Industry Trends
At Office Superstores Change Is the Only Constant
- By Charles Brewer
- Aug 01, 2012
Office superstores in the United States are arguably the most important retail channel for digital imaging supplies in the world, and among the largest channels in terms of both unit shipments and revenue. But there has been some contraction in the breadth and depth of the ink and toner cartridges found on the retail shelves of the so-called Big Three — Office Depot, OfficeMax and Staples. Each store continues to offer an assortment of supplies for inkjet and laser machines, but not as much as in the past, and OEM products have been replacing third-party cartridges throughout the past couple of years.
Today, like the other big-box retailers, Office Depot, OfficeMax and Staples are hurting. The economy has not been kind to large retailers; many consumers have moved away from brick-and-mortar establishments and turned to the Internet for better prices. Don’t get me wrong; hundreds of millions of dollars’ worth of supplies are sold by retailers in the U.S. each year, and no retailer sells more than the Big Three. But things have changed, and the change is permanent.
Down memory lane
By the late 1990s and early 2000s, most major retailers like Kmart, Sears and Wal-Mart were offering both OEM and third-party inkjet consumables. As impulse buys, some OEM products had even crept into other retail channels, including certain grocery stores and pharmacies like Albertsons and CVS. The selection at most retailers was limited, however — especially for non-OEM cartridges, which typically included only a few Pelikan-branded compatible ink tanks for Canon and Epson machines. And, then as now, most retailers priced consumable products at or near MSRP.
Savvy consumers quickly learned that the best deals and selection were at office and computer superstores. Supplies for most desktop inkjet and laser machines could be found at Office Depot, OfficeMax and Staples; at stores like the now-defunct Computer City; or at CompUSA, which today is just a shadow of its former self.
Although there were nowhere near as many SKUs on the market in the late 1990s as there are today, there were plenty. Firms no longer in the space — like Apple and QMS — vied for real estate against HP and other OEMs. Superstores carried a broad assortment of OEM products and third-party cartridges — sometimes more than one brand — as well as other consumables like refill kits and ribbons.
Because of the higher price of OEM supplies, computer and office superstores found non-OEM consumables were popular with many customers. Some stores offered consumables under their own house brands — mainly remanufactured toner cartridges for LaserJet machines. Because they catered largely to businesses, selling reman toner cartridges under their own brands made sense for certain stores like CompUSA and Office Depot. Inkjet supplies were consumer products, however, and larger superstores sourced them from third-party firms with recognizable brands such as Dataproducts and Nukote.
OEMs also saw opportunities in marketing remanufactured toner cartridges for the competition’s machines through retail channels. Not only could they make some incremental revenue selling remans, but they could inflict collateral damage on the competition by tapping into its supplies business. In addition to their expertise and access to raw materials like toner, OEMs had valuable relationships with retailers, which they leveraged and expanded. Lexmark and Xerox launched lines of replacement HP cartridges under the Linea and It’s Compatible brands, respectively. And for a short time, HP also sold remanufactured cartridges. Of the three, Xerox enjoyed the most success, and an assortment of It’s Compatible SKUs were available at various superstores.
Staples breaks new ground
Staples was a pioneer in the marketing of third-party supplies — both ink and toner — and it was destined to be the first to market a complete line under its own brand. The firm was well aware of the opportunities third-party consumables offered. Partnering with American Ink Jet in the early 1990s, it was one of the first retailers to offer non-OEM inkjet supplies. The category quickly grew — and so did Staples’ selection. It added a number of Xerox It’s Compatible toner cartridges to its shelves and grew its complement of inkjet SKUs by adding Dataproducts’ line.
In the summer of 2001, Staples launched its first two inkjet SKUs under the Staples brand. The line included compatible tanks for the Epson Stylus Color 740, 760, 850 and 860 printers as well as Canon BCI-21C cartridges. The Epson tank sold for $27.99, while Staples’ compatible was priced at $23.69 — about 15 percent less than the OEM equivalent tank. Likewise, the Staples BCI-21C cartridge was priced at $18.28, and the OEM SKU cost $21.49. In short order, 15 percent less than OEM became the de facto price point of third-party supplies, and it continues to be observed up to the present by most retailers.
Within months of launching its branded inkjet SKUs, Staples started selling its own brand of compatible toner cartridges. Soon the Xerox remans were gone. In 2003, the office superstore added a few remanufactured HP toner cartridges to its line of branded consumables as well as thermal transfer ribbons for Brother and Panasonic fax machines.
Watching from the outside, it appeared that the launch of Staples’ branded inkjet cartridges did not go smoothly. After the initial Canon and Epson compatibles, the Staples line grew to include supplies for HP and Lexmark machines. The availability of Staples’ inkjet cartridges, however, seemed limited. At the end of 2002, the cartridges unexpectedly disappeared altogether from the retail stores, to be replaced by SKUs from another third-party supplies vendor, NCR. Staples inkjet SKUs returned in 2003, but it seemed Staples also continued to offer the NCR products — as well as OEM cartridges — as backups. By this point, ink and toner cartridges were in big demand, and being out of stock of certain SKUs was no longer an option.
