*NEWS*CAN YOU COMPETE WITH DELL ?

[Anonymous]

Competing With Dell: The Printer Channel Takes On A New Look in 2005

If you are an Executive at a major printer vendor serving the United States, two words describe your outlook for 2005: channel conflict! No longer Will you be able to keep all of your channel partners happy. No longer will you be able to utilize every channel to reach all of your target markets. No longer will your VARs sit back idly as you cut into their margins by offering products directly. Just because it’s your competitor’s business model doesn’t mean it should be yours. Know your strengths. Realign your strategy. Win the game your way! Recent strategic partnerships are sure to change the competitive landscape for hardware in 2005. Dell and Tech Data announced a groundbreaking peripheral sourcing deal in November that, if printers are included, will have a major impact on the printing industry. In an industry that continues to struggle with minuscule hardware margins, this deal will allow Dell to offer a variety of vendor hardware products at extremely competitive price points. The problem facing resellers and vendors alike will be increased pricing pressure at the wrong time. While there is no specific indication that printers will be included in the agreement, competing vendors can assume that Dell’s highly growth-oriented printing and imaging product line will be involved. According to a VARBusiness article dated November 9, 2004, Dell’s deal with Tech Data will allow the distributor to supply Dell with products, including peripherals, from over 200 vendors at significantly discounted prices, possibly free of shipping charges. What does this mean to printer executives? It is simple. You are not going to turn any heads as the unimportant second mover in the direct game. If you’re not careful, the only affect your direct offering will have is to dishearten your VARs. Dell’s prices will soon be so low that resellers across e-commerce will see their slim margins essentially disappear if they plan to compete on price. For a company that readily accepts invisible margins on printer hardware, Dell’s Tech Data deal opens up its playing field for even more maneuvering. Printer vendors should be wary of following Dell’s path into direct sales at the low end. Across the industry, vendors have strengths that compliment SOHO and SMB sales strategies, and yet they have not been dedicated to those efforts. Instead they continue to upset their VAR’s with discounted direct offerings, while at the same time refusing to leverage their core strengths. Current Channel Environment Until recently, printer channels were clearly defined by functionality as well as price. High-priced lasers were sold primarily via VAR and direct channels. Only the most extreme home power user could justify the cost of a laser printer so most home offices included inkjets. Network connectivity was also a differentiator since only the earliest of adopters were networking their home offices. Most people who needed to share a printer in such an environment simply used an A/B switch to avoid the cost and complexity of networking. A printer manufacturer like Hewlett-Packard would carefully craft a channels strategy based on price points and features to determine the most appropriate channels for distribution. All that changed when laser printer prices plummeted. Attractively priced lasers started to flow through the retail and Internet channels, and small businesses began to add laser printers to their shopping carts. Printer manufacturers began to focus on low-cost laser printers, further increasing competitive pressures and lowering prices even more. As prices dropped, competition drove increased functionality. Today, both inkjet and laser multifunctional printers from a variety of vendors are commonly found in the retail channel. Networking in the home and home office, driven by a desire to share Internet connectivity as well as a laser printer, is an attractive incentive for many home office users. Large companies continue to buy a significant portion of their printers, particularly the very high-end, fast networked models, directly from manufacturers or from VARs. They will often supplement these channels and buy commodity desktop laser printers from e-commerce sites and retailers. There are a number of options when buying a printer in today’s environment. A small business might choose to buy an HP printer directly from HP via HPshopping.com, visit an online reseller, go through an authorized HP reseller specializing in small business, or purchase the same product at a local Best Buy. While this is convenient Channel strategies at most major printer vendors seem to be in disarray. While it is the general consensus that most printer vendors are anxious to reach the SMB customer, the strategies that they use to target this customer base differ significantly. Some vendors seem intent on pushing their products through SMB-focused VARs while others have ramped up their retail offering. Still others are banking almost solely on direct sales. Some printer vendors have