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Thu 13 Mar 2008 04:00 AM

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Consumables culture

Consumables sales are commonly seen as a high-profit business for companies in the IT business, particularly with end-customers printing increasing volumes of content and considering their printing infrastructure in a strategic light. But is the market really all it's cracked up to be?

Consumables sales are commonly seen as a high-profit business for companies in the IT business, particularly with end-customers printing increasing volumes of content and considering their printing infrastructure in a strategic light. But is the market really all it's cracked up to be?

Channel Middle East canvassed opinion from George Saliba (GS), sales manager at Medmark; Dekshin Karthik (DK), sales manager at Al Suwaidi Computers; Khaldoun Borini (KB), general manager at Integrated Standard Solutions; Faisal Jamal (FJ), purchase manager at Despec MERA; Khalil El- Dalu (KE), sales and marketing manager at Epson Middle East; and Amr Hassan (AH), regional general manager IPG at HP Middle East.

In the past we had generic consumables resellers. Today, even within the enterprise space, there are many sophisticated users requiring a reseller that will understand their business model.

Consumables have a reputation of being expensive, especially in comparison to printer hardware. Is the high end-user price reflective of the margins and profit that the channel makes from selling consumables?

GS: There is no profit at all in printers, we're trying to make the profits from consumables. Margins are very low though - often 1% or 2%. It is not enough to cover overheads.

We make the most profit in laser printers, and in business and high-end consumables. Margins with these can go up to 5% or 6%. The volume is less because these printers are for specific accounts.

We also have many factors that we have to combat like counterfeits and imports. This affects our margins.

FS: Broadly speaking, the distribution channel makes the same margins from consumables as printers and other IT hardware.

The high end-user price isn't reflective of the margin the channel makes. The perception is that the price is high because OEMs have fought to bring down the price of the hardware.

However, in respect to the whole printing package, it's more cost effective now than ever before. In real terms, the price has gone down compared to the last 10 years.

On top of that, printing has become more convenient; we can print at home, hardware is cheaper, quality higher and output better.

The cost per page is also improving. So the high end-user price is not reflective of the margin or the profit, but of what the customer is actually getting.

AH: With regards to the channel, the past fashion was to make high margins from hardware and reasonable margins from supplies.

This has changed because as the products have become commoditised, the pressure on margins has increased.

Today, product margins are very thin, so each reseller is trying their best to provide a portfolio of services that will give them a competitive edge in the market.

KB: The margins are slightly lower because we face a lot of competition in the market and with consumables you can see that for every brand there are many distributors and many resellers.

But I don't know where the argument for the consumables being expensive comes from. Generally speaking, they are not that expensive.

DK: Consumables are indeed expensive. There are two types of consumables business: genuine, from the vendor, and counterfeit or grey.
The profit margins are difficult because of competition and counterfeit goods so we protect our profit margins by also selling hardware as well as consumables.

What value can the channel add to a consumables sale given it has traditionally been a sector focused on volume and price?

GS: The supplies business is largely comprised of people that want to fulfill back-to-back orders. They don't make a lot of profit so their margins are usually very slim.

Refilling is a threat, of course. It affects our sales. People sometimes think simply refilling the cartridge is the same as the genuine thing and end up suffering from refill shock.

What we are trying to do, with the help of the vendor, is to put two cartridges with every printer. The reason is that people buy the printer and when the ink has run dry they throw the printer out.

It is cheaper to buy a new printer than buy a new cartridge. The end-user is being clever, but the vendor is losing money because they're reducing the price of the printer in expectation of people buying the cartridges.

For instance, in Saudi Arabia we sold 30,000 printers but zero cartridges.

KE: I think the only value add is to make the products available in the market. Also, there is the problem of customers not being able to find the ink.

It is like your car - if you cannot find many petrol stations in your area you are always worried about where to fill up. We always encourage tier-two power retailers to include the entire range.

Tier-one players add value by stocking the product and making sure they are able to distribute to all channels.

AH: With the consumer market, the product has to be available to the end-user at the store and displayed in an attractive way.

In the SMB space, one thing to do is offer the consumables when the customer needs them so we have started seeing resellers with websites where businesses can place an order for consumables deliveries.

Also, when you move up the enterprise space, the manageability of the supplies is an issue because companies often buy more than they require which means some of the toner will get lost or expire.

