Early this summer HP Inc. initiated a pivot in its distribution strategy that will fundamentally change the manufacturer’s printer supplies go-to-market operations forever. It was a bold and surely painful decision, but also very necessary given the changes that are taking place across the print industry and considering HP’s particularly high exposure to these changes. It is also a decision that other manufacturers in the industry would be wise to monitor, noting that there could be short-term opportunities to exploit HP’s shift and a longer-term necessity to adopt a similar strategy.
HP’s New Supplies Distribution Model
During the second half of its 2016 fiscal year, HP will take a charge of roughly $450 million as it buys-back supplies from channel partners in an effort to right-size inventories and enable a shift in its go-to-market motion from a push strategy to a pull strategy. Rather than relying on promotions to fill the channel at the end of each quarter/year in anticipation of future demand (Push), HP will align channel inventories with current demand and invest in marketing to drive print relevancy (Pull).
The buybacks and related charges were facilitated by the sales of $315 million worth of HP’s Marketing Optimization software assets to OpenText in June (plus a $170m sale to OpenText in April), thus softening the blow of losing nearly a half-billion dollars in high-margin supply sales through the second half of its fiscal year. Let’s hope for Canon’s sake that HP shared some of this software asset windfall with its surely-impacted OEM partner.
HP claims that the buybacks will allow the company to achieve its targeted supplies inventory levels by the end of its current fiscal year on October 31. However, this is just the start of HP’s latest supply stabilization journey, as the go-to-market shift directly contributed to an 18% YoY drop in supplies sales in its third quarter, with consumable revenue expected to continue to decline for at least another year before stabilizing at the end of fiscal 2017 and potentially increasing in 2018.
Industry watchers would be quick to note that we’ve heard supplies stabilization forecasts from HP before, as HP has been trying to wrestle control over its supplies distribution and right-size inventories for several years with little effectiveness. However, the level of investment and strategic emphasis placed on HP’s current supplies distribution overhaul make the company’s previous claims look like wishful thinking, and this more fundamental shift actually gives credibility to HP’s latest claims that its supply declines will indeed subside by the end of next year.
HP’s change in strategy was based on two major observations. First, the vendor believes that managing supplies pricing and promotions on a global basis is increasingly difficult in an omni-channel world, where customers and partners now have increased visibility into inconsistent pricing. Second, it is HP’s view that the practice of promoting supplies to the channel is becoming less effective, hurting profitability and brand value, without providing a justifiable or predictable boost in future end-user demand.
HP recognized that its channels, partners, and customers have changed and the vendor in turn fundamentally changed its own go-to-market approach. This makes sense.
The fact is, HP is rightfully managing its home and office printing business for profit and there is no point in continuing the calendar-based dance of channel stuffing at the expense of profitability, especially if next year’s/quarter’s supplies demand is far from guaranteed.
HP’s Message to the Rest of the Industry
To a certain extent, the industry should be grateful to HP for making the first step toward ending a channel strategy that poorly fits a declining market.
HP’s situation is somewhat different than its smaller printer competitors and is even more unique compared to traditional copier players, given the brutal impact of non-OEM supplies on HP and its overall lack of control once its products are in open distribution. The fact that HP had $480 million in non-core software assets that it could sell to pay for its inventory reduction is of course also hard for most competitors to duplicate.
However, HP’s primary motivation behind this shift – regaining control over its channel inventories and boosting the profitability of its supplies business – should be among every printer and MFP manufacturer’s primary motivations. Like HP, every player in this industry should be managing their print business for both short and long-term profitability, requiring continued supply chain evolution as market dynamics change.
Unfortunately, it is evident that many parts of the traditional copier dealer channel are far away from this realization, as quota pressures and too-good-to-be-true promotions continue to drive up channel inventories, even as pages trend downward. And unlike HP, which only has eight US two-tier print supplies distributors and a trimmed-down range of tier-1 resellers to manage this change with, the major copier brands’ channel inventories are spread across hundreds of dealers and thousands of dealer branch locations. Yikes.
Understanding many dealers’ rising supplies inventories and noting the rate that smaller dealers are being consolidated, this trend creates serious grey market issues as competitive acquisitions take place or as dealers attempt to liquidate their lower-demand supplies inventories. Even more serious, there is going to come a day (or an end-of-quarter) where the dealers who have been ordering supplies at a greater pace than client demand can support won’t need to buy another cartridge or drum for an extended period.
The fact is, page volumes are falling and any strategy that is based on the premise that supplies orders will continue to increase is a dangerous one, unless this strategy is limited to the subset of dealers that continue to grow.
This goes for hardware too. Take one look at the quarterly unit sales winners and losers and it’s easy to see how fiscal calendar timing plays a role in each quarter’s results. Fourth quarter: Canon, Xerox, HP, and Lexmark win and the Japanese OEMs with April-March fiscal years lose. First quarter: Konica Minolta, Kyocera, and Ricoh win and the manufacturers with calendar-based fiscals lose big. Second quarter: no one really wins, but the Japanese OEMs with April-March fiscal years lose big. You get the point. The MFP industry (outside of Sharp) has essentially accepted this cycle as a fact of life, but it’s coming at the expense of hardware profit during the highest-sales quarters, undermining future hardware sales, draining dealer free cash flow, and should be seriously revaluated.
Despite the above evidence, I don’t expect many manufacturers to move away from calendar-based sell-in cycles in the near future. That said, the manufacturers who choose not to follow HP’s evolution will still have an opportunity to target HP’s major distribution and channel partners, understanding that even though HP is done stuffing the channel, these partners may still be interested in taking-on inventory at the right price. Hate to say it, but the non-OEM players may have the most to gain, as higher-priced HP supplies will either allow them to build on their low-cost value proposition to win more sales or boost margins, or both.
The Big Industry Take Away
When your market changes, you should probably consider changing your go-to-market…
And yes, if you are in the print industry, your market is changing. Pages are going down and any strategy that assumes cartridge demand is going up is based on faulty logic.
You could take my word for it or you could follow HP’s lead, understanding that HP remains the world’s largest printer and printing supplies company, and arguably the most analytical and supplies-focused vendor in the industry.
Better decide soon, though. Q4 is only one month away…