Think ink

Supplies and consumables is a vital business for any peripherals vendor. Getting the channel strategy spot on is the secret of success

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By  Stuart Wilson Published  February 28, 2005

Long-term relationships|~|git200.jpg|~|Sassan Dieter Khatib-Shahidi, managing director at German Imaging Technologies (GIT)|~|Selling a printer is just the first step in what vendors hope will be a long-term relationship with a customer. Once the initial sales has been made, it is the follow-on sales of supplies and consumables that really cement the vendor-customer relationship, help build up brand loyalty and keep the revenues rolling in.

Channel Middle East caught up with a selection of vendors to get to the bottom of the supplies and consumables market. Alya Azar, supplies business manager at HP Imaging and Printing Group (IPG) at HP Middle East; Sassan Dieter Khatib-Shahidi, managing director at German Imaging Technologies (GIT); Ben Gale, general manager sales and marketing at Xerox Middle East, and Khalil El Dalu, general manager at Epson Middle East stepped up to share their views.

CME: How important are sales of supplies and consumables to vendors operating in the sector of the market? Is it an important part of the overall business mix?

ALYA AZAR (AA): From a demand point-of-view, the demand is definitely there and we look closely at customer expectations and customer needs. HP customers are looking for the best quality and reliability in printing.

SASSAN DIETER KHATIB-SHAHIDI (SDKS): If you talk about GIT, supplies and consumables (SAC) is our core business. We divide our business into segments; one is the compatible toner cartridges we produce and the other is the branded product that we sell. We are focused on HP products, whether it is compatibles or OEM products.

BEN GALE (BG): Xerox is one of the world’s leading providers of imaging and document supplies. From toner, inks and print cartridges to various types of paper and printing materials, supplies are an important part of the company’s overall business. Xerox designs its complete range of consumables, paper and specialty media products for digital printers in the Media Technology Centre and has a focus that befits the importance of quality and reliability to both customer and vendor.

KHALIL EL-DALU (KD): This is very important to us as, not only are we ensuring that our users are obtaining the best possible results by using genuine Epson inks and media, but as a manufacturing company increased sales of course enable us to place more support and funding into research and development, helping us to drive award winning products of the future.
||**||Channel focus|~|BenGale200.jpg|~|Ben Gale, general manager sales and marketing at Xerox Middle East|~|CME: How is the supplies and consumable channel structured in the Middle East markets and how is it developing?

KD: In each country, a minimum of one distributor is authorised to supply the reseller channel with Epson genuine supplies. We also have a regional distributor based out of Jebel Ali to satisfy the growing demand.

AA: HP has a two-tier channel model. The first level is the wholesaler channel and the majority of business goes through regional players. They have really invested in this side of the business, have dedicated staff and have enjoyed good growth. At a second-tier level, we have the consumer and commercial channels.

SDKS: If you talk about our HP business, the official channel was structured through one main distributor, Emitac, which remains the main distributor in the UAE for the consumables business. Last year HP appointed a number of other distributors, Almasa and Tech Data among them. Under Emitac come 130 or 140 authorised resellers I believe, and we are one of them. Under that there are up to 2,000 shops who are not authorised but sell anything and everything. The structure is not very interesting because what everyone does, and this is what we have discussed with both HP and Emitac, it does not create conditions that are attractive to resellers wishing to enter this market, unless they resort to illegal practices, counterfeit or grey imports. A lot of people make their money from the grey market, they mix up their products with grey market imports to up their margins, and I would say at least 80% of the market reverts to counterfeit as well. Our information is that between 5% and 40% of what is being sold in the market is being mixed up with counterfeit and grey market.

BG: The dynamic economies of the Middle East have seen Xerox focusing on its channels in the region. The strategy for providing customers with products and services through outlets, dealers and partners from which they prefer to buy, is now well established. Xerox believes that growth in this market will be commensurate with the economies of the region and that more value will be offered by leading players, such as Xerox, to its customers through offerings that meet the quality and reliability standards which are second nature to Xerox.

CME: What are the margins like in the supplies and consumables channel compared to those available on the initial product sale?

BG: Xerox is always at the forefront of driving down cost per page whilst offering significant value. Margins are in line therefore with offering a customer the total product experience they deserve and desire. Many vendors of many products from mobile phones to refillable razors to digital printers operate business models where the customer is introduced to the product at a great entry value.

AA: In terms of the channel, both the hardware and the supplies business gives partners balanced profitability. HP enjoys healthy market share in the region of approximately 70% — although this varies by region and product category. Some partners focus on the low margin but high volume products, while others look at lower volume but high margin products.

SDKS: In the OEM business the margins go from 0% to 5%. Anybody making over 5% is extremely exceptional. The talk about the town is that people don’t make more than 2% on average. We at GIT set margins at much higher levels, and aim to make 4% even on HP. Otherwise it is not worth us reselling it. We cannot afford to send a driver, a sales executive, and so on to the end-user for margins of 2%.
||**||Fake and grey|~|hpipg200.jpg|~|Alya Azar, supplies business manager at HP Imaging and Printing Group (IPG) at HP Middle East|~|CME: How much of an issue is fake and grey product in the supplies and consumables space in the Middle East?

