With a 338 per cent growth rate and better margins than their single-function cousins, multifunction inkjets are a key growth market at the moment. But the addition of new models this month will increase distribution across channels and margin erosion will set in rapidly thereafter. REBECCA SHAW investigates whether MFDs are destined to follow inkjet printers.
Sales of multifunction inkjet devices have grown 338 per cent from Q2 CY 2002 to Q3 CY 2003 according to IDC, an impressive feat in the technology industry. Revenue for inkjet MFDs has rocketed from $6 million in August 2002 to $12 million this year. This level of uptake is anything but accidental.
Two years ago leading manufacturers — amongst them HP, Lexmark, Epson, Brother and Samsung — engaged in a calculated effort to improve what was considered, before then, to be an inferior accessory, a machine that sought to be a jack-of-all-trades while excelling at none of them.
The movement was largely motivated by reseller complaints about the price erosion of single-function inkjets. Manufacturers sought to inject new value into multifunction devices so it could better retain margins and lift the overall revenue stream of the printing division.
The level of investment that went into this venture is nothing short of staggering. To date, HP has sunk enormous amounts into the research and development of MFDs on a worldwide scale, improving the stability of the engines, the connectivity, re-designing the casing and buttons for ease of use, and making the underlying software basically invisible to the user.
On top of this, vendors undertook expensive re-education campaigns. In Australia, HP started with major retail accounts, about six in total. It flew experts from the US, where the MFD strategy had already been trialled, to engage with store managers and explain the necessity of dual positioning.
To attack the single-function fax market as well as the scanner market they needed dual placement within store aisles and catalogues. This took significant investment by both resellers and vendors because retailers had to invest in greater stock while manufacturers had to outlay more discount demonstration units and also supplies to drive those.
Market development manager, personal printing, for HP Australia’s image and printing group, Guyon Collins, said, “We had to shift retailer’s focus in terms of catalogue exposure and educate them on why they should do that. We highlighted their losses on single-function Deskjets and offered MFDs as a chance to drive revenue back up, and drive their after-market supplies business which is very important to every retailer.
Supplies are one of those high-margin commodity sells that really helps them along each month.”
Having the retailers on board was absolutely imperative to the success of MFDs.
Collins said it would have been almost impossible without their endorsement.
“We saw big differences in retailers that didn’t embrace it as opposed to those, like Officeworks, that drive it very aggressively — placing products in three positions and changing their national planning to facilitate the conversion from single-function to multifunction inkjets,” he said.
Having done the initial hard yards, it seems only fair that mass merchants currently sell 59 per cent of all MFDs in the channel.
Analyst for channel research group Inform, Stuart James, said companies such as Harvey Norman, Officeworks, Harris Technology and DickSmith were the clear winners in this growth market.
In two short years consumers have become comfortable enough with the three or four-in-one concept to sustain significant turnover of low-end models through outlets such as Myer Grace Bros, Kmart and BigW.
National sales and marketing manager, consumer and small business, Lexmark A/NZ, Scott Millington, said that in the next 12 months MFDs would begin to flow with greater intensity through independent retailers now that consumers consider the device a serious alternative to standalone machines.
Selling the connect story
The motivation for consumers to buy MFDs is a combination of price, design and feature-sets. When Lexmark first entered the MFD market two years ago they were oriented to small businesses at $400-plus. Today, an entry level unit costs $199 and is infiltrating the home.
The new release MFD sports a more sleek compact design that fits into tight work spaces for which consumers are willing to pay a premium, according to Millington.
But the real change in market demographics is due to electronic and digital devices becoming more integrated and the intense promotion of the ‘connected home’ concept. October has seen the dawn of a new era for multifunction devices.
For the first time Australia and New Zealand will see multifunction devices with card slots for digital cameras, starting from about $250 (retail).
While strengthening their hold on small business, manufacturers have are also focusing on home users, designing specific models for the small or home office.
Millington said these new products, priced from $249-$499, would help create new sales channels.
“The goal with MFDs has always been to keep the channels narrower so as to retain margins a little more,” he said. “Where possible we’re trying not to put the whole range in any one store. We try to spread it out amongst the most appropriate channels.”
Staving off price wars
Vendors have also become more creative in their efforts to alleviate competition between channels by developing differentiators that take into consideration store demographics.
For example, Lexmark sells an X1150 MFD model to Harvey Norman without a USB cable and an X1140 model to BigW with a bundled USB cable.
For all intents and purposes the machines are the same, however, Harvey Norman knows it can make a good margin selling the USB cable independently and its sales reps are educated enough to prompt customers to buy one.
“They get upset if we retard their ability to do this by bundling the USB cable with the MFD,” Millington said.
BigW on the other hand presents a less controlled environment where shoppers are typically of a non-technical bearing. Lexmark bundles USB cables with the MFD to prevent high numbers of tech-support calls and poor brand perception resulting from the consumer’s frustration at not being able to use the system immediately.
To an extent, BigW-type consumers expect the vendor to have pre-empted its requirements.
Millington said, “Having two different products out there reduces the competition a little. If one outlet has the product on sale the other doesn’t feel obliged to engage in a price war.”
However, vendors concede that the Australian market is not large enough, or diverse enough, to stave off falling prices forever. As more channels adopt MFDs, the greater the competition will become and more rapid the price erosion.
IDC’s comparison of total MFD revenue against unit sales shows a glaring reduction. In August 2002, MFDs reaped $6 million from the total 11,600 units sold. This year, total sales units increased to just over 40,000 while revenue doubled to $12 million.
Flatbed scanners fall victim
In the meantime, the greatest victim of the exponential rise of MFDs has been flatbed scanner sales, which have decreased a whopping 20 per cent over the last 12 months, according to Inform.
“Scanners have become an unnecessary middleman in the equation,” Inform’s James said. Collins points out that the attack on scanners has been two-fold, MFDs on the one hand and the explosion of digital cameras on the other. Meanwhile, single-function inkjet printers have survived the MFD onslaught unscathed, mostly James feels because of the digital home and photographic segment taking off. Single-function printers tend to have better photo quality features and at $65-100 are money easily parted with from the consumer’s viewpoint. They also represent a simplistic sale psychologically for buyers that don’t need any of the other functionality.
“June and July this year produced back-to-back record sales in Australia for single-function inkjet printers. So it’s clear that while the multifunction market is expanding rapidly it is not eating into the inkjet printer market,” said James. It seems that at some point single-function inkjets will begin to feel the impact, after all 200 per cent growth has to institute a pitch somewhere. But even if it does the overall outcome is a win for both the channel and vendors.
Tony Pierce, category manager for Harris Technology, said: “It doesn’t make any difference to us because MFDs targeting the same consumer group, they generate the same flow-on sales in consumables and stationary, and although they have slightly better margins [than single-function inkjets] it’s not significant.”
Although Lexmark was seeing an impact on its single-function inkjet printers it was not too disappointed because total shipments for the printing division were up a long way, he said.
“The volume [for single-function inkjets] is still there, it’s just not as good as it used to be. They will still form an essential part of the channel’s product offering for some time to come,” he said.