Changing tunes: the print consumables dogfight

The rate of change in the printer market's modus operandi means vendors are obliged to revisit their distribution model frequently to ensure they are still on the same wavelength. But, writes Agnes King, if you are going to change the state of play mid-season, some notice and communication would be nice.

The best entertainment in the IT hardware market at the moment is the dogfight in the printer consumables market, one East Coast distributor said last week with an equal degree of weariness and glee. When Epson revoked Digiland's membership to the Genuine Gold Seal club last month in a very public advertising campaign, there were several issues at stake. The first was that the distributor was parallel importing Epson cartridges from Malaysia and selling it at reduced rates (whether or not it was genuine Epson stock remains a point of contention).

The practice not only contravenes the terms of the manufacturer's channel program but also creates conflict in all echelons of the channel with regards to warranties and brand integrity. For this reason, such behaviour is damned by the IT community at large -- on the surface at least. “The Gold Seal program was warmly accepted by the channel, so we’ve got to police it,” says Mike Pleasants, Epson’s director of marketing communications and e-commerce. “We can’t just put it out there and expect it to take care of itself.”

Some distributors, however, are questioning the seriousness of vendors’ intent to stamp out the practice of grey marketing or the utilisation of clone brands. Phil Gibbs, of Melbourne-based distributor Alloys International, says it may only be the increased awareness of end users that is the motivation behind printer manufacturers’ apparently more stringent stand. "With inkjets now obtainable for $135 wholesale, we've all got [margins] down to $1 a printer. It's inevitable that the parasites in the business would turn to raping the consumables segment in search of revenue," he says.

There are three alternatives to buying ink and toner cartridges locally, according to Gibbs. You can go for the crude drill-and-fill option of clones like Pelican and Cartridge World; import counterfeit stock, a highly illegal choice; or source genuine stock from countries where the list price is cheaper. Even if distributors have the goodness of mind to grey market genuine stock, the chances are that it will still be littered with counterfeit products, at a ratio of one in five units, Gibbs says.

"Vendors could take one of these three alternatives out of the equation by addressing the worldwide pricing issue," he explains. If opportunists know they can buy the same gear from Malaysia or Yemen for half, or even a tenth of the cost, they're going to do it, especially when the difference is a $15 margin as opposed to $1. Gibbs believes the setting of RRPs at what a market will bear is not really the issue. Rather, it's the visibility of price inconsistencies that have been picked up by end users with the help of various media. "If I get a price in one store then walk down the block and get another for $15 less, alarm bells are going to start ringing," he says.

There is no question that the price gap between the genuine article and cloned product has created a market for third-party players and grey marketeers. “Yes, the printer manufacturers have created their own headache by setting the price of the genuine article so high, but there’s nothing untoward in that,” says Stephen Gates, general manager of national consumables supplier Daisytek.

The parallel importing of genuine but unauthorised stock works nicely on many scores: customers want to print in colour but are discouraged by the high price of cartridge refills; the media has kindly alerted them to the reason behind the hefty local tariffs for authorised stock; and, because it’s genuine, the imported gear alleviates any misgivings consumers have about using non-genuine ink or toner in their machines. Meanwhile, the reseller/distributor makes a decent profit, which enables them to increase marketing activity to boost awareness among the user community, thereby increasing market share. The only glitch in the chain appears to be quality control and the fact that ethical distributors that are determined not to sully their hands in unauthorised channels are angry about the lack of support from vendors.

"I won't [parallel import] because I don't think it’s ethical, but I am losing business out of it," says Gibbs. "At the end of the day, who's crazy? Me or the distributors that grey market? I'm putting my hand up and saying I'm stupid because I'm passing up big dollars. And once all the ethical players have been squeezed out of the market, then the vendors will have them left to deal with.”

Many suggest that the grey importing avenue could also be curbed through the creation of an elitist club of ethical, vendor-certified distribution partners, similar to the Epson Genuine Gold Seal club, although judging by the frequency of rumours that other Gold Seal members have also engaged in grey marketing, perhaps it will need to be even more genuine.

