Talk Track: The Cannata Report Advisory Board weighs in on critical channel topics, including acquisitions, diversification, margin compression, managed IT, and HP’s entry into the A3 arena.
For the first of our 2018 Virtual Panel Series, we took our Editorial Advisory Board to task and asked them to suggest six questions to help us gauge the temperature of the independent dealer community. As one might expect, there was some consistency in the suggestions. Rather than reaching out to other independent dealers, we took those six questions suggested by our Advisory Board members and punted them directly back to them for their responses. We believe you will find their comments compelling and illuminating. We also gave our panel the option of answering some additional questions for our digital edition. Those questions and responses will be posted later in February on thecannatareport.com.
Our Editorial Advisory Board panelists include: Deb Dellaposta, president and CEO, Doing Better Business (DBB), Altoona, Pennsylvania; Dan Doyle, Jr., president and CEO, DEX Imaging, Tampa, Florida; Troy Olson, president, Les Olson Company, Salt Lake City, Utah; Jim George, president, Donnellon McCarthy, Cincinnati, Ohio; and Steve Gau, vice president of Sales, Marco, St. Cloud, Minnesota.
CR: The imaging industry buzz is all about the need to diversify beyond the traditional MFP. What are some of the ways you’ve diversified your dealership’s product and services offerings to date and how are you considering diversifying beyond that in the future?
Dellaposta: We began diversifying in 1996 by moving into IT services and eventually managed IT services. We started our printer fleet management program, which continues to evolve, as we aim for continuous improvement in business workflows and corporate communications processes.
Doyle: Our two main focuses outside the traditional MFP are managed print and document management. I definitely think that there will soon be an avenue for 3D printing too, but that it’s not there yet.
Gau: As many dealers have started to offer managed IT services in the last several years, we have been offering IT hardware and services since 1985. I’d like to tell you that we had that much foresight back in 1985, but the fact is we decided to get into IT space when business computing started to gain traction. We stuck with it and evolved our IT business over the last 30 years. It wasn’t always profitable in the early years, but it is today. We are strongly positioned in the markets we serve, as we don’t have any competitors that can offer the full gamut of IT, office printing, and software solutions that we can.
We’ve diversified into the “industrial print” space, offering high-end products from manufacturers such as MGI. We’ve recently had our first seven-figure sale in this space on a single piece of equipment. It takes several hundred mid-range copiers to generate what just one of these devices does for revenue and profit. It’s definitely an investment, but we believe it’s the next logical step to take in progressing our successful production print offerings.
We have added shred services in two of the main markets we serve. I look at copiers as sort of the beginning of the paper lifecycle and see shredding as a natural fit in the copier space, as it brings an end to what our copier business started with that piece of paper.
George: As we continue to watch a steady decline in MFP margins, we must diversify our offerings. We continue to train and sell MPS and MNS. The key to our industry has always been the annuity stream. Mailing equipment is another option. Furniture is also a good filler, but it does not come with the beloved service contract.
Olson: We diversified by moving into MPS about 10 years ago. As part of that, we also sell large format on a cost-per-square-foot basis. Three years ago, we started our managed IT services program and in 2017, it had the largest YOY growth over any other division. As independent dealers we need to continue to look for opportunities to expand our products and services to protect our business for today and tomorrow. We are very intrigued as a Sharp dealer by the concepts Sharp and Foxconn are sharing. We look forward to a bright future.
Pitassi: Pacific Office Automation has always understood the need to diversify product offerings to satisfy our customers’ ever-changing business requirements. The challenge is bringing products and services to these customers that meet our industry model. When adding products such as MPS, telephony, IT services, etc. to existing customers, you have already established the trust, making it easier for customers to expand their businesses. You need to add products that match our industry model, which sometimes requires you to break even or even take a slight loss on equipment in order to obtain profitable reoccurring monthly service. Currently, POA is offering products such as telephony, cloud services, mailing, and IT services and we are exploring other product offerings such as cameras and security systems.
CR: Margins continue to compress and tighten. Hardware prices have about bottomed out, and now, the CPP is under attack. Do you see a bottom?
Dellaposta: We have reached the bottom. You can see this by what happened this year with Ricoh. Manufacturers have been the ones driving the CPPs down and now are realizing this is not a sustainable business plan.
Doyle: Yes, most of the compression is caused by direct operations. As direct operations focus on profits, they will no longer continue to give away service pricing.
Gau: I’d like to say, yes—hopefully! I do believe we must be at or near a bottom on all-inclusive service and supply rates when using genuine manufacturer parts and supplies. There are likely lower rates to come in the non-OEM offerings. Everyday, we see service and supply rates under $0.04 for color and under $0.005 for black & white in up-and-down-the-street business. Given the importance of the recurring revenue stream to the growth and sustainability of the copier dealer model, I’m disgusted this industry helps in its own demise by the rapid drop in service rates over the last five or so years.
George: The CPP will fall to $0.002 black & white and $0.03 color. This will require help from our vendors.
Olson: It’s very concerning to continue to see margins continuing to compress. Hopefully, manufacturers can continue to build products that are more reliable with supplies that have longer yields to help us compete. I feel it’s imperative we find ways to be efficient on first call resolution and with tools that help manage devices remotely as much as possible.
