There has been a lot of hype recently around HP’s supplies distribution policy change, which went into effect on November 1, 2013. Ever since the change was announced in May, many have speculated about whether it’s going to disrupt the supply chain or not be as big of deal as others are making it out to be.
So, what’s changed?
At the beginning of this month, HP changed the classification of its Inkjet, LaserJet, and large format cartridges from “open” to “authorized”. What does that mean for anyone that wants to sell them? They are now required to have an HP U.S. Partner Agreement or U.S. Consumer Reseller Agreement, otherwise distributors won’t sell to them…or at least they aren’t supposed to. The responsibility for that verification now lies with the distributor, but we’ll get to that later. Because supplies are now classified as authorized products, the other BIG part of this change is that resellers can now sell only to end-users. This contrasts with open products, which partners can sell to any customer or reseller, as long as they are not an HP partner, distributor, or authorized HP reseller.
HP cites a number of reasons for its policy change, including better relationships with resellers, improving customer satisfaction, and simplifying its distribution structure.
HP continues to reiterate that the policy change is to improve relationships with the second-tier channel for its supplies, which will allow HP to provide better support and training, and ultimately a better customer experience. It is through those improved relationships that HP hopes to maximize its opportunities to push genuine HP supplies, including through the use of rebates or other incentives. Increased focus on getting customers to use genuine supplies could also be an effort to help return positive growth to its supplies revenue, which has seen a steady decline for almost two years (with the exception of Q2 2013).
HP states that another primary goal is to simplify its distribution structure and reduce the number of exchanges between the distributors and end customers. Although not expressly stated by HP as a reason for the change, requiring resellers to only sell to end users is expected to also help control gray market activities. Gray market supplies are often sold a number of times before reaching the end user, and the more times a product is sold, the more difficult it is to track its origin. By requiring resellers to sell only to end users, aside from ensuring that a greater proportion of supplies received by customers are genuine, there is also a greater chance they will be able to trace where any gray market items originated. HP will also exercise its right to end agreements with resellers that sell to anyone but the end user.
It is expected that HP will lose a portion of its reseller base due to these changes, as it is not likely that every organization previously selling genuine HP supplies secured an agreement by November 1. However, because HP’s partner network is extremely large to begin with, the company doesn’t appear to believe that it will cause a large enough impact to be concerned about. HP might even be trying to eliminate certain resellers. Although the company’s relationship with Amazon for printers and supplies ended earlier this year*, it may be targeting other online-only merchants, or resellers that make bulk sales to sites like eBay. Online channels are growing significantly and offering lower prices or lower-priced alternatives than consumers can find in store or from a physical reseller. By reducing the overall pool of resellers, especially ones that significantly undercut prices and/or offer huge selections of even lower-priced non-OEM alternatives, HP is reducing competition for its authorized partners. As a result, those resellers will able to improve their margins, as they won’t be competing with as many other sellers. Authorized resellers may even see an increase in business from customers whose genuine HP supplies reseller elected not to become authorized.
HP’s move could also have effects on the aftermarket, though at this point it is unclear whether those effects will be more positive or negative.
On one hand, you have resellers that will choose not to sign up as an authorized reseller. For their customers that have an installed base of HP printers, they will only be able to offer non-OEM HP supplies. This may not affect the reseller to a great extent, as many already prefer to sell non-OEM supplies over OEM because they are more profitable. For the customer, if they were not previously a non-OEM user, they will now have to decide between trying non-OEM or seeking an authorized HP reseller. This could ultimately result in the conversion of more customers to non-OEM supplies, thereby positively affecting the aftermarket.
On the other hand, an auditing clause in HP’s partner agreement gives the OEM the right to audit a reseller’s performance. Many are concerned that it will limit their ability to sell third party supplies, though HP states that it can only monitor the performance of HP products. The concern is not unwarranted however, as we saw in 2007 how HP successfully convinced Staples to remove its Staples-brand HP compatibles from shelves.
Lastly, as previously mentioned, distributors will now be responsible for ensuring that resellers wanting to carry HP supplies have a valid agreement with HP, whereas before they could sell to anyone. Although this may be seen as an extra burden for some, it hasn’t stopped new distributors from partnering with HP. Last week, the OEM announced a new supplies distribution partnership with technology wholesaler, Digitek, who has decided that any additional burden created by the extra verification steps are worth what it expects to gain from the relationship.
In the end, HP is following actions long in place by other vendors, such as Epson and Lexmark, who already require resellers to sell only to end-users. That’s not to say that we aren’t going to see some impact from this. We may see some effects on the aftermarket, likely more positive than negative as resellers without agreements increase their offering of aftermarket options. It’s also expected to benefit HP resellers, or at least their margins, as well as HP, who will be putting more effort behind its overall goal of placing genuine HP supplies into its installed base. Either way, it’s something that will continue to be monitored by the channel and ultimately, something that HP has decided will be of greater benefit in the end than any negative impacts reflected in the short term.