AA: Counterfeit is very clearly an illegal and criminal act. HP has been serious in tackling this problem because we want to protect end-users and channel partners and make sure they buy original product. Secondly we want to protect our intellectual rights. We launched an anti-counterfeit operation in 2002 and have a local website and hotline set-up. HP has received excellent support from government officials across the entire Middle East region, not just in the UAE.

SDKS: In the Middle East there are not even any decent laws protecting the market from fake products. People openly buy, produce, sell fakes and they don’t even need to go into grey market because they openly deal with fakes. I don’t know how the other GCC markets are, but going back to the UAE, our information is that up to 40% of what is sold under the name of some major brands is fake, and apparently another big chunk is grey market imports which are, I am sorry to say, legally imported through Jebel Ali past customs into Dubai. It’s a big issue, and it is a huge issue for anyone trying to make a decent living in the official channel.

BG: This issue is not just a problem for the Middle East, which suffers from this activity in the same way as the rest of the world. Counterfeiting is a US$250bn market worldwide, 25% of which is conducted on the Internet. Counterfeiting affects all branded products, from designer sunglasses to computer software and even office supplies. Xerox is not alone in this fight. Counterfeiting branded products with low quality imposters allows criminals to make a large profit without any of the investment, R&D, logistics, or customer service costs carried by legitimate brand owners.

CME: How do vendors and distributors ensure that customers buy genuine goods as opposed to fake or grey?

KD: It’s our duty to educate customers and end-users and to clearly demonstrate the obvious benefits of buying genuine Epson supplies. We emphasise this in all our user guides and set up procedures. We also place regular adverts in various media to heighten market awareness of the benefits of using only genuine Epson products and supplies.

AA: HP trains the channel at every level: distributor, reseller, retailer and end-user. Cartridges have security labels on including special holograms. We also do awareness campaigns to educate customers. Since we set up the anti-counterfeit unit we have seen definite success and interest in the authorised channel for authorised products continues to grow.

BG: Xerox has many initiatives — the first being to offer quality and reliability in its products and distribution network. Xerox has also engaged an internet monitoring firm to search the web for sites that advertise our products and/or violate our trademarks. There are currently over 3,000 unauthorised websites selling Xerox products worldwide. The investigation of these sites is ongoing. Xerox works with law enforcement, customs and excise, and legal counsel around the world to investigate the grey and black market. When an employee escalates an issue they believe is related to the grey or black market, all relevant information is recorded in a database. Xerox uses this information database to discover patterns in product flow around the world and to follow up each individual reported case.
||**||Compatible costs|~|El-Dalu200.jpg|~|Khalil El Dalu, general manager at Epson Middle East|~|CME: Why should customers purchase authorised supplies and consumable products as opposed to cheaper products that are marketed as being compatible?

BG: In one particular case non-Xerox inks claiming to be ‘compatible’ with Xerox devices were proven to damage print heads (the heart of the printing technology) by clogging the tiny print nozzles. The use of these inferior inks led to catastrophic printer failure, where one or more colours just stopped printing altogether. The generic ink manufacturer admitted that their ink may damage Xerox Phaser printers and subsequently hundreds of customers had to have their print heads replaced, some after only a few weeks of using Non-Xerox ink. For one customer it took only 17 days. Servicing these damaged printers costs as much as US$1700 per service call. In short: Xerox printers, supplies and media are, designed and engineered together, field tested for unmatched print quality and superior reliability, developed for legendary ease of use with unparalleled print quality and offer best customer value.

KD: Simply put, to ensure our customers get the quality, reliability and longevity that they have come to expect of Epson, coupled with a reassurance that our devices will work to their optimum performance.

AA: It is the choice of the end user on what cartridge or toner to buy. From our side as industry leaders for the last 20 years, we work with our channel partners to communicate the benefits of buying HP authorised products. We have the best reliability in the market. There is a company called Quality Logic that does testing and has proven that authorised products have the best reliability. It is all about giving customers peace of mind from better technology that ensures better printing. If they are not using HP supplies and consumables any warranty on the hardware is void.

SDKS: If you are talking about compatibles, then you should purchase these if you know that they are of a similar quality. We present to the customers the benefits. If you use a quality product from GIT or other manufacturers, then you have a number of benefits. We deliver exceptional services to a customer as we are focused just on the consumable goods. We are not trying to sell each and every product available in this market. We are focusing on this and are catering to customers’ needs. We have specially trained executives with nothing but compatibles to offer to customers. We deliver by courier. You can order from GIT one cartridge by courier. Our service is a USP to the customer, and they should decide based on quality and service. If he finds this exists with a cheaper product then he should go for it.

CME: How do you reach out to customers and build long-term buying relationships and vendor loyalty?

