IMAGING INDUSTRY REBOUNDS IN Q2 2006 ?
IMAGING INDUSTRY REBOUNDS IN Q2 2006 ?
2006-10-20 at 12:13:00 pm #16598
Imaging Industry Profitability Rebounds in Q2:06
After a disastrous 2005, imaging
industry profitability has rebounded in the first half of 2006. The Photizo
Group’s Imaging Industry Profitability Index showed slight growth to 1.025
versus 1.02 in Q1 of 2006. Most importantly, this is a marked improvement from
Q2 of 2005 when the index dipped to 0.86 due to the intense price war in the
second quarter of the year. In terms of absolute values, the operating profit
margins for the industry were 12.1%, flat from Q1, but up 2% from 10% in Q2 of
The positive results have been driven by a relatively benign pricing
environment during the first half of 2006 as vendors “lick their
wounds” from the intense ’05 price war. Additionally, several vendors have
pulled back from their aggressive strategies of gaining market share by
offering the lowest price points (Lexmark ) in ink jets, Konica Minolta in
color lasers, and Samsung in monochrome lasers).
Hewlitt Packard’s willingness to
selectively target these vendors and neutralize their price advantage has shown
this tactic to be a no win strategy. While these vendors may still have
slightly lower prices than HP (typically 15-20%), HP has effectively dropped
prices to a point that these vendors cannot compete by offering greater than
20% price discount. The hardware losses just become too large.
The Imaging Industry Profitability Index, shown in the graph below, was
developed by the Photizo Group to track the profitability of this market. The
base period for comparison is the first quarter of 2006. The index includes
supplies, hardware, and services profitability for the imaging divisions of 14
of the top industry participants. Calendar quarters are used instead of fiscal
quarters to provide a common comparison basis.
So who is benefiting most from this positive environment? Is everyone
winning, or are just a few? In our view, the most important measurement of who
is winning is the share of the industry operating profit that each firm
captures. From this perspective, four firms are the clear leaders: Canon , HP,
Ricoh , and Xerox . These four firms
collectively captured a resounding 84% of the industry’s profit share.
HP and Canon have managed to stay on top by using HP’s pervasive channel
presence and strong brand reputation with Canon’s technology base (at least in
the laser market; HP owns their own inkjet technology). Conversely, Xerox has
benefited from growth in color revenues in the production printing space /
digital press space, while Ricoh has maintained a laser sharp focus on winning
in the profitable MFP market space.
So will this positive environment last? Not likely! During the second
quarter, the promotion activity in the inkjet market has already started to
increase as HP offers rebates to clear inventory and make way for new models.
We expect HP to announce a new lineup of laser printer products with new MFPs
(multi-function printers) in the second half, which will increase price
pressure in the workgroup MFP and monochrome laser printer space. The digital
print/production printing segment will be under increasing pressure as Canon’s
new ImagePress products begin shipping, along with Oce’s new VarioPrint product
and Ricoh’s new high performance Aficio products.
So, the question is, will this just be a brief lull before the storm, or
will stabalization bring a more profitable price structure? The Photizo Group’s
view is that there is too much competition given the industry’s maturity.
Continued price pressure is inevitable until consolidation whittles the
business down to a few major players.
So, this will be a lull before the storm (or perhaps
the “eye” of the hurricane!) During the second half we expect
significant increases in price pressure and subsequent reductions in operating
profit margins. Hang on as it is sure to be a bumpy ride!