It can be said that the future rarely arrives unannounced, at least from a technology standpoint. Revolutions begin as murmurings among a select few, then gradually increase before reaching a crescendo of full-blown evolution. The business world consists of people who detect change early on (or at some juncture of the evolution), those who deny change is happening or those who react when the change is thrust upon them.
The 2020 edition of our industry forecast roundtable continues a talk track that began years ago: the evolution of the office technology dealership space. We have lined up five cracker-jack experts whose views take a connect-the-dot path that clearly illustrates major industry developments, changes and the need to diversify. Many of these changes/developments reflect significant modifications in the way business is done, and carry technological and generational undertones as drivers.
Our blue-ribbon panel consists of Randy Dazo, group director, Office Document Technology, for Keypoint Intelligence; West McDonald, vice president of business development for Tigerpaw Software; Joe Contreras, commercial marketing executive, Office Solutions, for Epson Americas; Mike Marusic, president and CEO of Sharp Imaging and Information Company of America; and Bill Melo, chief marketing executive for Toshiba America Business Solutions.
Their message carries a common denominator—there is still great opportunity within our industry for those dealers willing to invest in change and find different vehicles to monetize that opportunity. While the page may not be going away, the handwriting is clearly on the wall.
Did 2019 meet with your expectations? Were there any twists or surprises that altered how the year played out?
Dazo: The biggest twist is the HP-Xerox saga. One big move like this could really impact the industry, so it will be interesting to see how it plays out. Mega dealers are still growing; I think we saw more deals in 2018 than we did in 2019. As far as the manufacturers, we definitely see them doubling down on print, some more on the production side, along with wide-format, packaging and labeling. Some are focusing on other areas such as the IT side, going into the smart workplace, digital displays and other office-related technologies. It’s interesting to talk to some of the OEMs and manufacturers about what they see for the future. A lot of them are pretty similar—they’re talking about workflow, going digital, focusing on the SMB customers, cloud, mobility, robotics and security. I get a feeling they’re focusing more on those other areas besides print, but print is still a core part of their business. There’s a lot of talk about dealer transformation and passing on some of their knowledge within the MPS and IT services spaces. That will have implications, including for mega dealers who haven’t really gotten into managed IT. It’s taking them away from the box and exploring other revenues to enhance their services capability.
McDonald: While we saw everything that transpired with Clover, LMI, Xerox and HP, I’m surprised it didn’t happen earlier. Given my experience in working with my last division, we had pretty good insight into the number of print volumes per user and other metrics. Declining volumes per user and contraction in the imaging channel is like talking about politics or global warming: people believe what they want to believe, facts and figures be damned. With all of the transactions, the bigger dealers keep getting bigger, and the smaller ones become fewer and farther between. When you look at the numbers and the facts, it doesn’t necessarily mean that it’s a horror story. The imaging channel is still a strong one, and it has a certain stickiness to it because documents are always going to be a part of the business process; you get rid of documents in some places, but regulations make them pop up again.
Declining volumes per user and contraction in the imaging channel is like talking about politics or global warming: people believe what they want to believe, facts and figures be damned.
West McDonald , Tigerpaw Software
The reality is, there’s no new reason to print. In the end, I try to couch that with not being a doom-and-gloom observer, but rather a realist. My expectation for 2019 was that the industry was going to contract, and it did, and that there were going to be some shakeouts with OEMs and secondary providers, and that happened. The other expectation was we were going to see a much-stronger number of dealers who wanted to remain independent, diversify their services and move into managed IT. That was validation that there are a lot of very smart independent office equipment dealers out there who are not selling their businesses but are looking to grow, and they’re increasing the number of services they offer customers to reap that growth. I think it’s exciting any time you see a channel changing what they define themselves as. In 2020, we’re going to see a lot more evidence of that.
Contreras: I’ve changed companies and roles, and have been able to build a program within Epson and really start to evangelize and message out the value and benefit of inkjet. From an industry perspective, inkjet is getting a lot more attention and will continue to do so as Epson spreads the word to both the channel and end-user. What has also been interesting for me is the continued consolidation and acquisitions, both at the dealer and manufacturer level. It’s never a dull moment following the news on Xerox and HP, and what that could mean for the future of the industry.
