As part of our state of the industry look at the trends and issues that shape the way we do business in the office technology sector, we’ve gathered a cast of major industry figures to interpret the events of 2018 and the lessons that can be applied moving forward.
Our roundtable panel is quite an esteemed cast: Luke Goldberg, executive vice president global sales and marketing at Clover Imaging Group; Kay Du Fernandez, senior vice president of marketing for Konica Minolta; Wes McArtor, president of BEI Services; John Whidden, vice president, HP U.S. Print Services Channels Sales; and Jennie Fisher, senior vice president and general manager, Office Equipment Group, GreatAmerica Financial Services.
In considering the office technology dealership space and its providers, what lessons should we take away from 2018?
Luke Goldberg, Clover Imaging Group
Goldberg: Dealers need to figure out ways to be more important to their customers in an era when their core business is in decline. They need to be more creative in the way they’re delivering their core services, which is print and hardware. And they need to think about how to have stickier relationships with those customers that they’re eventually able to monetize on as hardware and print becomes a smaller part of their business. The most successful dealers, either via acquisition or organically, are the ones in a gradual process of expanding their portfolio to be able to encompass more aspects of a customer’s business beyond print and print hardware.
The most successful dealers, either via acquisition or organically, are the ones in a gradual process of expanding their portfolio to be able to encompass more aspects of a customer’s business beyond print and print hardware.
Luke Goldberg, Clover Imaging Group
Kay Du Fernandez, Konica Minolta
Fernandez: For Konica Minolta, our dealer solutions business is up 11 percent year over year. We’re seeing more dealers offering solutions to their customers and bundling software with their hardware. Bundling not only helps them differentiate from their competitors, it also helps them maintain and grow their hardware margin. Since the overall unit placements aren’t growing, finding net-new opportunity from a competitive knockout and preserving growth margin in any opportunity is important. We’ve really been focused on helping our dealers diversify their product portfolio—solutions, managed voice, managed IT services, security assessments—and we see the value of a more integrated hardware, software and services approach.
Some of the OEMs participate in acquisitions in an effort to retain market share in a particular territory, and I think that will continue to be a strategy for all OEMs in the market.
Kay Du Fernandez, Konica Minolta
Wes McArtor, BEI Services
McArtor: Print is a declining commodity, so diversification is critical to a dealer’s long-term success. IT and IT security are going to continue to grow. Customers are looking for a vendor that can handle the mission-critical components of their business. Being an expert in security will become a significant part of the decision process. IT VARs will begin to erode print revenue at the low end, while alternate channels of distribution move up segment with cheaper, more reliable A4s. Diversification in customer solutions will need to continue.
The differences we see from dealer to dealer indicate exceptional opportunities for dealers to improve their margins to make them more competitive and valuable.
Wes McArtor, BEI Services
Whidden: A good economy drives tight labor markets, pushing businesses to prioritize worker productivity over cost. While cost is never irrelevant, during strong economies customers are more open to spending money on new innovations and technologies that improve the efficiency of their businesses. Dealers can help their customers differentiate by offering workflow solutions to improve the speed and efficiency of paper-based processes. MFPs are often the center of that workflow improvement. Color printing is also a powerful tool. Many HP dealers used PageWide technology to shift customers from older mono devices and pages to color in 2018, helping their customers produce more valuable communications.
While cost is never irrelevant, during strong economies customers are more open to spending money on new innovations and technologies that improve the efficiency of their businesses.
John Whidden, HP
Jennie Fisher, GreatAmerica Financial Services
Fisher: Efficiency is more important than ever. The large and mega dealers realize this, and with the increased competition, the savvy smaller dealers are understanding this, too. We all are asked to do more with the same amount of resources. The good news is that we’ve seen our dealers scaling without adding as much headcount due to the numerous technology integrations we have in place, and continue to add, with leading software suppliers. The benefits of these integrations include reducing or even eliminating manual steps traditionally required, which reduces overall administrative expense. Choosing the right partnerships can make all the difference when it comes to “getting there” and doing so profitably.
Efficiency is more important than ever. The large and mega dealers realize this, and with the increased competition, the savvy smaller dealers are understanding this, too.
Jennie Fisher, GreatAmerica Financial Services
Did 2018 produce any surprises, in your opinion?
Fernandez: Maybe not quite a surprise, but I think the rate at which dealer acquisitions are still continuing seems to be growing stronger. I think we saw this begin a few years back, and dealer consolidation remains ongoing. Some of the OEMs participate in acquisitions in an effort to retain market share in a particular territory, and I think that will continue to be a strategy for all OEMs in the market.
