Ricoh, IKON, and the Next Great Bubble

Give credit where credit is due, special thanx to Jake Fishman at Gap Intellience for this.

Bubble, Bubble, Bubble….. The aftermath of the last big bubble, analysis of the current bubble, how to guard against the next bubble. There is no avoiding it. Every time we turn around it seems we're inundated by bubbles. Speculative bubbles are both everyone's favorite scapegoat and next great opportunity. From Holland's Tulip Mania Bubble of 1637 to the more recent examples that are currently affecting our economy, speculative bubbles throughout history have followed the same general blueprint. It has been proven time and time again, excessive buying that results in unjustified price inflation will eventually result in market contraction.


Ricoh completed its $1.6 billion acquisition of IKON Office Solutions last week, vaulting the manufacturer to the forefront of the office machine market and inciting what may prove to be the greatest run on dealer acquisitions to date - or the next big bubble. The deal is expected to allow Ricoh to surpass Xerox as the top selling office equipment manufacturer worldwide, as the company "upgrades" the estimated 720,000 non-Ricoh products that IKON has in the field. The acquisition also provides Ricoh with access to IKON's impressive Fortune 500 and public sector client list, adds 400 sales and service locations, and significantly bolsters the manufacturer's print services resume.

Since the merger was first announced in late August, rumors of impending consolidation and market-wide buying sprees have dominated conversations across the Internet and around the water cooler. With memories of Xerox' purchase of Global Imaging and Konica Minolta's acquisition of Danka Imaging still fresh, manufacturers quickly turned their attention to independent dealers across the country to ensure that their foothold in the channel remains intact. By the end of September, Canon had already acquired office equipment distributor Newcal Industries, reportedly outbidding Xerox by 20 percent, and revealing plans to "expand its sales network." Toshiba further fueled consolidation forecasts last week, announcing its acquisition of HPS Office Systems. Suddenly the value of the mom and pop copier dealership around the corner (not to mention regional distributor) is appreciating faster than a Southern Californian McMansion circa 2005 – and that was a big bubble.

It should be noted that the overlying theme of consolidation within the office machine channel is nothing new. All it takes is a Google search for "Independent Copier Dealer" to illustrate the fact that independent dealers are formed far less often than they are being acquired. In fact, IKON arguably had more influence in this phenomenon than any other company. IKON (then Alco) was among the first true copier dealer conglomerates, acquiring 450 independent dealers during the 1980s, and quickly emerging as a dominant player in the channel. IKON was also instrumental in educating manufacturers on the importance of maintaining control over channel partners, as it later dropped Sharp and slashed much of the vendor's US presence almost overnight.

Beyond possibly jump-starting the independent dealer boom of 2009, the acquisition of IKON presents several very real challenges for both Ricoh and IKON's now-former partner Canon. Canon devices represented roughly 60 percent of IKON's revenue and the termination of the relationship is surely keeping both manufacturers up at night.

Late last week Canon notified its dealers that the manufacturer will no longer supply copiers to the new Ricoh-IKON entity, essentially green-lighting competition with its expiring IKON contracts. Similar to when Jerry Maguire was unceremoniously ousted from Sports Management International, you can guarantee that Canon's network of Maguires plan to bring their share of Rod Tidwells with them. Like its previous contract terminations with both Danka and Global Imaging, it is very clear that Canon will not sell through its competition, even if it means a remarkable drop in channel presence. Canon will likely rely on dealer-friendly incentives as a short-term solution to its sudden loss in volume, but the vendor has no choice but to expand its direct and authorized network in order to maintain market share.

Despite Canon's ongoing independent dealer push, the manufacturer has just 53 direct branches providing the company with few opportunities to make up for the lost channel presence in the near future. With the prospect of a 40 percent lower US channel presence on Canon's mind and promises of an "expanded sales network" published, expanding its direct distribution network is undoubtedly at the top of the manufacturer's priority list. Canon's expected channel push will place similar pressure on every other vendor that relies on independent dealers to sell MFPs, laying the groundwork for an unprecedented year of acquisitions.

The supply void created by the end of Canon's distribution partnership with IKON and the promise of aggressive competition for the manufacturer's existing contracts provides Ricoh with its own set of challenges. Given the added financial burden created by the $1.6 billion acquisition, which comes in conjunction with the company's first drop in quarterly sales in 15 years, Ricoh is ill-equipped to invest in rapid capacity expansion. With that, it is likely that Ricoh will look to competing manufacturers to sell though the new reseller entity, delaying returns on many of the advantages that it sought to gain through the acquisition. The deal also disrupts the distribution of Ricoh's various brands and may concern some of its independent authorized dealers that share sales regions with IKON's 400 locations.

And so it continues, as the worldwide economy tries to buy its way out of the latest bust, MFP manufacturers move forward on a trend that has all the makings of a bubble. The need to establish and expand direct sales bases have never been more emphasized and the number of available independent dealers has never seemed more limited. Many manufacturers will see little choice but to expand their direct sales network, likely resulting in aggressive bidding wars, unrealistically steep premiums, and some unsound business decisions. That said, with dealerships rapidly being purchased, manufacturers have little choice but to take part in the ongoing consolidation and unlike previous bubbles, the true winners will not be the parties that resisted the trend. As long as the current copier business model remains intact, manufacturers who are conscious of dealers' intrinsic value and make sound investments will be best positioned as the latest boom period concludes.
And now I am off to open my own copier dealership...