<img src="https://d5nxst8fruw4z.cloudfront.net/atrk.gif?account=q34Yl1a8FRh2uG" style="display:none" height="1" width="1" alt="">

The Great Office Supplies Caper

In Plain Sight - An Ink and Toner Cartel or Not?

by Ian M. Elliott | 1/24/17 7:49 AM

At the end of November 2016, I concluded an eight part series of blogs titled "The Aftermarket, Office Supplies and a Major Tipping Point". During that series I argued the OEM's appear to have effectively orchestrated a cartel like structure, from which they are able to effectively control market share and pricing.

 A cartel, operating under the radar, in developed western economies in the 21st century. Really! How can this be possible? Well, strictly speaking, we don't have an ink and toner cartel, because that would require a formal agreement between a group of producers to regulate supply and manipulate prices, and that would be illegal. I don't, for one moment, believe any formal agreement exists between the various parties or underlies their market behavior. However, as I'll argue, there's no need for a formal agreement because the same results are achieved without one.

The definition of a cartel, according to Merriam-Webster, is as follows:

"A cartel is an organization of a few independent producers for the purpose of improving the profitability of the firms involved. This usually involves some restriction of output, control of price, and allocation of market shares. Members of a cartel generally maintain their separate identities and financial independence while engaging in cooperative policies. Cartels can either be domestic or international. Because cartels restrict competition and result in higher prices for consumers, they are outlawed in some countries. The only industry operating in the U.S. with a blanket exemption from the antitrust laws is major-league baseball".

Definition courtesy of Merriam-Webster https://www.merriam-webster.com/dictionary/cartel

There are twelve global enterprises that make up the Original Equipment Manufacturers of printers and supplies. They each make their own office products that are not compatible with each other and, each of them, are fierce competitors. This is very different, for example, to the OPEC cartel where their product is oil and, oil is oil, with little to differentiate it from one producing member and the next.

Oil from Saudi Arabia works the same in my car as oil from Iran but, a toner cartridge from HP will not work in my Epson printer!

Although the OPEC cartel has been weakened (largely because of its own pricing and production strategies) it still meets to discuss production quotas and to manipulate output to influence prices.

The twelve OEM's (Table 1) in the office printing industry (printers and copiers) are not likely to be meeting to discuss production quotas and pricing strategies. In fact, they are fierce competitors and each of them constantly works against the others to increase its market share. Just imagine, these twelve companies organizing a meeting and collectively agreeing to cut back production of ink and toner to increase prices. It's such a ridiculous concept it must be dismissed out of hand.

Table 1:  The 12 Global Printer and Copier OEM's
Name Global Sales ($M) Market Share US Ink & Toner ($M) Market Share
Hewlett Packard $48,000 28% $9,600 46.6%
Canon $32,000 19% $1,600 7.8%
Sharp $20,000 12% $500 2.4%
Ricoh $17,000 10% $1,700 8.2%
Kyocera Mita $12,300 7% $1,230 6.0%
Xerox $11,000 6% $2,200 10.7%
Konica Minolta $8,500 5% $850 4.1%
Seiko Epson $8,500 5% $850 4.1%
Brother $5,300 3% $530 2.6%
Okidata $4,213 2% $421 2.0%
Lexmark $3,500 2% $875 4.2%
Samsung $1,300 1% $260 1.3%
Totals $171,613 100% $20,616 100%


However, the OEM's don't need to arrange a meeting to achieve their goals because they, and the major resellers of their products, have a common interest. The top three OEM's have a 58% share of the global market and a 65% share of the more narrowly defined market for ink and toner consumed in printers and copiers in the United States.

Imagine if one of these top three decided to nudge up prices for ink and toner. What would the inclination of the other OEM's be? Would they look at the long-term opportunity for increasing market share by keeping their ink and toner prices at existing levels, or, may they follow suit, increasing prices and short-term profits?

What about the authorized resellers of OEM products? Do they care if the OEM cartridge is $100 or $105? At some point, maybe, but only if a price increase led to their major customers seeking alternative, lower cost cartridges. When the OEM's increase prices, the resellers blame the OEM's, shrug their shoulders and say, "Yeah, what can you do, those OEM's are really bad guys!" ... but, what they're really saying (all the way from Wall Street to the individual salesperson commissioned for top line sales performance) is "thank-you Mr. OEM, for increasing prices!"

Now, while the resellers may enjoy the top line sales that come from OEM ink and toner, unfortunately for them, the OEM holds the balance of power and the reseller only gets a small portion of the profits. If the OEM price increases from $100 to $105 then, it's the OEM who gets to keep most of the extra margin dollars, not the reseller.

It was this disproportionate allocation of margin dollars that led to the introduction of aftermarket alternatives to the Tier-1 distribution channels back in the 1990's. This was how the resellers reacted to try and keep the OEM's "honest" and, as a strategy, it worked brilliantly. Instead of making only 5-10% gross margin on the sale of an OEM cartridge, they could make 60%+ on an aftermarket cartridge. Their customers saved 30% or so over an OEM cartridge and the only losers were the OEM and the reseller's top line!

This development was a big problem for the OEM's.

So, what did they do to overcome it? Well, they leveraged what they knew about the resellers drive for top line sales, what they knew about sales compensation plans and, that they knew it was "easy" to sell an OEM brand cartridge compared to selling the "story" of aftermarket alternatives. The OEM's knew the resellers must be able to sell their branded products and, that any reseller breaking ranks (for example only selling aftermarket) would be performing the equivalent of a business "suicide".

So, armed with this knowledge, they introduced quotas and fine-tuned their back-end rebates to performance against quota.

