Over the past year or so, Hewlett-Packard has been fundamentally changing the way it distributes supplies in the United States. Beginning last year, the company implemented steps to move from an open model of supplies acquisition to a program that provides HP with more control concerning the resale of its branded consumables. From a channel perspective, the changes have been dramatic. Currently, only about one-third of the resellers that once sold HP supplies under open distribution remain “qualified” to continue selling the OEM’s branded consumables. HP, on the other hand, maintains that it has done what was needed to do to protect the brand and the experience customers have when purchasing HP consumables.
HP’s Steve Sakumoto, VP and general manager of HP’s U.S. supplies sales organization, explains that the reason for implementing its channel changes were practical and necessary. “When you have open distribution you have zero ability to manage the customer experience and brand representation for HP. Our objective is to shape that brand experience. We believe when you do that you will get a better customer experience, which leads to brand loyalty, which leads to more repeat business and revenue.” Mr. Sakumoto is convinced that HP’s remaining resellers will be those “that have the right skills and capabilities to do all that.”
Moving From Open To Qualified
It all started in 2013. In the spring of 2013, distributors including Supplies Network and United Stationers notified their customers that HP was changing the way resellers sourced HP-branded supplies in a very basic way. The OEM reclassified all of its printer consumables including all small- and large-format HP inkjet cartridges and LaserJet cartridges to “authorized products.” The reclassification would occur on November 1, 2013 after which all resellers had to have signed either a U.S. partner agreement or a U.S. consumer reseller agreement in order to purchase and sell the OEM’s consumables products.
With over 90 percent of HP supplies in the U.S. moving through resellers and retailers, the reclassification of consumables affected almost all of HP’s channel partners in the region. In addition to establishing requirements, such as resellers must have a fully functional website and a physical address, the U.S. partner agreement or a U.S. consumer reseller agreement further stipulated that resellers could sell supplies only to end users. Authorized resellers were also limited to purchasing supplies exclusively from one of HP’s authorized tier-one distributors (see table below). Prior to the change, resellers were not required to have an HP partner agreement to market supplies, and they enjoyed a degree of latitude concerning how they sourced HP supplies as well as to which customer they sold these products.
My company, Actionable Intelligence, began following the matter during the first part of 2013. In June of 2013, we reported that in a prepared statement, HP explained it was changing the classification to deepen its “relationship with resellers of our supplies products, and improve the customer shopping experience to help them make informed choices to purchase original HP Supplies.” Reading between the lines we speculated, perhaps, HP might also try to better encourage its resellers to sell less third-party supplies and more of the OEM’s branded products.
In the run-up to HP’s implementation of its reclassification of supplies products, a number of remanufacturers and companies in the channel express concerns that HP would attempt to stop resellers from selling third-party consumables for HP devices. HP informed Actionable Intelligence, however, that becoming an authorized reseller in no way would preclude channel partners from selling remanufactured or compatible cartridges. Mr. Sakumoto told us categorically last year, “HP has no intent to change or alter or influence what a reseller wants to sell to their customers. We fully support choice in the marketplace.” He went on to explain that nowhere in the partner approval process did it say anything about only selling HP supplies.
During the spring of this year, word once again began to circulate that HP would implement another round of changes before the end of 2014 related to the distribution of HP-branded supplies. Resellers that successfully began as authorized partners would be required to be “qualified” as of November 1, 2014 in order to continue purchasing and selling HP supplies. The qualified program for reselling supplies included a more stringent set of criteria for resellers to meet (see table below).
After the Changes
Last year, after HP reclassified its supplies as authorized products, I did not hear much grumbling from the channel, which was surprising given all the angst I heard expressed earlier in the year. The reason no one was complaining was that apparently for many companies the November 1, 2013 deadline came and went and nothing really changed for them. At least that’s what I was hearing from the companies I spoke with subsequent to the 2013 deadline. Some firms even said that they never obtained one of the required agreements and were able to continue to source supplies from various distributors just as they had before supplies were reclassified.
Having heard so many in the channel talk about the reclassification of HP supplies as a non-event, I was startled to learn that the number of independent resellers selling HP-brand consumables actually fell considerably. When discussing the matter with Actionable Intelligence, Mr. Sakumoto indicated that as a result of moving supplies from open distribution to authorized products, the number of resellers marketing HP supplies dropped from between 17,000-20,000 to around 9,000 resellers. After implementing the qualified program in 2014, he says the number of independent resellers fell to the 5,000-6,000 range, which is where it is now. Mr. Sakumoto pointed out that the resellers are in addition to “10,000-plus retail outlets from our major retail distribution partners and of course their dot-com sites.”
Although it seems fewer companies were dropped in 2014, I did start hearing howls from the channel after HP put further controls in place on its U.S. supplies in 2014 by implementing the qualified program. While I didn’t hear much chatter before November 1, after the deadline passed the channel became quite vocal. I started to receive emails about the situation and comments began to be posted to the Actionable Intelligence website from companies that could no longer purchase HP-branded supplies.
Many of the disgruntled resellers that I heard from said that they felt that they had met the criteria for being qualified to resell HP supplies but had been dropped from the roster nonetheless. Paul Mervis, for example, executive general manager of Marblehead, MA-based Encore Images, told me that his firm sold approximately $200,000 worth of HP-branded ink and toner cartridges annually. Regardless, he learned from his account representative at a tier-one distributor two days before the November 1 deadline that Encore was on a list of resellers to which the distributor could no longer supply with HP-branded consumables.
