*NEWS*UPSTARTS SPREADS IN THE INK WARS
*NEWS*UPSTARTS SPREADS IN THE INK WARS
2005-11-02 at 10:10:00 am #14482
Upstarts Spread in the Ink Wars
that refill ink cartridges on the cheap are expanding quickly. Will
they smudge the results of printer makers like HP and Lexmark?
makers have long known that ink is as good as gold. Just ask the folks
at market leader Hewlett-Packard . Analysts say ink and toner supplies
made up more than 80% of fiscal 2004 profit for the computer giant,
although they brought in less than a quarter of the company’s $80
billion in sales.
But, now, a new breed of fast-growing upstarts is
out to crash the profit party. Across America, retail stores where
consumers and small-business owners can go to have empty printer and
toner cartridges refilled — typically at half the cost of the original
– are cropping up alongside Starbucks and Subway restaurants.
largest of these chains, Emeryville (Calif.)-based Cartridge World,
opened its 1,000th store on Oct. 26. The privately held business plans
to increase the number of U.S. outlets, now at 275, to more than 3,000
in the next decade. And Rapid Refill Ink International, based in
Springfield, Ore., says the number of its U.S. storefronts will surge
from 40 to 1,000 by 2009. “This industry reminds me of the wild dot-com
days,” says Dave Shaw, Rapid Refill’s vice-president of franchise
development and a veteran of the Internet boom.
QUICK AND EASY. Though
many dot-coms had no compelling reason for being, these franchisers are
filling what could be considered a legitimate need. Burt Yarkin, chief
executive of Cartridge World North America, likes to point out that the
ink inside a new cartridge from HP, Lexmark , or Canon
costs roughly $60 an ounce — more than an ounce of Chanel No. 5
perfume ($44.11) or Dom Perignon champagne ($4.53). “People know
they’re getting ripped off,” says Yarkin.
Indeed, an HP 45 inkjet
cartridge sold through HP’s Web site will set you back $30, while the
Cartridge World in Conroe, Tex., will refill an empty one for just
$16.50. “Our service has been unbelievably well-received,” says store
owner Jim Spillman, a former Electronic Data Systems executive.
“Everyone likes to save money.”
Until recently, however, few
consumers realized it was possible to refill empty cartridges. Those in
the know had to deal with messy do-it-yourself refill kits, order
iffy-quality ink from online outfits, or buy house brands at
mega-stores such as Staples and Office Depot.
the new retail chains, shoppers can get their cartridges refilled in
just a few minutes. Rapid Refill even sets up drop boxes at coffee
shops, dry cleaners, and other easy-access locales. Most of the stores
serve local companies as well. Many have their own vans that pick up
empties and return them refilled at no extra charge.
TRICKY BALANCING ACT.
So how does this seemingly too-good-to-be-true setup work? As long as
HP and its peers maintain sky-high margins, there’s plenty of room for
undercutting, typically by 40% to 50%. Unlike the printing giants,
which spend lavishly on research and development to invent
electronics-packed printheads and printers to work with their
cartridges, these chains’ costs are much more pedestrian. They buy inks
made by third-party suppliers, often for less than $1 per cartridge.
After paying rent, salaries for a few staffers, and some low-tech
equipment, they can easily clear a 20% net income, company reps say.
road for us is wide open,” says Yarkin. “We’re giving consumers and
businesses a choice.” And, for now, it’s all legal — so long as
refillers make it clear the product is not new and ensure that inks
purchased from third parties don’t infringe on existing patents.
results in a tricky balancing act for the likes of HP, Lexmark, and
Canon. If they cut prices, they sacrifice margin. Yet if they make a
big show of trying to shut down this fast-growing industry — say, by
creating technologies that make it difficult or impossible for
refillers to reuse cartridges — they risk raising the ire of consumer
advocates and regulators, not to mention drawing attention to a
low-cost alternative to their products.
NOT TOO CONCERNED. Hewlett-Packard
has waged legal battles to keep refillers honest, though. On Oct. 20,
HP announced it had settled a suit with Rhinotek Computer Products,
which agreed to change its packaging to highlight that its cartridges
are secondhand and that it doesn’t use certified HP inks. That same
day, HP sent a letter threatening litigation against Cartridge World,
alleging that some of its inks infringed on patented HP ink
“It doesn’t concern us,” says Cartridge World’s
Yarkin, who says that’s the first such legal challenge his company has
faced. “HP was concerned about a couple of inks out of 150. We don’t
manufacture the inks, but if there are any issues, we have ways to
resolve them.” Cartridge World can either demand that the supplier
change its ink formulation or simply use a different ink.
suit HP fine, says HP printer-supplies chief Pradeep Jotwani. “We
support fair and free competition. All I want is to make sure there’s a
level playing field.”