Marusic: This year was a great year for Sharp. In fact, the past two years have been incredibly successful years for the company. Since Foxconn became a majority shareholder, we have achieved 12 straight quarters of profitability, and the past two years have been among the best market-share growths that we have experienced in over two decades. This has been the case even while the overall market declined in 2018, and I’m excited to share that we are currently operating at 116% year-over-year revenue growth for FY 2019.
Melo: On a macro level, it’s hard to imagine anyone anticipating some of the events that transpired in 2019. Certainly, the continued big-dollar M&A activity that continues to play out has affected the industry and threatens to do so further in 2020. The big news, of course, is the ongoing exchange between HP and Xerox—two of the industry’s largest and most-influential companies. Whether Xerox acquires HP, HP acquires Xerox, or neither, the continued consolidation of the industry at both the OEM and reseller level continues to shape the business.
Another big story for 2019-2020 is the battle for printer supplies between HP and the variety of alternates, including remanufactured and new-build compatibles. To a large degree, the managed print value proposition has been built upon the price delta between OEM and non-OEM supplies. As that delta shrinks, MPS providers will need to build their value proposition on deliverables beyond simple cost reduction.
…The managed print value proposition has been built upon the price delta between OEM and non-OEM supplies. As that delta shrinks, MPS providers will need to build their value proposition on deliverables beyond simple cost reduction.
Bill Melo, Toshiba
Lastly, the acquisition of DocuWare by Ricoh is unprecedented. Both companies have been careful to characterize DocuWare as an independent entity and pledging business as usual. It will be interesting to see the reaction of non-Ricoh resellers and their willingness to embrace a solution so tied to a competitive OEM.
What impact does cross-channel combinations such as the DEX Imaging-Staples pairing portend for the industry? Is this an outlier or the sign of things to come?
Contreras: It’s definitely a possibility. The Xerox-HP potential merger is surprising, with Xerox trying to take on HP, as I thought it would be the other way around. Selfishly speaking, I think it’s going to cause a lot of disruption within those two companies, knowing how difficult it is to bring companies together and get them operating on the same page with a consistent strategy. I think it will take some time. HP went through that with the Samsung acquisition. I think as Xerox and HP figure things out, so to speak, it’s going to probably benefit other companies before it benefits them. I welcome it; the fact that they’re busy trying to build that organization and get it running smoothly gives us more time to jump on the market with our inkjet technology.
Marusic: The market is certainly experiencing a series of changes from across all areas: margin compression, business model shifts, private equity and the entry of retail companies into the space. I believe that the DEX Imaging-Staples pairing is a development that is somewhere in the middle. It is definitely not an outlier, and I believe we will see more of it in the future, but it doesn’t have to be a sign of things to come with all the accompanying doom and gloom. There is a reason the dealer community always over-performs relative to corporate direct operations, and that is its entrepreneurial spirit. (Dealers) are open to new opportunities and are able to adapt to change quickly. The key is to make the change; don’t wait. The dealers know their customers better than anyone. It is up to them to take that knowledge and provide the services the big companies cannot, while using their natural flexibility as the key advantage.
To succeed in this new environment, independent dealers will need to change their approach to one that highlights the value they bring to the table with their services, rather than trying to have the most-competitive hardware prices.
Mike Marusic, Sharp
Melo: The DEX-Staples transaction was unique from the standpoint of the characteristics of the acquirer more than anything else. There have been bigger acquisitions of resellers (e.g. IKON, Danka) but in those cases, the acquirer was an OEM looking to expand distribution. In this case, the acquisition by a reseller who’s well established in one channel is looking to expand into a different delivery methodology. Toward that end, I expect that the Staples-DEX transaction is unique. There is likely to be continued consolidation in the channels, but I expect it to be more conventional—i.e., OEMs buying distribution or dealers buying dealers.
McDonald: Because I’m now in the managed IT world, that means a lot of things. I’m still doing managed print and still working with office equipment dealers, but it’s expanded into talking to people who are doing VoIP, managed IT services, drones and other cool things. They’re seeing the same kinds of activity, with ConnectWise buying Continuum, one billion-dollar company acquiring another nearly as big. The DEX-Staples thing is not just endemic to the office equipment world, it’s just a trend that is happening in any business vertical that touches technology that touches the office. It’s really fascinating to watch. Regardless of whether it’s good or bad for the industry, I think there’s a lot of flexibility in what the offerings are going to look like. When there are a lot of healthy, smaller players and they’re not playing in each other’s territory, there is a lot of room for innovation. But when these consolidations happen, what you see is the loss of choice, and that usually leads to a loss in innovation, which could be limiting for customers. I think the appetite for these kind of things will continue well into 2020. I think there has to be a reckoning; what is the end goal for DEX and Staples? Hopefully, they become more efficient, but it doesn’t create any new market growth.