Fisher: With the sheer number of acquisitions and changes in our space this past year, there have been a great deal of adjustments for the independent dealers to make and unknowns to navigate. What is not surprising is the resiliency our dealers have. They continue to impress us with their entrepreneurial spirit, business acumen and ability to pivot and succeed.
Whidden: Canon’s announced entry into page-width inkjet printing for the office, joining HP’s entry in 2012, shows that ink will continue to gain on laser in the office, as it has in other segments of digital printing, from postage stamps to building wraps. HP proved customers will accept ink in the office with its highly successful A4 and A3 PageWide and OfficeJet devices. Ink printing systems offer lower total costs to manufacture and maintain, while printing on a wider range of supported media. This has driven ink’s success in the home, office, wide-format, commercial printing/production and specialized large-format applications. The high initial cost of capital to build page-wide printheads has been the barrier to entry for ink in the office. But with two leading vendors, HP and Canon, having made that investment now, I’d expect other OEMs will be forced to follow, driving a relatively rapid shift to ink as the technology of choice in office color printing in the next five years.
McArtor: The speed in which Device-as-a-Service, seat-based billing, etc., has picked up momentum. As manufacturers start to promote their own flavor of this billing method, dealers will have to get on board with how this works and make the necessary adjustments. The key to success with this model is knowing and controlling your costs. The fact remains that this will be the billing method of choice for at least 80 percent of placements in the very near future. Again, it’s about the customer experience, and most customers hate meter billing.
Goldberg: Although consolidation is something that’s been taking place for a number of years now, the speed of that consolidation is ratcheting up to a level that’s a bit surprising. I don’t think any of us quite expected consolidation in the channel would be as rapid as it’s been. One surprise is the HP acquisition of Apogee in the UK. I think what that portends is interesting, in terms of what their strategy is going forward versus their direct business and the channel business, and how they’ll manage those two different things.
As the New Year gets under way, what trend do you think merits following and why?
McArtor: I believe there are two trends; no-meter billing and A4 will be hot in 2019. As a result, dealers must be much more focused on cost awareness. The differences we see from dealer to dealer indicate exceptional opportunities for dealers to improve their margins to make them more competitive and valuable. I would caution dealers to not get into any flat-rate model without first carefully analyzing your opportunities to improve your cost awareness. As volumes decline, feature functions of A4 continue to improve, and alternate channels begin to focus on our customers, we’ll have little choice to elevate our A4 offerings.
Whidden: MPS is prevalent now in every customer segment—SMB, public sector and even at home in metered solutions. As all customers move to a services model for all of their output solutions, the differentiation of the vendor and the dealer delivering the solutions will be crucial to winning across all customers.
Goldberg: HP’s long-term strategy in the U.S. market as it relates to their direct business. Are they looking to make any acquisitions in the U.S. in a similar vein to the Apogee acquisition, and what will that do and mean for the channel? That’s something we’ll all be looking at. Another thing people are starting to talk about, and it’s something we’re going to follow closely, is the device-as-a-service model. It’s about delivering prints more in line with the way that other business services are delivered. Obviously, Konica Minolta is a big believer in that, and BEI Services has been talking about it. Is the status going to change the way that print and that service is delivered to the consumer? What is Clover’s role in that, and how can we be a driver of that trend, if that’s the trend that indeed makes sense for the channel?
Fisher: Increased dealer focus on recurring revenue. We have seen more dealers paying attention to their enterprise value and the way they approach their contracts with customers, accordingly. Those in acquisition mode are finding the more secure the contracts, the more they are willing to pay to acquire a dealership. They appreciate the certainty of future revenue streams. As acquirers pay more attention to the nature of contracts, dealers are evolving and adopting a bundling philosophy. This creates better outcomes for those being acquired, too, i.e. higher multiples and better earn-out performance, when applicable.
Fernandez: On the technology front, we will probably see more IoT-connected devices and more integrated devices on the network that are able to interact and exchange data. Along with that, I think a lot of products will perhaps be AI-enabled platforms. We’re starting to see that a lot, and there will be more launches in the coming year.