Table 2 - example of how rebates control market share
  Quota GM on Sale Rebate Total GM GM % Change in GM $
OEM Plan (quota) $1,000M $50M $75.0M $125.0M 12.5%  
Reseller (actual) $800M $40M $37.5M $77.5M 9.7% -$47.5M


In the example, I've shown a quota of $1 billion and actual performance of $800 million or 80% of quota. This, below plan performance, may lead to only 50% of the rebate dollars being paid, representing a loss of nearly $50 million.

The OEM's know they control retail prices by only allowing the reseller a small margin on the initial sale to ensure there's no room for discounting. They also know, by assigning quotas and offering rebates tied to performance, they control market share.

In the case of the United States $25 billion markets for ink and toner (where the OEM's have around an 80% market share), you can be sure those collective reseller quotas (assigned by the OEM's), add up to $20 billion dollars. Missing the sales quota means missing a disproportionate amount of the rebate dollars which the resellers count on to hit their budgets.

So, what I've explained here is the ability of a relatively small group of OEM's and resellers with aligned interests, to have control over pricing and market shares. Furthermore, this control is achieved without restricting production or having any formal [illegal] agreements in place, as are typical in a conventional cartel!

However, there's usually a consequence of market distortions. For example, consider what's happened in the oil industry.

Saudi Arabia extracts oil at the lowest costs in the industry of around $5 per barrel. For a few years, prices were over $100 generating mammoth profits. Profits attract competitors, think U.S. shale producers, with costs of maybe $60-70 per barrel - still not bad profits when oil is $100+.

But, the cartel doesn't like the competition and decides to increase its production to deflate prices. Prices come down to $40 per barrel which, they believe, should put the shale producers out of business. Sure, it reduces their output but, the shale guys also figured out ways to reduce cost and protect themselves by hedging prices into the future.

Furthermore, the Saudi's have legacy social programs equivalent to $60+ per barrel in place to keep its citizens compliant. If these social programs are compromised it may lead to unrest. So, the rulers can't afford to compromise them and the real cost of Saudi oil is $65+, comparable to the U.S. shale producers.

Why is all this relevant to the OEM's in the ink and toner business?

Well, the OEM's have collectively distorted the market. Printers are under priced (to achieve scale with the installed base) and cartridges are overpriced (to subsidize losses on the hardware). In aggregate, the OEM's don't make [cartel] profits.

However, the high cartridge prices attract competition and, most problematic for the OEM's, that competition has cartridge build costs similar to the OEM's but doesn't have to fund losses on hardware.

If Saudi Arabia didn't have to fund its social programs then it would win the battle against U.S. shale producers!

The Chinese aftermarket cartridge builders are the equivalent of the Saudi oil producers without the social programs and, it's this parallel, that explains the opening for the aftermarket. However, this opening cannot be exploited through the Tier-1 distribution channels through which 90% of the $25 billion are currently spent. As I've explained, the OEM's control market share through these channels and block distribution of the Chinese products.

Going back momentarily to my oil parallel.

While oil prices were $100+ the U.S. shale producers raised billions of dollars to drill wells. While ink and toner cartridges are $100, the Chinese aftermarket manufacturers raised billions of dollars through IPO's and, recognizing the Tier-1 distribution channels were blocked, started buying distribution in western markets. Think Ninestar, Static Control, think Ninestar and Lexmark, think Goldengreen Tech and Cartridge World, think HNA Group and Ingram Micro.

The Saudi's cannot defeat the U.S. shale producers and the printer OEM's cannot defeat the Chinese aftermarket cartridge manufacturers. It's now only a matter of time before market shares for ink and toner cartridges begin to shift toward the aftermarket.

If you missed my recent eight-part series on the office supplies aftermarket tipping point, please check out my new eBook, it's just published, it's FREE, and it contains a thorough examination of the office supplies industry and a path to the $20 billion growth opportunity for independent resellers.

Free e-Book MERGERS & ACQUISITIONS Click Here for Access

Topics: Industry News

Subscribe to Email Updates

Digitol Logo

Become a founding member of our Digital Business Transformation Service!

Learn more with a no-obligation phone consultation.

Learn More

The Office Products Trilogy

Free e-Books

Authored by a 35-year executive veteran of the Office Products and Supplies industry and containing unique perspectives on the industry, the modern digital world, and roadmaps for independent office products resellers to set off down the path toward digital transformations.

Book 1 - The Path to a Business Transformation

Free e-Book DIGITAL TRANSFORMATION Click Here for Access

Book 2 - Mergers & Acquisitions: A $20 Billion Growth Opportunity

Free e-Book MERGERS & ACQUISITIONS Click Here for Access

Book 3 - How the Industry has Failed the Resellers

Free e-Book INDUSTRY FAILS RESELLERS Click Here for Access

Calculating Returns

For your Digital Strategy

The world has transformed from analog to digital. Digital equals data and most business operators don't like messing with data!

Check out our suite of Business Calculators!

  • Break the problem down into manageable segments.

  • Interactive - experiment and watch the results.

  • Develop a better understanding of how to translate effort into results.

Essential business tools to help you manage your digital transformation!

Calculators Click Here

Business Projection Model

Download our FREE proprietary business projection model.

It's been built to demonstrate a path for growth and profit potential that can be achieved in the office products channel on the back of an integrated business platform suitable for the 21st-century digital environment!

Financial Plan Modeling Platform Start Here

IT Scorecard

Download our proprietary Information Technology worksheet. Select answers from pre-populated drop-downs and develop your own task list and priorities for implementing a fully integrated software platform.

Once an integrated technology platform is established then start to have some fun transforming a business while leveraging technology and personality.

Access Free IT Scorecard