Dazo: I’m not so sure about other office supplies organizations doing something like that, though they could. There’s not a lot of them; there are mostly smaller, regional office supplies companies. I’ve always said our dealer industry typically has the most revenue compared to IT channels, systems integrators and VARs, which are much smaller organizations. I don’t see other channels going after the dealer channel. We see a convergence of IT and office equipment, and also the traditional A/V channel. We see office equipment dealers doing a really good job in those spaces. Some are doing it through acquisitions and others are doing it organically. I still think the office equipment dealers have an advantage because of the revenue they can potentially acquire. For the office equipment dealer market, there’s more of an urgency to transform versus some of the other channels. We are seeing some convergence going on between IT and A/V. IT definitely seems to be the link because of everything being connected to the internet anytime, anywhere. If dealers want to expand into cloud, mobility or digital displays, you have to have some kind of IT capability. As far as a Best Buy crossing consumer into office, I don’t think there’s interest in moving into that market.
With organizations throughout the industry combining through M&A or forging agreements to partner from a technology standpoint, what will be the key for independent dealers successfully serving the SMB space?
Marusic: To succeed in this new environment, independent dealers will need to change their approach to one that highlights the value they bring to the table with their services, rather than trying to have the most-competitive hardware prices. For example, they should look for ways to showcase their understanding of network connectivity to show customers how to operate more efficiently. They will need to be open to new product offerings and services, keeping in mind that their customers are facing the same challenges they are: new competitors, pricing pressures and a need to focus on their core. I always tell our dealers, “You are in the information and collaboration business, not the print business.” That provides a world of opportunity and is directly in line with the challenges their customers face. The dealer can solve those problems and become a key, integrated part of their customers’ business rather than the “cheapest quote.”
Melo: Historically, dealers have benefitted from the disruption caused by M&A activity in their market as branch closings, personnel transfers, territory reassignments, etc., have created opportunities to address customers who might have otherwise fallen through the cracks. Dealers should be prepared to act quickly to such market disruptions.
McDonald: For the SMB space, there is phenomenal opportunity. There are a lot of gaps that the bigger players leave wide open. Frankly, these bigger players don’t even care if somebody else takes it. They’re chasing completely different types of customers. For the dealers willing to look into diversifying their services, there are a lot of cool things that they can sell to the same customers. When I moved into the managed services world, in my mind it was really servers and desktops. Man, have my eyes been opened. It’s commercial audio and video, HVAC, dark web and unified communications. The Internet of Things has been huge for control systems within offices—there are so many things that you can sell to a customer. For those who are serious about growing their business and chasing the SMB, there’s a huge opportunity for them. In the managed print world, not including equipment, we’ve been looking at about $17-$24 per user. In the managed IT world, if you’re bundling packages, it’s anywhere from $98-$150 per user. It’s all high-margin revenue. There are huge opportunities for people willing to chase the SMBs.
Dazo: Part of it is diversification. Ten or 15 years ago, there were 6,000 dealers, and now we’re at about 2,000. So the dealer community has been shrinking, as have the manufacturers. When I talk to some dealers, I don’t think they’re feeling the same pain when it comes to revenues and margins that the manufacturers have. I think you’ll definitely see more consolidation on the manufacturer side within the next decade. There are still too many, there’s too much competition and not enough pages overall. When it comes to dealers still making the margins, it’s funny because the dealers often are dictating and still maintaining pretty good margins, even on the equipment side. The manufacturers are going to have to consolidate in order for the margins and efficiencies to take effect and be beneficial for them, or they’re going to have to take some of that margin back from the dealers, who are still making 35-40 points. And even their operating margins are still in the double digits.
For the smaller dealers, there’s some level of transformation needed. That entails doing things around workflow and solutions, for which the revenues aren’t as good as hardware and supplies. It will help for them to differentiate their capabilities as opposed to not doing anything. A certain amount of these dealers will likely look for exit strategies; they will either be acquired or have future generations take them over. There will be some attrition for those who don’t want to invest in their business. Those who remain will have to make a transformation into solutions and services. I have a hard time seeing some of the smaller dealers getting into production and wide-format. On the production side, they just don’t have the capital to be able to afford to build the infrastructure necessary. They will be forced into areas like network services, managed IT, workflow and cloud solutions, because there’s an opportunity to add without building an entire infrastructure.
