Manufacturers and Their Emerging Responses to Changes in Consumer Behavior

A combination of technology and workforce mobility underlie a decline in the number of pages printed. As the number of pages printed decline, printing devices with a much-lower cost of ownership are brought into play, thereby setting the scene for a shake-up in the distribution channels.

We have already established the framework for arguing that upheaval in both the office-products and office-equipment sales channels is going to take place. More accurately, the upheaval is already underway. It is being driven by the consumer and changes in the traditional buyer/seller relationship as the economy transforms over to a “pull” dynamic in which the buyer has more control.

When this change in consumer behavior is combined with the dynamics of a mature office-products, business-equipment and supplies industry, it should start to become more apparent there are irreversible forces in play. It means that the likelihood for a convergence of the two, historically well-delineated equipment and office-products channels is becoming much higher.

To help illustrate this, we’re going to focus on the main industry players and their various interactions to explain why an upheaval is inevitable.

We’ll look more closely at the role of the manufacturers and the steps they are taking to preserve, or expand, their presence in the market. We’ll then focus on resellers and consumers to tie all of the change elements together and illustrate how they collectively impact the channels of distribution to make it more likely than not they will converge. As we do so, we will also relate these topics to the key product technologies to show how they also underlie the inevitability of channel convergence.

The Key Equipment Manufacturers

Between them, these 14 corporations have nearly $350 billion in global revenues, $230 billion in market capitalization and access to nearly $85 billion in new-debt capacity.¹ In addition to ongoing earnings, this debt capacity could be used for the purpose of financing potential acquisitions, as well as supplementing product- and/or channel-development efforts. Nobody participating in this industry should underestimate the ability of the industry (at least in the aggregate) to finance change.

Note 1. When assuming a maximum debt to (current level) EBITDA ratio of 4.

Of course, some players have a greater financial capacity for influencing change than others, and some have a stronger value proposition that’s helpful for developing higher customer acquisition rates than others.

The chart above is designed to illustrate the relative financial strength and market presence of the key equipment manufacturers in the industry.

• The larger the bubble, the stronger the value proposition
• The closer to the left vertical axis, the greater the financial strength.
• The higher they’re placed on the left vertical axis, the greater their revenues and, therefore, market share.

In short, HP is the strongest player financially, the strongest in terms of their value proposition and (besides Dell Corporation) also the largest in terms of annual revenues. At the other end of the scale, Ricoh and Ninestar (Lexmark), while both having strong value propositions, are the weakest financially and, therefore, will have less access to conventional financing sources that are likely to be necessary for implementing the strategies required to survive in the changing marketplace.

Certain players—for example, those aligned in the upper left-hand segment of the bubble chart—are more likely to be long-term winners than those that appear in the lower right-hand segment of the chart.

In a mature industry, the stronger players have the financial strength to overwhelm the weaker players through acquisition or organic growth, or even a combination of both.

For those who follow the share-price performance trends of the major industry players, it’s probably not surprising that there are few standouts in terms of consistent, steady, stock-price improvement over the last two or three years. Perhaps this shouldn’t be surprising in a mature industry where aggregate sales are declining. However, the ultimate differentiator of how the market will reward (or punish) the industry players is how successful they are winning market share in a declining market. Additionally, it will be determined by how they redefine their markets as they attempt to diversify into new and growing segments such as 3D printing, clothing, and other industrial, print-related, applications.

With this in mind, we’ll start by taking a closer look at the market leader.

HP

After HP completed its acquisition of the Samsung printer business in late 2017, it intended to establish its presence in the so-called A3 copier channel and develop a significant share of the $55B+ market.

The company was a new entrant into the A3 equipment channel, with nothing to lose in terms of a legacy business model, and unburdened by a need to protect legacy sales practices necessary to maintain the top line. As we explained in a previous article, it takes someone to break ranks, or it takes someone with nothing to lose to become a channel disruptor. With HP, we not only had a new entrant with nothing to lose, but we also had a company with one of the strongest value propositions AND balance sheets. It meant HP was, at least on paper, well positioned to become that disruptor.

However, within 12 months of closing the Samsung acquisition, HP closed another significant deal that may have altered its position as a potential disruptor.

On November 1, 2018, HP completed its acquisition (previously announced in August 2018) of Apogee, a UK-based office-equipment dealer with a leading European presence, for around US $500 million. HP had said the acquisition “would further its plan to disrupt the $55 billion A3 copier/MFP market.” In addition to already being a reseller of HP and Samsung equipment, Apogee has also sold office equipment sourced from Canon, Ricoh, Xerox, Kyocera and Konica Minolta.