We have software called Webjet Admin, through which the reseller and HP manage the availability of products.

FS: We provide the channel with increasing local availability and a full range, two very critical issues. Resellers and retailers have to rely more on us as a value-added distributor because they now have to control costs in terms of shelf space and stock holding.

On top of helping our resellers and retailers we are continually developing our own infrastructure.

For instance, online ordering for the channel so that they can always order whatever is in stock and they can do it at any time of the day, they don't always have to talk to a sales person.

We are also moving to providing marketing support, so we can now design the leaflets for our customers, resellers and retailers to send onwards.

DK: My business is purely box moving, there are no extra services with regards to consumables. It is a boxed product.
However, some of the vendors offer their warranty through us which is an extra service.

KB: For services, the most important aspect is delivery and logistics. There are a few technical support services for such products. It counts as added value if you have the proper pricing, availability and logistics.

It is a service to educate the end-user to the problems of buying counterfeit products.

Grey marketing will always happen in waves. It happens whenever there is a gap in the market, like whenever a certain product is not available. We try to eliminate all the factors that lead to grey marketeering.

End-users are becoming extremely sophisticated when it comes to their printing needs as they increasingly understand the importance of an efficient printing infrastructure. What pressure is this putting on the consumables channel?

GS: It's putting pressure on the distributor because we have to stock all of the advanced cartridges as demand increases.

Our overheads will be higher and you cannot order one box, you have to order boxes of 48 cartridges and at least 10 boxes, which is a minimum of 480 cartridges.

The cartridges have a lifecycle, so after 12 months they'll be dry and done. It means an additional cost for us as we carry the full Lexmark range.

FS: It would be completely unacceptable if a user does not find the appropriate retailer or reseller. This represents a challenge to the channel and for us to optimise the service we give to the customers.

We are working with OEMs to overcome the pressures the end-users apply. At Despec we hold a huge assortment of products so that stock is available for every partner and user.

We carry everything from diskettes to flash, ink to toner, photo paper to large format paper. It is not only an issue of having the stock, it is also ensuring the stock is available and where they need it. We are investing in having stock locally available across the region.

AH: The pressure creates specialisation in the channel. In the past we had many generic consumables resellers. Today we have many different users and even within the enterprise space there are many sophisticated users.

They require a reseller that will understand their business model and which is able to stock the right products for them, deliver them swiftly, and offer the right credit terms.

As the customer becomes more demanding and sophisticated it will lead to the transformation of the channel to become subject matter experts able to answer each particular segment's consumables needs.

KE: It is a matter of market demand. If there is a high demand there's not much pressure other than making sure there's always shelf space for the product and the logistics are in place.

The life of consumer products is three to four months, which means that in one year you might find seven or so new products. Stocking supplies has become really challenging and this has placed a great deal of pressure on the channel to make sure they have stocks available.

KB: Having a knowledgeable end-user is much better than having an ignorant one. If they are uneducated then they will not understand the benefits of purchasing the genuine products.

Educated end-users also know a lot about the competition in the market. So for us, knowledge is part of the pressure in the market that we operate, but it is also beneficial for business.

DK: End-users want to buy a printer and talk directly to the sales person. There are two types of commercial customer: one who wants the printer for a normal office set-up where the quality is not necessarily that important and one who wants to buy for a professional set-up.
The end-user knows what type of quality they need and they are hunting for it. The pressure is to educate the user that is buying fake toners and cartridges. Business users, creating things like portfolios for clients, want to create a good impression with quality printing.

They're very happy with the price of the hardware, but not with the consumables and they tell me it is too expensive.

The refillable ink cartridge market appears to be gaining momentum in the Middle East. Does this pose an opportunity or a threat to the consumables channel?

GS: It is a huge threat affecting everybody - the vendor, authorised distributor and the end-user. Who is benefiting? The small shop on Computer Street. We would not offer refills because we stick to the warranty and original products.

We do not go for refills and all this hanky panky business because we have built our reputation here over the last 18 years and we would destroy this by just selling one or two refills or counterfeit products.

AH: It is a fact of life that we have to deal with, and the customer's choice. I don't want to take it as a threat or an opportunity. Customers in the Middle East care about the quality of printing and the impact of non-original ink on the hardware.

