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 user 2006-09-19 at 11:16:00 am Views: 33
  • #16472

    INK-QUISITION: Lexmark plans to weaken competition by rewarding customer’s loyalty
    Lexmark fired a new salvo last week in the war for consumers’ ink allegiance.
    In an industry first, the printer maker announced that one of its newest inkjet printers will use cartridges that can come with an upfront discount if the consumer agrees to return them to Lexmark, not remanufacturers or refillers.”This is big news for this industry. It’s huge,” said Jim Forrest, a senior analyst at Lyra Research, which follows the imaging industry.It’s the newest chapter in a long unfolding saga that pits printer makers against remanufacturers and refillers in a struggle for the lucrative ink market, the most profitable piece of the printer industry.Lyra Research estimates that consumers will pay $32 billion for inkjet cartridges in 2006. Of that, remanufacturers and refillers have about 21 percent of the market.Lyra estimates the market for inkjet cartridges that go in Lexmark printers is about $4.3 billion. Third-party companies, such as refillers, take $790 million of that revenue, or about 18 percent.Forrest said refillers and remanufacturers have been steadily gaining on Lexmark and other printer makers.”It’s a matter of awareness and availability,” he said. “Five years ago, many people weren’t even aware there was a choice.”Lexmark’s cartridge return program offers a $4 discount to consumers who agree to return the cartridges to Lexmark when they run dry. So far, the program applies only to Lexmark’s new Z845 inkjet printer, a low-end device that sells for under $50.The suggested retail price for black and color cartridges that are part of the program is $17.99 and $18.99, respectively. Similar cartridges that can be sold to remanufacturers go for $21.99 and $22.99.The cartridge packaging is identical on the front except for a prominent band that reads “Return Program Cartridge.” On top, it tells buyers to read details about the program listed on the back.If consumers have the return-program cartridges refilled and then attempt to reinsert them into the printer, a chip on the cartridges will disable them, Lexmark spokesman Tim Fitzpatrick said.Lexmark likely started the pilot program on the low-end printer because its buyers are more price-sensitive and more likely to buy cheaper alternatives, analyst Toni Sacconaghi Jr. of Sanford C. Bernstein & Co. said last week in a research report.The company will “evaluate the program and its market acceptance” before deciding if it should be extended to other printer lines, Fitzpatrick said.The availability of remanufactured cartridges has exploded in recent years, as franchises like Cartridge World expand rapidly, and top retailers like Staples, OfficeMax and Office Depot offer self-branded ink and toner. Walgreens announced earlier this year that it plans to place in-store ink refill services at 1,500 stores.Refilled and remanufactured cartridges can cost up to 50 percent less than original cartridges, but some have had quality issues when tested by independent researchers.

    Consumer impact
    While Lexmark emphasizes its new program is meant to offer customers a choice, the head of a trade group that represents remanufacturers said consumers will suffer.”If you give the consumer two identical choices and one is $4 less, they’re going to take the one that’s $4 less … without paying attention to the details,” said Tricia Judge, executive director of the International Imaging Technology Council.She said Lexmark, in particular, goes “out of their way” to lock in consumers.”Lexmark sets out to confuse or contractually bind the customer or intimidate them. ‘You must return this cartridge’ sounds intimidating,” Judge said.Whether Lexmark’s $4 discount will reduce the appeal of refillers remains unclear. However, the company succeeded with a similar program offered on toner cartridges for laser printers.Sacconaghi estimated that Lexmark captures about 90 percent of the aftermarket supplies for its laser printers.In an interview earlier this year with the Herald-Leader, Lexmark CEO Paul Curlander said he believes Lexmark is “the largest remanufacturer of laser cartridges in the world, and we just do Lexmark pretty much.”A remanufacturing group challenged the legality of the laser cartridge return program in a lawsuit in 2001. The Ninth Circuit Court of Appeals upheld the program last August.

    Hoarding empties
    Despite its laser success, Forrest said he doubts Lexmark will remanufacture the inkjet cartridges and sell them.
    Inkjet cartridges can be tough to remanufacture and have quality issues. The primary advantage to the program is that it keeps empty cartridges out of refillers’ hands, Forrest said.”Empties are the lifeblood of the remanufacturing industry. They can’t produce a product until they get empties. It’s the highest material cost they have,” he said.If Lexmark’s program is widely accepted, analysts say remanufacturers will have a smaller supply of cartridges to buy, thereby driving up prices on remanufactured cartridges and making Lexmark’s products more price competitive.

    Fitzpatrick said Lexmark hasn’t decided whether it will remanufacture or recycle the cartridges.
    “This is limited to a single printer, so remanufacturing would presumably require a substantial number of cartridges,” Fitzpatrick said. “But we really aren’t getting into predictions at this point. We will most definitively do one or the other.”Forrest said he doubts other printer makers will follow Lexmark’s move.”The rest of the industry hasn’t followed suit on the toner side,” he said.The return program beckons the question, though — will Lexmark succeed in luring back people who use refill services or will it just offer discounts to loyal Lexmark customers, thereby reducing the profit margins on their ink?”I assume they’ve done their homework,” Forrest said.