A year of decision looms for independent dealers.
If you want to get forecasting correctly, you need to know the short-term history of our industry. The best tool we have for our 2023 forecast is our Annual Dealer Survey. In our 37th Annual Dealer Survey, published in our October and November issues, the average revenue was $17 million for 380 dealers. If you took out the top 13, responsible for 45% of all reported revenue, the average declines to $9.8 million. One hundred or 26.3% of all returns noted their revenues at less than $2.1 million. There were 222 who reported revenues from $2.2 to $19.9 million. Each was most concerned about resolving supply chain issues. Beyond that, each had different concerns. Here are some questions dealers are asking themselves:
- Do I attempt to be more diverse and build a more substantial business?
- What is my exit strategy, or is it best to sell now?
- Should I invest and become more profitable to secure a higher selling price later?
- Where will technology take us, and what will we sell five or 10 years from now?
Diversifying is the most consistent concern throughout our Survey. That is something we have come to believe is the most critical decision for dealers today.
If you accept the premise that the decline of the copier-print business in the office will continue, then you have a choice to make. If your dealership has less than $20 million in revenues and sells solely to the office, I’d advise you to treat the existing business as a foundation to build a business model that earns half of all revenue from copier-print products sold to the office. The other half could come from various products sold to the existing MIF. For some, IT or managed network services coupled with production print could be the answer. It is something each dealer seeking to diversify must answer. There is no right or wrong answer.
This is about forecasting for 2023. Based on what five leading MFP manufacturers have told us, a sufficient number of products will be available by summer. This is a time for dealers to decide on the questions we previously addressed. If what the manufacturers are telling us is true, by June or July 2023, dealers will be able to buy inventory, sell, and reorder as needed with no backorders. Going back to business as usual should solve some serious problems.
What will that business represent compared to what we refer to as pre-pandemic? We are estimating that business will generate 25% to 30% less than in 2019 in orders generated in 2023. Many will be filling backorders through the spring. The options to replace that shrinkage have been available for some time. These are the areas that we believe dealers will gravitate to in 2023. We think it will be marked as the year dealers embraced opportunities they have been dismissing, including:
- Managed IT/telephony
- Security software
- Physical security
- Smart Boards/AV, focusing on current clients and with education as a lead segment
- Color and monochrome light production equipment
- Production print (The more adventurous can, and some will, provide products for commercial printers that can also be sold in the CRD environment.)
- E-commerce for A4 MFPs (Dealers can win in this space.)
- Acquisitions could and will continue to be part of the plan. (We project that acquisitions will be concentrated in the 14.5% of dealers with $20 to $100-plus million in annual revenues. The acquired dealers will have revenues between $1.8 to $2.1 million.
Dealers in different volume bands will have other options. It isn’t easy to project who will take the lead in diversification and to what degree.
The Survey told us that there were 33 dealers in the $20 to $40 million class, representing 8.7% of the Survey universe. There were 3.2%, a total of 12 dealers, in the $41 to $100 million class, and 3.4%, 13 dealers, with $101-plus million in revenues. Of the three groups, we come away with 58 dealerships, representing 15.3% of the 37th Annual Dealer Survey. As a group, we predict they will continue to have a strong recovery and experience a run rate higher than in 2019.
What about the remaining 322 dealers who generated less than $20 million in revenue? What do we forecast for 2023?
Based on what we have reported on acquisitions in our Surveys over the last five years, we believe at least 8% of those with less than $20 million will sell. If you believe the number of viable dealer businesses is 1,500, roughly 120 will likely sell their dealerships in 2023.
As for the rest, they will continue to make every effort to rebuild and restore their businesses to where they were before the pandemic. It is difficult to forecast how many will take risks necessary to build what for them will be a different business model.
We are choosing to be optimistic here as these entrepreneurs have stayed with it during the worst times. We cannot see them giving up. The one thing that has always stood out in my mind is the resiliency of the independent dealer.
Those dealers that do not sell will find new opportunities coming their way from unexpected sources. Supply is always generated by demand. As more corporations seek distribution that can sell and service onsite, there will be demand. These opportunities will come from highly unusual sources.
An excellent example of that is what ACDI came up with in EV charging stations. Today, we do not know what that market represents. What is important is that an organization that has intimate knowledge of the dealer audience is offering something that may well be an answer for many dealers. We know that it is worth looking at and determining if it makes sense. We will see more of these unique opportunities coming to play in 2023.
You may ask why I would be so bullish in the face of a declining market and distribution that is often so slow to embrace change. As I noted early on, I always look at history for our answers.
In the 1985–1990 era, facsimile came into the market. Every analyst known to the copier industry said dealers could not sell facsimile. We were one of a few who said they would engage and succeed.
The supposition for being a naysayer was that Xerox owned the Group 1 market of 600,000 machines. Sharp and Canon, followed by Panasonic, introduced the first Group 2 machines. The same pessimistic dealer analysts claimed they would never sell because it was incompatible with Group 1. To their way of thinking, dealers would have the burden of selling multiple units.
They failed to consider that Group 1 machines took six minutes to transmit a letter-size document. Group 2 devices did it in a matter of seconds. It was easy to upgrade those Group 1 machines. Xerox did not have an answer.
Those that denigrated dealers, including Xerox, ultimately did not understand that the Japanese manufacturers would quickly redesign Group 2, and then Group 3 for compatibility with Group 1. Bye-bye went Xerox facsimile, and dealers had a field day selling the machines with maintenance agreements for devices that did not break down.
As George Santayana said, “Those who do not learn (from) history are doomed to repeat it.” We have learned that history is a great teacher, and we have seen dealers overcome every obstacle, such as 23% interest rates. We have seen financial analysts in the early 1990s who proclaimed loudly that mega dealers such as Danka, Alco Standard/IKON, and others would bury the dealers. We all know who is still standing.
The rollups out there today have profited from the mistakes of their predecessors and continue to believe the market has a lot of leg in it.
If we are betting on anyone, it is the survival of the independent dealer. Those survivors in 2023 will look and act far differently than the dealers of 2019.
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