Over the past decade or so, consolidation in nearly every industry has come about due to the abundance of cheap money, as well as the proliferation of investors in private equity and venture capital looking to find investments.
In the heyday of our industry, dealers and imaging suppliers of all shapes and sizes could not only survive, but also thrive. But as with any maturing industry, competition and margin erosion were inevitable—perhaps even healthy.
The toner industry consolidation started around 2005. With Clover’s acquisition of MSE in 2014 and the demise of LMI, it’s unclear whether there is a chance for another major player to compete with Clover or whether Clover can continue to dominate that market.
Parts remanufacturers/distributors consolidating with toner remanufacturers began in 2009 and we’ve seen the mixed results that came from combining these two sister operations.
As for dealer consolidation, it’s harder to pinpoint exactly when it began, but the speed with which it’s taken off the past few years has been staggering. The rise of the super-dealer is a real thing, as is the potential extinction of the mom-and-pop break-fix shop.
This all brings us to recent years, when we’ve started to see channel integration take place. In 2017, Office Depot acquired Compucom, and more recently Staples made a surprise entry into the dealer market. But the biggest shockwave occurred just recently.
2019 ended with a bang on the heels of one of the biggest stories of the year—and possibly the next iteration of business strategies in the imaging channel. Norwest Equity Partners—the private-equity company behind Marco, the country’s largest megadealer—acquired Clover Imaging Group. This acquisition brings together a formidable team of parts and printer remanufacturing, field service and toner remanufacturing under one roof.
The imaging industry isn’t as neat and organized as the structure you would find in the automotive parts industry. After labor, toner and parts are the costliest expenses to a service operation. With the stroke of a pen, NEP has redefined their business in one acquisition, giving Marco a tremendous competitive advantage.
Vertical Integration for Dummies (Written by a Self-Proclaimed Dummy)
We first need to define what we mean by vertical integration. It’s a business strategy in which a company purchases its suppliers and/or distributors to control the supply chain. The goal: giving the acquiring company a competitive edge over non-integrated companies. End users are more likely to choose the integrated firm’s products or services because, ideally, the costs are lower, the quality is better or the product is tailored directly to them.
Vertical integration certainly has its share of both pros and cons.
Advantages
- Lower prices
- Avoidance of supply disruption
- Increased market control
- Creation of economies of scale
Disadvantages
- More rigid to trends
- Harder to manage well
- Corporate culture tension
- Reduced flexibility
- Loss of focus
Without debating either side, the important point is that once the integrations occur, there’s no going back. So moving forward, it’s more about looking at the execution of the strategy and the reaction by all factions and third parties.
Twilight of Consolidation
The low-hanging fruit has been picked and the consolidation story is running on fumes in the supplies market. Sure, it will trudge on for a while, but it appears that vertical integration may leapfrog that playbook—bankers and private-equity companies may see greater upside in that value pitch.
As the imaging channel has matured, we’ve moved along with the various strategy phases, each mirroring the health of the industry at that time. While vertical integration is a typical strategy, it is largely executed toward the end of an industry cycle because it is considered one of the riskiest and more capital intensive. In a sense, it is also a signal to the industry of where things currently stand.
While we could argue when the industry began to experience flat growth, we can say we saw more consolidation toward the end of this nine-year period than the beginning. Full-on vertical integration could now begin to happen in half that time due to the remaining density in the supplies market.
How will the vertical integration strategy be processed by the channel?Your guess is as good as mine. Will the different business-segment industries develop countermeasures? Copy it? See it as business as usual? Escalate an arms race?
There are also a number of large segments that will influence vertical integration based on how its members react. For example:
- Device manufacturers—HP, Canon, Xerox
- Competing megadealers—Applied Imaging, Impact Networking, Gordon Flesch Co.
- Wholesale technology distributors—Office Depot, Staples
- New-build toner manufacturers—Aster, Ninestar, Print-Rite
It’s going to be an exciting year as the various industry leaderships respond and execute on the unfolding strategies. Perhaps most importantly, how will these changes affect you? Are you a dealer who might be acquired? If not, will you support your competition by buying supplies from someone who might take your orders today—and take your customers tomorrow? If you’re not going to be part of the frenzy for consolidation, how is this moment going to create opportunity for your company to grow?
The answers to these questions will all be answered soon enough. I would love to hear your thoughts on what the best direction is. Stay independent or integrate? Something else? Email me at wdemuth@metrofuser.com.
They say hindsight is 20/20. Well, it’s 2020 now, so it’s time to look at your future goals and how to achieve them. If not, you’ll end up looking back at this moment and wondering why you didn’t.
