The ‘New’ Xerox Sheds Its Old Skin and Is on the Offensive — Pt. 2: Channel Position

In Part 1 of this article we looked at the financial performance of the “new” Xerox following its Q2 financial results, which marked the second quarterly financial report since the company split itself in two on Jan. 1. The company explains it expects to see overall revenue improvement build toward the end of Q3, noting that it laid out a strategy at its most recent investor conference to weight its revenues over time to the growth areas of the market. But growing share in the channel is easier said than done. 

Where does Xerox, a company long famous for its skilled direct sales force, sit with the dealer channel today? In a survey of dealers performed by BPO Media last fall, 20 percent of dealers responding said they carried Xerox, compared to 37 percent for Canon, 33 percent for Ricoh, 30 percent for Konica Minolta, and 33 percent for Kyocera. As shown in the tables below, dealers carrying Xerox were:

• More likely to be smaller revenue locations than the dealer base as a whole; the company is underrepresented in the $6M-$50M midtier dealer population, and overrepresented in the $51M+ channel populations.
• Dramatically (almost four times) more likely to be an MPS and/or IT services and hardware provider than the total population and almost half as likely to be a BTA dealer. The fit for Xerox in the MPS and/or IT services and hardware provider category is a natural one and in line with the company’s stated strategy to grow its channel-based MPS business.
• Dramatically (more than five times) more likely to be a single brand/line dealer than the total population, representing nearly half the firm’s dealer base. We don’t know how many Xerox GIS locations participated in the survey, so that could be an influencing factor in this result.
• Xerox dealers are much less likely to also carry one of the “Big Three” major copier competitors (Canon, Ricoh and Konica Minolta), but significantly more likely to carry Kyocera, HP and, surprisingly, Brother. In recent public statements, Xerox executives have said that boosting the company’s presence in the A4 category is a major element in their strategy to grow revenues from the channel, and essentially admitted that the company’s previous A4 offerings were not very competitive. This situation helps explain that a dealer might be carrying the A3 market share leader (Xerox), but offering more competitive A4 offerings from other brands (such as Brother) to meet A4 customer needs – especially in the MPS and/or IT services and hardware provider base, which represents almost 40 percent of Xerox’s dealer base.

Considering the above, Xerox’s channel partners are often smaller, carry Xerox only, are most often MPS and IT services based, and often carry other A4 brands of hardware. If the company plans to grow revenues from the indirect channel (which it believes is about 2,500 independent office equipment dealers in the U.S.), it will have to:

• Gain presence in those important midmarket locations where it has a weaker share position. Xerox explains in an investor presentation that it sees an untapped dealer pool of:
  • approximately 300 dealers with $5M-$10M
  • approximately 200 dealers with >$10M
• Strengthen its A4 offerings to capture more wallet and footprint brand shares in dealerships.
• Increase its adoption in the BTA channel, where it is significantly under-represented.
• Ensure it is capturing a share of wallet from Xerox dealers that carry more than five brands.

The company points out the importance of the channel as an opportunity, saying that the multibrand reseller space is a $20 billion market, and that 75 percent of office technology sales are made through indirect channels.

Xerox stated channel goals are:

• Increased SMB coverage for Xerox with multibrand dealers and continued Global Imaging acquisitions
• Increasing its multibrand dealer base in the U.S. by more than 30 percent in 2017 (which it also noted in a separate document as “add 60 new multibrand dealers to its U.S. base,” which, of course, tells us the size of its existing base).
• A4 share gain with strengthened portfolio and increased distribution capacity
• Grow its U.S. print-focused partners by 25 percent
• Plans to add between 10 and 20 new agents (non-stocking independent sales reps)

Xerox shifts its channel plan into gear

To generate momentum and cement the positioning of Xerox as not just that aged copier company, in the spring, Xerox debuted a swath of new hardware and services, which it billed as the largest product launch in its 110-year history, including 29 new A3 and A4 machines designed to advance the user experience, connectivity, and a new vision of the future of work. Since then, the company has been busy:

• In March, as part of the launch, Xerox unambiguously positioned the target of these new offerings as the channel. “Providing our channel partners, including multibrand dealers, with the right combination of technology, software and services to grow their businesses is among the biggest priorities for Xerox,” said Mike Feldman, president, North America Operations.
• In April, the company announced that Pete Peterson was joining Xerox to serve as SVP of Global Channel Strategy. Peterson’s background includes stints at TESSCO Technologies, Brocade, and, oh yeah, he also spent 20 years at Tech Data.
• Also in April, the firm hosted 200 current and prospective partners in New York City at the Xerox Future of Work Partner Forum.
• In June, Xerox announced that its channel partners could recreate the company’s successful Future of Work global forum roadshow locally using two new marketing kits with promotional tools designed to help generate awareness in local markets and drive demand for Xerox’s products and the partners’ complementary services, custom apps and deep expertise. The kit includes suggested exhibit venues, sample invitations and agendas, presentation materials, imagery, equipment recommendations, logistics and budget guidance, social media assets and public relations support. On the Demand Generation side, the kit includes marketing resources such as online content and outbound emails designed to keep the partner and its offerings top-of-mind with current clients and prospective customers, as well as drive demand for Xerox’s  new offerings, plus social media templates with images, suggested content, webpage elements, photography and inserts for customer emails.
• Also in June, the firm announced that Memphis-based communications and office equipment dealer Memphis Communication Corporation (MCC) and Little Rock-based print dealer Standard Business Systems (SBS) will join as Xerox channel partners.

In July, however, Xerox outdid itself. In that month alone, Xerox:

• debuted a managed print services (MPS) accreditation program for a select group of channel partners that exhibit MPS expertise and revenue growth. The Xerox MPS Accreditation Program channel partners receive custom training, access to sales and assessment tools, pricing considerations and marketing support.
• launched the DocuMate 6460 and 6480 desktop scanners designed for scanning, storing and organizing up to 10,000 double-sided pages daily.
• noted that industry research analyst firm Quocirca named it the market leader in its Managed Print Services Market Landscape Report for the eighth year
• announced that Ted Dezvane will lead the Managed Document Services (MDS) organization. Dezvane joined Xerox in 2005, and was Xerox’s Chief Strategy Officer.
• announced that its new monochrome and color printers and MFPs products swept four Summer 2017 Pick Awards from Keypoint Intelligence – Buyers Lab

A family of new products, new senior management and executive channel team, investments in channel support and marketing, and what appears to be a new level of aggressiveness and laser focus on the indirect channel are the Order of the Day at a company not generally known for its popularity among dealers. The game is on.

Xerox, too, is playing the acquisition card … and is not shy about it.

Of course, like its competitors, Xerox has also gained share in the channel over the years through a tried and true strategy — acquisitions — through its Global Imaging Systems (GIS) subsidiary. Xerox says GIS revenue has doubled since being acquired in 2007, and attributes about two-thirds of that growth to additional acquisitions. For the most recent year in which the company has provided data, Xerox’s GIS arm, consisting of dealerships the company has acquired over the years, had revenues of about $1.5B annually, with Xerox on pace to show company-wide revenues of about $10.5B this year. The company has said it has reserved $100M this FY for GIS to acquire dealerships, and it has announced the following to date:

• In March, it acquired Laser Resources, a Grimes, Iowa-based multibrand dealer of printing systems and managed services solutions. Publicly available data indicates that Laser Resources has annual sales of about $10M.
• In May, it acquired MT Business Technologies, a Mansfield, Ohio-based multibrand dealer. Publicly available data indicates that MT has annual sales of about $60M.

The GIS website has quite an interesting page with information on how it evaluates possible acquisitions, what capabilities it is looking for, financial criteria, and other key attributes that GIS will consider in deciding to buy an operation. It also actively suggests that interested parties directly contact the firm’s senior vice president, acquisitions, service & marketing, providing his phone number and a contact web page.

The “new” Xerox: on the offensive in a tough battle

The print/copy/document industry has been evolving since the advent of computers entering the office in the 1970s, when printer technology, connected to computers, ushered in a golden age of document production by every office worker in the system. Most understand and accept that office business printing, in general, is a trailing edge market that is flat or in cyclical decline. Pockets of growth do exist, and the collected marketing wisdom of the current gladiators in the market are pursuing these growth sectors and niches as hard as possible. Growth also exists in several segments that Xerox has outlined – areas it already has a substantial presence in or are targeted by one or more of the company’s new efforts.

Businesses are printing and copying less every year, regardless of GNP growth in the economy or other macro-economic factors. There was a time when a booming economy meant more transactions, more business activity and inevitably more printing and copying. There was also a time when corporations and individual users were blissfully unaware or relatively uninterested in the cost involved to produce all those pages.

The decline in office page production has been a more acute problem for Xerox because the company derived the lion’s share of its document revenues from large, enterprise-class organizations (including government and related nonprofits such as education and health care). However, these are the very industries and customers that have embraced going paperless and reducing print/copy costs as much as possible (often through adopting MPS – where Xerox is a clear leader) – and thus, these organizations have been at the forefront of declining paper document output with no possibility of growth, though some of the remaining volume is shifting to higher per-page value documents including color. The company told us that it is the market leader in large enterprise MDS (MPS) but that the growth rates have fallen off some, so it is taking action to improve this area, and, its SMB MDS business is smaller but is growing at or above market rates.