As Staples worked out its supply-chain issues and product mix, Office Depot and OfficeMax did not sit by idly. As noted, Office Depot had remanufactured toner cartridges, and its selection of branded consumables continued to grow to include ink cartridges as well as additional toner SKUs. Always the laggard, OfficeMax did not introduce its first branded toner cartridges until 2002, and it was more than a year before its inkjet cartridges debuted. The firm made up for lost time, however, and by the end of 2003, its line included SKUs for the leading machines from Canon, Epson, HP and Lexmark.
The office superstores also rearranged their planograms to provide easier access to cartridges. Once kept under lock and key, inkjet cartridges were freed to hang from store pegs. Office Depot launched its Ink Depot store-within-a-store concept, a major planogram change made solely to promote consumables sales. The small shops were established near the front of the office superstore and were stocked with printer, copier and fax supplies. Likewise, Staples moved its OEM and third-party cartridges to the front of the store so consumers could dash in, purchase a cartridge and leave.
OEM angst
The office superstores’ branded ink and toner cartridges had a profoundly adverse impact on the OEMs’ consumables business. And most hardware vendors recognized the threat almost immediately. According to a Reuters report from back in the day, Lexmark voiced some concern in a quarterly financial report filed in 2003. The firm fretted over ongoing investments office superstores were making in their own branded inkjet lines despite the fact that only a handful of refilled Lexmark SKUs were being offered by the retailers.
Hardware manufacturers were in a bind. The superstores were important channel partners, so it was difficult for OEMs to exert much pressure on the Big Three despite the big threat they represented to the OEMs’ supplies business. Cartridges were very expensive 10 years ago, and consumers actively looked for lower-cost alternatives. The HP 45, which was the most popular cartridge in the world in 2002, cost more than $30, and a remanufactured HP 45 could be purchased for as much as $5 cheaper. It is easy to see why consumers would be attracted to the office superstores’ non-OEM products — and why OEMs were so worried.
The planogram changes, SKU proliferation and all the other investments office superstores lavished on their branded consumables acted as a call to action for OEMs. Beginning in 2003 and 2004, hardware vendors poured money into marketing campaigns to elevate their branded supplies over alternative products.
In 2001, prior to the introduction of all the office superstore products, Epson kicked off a campaign promoting its DuraBrite-branded consumables to distinguish its pigmented inks from inks used in aftermarket knock-offs. With permanent print heads, Epson printers used supplies that were easy to clone because they contained little technology. DuraBrite was meant to woo consumers back to the OEM’s higher-quality brand. HP took a page from the Epson playbook and in 2004 launched its Vivera-branded cartridges. Canon and Lexmark followed with their own branded products. Over the years, most OEMs have marketed at least one branded ink or toner, and some currently maintain several brands.
Of course, branding was only one arrow in the OEMs’ quivers.
Enter the lawyers
As OEMs lost market share to third-party vendors through the office superstores, they became less forgiving of those who infringed their intellectual property as well as those that peddled infringing goods. While OEMs never actually went toe-to-toe with one of the Big Three in the courtroom, they did put significant pressure on the companies that supplied the office superstores — especially Staples.
HP sued Lenexa, Kan.-based InkCycle, alleging inks used in the remanufacturer’s cartridges infringed HP ink patents. Noting in its complaint that InkCycle was one of Staples’ suppliers, the OEM claimed that Ink-Cycle had “induced” others to infringe HP’s patents — an inference that must have caused Staples some concern. After all, companies that sell infringing products are just as guilty of violating a patent-holder’s rights as the firm that manufacturers the offending product.
In the spring of 2006, Canon sued Staples’ compatible toner cartridge provider GCC International and its wholly owned U.S. distributor Q-Imaging as well as TallyGenicom, which, like the office superstore, was marketing new-build HP cartridges. Staples was not mentioned by name in this particular suit, but given its exposure, the retailer must have found the matter disconcerting. Canon alleged that GCC had infringed a patented technology related to a gear used to rotate the imaging drum. (Although the patent is different, the technology is similar to that at the center of a suit Canon filed earlier this year against dozens of third-party supplies vendors.) GCC eventually lost the earlier suit and later went out of business.
By far, the most well-known case involving a Staples supplier was between Epson and two dozen third-party supplies vendors. The case led to the removal of virtually all third-party Epson supplies from retail shelves in the U.S., including the stocks held by superstores, mass merchants and others. In March 2006, Epson sued 24 companies, including Staples’ supplier, the French aftermarketer Armor, as well as its German manufacturing subsidiary Artech. (Actually, Epson had initiated a separate suit against the two European Staples suppliers the year prior and added them to its larger case in 2006.) Ultimately, the pair settled with Epson, and Staples pulled all of its branded Epson compatibles off the market. While Staples was the first to drop Epson compatibles from its retail stores, catalog and website, by the end of 2007, Office Depot and OfficeMax had followed suit.
