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Channel subsidising OEM profits as OEM prices are pushed up by as much as 68%

Issue #0919/1 – As we see UK printer users venting their anger against OEM supplies price increases by turning to third party supplies, see , we drill a little deeper and find that price increases (Manufacturer Recommended Sales Price – MRSP) from at least one major OEM have been pushed up considerably higher even than prices on the street – meaning that the channel is absorbing a portion of the manufacturer’s increase.

Because of the number of manufacturers, and the time that would be required to do an in-depth analysis of all printer manufacturers, it is necessary to take a snapshot, primarily looking at just one manufacturer – Hewlett-Packard, the largest and most profitable printer manufacturer in the market. It does also look, however, that Hewlett-Packard price increases are the highest in the industry!

Referring back to last week’s article (), we found that the average price increase on the UK street, using a small basket of products from Hewlett-Packard, was 37% with a couple of manufacturers showing average increases as high as 42%.

But, we also saw a maximum street price increase of 52% – but even this pales into insignificance when we consider the increases imposed over the past 18 months by a manufacturer such as Hewlett-Packard in its MRSP list. Most of the focus will be on the UK, because this is where the exchange rate turmoil has been most severe, but comparisons will also be made with Euro pricing in Germany for Hewlett-Packard and with a couple of other manufacturers in the UK.

In the UK, repeated price increases between January 2008 and May 2009 from Hewlett-Packard have resulted in MRSPs for inks and toners suffering an ‘average’ increase of 53%, with a high of 68%! Indeed, the median price increase was above the average (mean), at 54% even though the product showing the lowest price increase experienced a rise of just(!?) 33%.

Average UK Price Increase – MRSP

Hewlett-Packard Supplies – Jan08 to May09

In Germany, as indicated last week, the price increases have been much more subdued, because exchange rate movements have not been as severe, but even here we see an average (mean) MRSP increase of 14% with a high of 27%.

Having said that, Germany experienced a 21% exchange rate movement against the Dollar between its high point at the beginning of August 2008 to low points in November 2008 and March 2009. But, this hardly seems relevant to the scenario when Hewlett-Packard made no changes to prices between the beginning of 2008 and July 2008 when the value of the Euro rose against the Dollar, to the tune of about 7% – a movement that should have triggered price reductions in the UK!

Instead, the company made some reductions of about 4% to toner products in October at the point where the value of the Euro had started to slide and prices of inkjet supplies were being raised by around 3%. Reductions to toner prices at that time is understandable because those decisions would have been made early in August when the Euro was still high. What is unusual, and unjustified, is that inkjet prices should have been raised at a time that they should have been reduced to track those exchange rate movements.

These adjustments were followed by much larger price increases on both ink and toner supplies in December, and then again in February, to bring the total average price increase over the period to the 14% level – above the benchmark 13% exchange rate movement from early to late 2008. In particular, the fact that there were 27% increases amongst the product range is somewhat surprising.

GBP and Euro to USD

By contrast, the above chart shows the cataclysmic collapse of Sterling against the Dollar over the same period, where the value of Sterling fell by 32% from the time that Hewlett-Packard would have set pricing for January 2008 (early November 2007) to early March 2009 when pricing would have been set for May.

So, one has to wonder why the lowest price increase on ink and toner products was 33%, the average 53% and the biggest increase 68%? An average of around 30-35% might have been understandable – and, certainly that is the general view that resellers seem to have taken despite being pushed by the manufacturer to impose much bigger price increases.

In the following chart, we’ve made a direct comparison between price increases from the Hewlett-Packard MRSP list and street pricing on three toner products. One is a toner for a mono laser printer and the other two are black and colour toners for a colour laser printer. The time scale is January 2008 to May 2009.

Price Increase, UK – MRSP vs Street

Hewlett-Packard Supplies – Jan08 to May09

What we note is that Hewlett-Packard raised the MRSP of each of the products by 54% over the period while resellers restricted the pain to users to just 33% for the mono toner. Toners for the colour printer suffered a little more, with the colour toner experiencing a 40% increase – but even this is 14 percentage points lower than the price increase imposed by Hewlett-Packard. Hewlett-Packard’s MRSP price increases on these products are 22 percentage points higher than the exchange rate shift!

To complete this picture, we should also have a look at the same situation in Germany with supplies for the mono printer and colour MFP products used in price comparisons in September 2008.

On a smaller scale, we see a very similar picture to that in the UK, where the channel has not passed on the full increases imposed by Hewlett-Packard on the colour laser MFP. We see five to six percentage points absorbed by the channel.

Price Increase, Germany – MRSP vs Street

Hewlett-Packard Supplies – Sep08 to May09

On the mono laser printer, however, the channel appears to have seen the opportunity to balance its books by charging a little more for the high-sales-volume mono toners.

Quick comparisons with just a few products from other manufacturers reveals a situation where the channel is clearly taking a view on the scale of increases that can be applied, based on the rest of the market. Where manufacturer increases are very high, as with Hewlett-Packard products and Kyocera’s TK-140, the channel is not imposing the full increase but where manufacturer increases are relatively low, as in the case of the toners for the Kyocera colour printer, the channel is applying higher increases in order to keep the increases more closely in line with other products.

Price Increase, UK – MRSP vs Street

Supplies – Early08 to Summer09

It is perhaps a little surprising that the street price increase on the Kyocera TK-140 is so high – but then, it is surprising that the RRP increase is so high.

There is no doubt, then, that printer manufacturers have hiked prices above exchange rate percentages in many, but not all, instances. Note, bearing in mind that these three manufactures are all Japanese, the exchange rate variation between the Japanese Yen and Sterling has been very similar to Sterling’s variation with the US Dollar.

There is also no doubt that the UK channel does not feel that it can impose the higher scale of price increases on its customers that some manufacturers have attempted to impose. There appears to be a fairly clear threshold, at 40%, that the channel feels is as much as the user base can withstand in most cases.

This results in the channel effectively subsidising the printer manufacturers as they attempt to hang on to their business rather than throw it in the direction of the third party supplies providers. But, there is a sense in which the channel is attempting in some way to compensate for this price capping by pushing up prices on products where the manufacturer has not increased prices as high has others.

In the longer term, we may very well see street prices not reducing as fast as we should do when some economic relief finally arrives.

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