However, in acquiring Apogee, HP also acquired legacy business practices that it now needs to protect/manage in order to justify its investment. There are two possibilities here:

1. In acquiring a legacy business, HP will quietly drop what may have otherwise been an aggressive disruption plan leveraging its vertically integrated business technology to deliver the lowest possible cost of ownership solution to the channel customers, or;
2. HP believes it can acquire legacy businesses and still execute its plan to rapidly develop a leading market share in the channel.

Regardless of which of these two may be the case, we shouldn’t expect that HP’s acquisition activities will end with Apogee.

For example, think about HP in its context of $5 billion in annual EBITDA and its current $18 billion of potential new-debt capacity. Then think about their potential to snap up the often-discussed Xerox business for around $10 billion (a 30% premium to current market cap). It’s a business that currently generates its own EBITDA of $1.7 billion and, when combined, could be absorbed into HP with a manageable post-acquisition/pre-synergies debt to EBITDA ratio of less than two.

We’ll all continue to speculate on this until it’s no longer a possibility, because some other event may take place that precludes it (including that of an FTC intervention). But regardless of whether HP goes down this path, they already have all the tools in their war chest they need to disrupt the channel and are probably already able to do so on their own terms.

Without more acquisitions, it will take them longer to develop the market share they are targeting, but eventually they will probably get there.
Effectively, they already have the power to manage the pace of change by attacking opportunities to win competitors’ customers using all their available technology—options that their competitors may lack.

Furthermore, they can likely accomplish this while simultaneously preserving the legacy business model when it strategically makes sense to do so.

How does the relative strength of HP impact its competitors in the equipment channel, and what does this mean in terms of increasing the likelihood for the sales channels to converge?

HP has certain technological advantages over many of its rivals. It has a full complement of A3 laser, A4 laser and A4 page-wide-array business inkjet printing devices. Between them, these machines can be configured to suit the changing needs of the so-called A3 channel. The trump card they hold is that, depending on print-volume requirements, A4 laser may be 50% of the cost of ownership of a typical A3 copier device, and A4 business inkjet (page-wide) may be as much as 50% lower than the TCO of an A4 laser device. In the world of declining print volume, this provides HP with a significant competitive advantage.

For companies to remain competitive with HP, they must also have access to equipment with a similar cost of ownership, or HP will steal away their customers. For proof of this reality, we need to look no further than the following list of market developments:

1. Canon, also deploying a series of business-suitable page-wide-array inkjet printers, has a similarly strong balance sheet and value proposition to that of HP. With an independently self-sufficient critical mass, it is not confronted with the need to seek out a partner to hold its own in the channel.
2. Konica Minolta partnering with Memjet for access to its page-wide inkjet technology.
3. Toshiba partnering with Brother, possibly for the same reason. Note, investors at Toshiba are urging the parent to sell off its non-core businesses such as Toshiba Tec. Perhaps the already-announced partnership with Brother is the precursor to a permanent combination.
4. Seiko Epson, also with a series of business suitable page-wide-array inkjet printers already in the market, is not in a publicly disclosed partnership with another player in the A3 channel. It does have the most-important element of the product platform technology necessary to compete. But with a less-well-developed overall value proposition (ecosystem) and lacking the required critical mass, it may be open to a combination with a well-capitalized player, such as Kyocera Mita, who will otherwise find itself at a significant competitive disadvantage.

Where does all this lead us?

HP, Canon, Toshiba/Brother, Konica Minolta/MemJet and potentially Kyocera Mita/Seiko Epson either will be, or could be, well placed to compete effectively in the channel. It leaves the others—Fujifilm, Xerox, Sharp (Foxconn parent), Ricoh, Ninestar/Lexmark and Okidata—all at a serious disadvantage.

It also means that, as the key players are forced to fight it out with products that trend toward the lowest TCO (A4 page-wide inkjet array), the introduction of A4 to the previously dominant domain of A3 will be accelerated. As it’s accelerated, and as the legacy equipment resellers hesitate to embrace the trend because of the impact on their top line, the primary resellers of A4 equipment (i.e., the office-products resellers) will sense the opportunity to enter the channel. This is the developing scenario that underlies the prediction for a channel-convergence event.

Next issue, we’ll explore the challenges a traditionally transactional business operator will encounter, despite offering a better-aligned value proposition, when selling to a customer base used to paying subscriptions for print related services as opposed to purchasing a printing or copying device in a simple business transaction. We’ll relate this dilemma to other developments taking place in the market as the larger organizations, such as Staples and Office Depot, make their moves toward service-based value propositions.