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2020 Outlook: How Will Consolidation and Vertical Integration Affect You? (Analysis)

Updated: Jan 15, 2020

Over nearly the past decade the abundance of cheap money and the proliferation of investors in private equity and venture capital looking to find investments for the growing endowments has led to consolidation in nearly every industry.

December 13th, 2019

By Williama DeMuth wdemuth@metrofuser.com


New Jersey

In the heyday of our industry, dealers and imaging suppliers of all shapes and sizes could survive and thrive. As with any maturing industry, competition and margin erosion and eventually consolidation was inevitable, perhaps even healthy. The toner industry consolidation started around 2005. With Clover’s acquisition of MSE in 2014 and the demise of LMI, it’s unclear whether there is a chance for another major player to compete with Clover or whether Clover can continue to dominate that market.

Parts remanufacturers/distributors consolidating with toner remanufacturers began in 2009 and we’ve seen the mixed results that combining these two sister operations has produced.

It is harder to pinpoint exactly when the dealer consolidation began, but the speed to which it has taken off in the past few years has been staggering to watch. The rise of the superdealer is a real thing, as is the demise of the mom-and-pop break-fix repair shop.

And now we are starting to see the channel integrate.

Parts remanufacturers/distributors consolidating with toner remanufacturers began in 2009 and we’ve seen the mixed results that combining these two sister operations has produced.
Parts remanufacturers/distributors consolidating with toner remanufacturers began in 2009 and we’ve seen the mixed results that combining these two sister operations has produced.

In 2017, Office Depot acquired Compucom and more recently, we saw Staples make a surprise entry into the dealer market. But the biggest shockwave was yet to come.

2019 ended with a bang with one of the biggest stories of the year. While the news caught all the buzz, we could have witnessed the next iteration of business strategies in the imaging channel. NEP, the private equity company behind the country’s largest mega-dealer, Marco, acquired Clover Imaging Group. This acquisition brings together a formidable team of parts & printer remanufacturing, field service and toner remanufacturing under one roof for all intents and purposes.

The imaging industry isn’t as neat and organized as the structure you would find in the automotive parts industry but essentially it is as follows:

2020 Outlook:  How Will Consolidation and Vertical Integration In the Imaging Industry Affect You?
2020 Outlook: How Will Consolidation and Vertical Integration In the Imaging Industry Affect You?

Next to labor, toner and parts are the costliest expenses to a service operation. With the stroke of a pen, they have redefined their business in one acquisition giving Marco a tremendous competitive advantage.

Vertical Integration for Dummies (Written by a Self-Proclaimed Dummy)

Vertical Integration is a business strategy whereby a company purchases its suppliers and/or distributors, to control the supply chain. The goal of vertical integration is to give the company a competitive edge over non-integrated companies. End users are conceptually more likely to choose the integrated firm's products or services. Ideally, the costs are lower, the quality is better, or the product is tailored directly to them.

There are volumes written about vertical integration both pro and con. The general consensus is the following;

Historical Advantages of Vertical Integration

  • Lower Prices

  • Avoid Supply Disruption

  • Increased Market Control

  • Creates Economies of Scale

Historical Disadvantages of Vertical Integration

  • More Rigid to Trends

  • Harder to Manage Well

  • Corporate Culture Tension

  • Reduces Flexibility

  • Loss of focus

Without debating either side, the important point is the event itself occurred and there is no going back. Moving forward we are looking at the execution of the strategy and the reaction by all the various factions and third parties.

Twilight of Consolidation

The low hanging fruit has been picked and the consolidation story is running on fumes in the supplies market. Sure, consolidation will trudge on for a while however vertical integration may leapfrog that playbook. Bankers and private equity companies may see a greater upside in that value pitch.

As the imaging channel matured we have moved along with the various strategy phases, each mirroring the health of the industry at that time. While vertical integration is a typical strategy it is largely executed toward the end of an industry cycle because it is considered one of the riskiest and capital intensive. So in a sense, it is also a signal to the industry where things are currently.

When an industry transitions into vertical integration it needs one brave soul to initiate it before others begin to imitate it.

While we could argue when the industry began to experience flat growth we can say we saw more consolidation toward the end of the nine-year period than the beginning. Full-on vertical integration could happen in half that time due to the remaining density of the supplies market.

How will the vertical integration strategy be processed by the channel? Your guess is as good as mine. Will the different business segment industries develop countermeasures, copy it, see it as business as usual or will it escalate to an arms race. How will the biggest segments view vertical integration;

  • Device manufacturers- HP, Canon, Xerox, etc

  • Competing mega dealers - Applied Imaging, Impact Networking, and Gorden Flesh, etc.

  • Wholesale technology distributors that provide services like Office Depot, Staples etc.

  • New build toner manufacturers like Aster, Ninestar, and Print-Rite.

It’s going to be an exciting year while we see how the various industries leaderships respond and execute on the unfolding strategies. Perhaps most importantly, how will these changes affect YOU? Are you a dealer who might be acquired? And if you’re not looking for that endgame, are you going to support your competition by buying supplies from someone who might take your orders today and take your customers tomorrow? If you’re not going to be part of the frenzy for consolidation, how is this moment going to create an opportunity for your company to grow? The answers to these questions will all be answered soon enough.

I would love to hear your thoughts and what you think the best direction is. Stay independent or integrate? Something else? Email me at wdemuth@metrofuser.com

They say hindsight is 20/20. It’s almost 2020 now and it’s time to start looking at what your future goals are and how to achieve them. If not, you will end up looking back at this moment and wondering why you didn’t.

Will DeMuth Co-President, Chief Operating Officer

Will DeMuth is the Co-President, Chief Operating Officer. His company is a leading global innovator, manufacturer and marketer of printer parts, equipment, diagnostics, repair information and systems solutions for professional users performing critical tasks. Products and services include remanufactured laser printer parts, remanufactured printers and service training for HP, Lexmark and Canon brands. The company's customers include office equipment dealerships, online retailers, repair centers and MPS service providers nationwide. Visit Metrfouser.com

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