry is indeed interesting - essentially flat, still contracting at many levels, certainly mature, and yet continues to evolve. Over the years, there have been many discussions about the next big industry disruptor. Some of these have materialized as predicted, while others still wait for a day that may never come. Undeniably, color is here to stay and the transition continues at a methodical, evolutionary rate. COLOR – THE GROWTH ENGINE OF A MATURE MARKET A quick review of current U.S. market trends and projections for laser-based equipment and marking supplies (courtesy of Infotrends) reinforces color’s expanding foothold in the office environment. While the US installed base of monochrome equipment still dominates at roughly 80% of total, its gradual projected annual decline of 3-4% combined with the 10-11% projected annual growth rate of the color installed base over the next few years translates into color capturing an impressive 26% of the total installed base total by 2013. Similarly, images produced on color equipment are projected to grow at a 12-14% rate over the next few years, while total monochrome images are forecasted to decline at a 3-6% rate per year – resulting in color images representing 35% of all images produced by 2013. Further, the total value of color marking supplies (at point of sale) is projected to increase by 8-9% per year, while the total value of monochrome marking supplies is projected to decrease by 6-8% per year – translating into color marking supplies representing almost 65% of the total US supplies market by 2013. While these trends are not especially surprising, they do nicely reinforce the significance of color today and the projected preeminence color will have in just a few years. Yet not all is positive in the color arena. While the value-per-page (price-per-page) of monochrome marking supplies is projected to remain relatively stable going forward, the value-per-page of color marking supplies is projected to decline by 3-5% over each of the next 3 years – which would represent about a 21% decline in value-per-page of color from 2008 to 2013. Whether driven by fundamental changes to the installed base (e.g. shifts to higher speed / lower price-per-page segments or changes in OEM market share) or by the very nature of increased competitive pressure (intensified OEM vs. OEM price competition for share of market or increased proliferation of aftermarket supplies), the expected color supplies value-per-page erosion should also come as no surprise, since the growth engine within this mature industry will eventually cool and reach a mature, more competitive stage itself. Classic business life-cycle theory. FINANCIAL IMPACT NOTE: With an assumed supplies gross margin of 45% across both monochrome and color segments, a 3% color value erosion per year without comparable cost erosion - combined with the growth of the color category to 65% of total in three years - represents a negative 3.45 percentage point impact to your organization’s supplies profitability. More disconcerting than the current and predicted value-per-page erosion of color supplies is that this trend may not be accompanied by an equal degree of cost-per-page reduction over the same time period – particularly given a relative scarcity and/or inconsistent quality of OEM-alternative color supplies options. Obviously and somewhat ominously, the combination here has the potential to severely compress your color supplies profitability over the next three years – most certainly impacting the financial health of your dealership as color increasingly becomes the prevailing driver of your supplies revenue. TECHNOLOGICAL AND PERCEPTION BARRIERS STILL FACING THE AFTERMARKET With every evolutionary shift within the office equipment industry, the OEM-alternative supplies market (a.k.a. “the aftermarket”) has adapted to maintain its value position in the industry - providing dealers lower-cost products at varying price and quality levels, thereby representing an important cost-relief mechanism in the industry to help dealers maintain profitability or enhance competitiveness. Color will be no different…eventually. Of course, we know OEM-alternative color supplies have been available for quite some time now - particularly in the printer arena and typically in the form of remanufactured all-in-one cartridges. Yet we also know the road for the color aftermarket has been treacherous thus far, with wide ranging product quality/reliability offered to the industry – particularly in the early days. In a general sense, while the aftermarket has made recent strides in product quality, considerable variability in this area certainly still exists – particularly as the aftermarket often struggles to bring quick (sometimes premature) OEM-alternative solutions to the latest, hot color models. Regardless of product quality and reliability, gaps in the aftermarket product offering remain in the color space – particularly in copier-legacy OEM portfolios where full product design (toner, components, and cartridge) is often required, but also in some niche printer-legacy OEM lines where full component solutions and/or sufficient core access remain elusive. Moreover, end-users continue to have a heightened sensitivity to color print quality, so the early missteps of color aftermarket products and the current variability of aftermarket color product quality, undoubtedly continues to fuel end-user reluctance to select (or accept) something in a non-OEM box. A leaking color cartridge or a print quality defect associated to a cartridge that arrived in a different or “premium” box will most certainly be noticed by an end-user – even if the one from the OEM box occasionally has an issue of its own. Worthy of note, from an office equipment dealer perspective, it