BRIDGING THE GLOBAL IMAGING CONSUMABLES INDUSTRY

LATEST BUZZ:

Only Equipment Matters

By Ronelle Ingram //

 

 

The headlines, blogs, industry publications and online discussions focus mostly on the decline of the OEM’s predominance and profitability. The value of OEMs’ stock prices continues to decline. Thousands of workers formerly employed by OEMs, their subsidiaries, authorized dealers, vendors and manufacturing partners have been laid off. OEMs continue to reduce staffing levels and to restructure their business models through mergers, acquisitions and sell-offs. Some industry advocates express sympathy and concern for the decline in status of the hardware making OEMs.  

I view the decline of the OEM’s profitability as the inevitable outcome of the way they chose to do business over the past two decades. Having begun my working involvement with the office equipment profession in 1973, I have viewed firsthand the good, bad and the ugly of the OEM- reseller relationship. Additionally, (for good, bad or ugly) I have experienced several 180 degree changes, reversals and “back-to-the-future” management theories. What was best for the OEM usually took priority over what would increase the viability of the OEM–Independent Dealer partnership.

The OEMs realized that selling directly to the end-user was not their strong suit. They preferred to have someone else sell and service the products that they manufactured. Through the years, they have authorized, allowed, encouraged, discouraged and forbidden open distribution, branch operations, grey market selling, open territories and multiple brand labeling on the same model of equipment, to name a few. Each changing strategy has steadily whittled away bits of profit from the reselling channel. This includes selling through OEM retail branches, independent BTA channel, VARs, direct to the government through GSA arrangements, master authorized distributors, local wholesalers, grey market sales, authorized internet resellers, OEM refurbishing centers, swap meets, eBay and Craig’s List, and more.

Ultimately, the independently-owned dealer channel has proven to be an excellent way for the OEM to profitably sell hardware, products, supplies, etc.  Local dealers helped to create brand loyalty, satisfied end-users and repeat buyers. However, independent owners have the freedom to break rules, be creative and out-maneuver the structure and (often unwritten and unenforceable) guidelines (dealer contracts) presented by manufacturers. Additionally, the OEMs factories, corporate headquarters and key selling markets are separated by thousands of miles, working under different cultures and different legal and monetary structures. Both independent dealers and OEMs alike require the skills and products of the other. However, each tends to resent, distrust, and try to out-maneuver the power structure one holds over the other.

Over the years, the OEMs have repeatedly found ways to create disincentives for their entrepreneurial dealers.  Eventually, the dealers learned to take on other forms of products and services that created new areas of profitable revenue that did not directly involve products sold by the OEM.

The 1970s through the mid-1990s was the “golden age” of the OEM’s profitable relationship with the independent print-on-paper hardware dealers.  

BTA and VAR dealers bought the products that were sold by the manufacturers of hardware while the OEMs aggressively campaigned to nurture new dealerships throughout their key business hubs around the world.

In response to the worldwide economic business growth during 1980-2005, the independent dealer channel supplied the sales and servicing needs for print-on-paper hardware. Each major OEM was in a race to make sure their factories were able to increase their manufacturing capacity and productivity to meet the needs of the buying public.  

In the 1970s, as the print-on-paper era came of age, OEMS often contractually granted independently owned dealers exclusivity, protecting sales and service territories. OEMs promised to not allow any other authorized dealer to sell or service within the contractual assigned geographical territory. Once the OEMs were able to establish privately owned dealerships and appropriately trained dealers in designated geographical areas, they looked for a way to increase the number of authorized dealers in the previously established exclusive territories.      

The first strategy was to increase the current authorized dealer’s quota to an unattainable and unrealistic goal. When the independent dealer could not consistently attain their ever- increasing quotas, the OEMs had a “legitimate” reason to shrink the territory or simply add new authorized dealers in a once-exclusive geographical territory. The increased competition naturally resulted in lower retail selling prices on all equipment, service and supplies. Quarterly bonuses were more difficult to achieve. Overall dealer profits decreased. The OEMs were able to keep their newly built factories manufacturing at full capacity. Ultimately, dealer–OEM animosity increased.

As Asian OEM manufacturing plants were modernized with increased automation, thus producing increased capacity, OEMs started to manufacture and sell similar equipment under different brand names. This allowed OEMs to contractually stay within the legal agreements for exclusively authorized dealer territories. The OEMs were able to open unlimited sales dealerships and open distribution channels with the same (or slightly altered) piece of equipment under a different brand name on the cover.  In most cases, the requirements (staff training, service response time, inventory levels, quality of service, ongoing purchases and payment history) for a dealer selling (in name only) the 2nd tier products were less stringent, and offered at a lower wholesale cost than for the originally authorized dealer in the area.