Paradise lost
The compatible Epson tanks were not the only non-OEM products that Staples removed from its retail shelves in 2007. The office superstore also discontinued selling Staples-branded HP ink and toner cartridges at its retail outlets, although it did offer certain remanufactured HP products in its catalogs and at its online store. Rumors at the time contended that HP paid Staples something in excess of $100 million in rebates, marketing dollars and other perks to get the office superstore to drop the line. While many in the aftermarket were certain Staples would rue the day it made that deal, no third-party HP cartridges have been available at the office superstore’s retail outlets for almost five years.
HP may have indeed paid Staples a tidy sum, but the office superstore’s motivation may not have been wholly related to the OEM’s checkbook. After years of turmoil to find the right suppliers and the constant risk of a lawsuit, it is possible that Staples was all too willing to walk away from the lion’s share of its retail third-party supplies business. Today Staples appears to sell more third-party supplies through Internet sales than it does through its retail stores. Perhaps that strategy was being developed before it made any deal with HP. Who knows?
Although there was no way to tell at the time, the consumables market reached its high-water mark about a year after Staples pulled its HP-branded products. Since then, OEMs have routinely reported flagging demand and declining supplies sales. Staples has made some moves throughout the past couple of years that suggest ink and toner cartridges — regardless of the manufacturer — are not as important to its retail business as they once were. No longer featured at the front of the stores, Staples has moved all cartridges to the side walls to make room for digital devices like smartphones and tablets, which are now the first thing many consumers see when they enter a Staples store.
Staples has also reduced the number of ink and toner SKUs it carries. There are plenty of OEM inkjet cartridges, but the number of third-party SKUs has really dwindled, and HP and Epson are not the only OEMs with SKUs that do not have third-party counterparts. There were no third-party Brother, Dell or Kodak ink cartridges at the Staples stores I visited, and the selection of third-party Canon and Lexmark ink cartridges was pretty meager. I was surprised to see an even more pronounced death of remanufactured toner cartridges. There were only a few Canon remans on the shelves; all of the other toner cartridges at Staples were OEM.
At Office Depot and OfficeMax, the change has been more subtle. Cartridges remain where they have been for years, but there appear to be fewer ink and toner SKUs than there were in the past. With the exception of non-OEM Epson SKUs, both office superstores have a full line of remanufactured inkjet cartridges; however, the amount of dedicated shelf space has been reduced, and there are fewer facings. The number of reman toner cartridges has also been scaled back. Overall, cartridges occupy less total real estate. Today, supplies share the shelves with reams of print and photo paper, and one store even had another consumable — candy — in its cartridge aisle.
Change is constant
As I noted at the beginning of this article, ink and toner supplies remain hugely important to the office superstores as well as to their suppliers — OEM and reman alike. However, office superstores have struggled in the ailing economy, and they are looking for new, more expensive products to feature in their retail stores to spark top-line growth. Staples’s tablet-focused planogram reflects this trend.
Office superstores have been pummeled in the bad economy. Operating 1,147 stores in North America at the end of last year, Office Depot has shuttered 136 stores since the start of 2009. During the same period, OfficeMax has closed 32 stores and at the end of last year operated 978 in the U.S. and Mexico. Staples managed to buck the trend and at the end of 2011 had 1,917 stores open in North America, up from 1,871 at the beginning of 2010.
Through acquisition and organic growth, Staples has also managed to grow its top-line revenue from $19.4 billion in 2007 to $25 billion last year. During the same period, OfficeMax total revenue slipped from $9.1 billion to $7.1 billion, while Office Depot revenue declined from $15.5 billion to $11.5 billion. Wall Street has not been kind. OfficeMax shares have tumbled from nearly $40 per share in July 2007 to a little more than $5 per share this July, and Office Depot’s have plunged from almost $31 dollars to slightly more than $2 per share. Ouch! Staples has fared better. Trading at about $13 per share as of this writing, Staples stocks were worth a little better than half of what they were at the beginning of July 2007.
In terms of how they market consumables, I would not be surprised to see other office superstores follow Staples’ lead, at least in part. In order to maximize revenue, office superstores may look to change the product mix on their retail shelves. Sales of more expensive OEM cartridges will lift individual store revenue, and the OEMs’ products may come to dominate retail real estate. Customers looking for third-party supplies, on the other hand, will be encouraged to make their purchases at the office superstores’ online stores. It seems that this strategy has worked for Staples, which now operates the second largest website in the world after Amazon.com. The risk to such a plan, however, is that once consumers go online, they may find better bargains at sites that sell supplies exclusively.
Retail operations are changing, and office superstores must change with them. With Wall Street breathing down their backs, you should expect more changes at Office Depot, OfficeMax and Staples, and those changes will happen sooner rather than later. Digital imaging supplies will remain an important category for the office superstores, but probably not as important as it has been in the past.
This article originally appeared in the August 2012 issue of Recharger.