was only a few years ago that the majority of service managers I spoke with about aftermarket color products would share their concerns along three similar themes: (1) “I’m afraid of all aftermarket color products.” (2) “I just don’t believe the aftermarket can develop color products at the same quality level.” (3) “My technicians aren’t fully comfortable with color machines yet, so even the best-quality aftermarket color products will be blamed anyway.” With the combination of variable product quality, product offering gaps, end-user sensitivity, and reseller apprehension, it’s no wonder industry sources continue to estimate the aftermarket penetration of the total US color supplies market at only a tiny fraction (approximately one-fifth to one-sixth) of aftermarket monochrome supplies penetration. Moreover, the color penetration rates are not projected to mushroom to the estimated monochrome levels of 25 to 30% market share anytime soon, and are actually estimated to remain relatively flat for the next few years. Although we can certainly understand and continue to respect both end-user sensitivity and reseller/dealer apprehension to the color aftermarket, I have always wondered if the core elements and sentiments of these objections weren’t similarly heard when the aftermarket first began offering replacement parts in the late 1970s – or photoreceptors in the 1980s – or began to introduce viable monochrome toners in the early 1990s – or made the digital transition with the industry rough 10 years ago. I suspect similar objections and skepticism existed at each of these points…just as I have faith that the aftermarket will continue to evolve with the industry through color and managed print. Despite the technological complexity of color supplies and end-user / reseller apprehension, very soon the color segment of the industry will represent the lion’s share of the total supplies business and will itself mature – accelerating competitive pressure inside a flat to declining industry. CHOOSE YOUR COLOR GUARDIAN, BUT CHOOSE WISELY With recent product quality improvements, continued aftermarket color product offering expansion, and increasing price / cost pressure, both end-user attitudes and reseller / dealer apprehension appear to be steadily changing. Interestingly, many of the same office equipment dealer service managers – reluctant to even field test aftermarket color supplies a few years ago – now increasingly rely on the aftermarket for a portion of their color needs, either to offset the cost of their growing color supplies category or in an effort to capture a slice of the huge profit opportunity converting from OEM supplies represents. Recognizing the likely price and margin pressures facing their color business, the challenge for office equipment dealers today is no longer IF they should utilize aftermarket color supplies sourcing, but rather WHO to partner with and HOW to select this partner. Making the decision to leverage your color supplies business is certainly the important first step, but selecting the right color partner for your business can have far greater implications – for better or worse. The following are some important elements to consider when assessing a potential aftermarket color partner: • LONGEVITY AND REPUTATION: In a very real sense, you are entrusting your growing and most important product segment to another organization that may or may not have your best interests in mind. Certainly, an aftermarket organization with an established brand and a reputation for quality, reliability, and support – as well as a degree of longevity in the industry – is a very good place to start. • REASONABLE VS. UNREAL PRICING: By definition, any aftermarket color product will need to provide a reasonable level of cost-savings over the comparable OEM product. However, be skeptical of extremely low price points from potential aftermarket sources – as this could be a signal that this company is simply a sourcing organization, with little to no testing and qualification processes to ensure the product quality and consistency essential for color supplies. Sometimes the price is indeed too good to be true and sometimes a product’s low cost is offset by the true cost of the product when it doesn’t perform to your end-user expectations. Increased service calls are the most obvious after-purchase cost consequence, while lower actual product yields are not always so noticeable. • QUALITY AND RELIABILITY: Are quality and reliability fundamental cornerstones of the potential aftermarket color partner’s value proposition…and do they LIVE it? A product flyer that touts “high-quality” or a product box that boldly proclaims “Premium,” needs to be taken with extreme skepticism. Most important here is to understand the company’s new product qualification processes, independent testing capabilities, and quality assurance protocols. For example, do they: P Actually develop products or simply source them? P Have a comprehensive product testing facility that incorporates not only the classic xerographic print quality measurement practices (e.g. yields, image density, fusing, etc.), but also includes color-specific print quality assessment capability (e.g. L*a*b* values, gloss, hue, chroma, etc.)