WHY AREN’T CONSUMERS BUYING LEXMARK ?

[Anonymous]

Why Aren’t Consumers Buying Lexmark?
NEW YORK – What’s wrong with Lexmark?
For its third quarter, ended Sept. 30, revenue at the Lexington, Ky.-based printer maker fell 4%, year-on-year, to $1.22 billion. Not so good. But look at profits, and things get really ugly. On a per-share basis, Lexmark’s profits fell nearly 50% from a year ago. Not surprisingly Lexmark has been taking it in the shares, currently trading at around $41, off $50, or 55% from its 52-week high of $90.50.
And while the printer market is indeed maturing, things at competitors are a heck of a lot better. For instance, rival Hewlett-Packard , which dominates the U.S. market with a 49% share, according to InfoTrends/CAP Ventures, somehow managed to grow its printing and imaging group by 5% in its third quarter.
Lexmark CEO Paul Curlander blames slower consumer demand, but the real reason may be more fundamental: lack of innovation in a cutthroat consumer business. “We’ve been more reactive than proactive,” Curlander admitted to analysts earlier this week.
Analysts are more blunt. “Lexmark needs to come out with new products, sooner rather than later,” said FTN Midwest Research analyst Bill Fearnley.
Although Lexmark is increasing its R&D spending–it’s spent about $252 million over the last three quarters–that’s still just a fraction of the $1 billion spent annually by HP.
Lexmark’s aging tech and limited product line is hurting it where it counts–retail. While Staples  and Circuit City , both strong Lexmark vendors in the U.S., declined to comment on their handling of the company’s printers, visits to both chains in New York City found no Lexmark laser-jet printers on the sales floor–while there were extensive offerings of HP products.

“Anytime you see retailers carrying less of a particular brand, one of the leading reasons is because of less consumer demand,” said InfoTrends/CAP Ventures analyst Robert Palmer.
Another issue: Dell . Since 2003, Dell has been bundling Lexmark printers–albeit under the Dell brand–with its new PCs. That was great news for Lexmark, at least for a while. But since ink-jet printers are a razor and razor-blade business model (meaning that the profits are in selling the replacement ink-cartridges, not the printers themselves), Dell doesn’t care if it sells Lexmark’s printers at a loss. Dell can make up the loss–and a lot more–by marking up the ink-cartridges.
“Dell wants a piece of the replacement ink market, and they can afford to sell the printers at a loss,” said MTN Midwest Research’s Fearnley. “Lexmark has to get the units out there and sell the ink.”
While there isn’t much Lexmark can do, at least in the short term, about Dell, it can try to reignite consumer excitement in its own brand. And the company is trying. Curlander said Lexmark is plotting an aggressive advertising campaign this fall. And the company recently announced a new family of $500 or less monochrome and color laser printers aimed at small and medium-sized businesses. These printers are not particularly innovative, but it’s a sign to investors that the company is learning from its mistakes.
It better start learning faster. Curlander himself admitted that Lexmark was expecting similar revenue loss next quarter, adding lamely, “But things are not getting worse.”
“Lexmark has to run as fast as it can to catch up,” Fearnley said. 

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October 31, 2005 at 10:22 AM