Pitassi: While there is a slight feeling of compression from manufacturers in the industry today, this has been occurring for many years in our business. This compression could worry some vendors, but I believe customers value great customer experiences. Though economics and costs are an ingredient to a customer’s business decisions, they are not always a driving force when solving a customer’s problems. Some other factors contributing to this compression are international trade agreements, currency exchanges, and the new administration. It seems to me these things come and go.
CR: Are you offering managed IT services? If yes, are you partnering or doing it on your own? And if so, are you making a profit and how are you making that profit?
Dellaposta: We started by offering managed IT services on our own, and it was not profitable. Since we have partnered, it is profitable.
Doyle: No, we are not currently offering managed IT services.
Gau: We offer in-house Marco managed IT services that we created 100% ourselves. All of our IT employees are Marco-badged employees. We began offering IT hardware and services in 1985 and continue to be 100% self-supported today. Our managed IT services are profitable and have been for many years.
George: We are partnered in managed IT services as we continue to grow our internal IT team. We are seeing margins north of 48%.
Olson: Yes, we are offering MIT Services. We use a dual approach, meaning we have invested in our own NOC, as well as use Continuum for customers that fit their profile and offerings. We have found it very beneficial to have flexibility in our offerings. We are making a profit.
Pitassi: Yes, Pacific Office Automation is offering managed IT services, including a 24-hour help desk. We offer on-premise servers, firewalls, back-up data systems, and on-premise telephony. We also offer cloud services and VOIP. As with any new product, Pacific Office Automation is in investment mode. We are optimistic to see increases in our gross profit margin, as we are currently not meeting the traditional copier industry profit margins.
CR: What are your thoughts on HP Inc’s A3 products? Are you selling them, or do you plan to sell them? Does HP Inc. add anything or solve any business problems one of the other manufacturers doesn’t already solve?
Dellaposta: We do not offer HP A3 products. Not only is it important to provide products and solutions, which solve business problems, but security is also a critical factor for businesses today. We feel we have the two strongest partners in Ricoh and Sharp when it comes to covering all the bases for our customers.
Doyle: We are testing HP’s A3 products. They seem to be working very well. I believe customers will be more accepting of HP due to the reliability of HP’s printers.
Gau: We’ve been very successful with HP’s high-quality color and black & white single-function laser printers and A4 multifunction devices for a couple of decades now. We’re not sold on the HP A3 offering at this time. We aren’t selling their A3 devices today as part of our product offering. We will continue to monitor how the market responds to these devices and adjust accordingly. For us, HP isn’t solving any business problems that aren’t already being effectively handled by the traditional copier manufacturers. We have Konica Minolta, Sharp, Canon, and Toshiba, and HP doesn’t bring anything new to the market that makes risking our relationship with our other partners worthwhile. We will continue to sell thousands of their single function and A4 multi-function devices each year.
George: HP is extremely hard to work with. We do not receive any rebates, and you can find any of their products online.
Pitassi: We currently do not have enough information to formulate an accurate opinion on HP’s A3 product line. However, Pacific Office Automation is carrying the A3 product and have trained our sales staff on the product. I think HP makes sense with some customer challenges.
I believe HP should have the same channel and sales representative support for both their A4 product and the A3 product lines. By combining products and promotions, it would be a better opportunity and easy to understand for sell through.
CR: Should independent dealers be concerned with all the acquisitions taking place? Many dealers started (or most began) as a small dealership and grew organically for years. Now, it seems it is more difficult to grow organically.
Dellaposta: This is probably a question answered differently in each market. We are growing both through acquisitions and organically. In some of our markets, it has been to our benefit when Global has acquired a competitive, independent dealer.
Doyle: I think that the latest trend of acquisitions is just one of the many cycles of this industry. The industry has been through it before and will continue to go through it every so often. I think independent dealers still have plenty of room to grow organically.
Gau: I don’t believe acquisitions are a detriment to independent dealers. Many of the dealers doing the acquiring are independent dealers themselves. I would be more concerned if it were the manufacturers that were doing all of the acquiring, which could be a threat to the independent dealer channel and signal a strengthening of the direct channel. As long as smaller independent dealers continue to invest in their businesses, I believe they can remain competitive, viable options for customers. There will always be a segment of the market that doesn’t want to do business with the so-called mega-dealers.
George: Today, you are buying or dying. The days of strictly organic growth are behind us. Smaller dealers will continue to struggle with the decline in margins and the ability to compete against the larger dealers.
Olson: Dealers should pay attention to all the acquisitions that are taking place. There may be opportunity for dealers to grow through acquisition and that will make sense. With that said, I feel dealers can still grow organically. I see it happening as I speak to smaller dealers who are making sound decisions and growing organically. Typically, it does take more time with dedication and patience through the process.
Pitassi: No, I do not think independent dealers should be overly concerned with the current acquisition climate in our industry. I strongly believe there is more opportunity today to grow organically as there ever has been in our industry. I regard our industry sales model as one of the most successful. It allows dealers, no matter the size, the opportunity to grow. In my years of experience in this industry, mergers and acquisitions have constantly occurred, and I believe when these occur, the change creates big opportunities. My long-standing belief is that manufacturers should stay in the manufacturing business, finance companies should stay in the finance business, and service companies should stay in the service business.
I also think some manufacturers need to do a better job of partnering with smaller dealers by helping with the investments on larger product offerings. Helping with demo equipment, technical training costs, and up-front parts, supplies, etc.