This time, Xerox appears to be pushing all the buttons on the elevator to drive a major market share land grab in the channel for its new products and services, such as its successful MPS portfolio. Besides cyclical decline influences, Xerox faces stiff headwinds in achieving its stated goal of increasing its multibrand dealer base by 30 percent this year; among these headwinds are:

• Continuing channel roll-ups and acquisitions: Xerox is not the only OEM buying up dealerships, and the consolidation among independent dealerships continues unabated. Obviously, any dealership that falls under the auspices of a new owner such as Canon, Ricoh, or Konica Minolta will obviously emphasize its new owner’s product line. The buy and sell activity could end up as a zero sum game for Xerox: for every dealer it signs up – or acquires – its competitors could take wallet share from existing Xerox dealers or buy an attractive dealer target, nixing opportunity and growth for Xerox.
• HP: remember them? Well, they are in the middle of an aggressive new dealer recruitment and growth program to establish its new Samsung-based A3-class product line. If a dealership were looking for a big name brand to add to its line card – both Xerox and HP qualify. Neither HP nor Xerox is likely to win every dealer recruitment contest they enter, but their simultaneous entry in a higher stakes game could trigger price erosion or an auction mentality on the part of interested dealerships, a trend that makes achieving revenue gains from the channel all the harder to achieve. In particular, it is clear that HP plans to target its existing IT VARs and MPS dealerships as outlets for the new A3 line….possibly the same IT VARs and MPS dealerships where our survey showed Xerox was firmly established. In this kind of trench warfare situation, major share gains are very hard to realize – especially quickly.
• Sooner or later, the most desirable dealerships will have been acquired by somebody (if they haven’t already) – leaving the remaining available dealerships as largely unattractive targets, unlikely to ‘move the market share needle’ and therefore not very attractive to GIS as an acquisition.
• Since the available page volumes are declining in many businesses, the existing OEMs have few options to increase revenues; one of them is adding new dealers to its existing network with the goal of stealing some new installs – and pages – from those dealer’s customer base. However, it appears that many of the major OEMs are scouring the available dealer listings prospecting for pockets of possible opportunity – and they certainly understand the right formula to gain dealer interest and adoption.
• The large and growing multiregional dealer groups are already an outlet for Xerox – as our survey data revealed. The challenge in those partners is to prevent share erosion from the HPs of the world while carefully balancing possible conflict with these $100M-plus players as they target larger organizations – and run head-first into Xerox direct sales efforts – a long-standing complaint of the channel against Xerox.
• Even substantial market share gains in the dealer channel for Xerox does not guarantee better financial results: obviously any sales gains through the channel will come at reduced revenue levels per machine install – simply because the OEM gives up substantial revenue and margin slices to the channel to secure that install. The BTA channel lives on its services and supplies annuity businesses – a formula Xerox knows well – and squeezes as much of that milk as possible out of their OEM suppliers. The trick is to grow sales in the channel in a way that is revenue positive, despite having much smaller OEM margins on every sale, so adjusting internal costs structures to match this lower profit margin universe explains why Xerox has been so aggressive in its cost-cutting plans. If the company plans to grow revenues through the channel, it has to adjust its cost structure to be in line with the norms of that business strategy – without making crippling cuts to its critical enterprise and large organization sales and marketing operations.
• It is common knowledge throughout the industry that Xerox has been an OEM buyer of products and engines from Samsung for several of its office product lines. It is fair to say that Xerox is shopping for a new OEM source (if Fuji Xerox doesn’t have a competitive offering) for these important segments – a transition that could cause supply or transition disruptions, possibly higher acquisition costs, and incompatibilities among existing and newly-acquired and designed products.

Our Take

The macro shifts underway in print volumes, customer demographics, the competitive landscape, the channel dynamics, and shifting applications all present serious challenges to every OEM in the industry. Xerox is betting big that it has the right mix of products, marketing support, brand strength, channel programs and on-point strategy to weather and even prosper in such a tough environment – and the company knows it will be severely tested by these challenges and new ones that may appear just over the horizon. For the ‘new’ Xerox, its Conduent spin-off strategy and 4:1 stock reverse split achieved what previous Xerox management could not over many years: increase share values and stockholder equity through well-executed financial actions. While it is early in the life of the new Xerox management, its products and its new channel strategy, somehow what has been going on with Xerox this year has a different – and better – feel than their past efforts in this area. 

Can’t get enough of our awesome analyses? Read Part 1 here.