Contreras: The key is to have something that will differentiate. As you see the larger mega dealers and increased acquisitions, there’s net greater buying power with the manufacturers they work with. For the dealers remaining independent, depending on their size, they have to be able to compete. And to do that, it can be simply based on the products that they’ve been offering historically. They have to change it up and differentiate, and that’s where we feel Epson brings a value to the table with PrecisionCore and our inkjet technology. We’re enabling them to change the conversation and be more flexible when it comes to the price points they’re taking to market. Partnerships are integral for independent dealers to get into this key space and allow them to differentiate, whether it’s technology like inkjet or value-added services like managed IT.
Other manufacturers have inkjet technology as well, and Epson continues to push the envelope in creating that competition and disruption in the marketplace. Others will ultimately have to follow suit at some point.
Joe Contreras, Epson
Which major talking point (future office, security, managed services) do you think will move to the foreground in 2020? Why?
McDonald: People definitely have to be talking about acquisition, because I think 2020 is going to start to see some activity slowdown. There is a window for all of this frenetic activity, and a window for how much money that’s available out there—especially private equity—for the office equipment space. I’ve been a huge proponent of flat-rate models of print moving away from cost-per-page. I think we’re going to see a lot more of that in 2020. A lot of dealers I spoke with in the past were reticent to move away from cost-per-page, but they aren’t anymore. They’re looking at device-based, user-based flat models. Big players in the market space, like Marco and Konica Minolta, are having huge successes with that model. In 2020, it’s going to be the year of cost-per-page becoming less of a thing, and diversified services and flat-rate models becoming more prevalent.
Melo: Security continues to be a concern of both large and small organizations. Understanding the security features of the products and solutions that you represent, as well as how to best apply these to customers, will be a great distinguishing feature for resellers.
Cloud and mobility will also continue to become the standard in the office. Companies are challenged to staff IT to sufficient levels, and resellers that can provide cloud-service offerings will be advantaged. Similarly, business users are increasingly away from their workstations and require the same level of access to information and business services as if they were sitting at their desks. Resellers need to be able to promote mobile printing and the security features associated with those capabilities.
Dazo: We’ve been talking about the transformation of services for a while. It started with managed print services, managed workflow and managed IT. I’m bullish on managed workplace services, owning the entire workplace when it comes to technology. I think it’s a very obvious area where our industry should be moving into. There are some players really focused on that, where we’re seeing some success today. I think those who stick to it and have a really good strategy help not only transform their organizations, but help transform the dealers to get into these spaces. It’s kind of a natural progression for our industry. The growth of smart workplace technologies does keep the manufacturers relevant in the office, especially when people are consuming more information through other digital technologies as opposed to paper. We talk a lot about automation and how that should benefit the end users when it comes to automating document processes. It’s just a natural progression for us to also own the automation that happens in other areas of the office, as well. We have to think, as an industry, about how to remain relevant.
When I talk to some dealers, I don’t think they’re feeling the same pain when it comes to revenues and margins that the manufacturers have.
Randy Dazzo, Keypoint Intelligence
Contreras: I think you’re going to hear a lot more about inkjet because of what we’re doing in the market. Every dealer we talk to is aware of it; they understand that it’s real and it’s coming, so how does that affect their business? How can they incorporate it, or how are they going to address it when it comes to either their customers asking for it or having to compete against it? Other manufacturers have inkjet technology as well, and Epson continues to push the envelope in creating that competition and disruption in the marketplace. Others will ultimately have to follow suit at some point.
Marusic: We certainly believe the office of the future is a major talking point for 2020. With the recent launch of the Sharp Synappx applications and the upcoming launch of the Windows collaboration display from Sharp, we are working to address some of the collaboration and smart office needs of the future. Customers want their work technology to be as convenient as their personal technology. Sharp truly believes that the ability to make all of your technology work seamlessly is now expected in the workplace, and the ability to work with the cloud is key. For example, millennials are now the largest group in the workforce, and they are demanding that technology be more compatible with remote work, shared workspaces, mobility and the desire for greater autonomy. Addressing their expectations addresses the needs of the company, making their people more productive.