shown signs that they are moving to organize channel operations for 2005. Xerox recently situated its former North American president, Jim Firestone, to manage its entire channel strategy. Mr. Firestone will now oversee reseller, direct, dealer, and agent sales operations in North America. This move will allow Xerox, which has no retail presence, to bring channel decision-making under one roof. Will Mr. Firestone choose to eliminate Xerox’s direct sales? It is unlikely. However, if we were a product manager (or an investor) at Xerox, we would be excited about the promise of a seasoned industry veteran guiding all of my products through the treacherous world of vendor-channel relationships. Impact of Dell-Tech Data Agreement In the short run, the Dell/Tech Data agreement gives Dell a cost advantage over other resellers. Dell’s efficient distribution, coupled with lower distributor costs, will allow Dell to increase its reseller profit margin while undercutting reseller competitors on price. Lower prices will drive increases in unit volume and revenues, and Dell’s improved cost structure will positively impact its gross margin. There is speculation that Dell’s cost advantage is at least partially due to Tech Data waving shipping costs as part of the agreement. If true, the large scale of the agreement would give Tech Data the leverage to increase the minimum unit volume required to wave shipping costs. This will hurt smaller resellers. Shipping costs often rival profit margins and resellers unable to buy large orders would be priced out of some low-end product purchases. The agreement will strengthen Dell’s competitive position as a leading e-commerce reseller. Dell focuses on providing business users with low-cost, low-service products. Therefore, resellers providing enhanced solutions and services will still have advantages over Dell in the high-end market. The deal will have the largest impact on resellers selling products to the home and small office markets as cost is a primary concern to these consumers. Volume is a driver of profits for low-end peripherals and components so Dell’s strategy to gain unit share will hurt the bottom line of resellers that focus on these segments. Ingram Micro was one of Dell’s largest distributor partners before the Tech Data agreement and the deal is expected to cut into Ingram Micro’s sales to Dell. Losing business from a heavy hitter like Dell will hurt Ingram Micro’s revenue streams and the distributor will be looking to make up the losses. Ingram Micro needs to court other resellers, making it clear that it will offer favorable contracts. Tech Data maintains diversified reseller relationships and it will not want the Dell agreement to alienate other large partnerships. In the long term, the distributor can be expected to make concessions to other resellers that will help them offset the impact of the Dell deal. The Dell purchasing agreement is a huge win for Tech Data and the distributor will benefit from Dell’s sustained sales growth. Tech Data will be able to leverage its increased revenues to pass on cost savings to its other reseller partners down the road. In the end, the consumer is the big winner in this deal. Dell will pass on cost savings to end-users and increase downward price pressure on entry-level peripherals and components. Many distributors and resellers will be forced to lower costs to compete and discounts will be available throughout the channel. Resellers that are unable to compete on price will have to provide more consulting and services with their products to justify the premiums they charge. Cost savings should permeate the retail channel as stores increase promotional activity to keep pace with low cost offerings from e-commerce resellers. With many printer vendors utilizing VARs, the direct model, e-commerce, as well as retail to reach their target customers, channel conflict continues to exist. Many VARs are increasingly unhappy with the declining margins caused by direct offerings from vendors. Samsung is one company that has stayed its course and decided not to offer products directly. While this may seem a risky strategy as Dell is finding success with the direct model, vendors need to recognize that their ability to increase their install bases will depend on their aptitude in coordinating efforts with VARs. Vendors should not expect to be able to convert current competitor monochrome install bases to color without the help of VARs! The printer market is sure to see changes in 2005 as vendors look to add functionality, such as photo printing, to single function laser printing, and multifunction devices continue to eat up market share. What must not be lost in the price competition is the fact that a focused, organization-wide channel strategy will help printer vendors offset pricing pressures and realize the growth that will be needed to overcome shrinking margins. What a good time to realign your channel strategy, take control of your future, and differentiate your business from your competition!

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January 11, 2005 at 9:42 AM