There are no rebates involved in being a Gold Seal member so inclusion is purely a stamp of integrity. However, the effectiveness of the scheme depends on the regard in which it is held by the industry at large. Gates says customers do take into account the Epson Genuine Gold Seal. “Big buying groups like Office Works and Kmart, which depend on their reputation, wouldn’t even entertain a conversation with a company like Digiland because the risk on their part is too high,” he says. “The Gold Seal program raises a flag for consumers and we’re seeing an uplift in our business as a result.”

The second issue exposed by the Digiland/Epson fiasco is the limiting of distributors by vendors to certain geographies despite their ability to sell outside these regions. Digiland was caught selling stock in Western Australia, a region in which it is unauthorised and an act “which breaks the main distribution contract”, according to Epson. “All our agreements with our disties are quite specific about the geographic zones they can and cannot operate in, and each of them would know that,” says Pleasants. “We have to be specific about this aspect, as it is an important contribution from us towards making the channel function effectively.”

Not everyone agrees with the philosophy of protecting regions with a big vendor stick. Many cite the Digiland breach as an example of its archaic and unpractical nature as a business model.

David Finn, managing director of Kyocera Mita, says there is little point in appointing a national distributor if you're not going to allow them to operate at full capacity. At the end of the day, they are a distributor and their livelihood depends on taking the order, regardless of the customer's address.

Minolta-QMS managing director Stuart Drysdale agrees, saying that much of the problem is caused by over-representation in distribution. "We only use two distributors for our hardware and consumables and we have one other that sells just consumables. If we were to go out there and dilute their story by appointing other distributors, then to be honest I am sure that grey marketing, counterfeits and clones would happen to us as well."

Epson has 13 distributors in its Genuine Gold Seal list. While this is generally acknowledged to be a more appropriate number for a vendor with 35 per cent market share (Epson has 22 per cent share or thereabouts), Gibbs says the level of competition in low-end printers is so fierce that if vendors don't have aggressive representation on the ground, it will quickly affect their competitive ability. “You can become under-represented very quickly in this game,” he warns, “especially if one or two of your partners fall over.”

Distributors, especially those on the West Coast, claim that restricted selling geographies protect the consumer more than anyone. Many of the national players, even those the size of Tech Pacific, are more interested in box moving than providing the support and hand-holding that a local player will use as a differentiator. East Coast disties go to regions like Western Australia and dump low-cost stock, leaving the customer either without support or having to deal with issues via expensive phone calls.

While the struggle in the consumables space provides good entertainment in a largely stagnant era, it signals the increased pressure being felt by printing hardware vendors. In posting its annual financial results last month, HP showed almost total reliance on its imaging and printing division to sustain the health of its overall business. IPG revenue was US$5.6 billion, a 12 per cent increase year-on-year, and just shy of one-third of the company’s total revenue income. It is a revenue stream that tier-one vendors cannot afford to lose and yet there will be no slackening of the third-party players while the returns remain so great.

Meanwhile, newcomers to the market are looking for ways to turn it on its head. In August, Minolta-QMS smashed the $2,000 price barrier for laser colour printers and Samsung claims that next year it will take the cost to a new all-time low. Kyocera Mita also claims to be taking an alternative approach to making its money from consumables. “We have a completely different view to consumables altogether than our colleagues,” says Finn. “We sell print solutions and then the consumables follow. The cheaper we can get the consumables to the end user, the better value proposition we have to sell the printer.”

The growing confidence in multifunction devices is providing another avenue by which newcomers can advance a few rungs up the ladder of brand dominance. Unlike printing, where the incumbents have created an impenetrable moat around the top three or four rungs, MFDs are an area where everyone starts on a more or less even footing. HP and Lexmark may have had MFDs on the market for longer than anyone else, but the products’ performance hasn’t been particularly good, which is more of a deterrent than anything else, from the customer’s point of view.

Plagued by so many pressures, Alloys’ Gibbs says it is important vendors protect and support the parties who actually disseminate the hardware in the market, lest they risk losing their greatest ally.