We share with them the facts and at the end of the day, in most cases, customers do not switch to refill.

KB: It is definitely a threat. In the ink market this causes a problem because it is entirely legal and for the customer it is very convincing. Refills will cost only 20% to 30% of the price of the cartridges, which is more convenient to the customer.

You can hardly compete in that area, you have to depend on the customer themselves.

KE: It is a threat because it affects our sales. People sometimes think that refills are the same as the genuine thing and end up suffering from refill shock. Refill shock means that after the customer refills the cartridge, it might damage the printer or fail to give the number of pages per cartridge stated by the vendor.

If the printer is meant to print photo-quality pictures, forget it. It affects reputation and sales. There are not that many refill outlets in Dubai, but you see it in markets like Iran, Egypt, Jordan and Yemen. In most Gulf countries people want to buy genuine supplies.

FS: We are not sure that refills will take a considerable share of the market as there are still problems with respect to the technology. There is basically no guarantee offered by the vendor that the refill is totally safe or will not damage the print head or the quality of the printout.

At Despec we have been committed to distributing only original products and we are going to maintain this in the future because we don't think the technology is ready for it to start taking over the market share of the original products.

DK: This is a threat. When someone is using the duplicate cartridges they do not know that they are using it.

The life of it will deplete very fast and this reflects badly on the vendor when it appears to the consumer to be a product that has genuinely come from the vendor.

The consumables sector is renowned for being a target of grey marketers who ship product into the Middle East from outside the region. What impact is this having on local channel dynamics and what can be done to address it?

GS: We are trying on every single occasion to tell people about the threat, but in my opinion 40% of the entire consumables business is coming from import, especially from the Far East and especially Singapore.
The price is far better in the Far East than in the Middle East by a gap of at least 5%. If you take the cost of shipping you are still making up to 4% profit.

It is an open market so we cannot stop it and the government of Dubai does not have the means to stop it.

So smuggling is affecting everybody. It is affecting channel dynamics because we are losing 40% of the business, and resellers are also coming to us and saying that their warranty is genuine when we know that it is not from us.

Vendors are not doing enough to stop this from happening. They still have a big role to play, but legally they cannot stop resellers. They cannot say, "do not go and buy counterfeit." The authorised distributor is taking the major hit because of this.

: Grey marketing will always happen in waves. It happens whenever there is a gap, whenever a certain product is not available. So we try to eliminate all the factors that lead to grey marketering.

One of the most important factors is pricing. If there is a different pricing in one region it can lead to grey marketing. It is under control from an HP perspective because we have a very good channel that is reliable and they buy only from authorised distributors.

Our relationship with the channel goes back 30 years and we have been able to build a very strong dynamic in which our partners value our relationship.

FS: It is a big issue. And the biggest impact is de-stabilising the pricing, which is bad for OEMs, bad for the channel and bad for the consumer in the long run.

Grey importers set an unrealistically low price on certain models in the market. Unfortunately, as the distributor, we cannot ignore this because we would lose market share.

This means we have to depress our margins as we try to compete, which in turn means we have less money to provide the value-added services that we strive for.

This is, of course, not taking into account the fact that counterfeit products are often mixed with the grey products.

The issue of grey and counterfeit products needs to be addressed by the OEMs to ensure that the legitimate distribution partners in the region have a sustainable platform in the future.

KE: I think grey is more of a vendor problem and not a market problem. Epson segreiddgates the sales of supplies by region. For instance, some of the products sold in Europe have different cartridges than some of those sold in the Middle East.

So we have closed the grey market from Europe to the Middle East, but of course the Mle East to Far East is open and that represents about 25% to 30%. We can eliminate anything by price.

The second thing is to have a loyalty programme that can be extended to the channel or directly to the end-user, which would require a great deal of manpower and resources so the channel would also be needed to implement that. Firstly, it is the vendors that have to tackle this, but the channel also has a vital role to play.

KB: A lot depends on the local market. In the Gulf it is big problem because the markets are very open.

In Jordan we have a much lower problem. It has to be tackled from the vendor level - they have to focus on this area in their price structures, programmes and channel strategies because it is a problem in the larger Gulf area.

There has to be more help in terms of the margins and rebates that are given to the channel and the marketing programmes around the products so that we can aggressively go after the grey market.

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