Analysts at Lyra Research figure that refillers already have grabbed
roughly 10% of the U.S. market. Together with knockoff brands, this
so-called aftermarket represents around 20% of the $25 billion ink and
toner-supplies business. That may sting, but not enough to compel the
big dogs to lower prices — and thereby take a bite out of their
soaring margins, say analysts.
Nor have the upstarts made enough of
a dent to force HP and its peers to start offering their own refilling
services, a practice that would hurt sales of new cartridges. “While
we’re a pain to them financially, it doesn’t make sense for them to
respond at this point,” says Rapid Refill’s Shaw.
But printer makers
can’t completely ignore the threat. When Lexmark announced
disappointing financial results on Oct. 26, CEO Paul Curlander didn’t
rule out that aftermarket refilling chains may have been part of the
problem. Earlier in the month, Lexmark warned investors that profit
would miss the company’s earlier forecast, sending shares into a
“BASICALLY STABLE” SHARE.
HP executives claim they’re not overly concerned with the new
competition. Despite most refillers’ offer of a 100% guarantee on their
products, HP is confident that most consumers are willing to pay higher
prices to get the real thing. “Some people will try” these stores, says
HP printer chief Vyomesh Joshi, “but how many will keep using them?”
the quality of refilled cartridges has undoubtedly improved in recent
years, some independent analysts say a tangible difference still
exists. “I use aftermarket ink all the time,” says Lyra Research
analyst Jim Forrest. “But when I print a photo of my grandson, I’ll use
the genuine ink. HP guarantees it for 100 years on their paper, and the
quality is a bit better. You can see it.”
Indeed, HP’s Jotwani notes
that a healthy aftermarket has been around for 20 years but HP’s market
share has remained “basically stable.” That’s because HP continually
comes up with better printers, most of which have their own ink or
toner cartridges, he says. So aftermarket rivals are forever racing to
keep up with the latest innovations. “This business is driven by
technology,” says Jotwani, adding that HP’s printer-supplies unit has
4,000 patents and 2,000 R&D engineers. “This is serious stuff.”
LOOKING TO EXPAND.
Although experts may be able to spot slightly off-color hues, many
consumers are more focused on their wallets, says Cartridge World’s
Yarkin. The company, which got its start in 1997 in Australia, now has
franchises in 30 countries and generated roughly $300 million in sales
Since entering the U.S. market in mid-2003, it has been
signing up a new franchisee almost every day. After two weeks of
training at a mock store at its headquarters, franchisees are supplied
with the necessary equipment and marketing collateral, along with an
initial stock of the 150 or so inks required to fill almost any
brand-name cartridge. When inventory runs low, it is quickly refilled
from a 20,000-square-foot warehouse in Berkeley, Calif., that contains
roughly $1 million worth of ink at any given time.
The process has
been successful enough to attract a wide range of franchisees, who
typically start earning a profit on an upfront investment of around
$100,000 within around nine months. Terry Shea, a former executive
vice-president of operations for an Atlanta-based textiles company,
signed on after reading about Cartridge World during one of his many
trips from his hometown in Chicago. After opening up a store in Oak
Park, Ill., he logged sales of $36,000 in his ninth month. With those
hefty per-store operating margins, that translates to $80,000 in annual
income — even after paying the 8% franchising fee. Shea is about to
open a second store and is looking for a site for a third.
Still, refiller upstarts face roadblocks. One is obtaining enough empty
cartridges to pre-fill, so customers can simply trade in their empties,
rather than wait the 10 minutes or so to get their own back. This has
led franchisees to get creative — often helping schools, churches, and
other civic groups organize fundraisers by collecting empties. Erv
Zintner, a former finance executive with National Car Rental who owns a
store in Maple Grove, Minn., says he has contributed $20,000 to such
groups so far.
Refillers often appeal to environmental concerns as
well. While HP urges its customers to send back empty cartridges for
safe disposal, the company crushes them and then reuses the plastic and
metal bits. Refillers, on the other hand, argue that they’re reducing
the load on the world’s landfills by reusing the cartridges. “The
really environmentally friendly thing to do is to reuse the product,”
says Yarkin. (He says the average inkjet cartridge can be reused as
many as seven times, while a toner cartridge can be “remanufactured”
Even if the HPs of the world can’t slow down this
latest franchising craze, there’s always the chance that it could
overheat on its own. In a number of famous instances — think Boston
Chicken — hot new franchising operations expanded so much that stores
ate into each other’s markets, hurting everyone’s profits.
now, that seems a remote possibility. “Being a financial guy, I’m
always worried about the exit strategy,” says Zintner, who is 58. His
current plan: Start some more stores before he retires and develop a
management team to run it, including his son-in-law. “I’ve been very
pleased so far. I’m very confident.”