Also, we’ve been talking about millennials for a while now. They represent more than one-third of the American workforce, and in 2020, they will be half of the workforce. They’re becoming a bigger part of the vendor selection process, so they’re being asked to help shortlist vendors and invite them to the final stages of the selection process. From a dealer perspective, investing in digital marketing and showing that you have optimized your website and are very visible and accessible online is important. The millennials are driving some of this digital transformation in the workplace, wanting to have the most up-to-date devices and technology to do their jobs. It’s about creating this Workplace of the Future and dealers being able to support it. We’ve come full circle as more of these IoT devices and AI-enabled platforms come into the workforce. As a dealer, being able to support that technology, as well as offering different types of models for acquisitions, is vital.
Consolidation/M&A seems to be touching every aspect of the industry. What are the ramifications for the various industry segments, and what does it mean for the smaller, independent dealership?
Whidden: Yes, even we at HP got into consolidation with our acquisition of Apogee in Europe. High service margins will continue to attract private-equity funding looking for good returns. Printing device OEMs are looking to capture a piece of the service profit pool while securing hardware share via acquisitions. Smaller dealers will have to differentiate on things other than cost and hardware offerings. Closer customer relationships, better service experience and customized solutions that are more available today than previously will allow the smaller partner to continue to deliver value at a high level if they embrace real fleet- and output-management tools available from vendors and in the marketplace.
Goldberg: A lot of the rollups taking place are with the mega dealers, whether it’s Marco, DEX, Flex Technology Group or Visual Edge. A lot of these roll-ups are to expand regional strength or to expand nationally. But there are a lot of small dealers in smaller cities or rural areas, where they can have a very nice business that isn’t necessarily impacted by these roll-ups. In fact, some of these small dealers are in areas that are under-represented and can even be targets to roll-ups. I talked to a lot of dealers at an industry event on the East Coast, and some of the acquisitions that they’re looking at are sub-$3 million dealers in smaller regions without much competition. I think even small dealers have an opportunity with this roll-up strategy. I think the next phase after dealers in the larger metros have been acquired is to target smaller metro dealers.
If, however, you’re a small dealer in a major metro where these mega dealers exist, then yes, it’s going to be difficult. They’re only going to succeed—and ultimately compete—by essentially being the small guy that’s more flexible and can provide a high level of service, along with the personal touch that you can only get from a small dealer. In a lot of cases, mega dealers concentrate on larger SMBs in terms of end-user size. There’s an opportunity for smaller dealers to make a nice living off the minnows…they don’t need the whales. There will be a lot more acquisitions because there are too many dealers.
Are there too many manufacturers? That’s a question we’ve all been asking. We’ve seen some consolidation in that vein with Konica Minolta adding Muratec and HP getting Samsung. I think some of the manufacturers are feeling like the traditional A3/A4 office space has become commoditized and they are looking at different technologies. You see ink technology and hardware manufacturers upping the ante in terms of speeds, feeds and operating costs, and they are getting more into a light-production and production realm. I do think there are too many manufacturers selling A3 and A4 technology into the office, and the demand’s been declining. They’ll either have to segment themselves into different areas or there will inevitably be some more consolidation.
Fisher: The big just seem to get bigger and it’s putting smaller dealers under more pressure to compete. As dealers become larger, they have more buying power with the manufacturers, and are able to leverage their economies of scale in service and other aspects of their business. Consequently, it’s even more imperative for smaller, independent dealers to focus intensely on the level of service they are providing.
Unless smaller dealers have a strong niche segment they serve well or operate in a small geographic market, their MIF will likely be vulnerable to the competition. No matter how the competitive landscape evolves, those smaller dealers who learn to evolve their customer-centric approach will still win their fair share of accounts.
Fernandez: For the smaller, independent dealership, I think they need to be a little introspective and ask themselves if they’re positioned to transform their business as our industry moves into managed services. If the answer is yes, then they should be going to their manufacturer and asking them for help and programs to transform their business and grow into these new markets. If the answer is no, then consolidation may be the answer. I think there will always be a need for the smaller, independent dealership. Some buyers value that local presence, the people who really know the business. The model isn’t going away, but I think dealerships should really decide if they want to grow in a certain direction. Business as usual isn’t a wise tactic, and dealers really need to work with manufacturers to plan out their next step.
McArtor: Having been in the business longer than I care to admit, I’ve seen this cycle a few times. History indicates that most consolidators start with the mindset of leaving what’s good about an acquisition alone, but eventually start moving redundant functions to central locations for cost control. Inevitably, that moves decisions further from the customer, opening the door to the more responsive, experienced and focused small, local dealer. We’re an industry in transition, and that creates opportunity for increased M&A activity. Whether your company is in it for the long haul or working toward an exit strategy, cost control should be very much top of mind.