Similarly, during an interview for a story about the changes in HP’s distribution, Tony Casillo, president of TTS Business Products in Garden City, NY, told a similar tale. He said that after meeting the requirements to be authorized last year, the firm was not granted qualified status as of November 1. TSS was denied despite the fact that according to Mr. Casillo, TTS carefully tracked sales of its HP-branded supplies and its sales well exceeded the six-month $15,000 minimum.
These are only two examples of the companies that we heard from, but they are indicative of other comments dropped resellers sent to us. Like the two above, most said they exceeded the sales volumes to be qualified. As one can see from the list of criteria, however, it takes more than just meeting HP’s minimum sales threshold to be qualified to sell HP supplies. And while the purchasing requirements are concrete and easy to prove they’ve been met, others, such as presenting the HP supplies portfolio in a certain way or having a fully functional website, seem more nebulous and open to interpretation. Indeed those resellers we heard from who were denied qualified status usually indicated the reason was not sales related but rather had something to do with how the HP brand was presented or the functionality of their websites.
What Can They Do?
Dropped resellers have been left to scramble to get HP-branded supplies for their customers since November 1 of this year, as they try to become qualified resellers. One company stated that sales of HP-branded supplies made up roughly half of its annual revenue and said, “We are NOT going to stop selling HP OEM to our customers.” Although the firm was forced to stop purchasing from its HP tier-one distributor, it claims its “customers have seen no disruption in service and our costs have only gone up slightly.” The firm says it continues to look for ways to reapply for qualification but it is being met by “a corporate wall of silence” and its “ex-HP rep [says] there is simply nobody to talk to about it.”
Other dropped resellers have commented that they are also met with silence from HP in their bid to be qualified. Mr. Mervis says that the HP team that does the qualifications “has been largely unresponsive,” “a “nameless, faceless team you communicate with via email.” Mr. Casillo agrees, indicating that HP’s Qualified Supplies Partner Program team only communicated by email, never divulged the name of an actual person to contact or call, and was always slow to reply. He says, “All my communication with HP has been intermittent and cryptic. That’s been consistent,” says Mr. Casillo. Another dropped reseller said, “We are looking for ways to re-apply for ‘HP Qualified Supplies Program.’ If any body knows how please let us know.”
Despite hitting what sounds like a brick wall, Mr. Sakumoto suggested that it was not the end of the road for dropped resellers and offered advice as to what they should do next. He emphasized that resellers and tier-one distributors need to work together to get dropped resellers back into the loop. For resellers, he says, “The first thing to do is go to your tier-one distributor and figure out a plan for working toward meeting our requirements. Once you feel you have a track record of showing you meet these requirements, you are welcome to reapply.”
Of course, it behooves HP to bring its resellers back into the fold or risk losing sales of HP-branded supplies to third-party vendors. Mr. Casillo told Actionable Intelligence that he was not concerned finding product because of the availability of non-HP alternatives. “It’s not a problem. There’s plenty of product out there.” He told us, “I never pushed that stuff [third-party cartridges] before. Now I have no choice.” Mr. Mervis indicated the same was true for Encore Imaging. “If you can’t supply OEM,” he explained, “you are going to find another way to meet customer needs.”
We asked Mr. Sakumoto if he was concerned that resellers without qualified status might source products from suppliers they had not used before, including third-party supplies vendors or other alternative suppliers. He said they worried about that a lot but listed three reasons why the risks were manageable. First, the size of the business represented by the lost resellers was “low in terms of dollars,” he said. Second, the overall availability of HP cartridges mitigated against any risk. “If the customer has 17 different ways to buy toner and loses one or two choices,” he explained, “that customer still has a lot of options available.” Third, HP has always had to compete with remans and other alternatives. “Those alternatives were already available. If customers had a propensity to choose reman, they would have done it a long time ago.” He summarizes that from HP’s perspective the focus is on the customer, and customers still have many options for purchasing genuine HP cartridges.
Even after the new programs have been implemented, Mr. Sakumoto concludes that HP supplies are still over-distributed in the United States, a remark that some in HP’s U.S. supplies channel may find unsettling. Although he did not entertain any suggestions that HP’s independent resellers may be further pruned, he did leave the door open to dropping distributors. Since reclassifying its supplies, HP has dropped Wynit from the above list released in 2013. When asked if HP has plans to further thin its tier-one distributors in the United States, Mr. Sakumoto says HP has not made any final decisions but is reviewing the matter. “The question is, do you need eight tier-one distributors? There are reasons why we could continue to maintain eight and there are reasons why we might not. We just have not made a decision on that yet.”
HP’s move leaves a lot of other questions unanswered too. Is HP indeed right in its estimation that its supplies revenue will be relatively unaffected by cutting off the end of what Mr. Sakumoto sees as its “long tail” of supplies resellers? And what will that do to supplies sales going forward? After all, even with its full complement of U.S. resellers, the company has struggled to maintain its supplies business since the recession. Is HP’s assessment correct that customers who were willing to try third-party product have probably already done so? Moreover, will HP supplies customers be more willing to explore alternatives if the disenfranchised resellers begin to promote more non-OEM product? And, is this the end of HP’s supplies channel changes, or will we see a further reduction in either the number of tier-one distributors or resellers? Rest assured, Actionable Intelligence and ENX will be following all this very closely in the months ahead.