BG: We continue to make good progress in improving our customers’ experience with Xerox. In developing market operations we are reporting customer satisfaction measurements higher than 75%. Our technology continues to delight our customers and last year we announced 40 new products — 30 were launched globally in the Middle East at Gitex 2004. We have constructed a value chain of partners and distributors that understand what it means to sell Xerox products and the excellent service they provide to our customers encourages the long-term relationships and loyalty that the Xerox brand engenders.

KD: We make sure we have good availability in key areas ensuring customers will be able to find product easily. We make our products available in all major retail outlets and hypermarkets as well as in outlets such as Computer Street. We also run special promotions in the media such as ‘2-for-1’ offers and special cartridge and paper bundles.

AA: I am very proud to say that HP is a customer-oriented company. From an account manager right up the worldwide management there are just six layers meaning smooth information flow. This allows us to understand our customer needs. The long-term loyalty to channel partners comes through the account management, feet-on-the-street and the systems and processes we have in place. We look carefully at the needs of customer and partners and cater to them.

SDKS: We have a strategy whereby in every Emirate we have five or six selected resellers for GIT products. Each one will have a different expertise. One is maybe more specialized in tenders, one in corporate resale, one in retail, one in export and one in wholesale. We want them to have free space to operate. We don’t want them to kill each other and their margins, so the margins become uninteresting and then nobody provides service. We really want our resellers to make a decent margin and we control that. We don’t want them to make 1% or 2%, but rather 12% or 13%. We want to satisfy them. In the international markets we are trying to find two or three distributors. We have partners in Syria, Egypt, Germany and we are trying to expand out.
||**||R&D investment|~|gitshop200.jpg|~|Product availability in retail outlets is critical to vendor success|~|CME: Why are printer cartridges and toners so expensive?

SDKS: The OEM, not so much the reseller or distributor, is making the margin. They are making significant margins. For us, we are making good margins. But it is not the same type of margin an OEM would make, as we operate at lower prices and with a much higher cost level. We are not taking extraordinary margins. But OEMs dump the hardware and then earn their money through consumables. You see that worldwide.

BG: An R&D and manufacturing partnership with Fuji Xerox positions Xerox as the world’s largest toner manufacturer. With over 50 years of excellence in manufacturing and research Xerox consistently offers value for money and our customers understand that. We have a balanced business model which gives us the opportunity to serve our customers to maximum effect and, just as all vendors in the market place need to cover costs and realise value for stakeholders, Xerox will consistently look at its offerings and continue to provide value for money to its customers.

KD: At Epson we are committed to providing our customers with good value and high quality printers and supplies, and not simply to produce the cheapest ink we can. We design our supplies for the optimum performance of our products and offer an unmatched combination of image quality, print durability and printer reliability when using genuine Epson products.

AA: That is a very subjective question and I believe that HP offers competitive prices. We enjoy high market share, we are leaders and customers are prepared to pay for that quality. The science behind brilliant printing comes from HP’s investment in R&D. The IPG unit invests US$6bn in R&D every year with US$4bn of this ensuring that the supplies we deliver to the market are of the highest quality. Ink formulation is a very sophisticated science — it is not just coloured water. The actual cost of printing has decreased by 30% during the last 20 years and performance has increased by 900%.

CME: What are the three biggest challenges facing the supplies and consumables channel in the Middle East during 2005?

KD: Grey product, compatibles and non-genuine consumables.

SDKS: There is only one big challenge for the resellers, and that is to survive. Their biggest challenge is to survive, rather than cater to the market or customers. It is simply to survive and have a sustainable business because they have driven the margins so far down that none of them can operate commercially unless they sell huge volumes through exports or they mix up products with grey and fake products. They have forced themselves into this because they have no margins. For the OEM vendors, it is to produce operational, fair and ethical business-oriented channels. Even the big resellers have trouble. Why should they sell such huge quantities for small margins? They have to reposition themselves, but only in very close communication with OEM vendors. OEM vendors must prevent products spreading through too many channels and not allow the chaos that you see in Dubai, as they will ultimately suffer, as the end user will receive no service.

BG: Xerox will look to increase our penetration rate on supplies in the market place and ensure the customer is returning to Xerox again and again by offering best value service and products. Xerox will also look to increase our coverage in the market place, offering the channel more opportunities to be involved with a quality brand and customers an enhanced choice of purchase and service points. Xerox will look to fight back against grey and black marketers who are destroying our customer value and choice and are using the Xerox brand to fool customers into thinking they are getting Xerox quality and reliability.

AA: I would call them priorities rather than challenges. One is to really continue the fight against counterfeit and protect our end-users and channel partners from accidentally buying counterfeit. HP will also continue working with government officials to raise awareness of these issues. The second one is to promote digital printing and focus on areas such as photo media and the potential business uses. The third priority is to really continue what we are doing in terms of commitment to channel partners. This means building loyalty and giving them the right level of support through all the systems that we have in place.

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