Independent dealers and their end-user consumers continued buying products to meet their ever-changing needs. As the economy and buying needs of personal and business use expanded, independent dealers were very responsive to changing their own buying and selling habits. They did not have the OEM deep pockets, stock holders and parent companies to support long term non-profitable business practices.

The authorized independent dealers began buying non-OEM products and using distributors for their genuine OEM products as soon quotas were met. It was more economical to buy all their parts and supplies from the second-tier dealers or distributors who offered lower wholesale pricing. It also eliminated the fear of higher quotas being set by the OEM because the dealer had over-achieved their buying quota from the previous quarter.

Some OEMs retaliated by not allowing their second-tier dealers to buy more parts and supplies then their purchased machine base could statistically use. A “cat-and-mouse” game of dealers buying and selling products to one another on the grey market and creatively bypassing the OEM rule became standard practice for profit-conscience entrepreneurial dealers.

Soon, dealers and their “authorizing” OEM began suing one another for contractual violations. Many independent dealers repeatedly sued and won monetary settlements from their OEMs for breach of contact.  Oftentimes, the terms of the settlement were for monetary credits toward future purchases from the OEM.

The OEMs countered by setting up large distributors allowed sell products to anyone with a reseller number. Initially, only low-end products were offered. Eventually, however, these authorized distributors were allowed to sell (usually only the very high-end whereas enterprise-level products were excluded) the full line of products, parts and supplies.

The authorized OEM independent dealers now had to face competition from both other OEM brands as well as selling against identical equipment. Reducing the selling price became the only competitive edge that reduced the overall profitability for all selling dealers. Now, the OEM appeared to be more focused on selling hardware than being a business partner with their resellers. OEMs stressed the need to keep the factories running at full capacity to keep the overall cost down on the products. The dealers were expected to buy hardware from the OEM to fuel projected yearly growth percentages which would keep the share holders happy.

All this maneuvering resulted in the OEMs’ ability to sell anything, to anyone, at any price.  Authorized resellers believed there was no financial value to being a single-line dealer. Their loyalty to one OEM now had little monetary value. The reselling dealers went looking for new opportunities to sell additional products and services.

The OEMs countered by engaging in joint ventures with independent dealers. This took into consideration that the OEMs did not feel qualified to profitably operate OEM branch operations. They needed more single-line dealers. In desperation they offered credit to some local entrepreneurs to start joint ventures dealerships. With the OEM providing the needed capital for inventory and start-up costs, the joint venture partners had little incentive to be successful. Large executive salaries were paid while lower costs of products resulted in lower overall street prices of OEMs products. This directly affected the profit margins of those dealers who were not being directly subsidized by the joint venture relationships with the OEMs.

Many OEMs provided rebates or co-op dollars to their authorized dealers. There began a sliding scale of rebates, depending upon whether the independent dealer was a single-line or multiple-line dealer. Unfortunately OEMs operate under a double standard, requiring their authorized dealers to be monogamously loyal, while the OEM is able to authorize many dealers simultaneously, open branch operations and open distribution, exaggerate quotas and reduced rebates/bonuses.

Currently, the OEMs are facing numerous challenges.  Sales are down, factories are running at reduced productivity levels, staffing continues to be reduced, dealerships are closing, stock prices are down, and CEOs have been fired or resigned. Dealer meetings have been postponed. In addition to this, OEM-offered training has been reduced, fewer OEM-sponsored dealer incentive trips are sponsored, and OEMs are now openly concerned about the loyalty of both their independent dealers and the buying public.

Each time the OEM removed an incentive or built an obstacle for the authorized independent dealer to make an acceptable profit on hardware sales and service, the dealer sought a business partner that enabled them the opportunity to sell a unique product or service that is not a commodity-based sale.

During the past 15 years, the OEMs have made it imperative for independent dealers to use alternate products and services to generate profitable revenues.

The OEMS slowly removed most of the options an independent dealer had to fairly make a reasonable profit selling OEM hardware, parts, supplies and services to their clients. During 2012, most of the major OEMs have reported substantial loss of revenue and profits. It is difficult to have empathy for the OEMs who appear surprised at their loss of market share, depleting sales and decreasing profits. The OEMs killed the goose (i.e., the independent dealer) that used to lay their golden eggs.

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