? P Perform extensive compatibility testing of their products – to ensure seamless product performance when installed before or after OEM supplies…or (especially important for color supplies) work effectively when combined with other CMYK OEM supplies? P Rigorously test their products and the related OEM products in multiple environmental conditions and also assess their performance impact to the machine and other components? P Have factory-trained technicians to run and oversee all testing, supported by teams of chemists, engineers, and product managers? P Have a clear and customer-friendly technical support team and warranty policy – that not only covers you in the event of a possible product issue, but also investigates for root cause to understand how to improve the product if there is any fundamental issue? By the way, be wary of new aftermarket color products that are “first-to-market,”as you (and your customers) may actually be beta testing a partially developed product. PRODUCT OFFERING: In an environment where the printer and copier/multi-function worlds have essentially converged, breadth of color product offering has become increasingly important. Further, given the managed print world of today, you can most certainly expect to capture or inherit color equipment populations across unfamiliar OEM lines and platforms – ranging from the most common HP color printers, to legacy copier/multifunction devices, or to niche color printer applications. Does the product offering of your potential aftermarket color partner have the product range of quality color products you will likely need? GUARD YOUR PROFITIABILITY THROUGH MEASURED CONVERSION While selecting the right color partner for your needs is obviously critically important, pragmatically converting a portion of your OEM color supplies - specifically which product types and to what degree - to this trusted OEM-alternative color source is likely equally important. Whether you utilize aftermarket color supplies for (1) legacy printer applications, (2) unfamiliar OEM equipment acquired through a recent MPS victories, (3) secondary, non-authorized OEM equipment lines, (4) your primary, authorized OEM equipment models late in their life-cycles, or (5) your primary authorized OEM equipment models still early in their life-cycles – the decision is obviously entirely up to you and based on what OEM commitments you may have in place, profitability targets you need to achieve, and degree of trust you have established with your aftermarket color partner. However, that being stated, it should be clear at this point in this mature, yet ever-changing industry that the steady growth and mainstreaming of color represents both an opportunity and threat to your organization – particularly as the category itself matures and predictable competitive price pressures escalate without an equal degree of cost relief. If you haven’t done so already, qualifying and subsequently leveraging even a small portion of your color supplies with a trustworthy aftermarket color partner today will position you to offset expected profit erosion in what will soon be your largest supplies category – potentially having a powerful impact on your organization’s overall profitability now and in the next few years. Take the bottom-line profitability erosion estimate presented earlier as an example. With color growing to 65% of your supplies business in three years and forecasted value-per-page erosion of roughly 3% annually, your expected profitability impact would approximate a reduction of 3.45 percentage points without any cost-relief. Assume over this three-year period, you successfully convert 20% of your OEM color dependence to your aftermarket color partner and achieve an average cost savings of 25% on this converted supplies business. The impact of this measured conversion to your organization would be considerable – representing (as displayed in the table below) almost 2 full percentage points to your organization’s profitability. While these 2 percentage point gains don’t fully offset the estimated 3.45 point profitability erosion driven by increased price pressure in color, these 2 points just may represent the difference between financial health and financial crisis. Perhaps most important of all, partnering with a viable aftermarket color supplier for a meaningful fraction of your color business will not only directly impact your profitability, but from a broader and more theoretical perspective, will also help generate increased competitive pressure on OEM color supplies costs industry-wide…a phenomenon we have all experienced for over thirty years in the monochrome world. PROFITABILITY IMPACT OF CONVERTING ONLY A PORTION OF YOUR COLOR SUPPLIES % CONVERSION OF OEM COLOR SUPPLIES 20% COST SAVINGS ~ OPERATING PROFIT % IMPACT 25% COST SAVINGS ~ OPERATING PROFIT % IMPACT 30% COST SAVINGS ~ OPERATING PROFIT % IMPACT 10% +0.79% +0.98% +1.18% 15% +1.18% +1.47% +1.77% 20% +1.57% +1.96% +2.36% 25% +1.96% +2.45% +2.94% In a very real sense, as the aftermarket continues to quickly evolve to meet color’s technological challenges and overcome end-user perceptions of color during this latter stage of conversion, the resulting and simple mechanism of increased competition can most certainly help leverage improved color profitability for you (depending on your specific degree of participation) and will eventually do so across the entire industry in a very meaningful way. At least until Professor Paperless finally arrives… Joe Wagner is Vice President of Katun’s Corporate Marketing And is responsible for marketing strategy, product marketing, marketing communications and market intelligence. Mr. Wagner focuses on the identification of attractive market opportunities, effective product launch methods, and strategic market planning linked to market-specific tactical implementation plans. Mr. Wagner originally came to work for Katun in 1991 as a Marketing Analyst, held positions as a Senior Product Marketing Manager, Marketing Director for New Business Development and Assistant Vice President for Marketing Development. He left the Company in 2004 to work for Conwed Global Netting Solutions as the Marketing Director for New Business Development. Mr. Wagner holds a B.S. in Marketing and Finance and an MBA from the University of Minnesota