While the print and imaging industry couldn’t put 2020 in the rear-view mirror quickly enough, changing the calendar won’t mean much. Expectations are that upcoming earnings results will continue to show an industry undergoing dramatic change. The shifts that took place in 2020 will have a long-lasting impact on the future of this industry, especially for the OEM community. Before we hit the next round of financials, let’s take a look at past year and what the future of the imaging channel may be in 2021 and beyond.
A look back at 2020
The increased reliance on work-from-home (WFH) employees meant digital transformation of business processes, communication, and collaboration tools was more critical than ever. Some companies with large offices downsized while others closed entirely. All these factors conspired to drastically cut the demand for business printing, reducing device sales and clicks. As we noted last year, the coronavirus pandemic accelerated market dynamics that had been causing print industry declines for many years. It created a time warp, transporting the industry five to seven years into the future.
For the OEMs, the third quarter print-related year on year (YoY) declines were not as bad second quarter. (Note: The OEMs operate on different fiscal-year calendars; for the purposes of this piece, we are referring to calendar quarters.) Surprisingly, Canon and Brother reported YoY increases driven by WFH and remote education; Canon inkjet printers and consumables “increased significantly” and Brother reported a stocking up of consumables in the channel and a “strong performance” in SOHO. However, for the nine months between January and September, every OEM performed well below their 2019 levels.
During the last quarter of the year, a resurgence in coronavirus cases prevented much of the anticipated “back to normal” movement in many hard-hit business sectors, resulting in continued layoffs, particularly in the service industries. What may prove to be a piece of good news for the imaging channel is that at the end of the year some industries such as manufacturing, construction, architecture, engineering, and accounting reported adding jobs. However, even as industries begin to add back jobs, it’s vital to remember that the workplace dynamics have changed and will have a lasting impact on the performance of the imaging channel.
While print industry OEMs have yet to announce their most recent results, it’s not out of line to consider that their print revenue results will continue to be as adversely affected as they were during the previous quarter, possible coming close to the results from the second quarter of the year. We base this on knowing that the pandemic was more severe at the end of the year than at any other time. At best, we see OEM 2020 combined annual worldwide print-related revenue declining 9% to 10% from 2019, with the more likely scenario being a decline of 10% to 15%. This ultimately increases the already stressed profitability positions of the OEMs, which has already led to market exits (OKI) and restructuring (Canon, Konica Minolta, Ricoh, and Toshiba TEC).
A look ahead at 2021
The urgent need for businesses to use WFH employees during 2020 expanded the desire of many of those employees to continue to work from home even after the pandemic is brought under control. Indeed, 50% of workers said they would not return to jobs that did not offer the flexibility of WFH. The digitalization of business processes has been accelerated to meet this urgent need, and cloud platforms are accepted as the way to distribute and manage communication and data infrastructures. This has eliminated the dependence on the physical processes — paper documents and the devices that create them — once used to carry out those missions. As organizations equipped their WFH workforces, information processing equipment purchases rose during 2020, and PC shipments grew at their highest annual growth rate in a decade. The “market’s mind” has not completely moved away from the need for print, but it has significantly refocused and will continue to refocus as we move into the future.
Anticipating what happens in the future is always a difficult task. However, it seems likely that available vaccines will ultimately help get the pandemic under control, and optimism and hope these vaccines bring will mean some improvement in economies around the world. The International Monetary Fund (IMF) shows worldwide Gross Domestic Product (GDP) falling by 4.4% in 2020, and while it forecasts 5.2% growth in 2021, it tapers to an average of less than 4% growth through 2025. During the past 10 years, worldwide OEM print revenue growth has averaged slightly higher than 5 percentage points below worldwide GDP.
With an understanding of the impacts made by the changes thrust upon the industry in 2020 and the statistical data above, we expect 2021 to show OEM print revenue growing but not at the rate of worldwide GDP. A best-case scenario for OEM print revenue is that it will grow 4% above 2020, but the more likely scenario is a growth of about 2%.
Industry and channel impact
For the OEMs, 2020 was a clanging alarm. There is a new urgency to change business focus, demonstrated by Ricoh’s restructuring rationale in “transforming its business as it becomes a digital services company,” Konica Minolta’s statement that they will reduce their “dependency on office printing business to 25% or less in terms of operating profit over the medium- to long-term,” Canon’s plans to “boost sales from new businesses such as monitoring cameras and medical equipment to more than 40% of consolidated sales by December 2025, compared to 25% in 2019,” and even Toshiba TEC’s changing the name of its “Printing Solutions Business Group” to “Workplace Solutions Business Group.”
This isn’t an indication that any of these OEMs are exiting printing altogether. There is still plenty of revenue opportunity out there and, for most, the print business is still profitable. However, with the lost device sales from the past year, the critical aftermarket revenue and profit engines of the OEMs have been hurt for the long term. Revenue opportunity that remains will be even more costly to gather due to lowering market demand and competitive pricing actions. Therefore, we expect cost-cutting to continue, including more headcount reductions. While there may be continued debate about M&A action between OEMs, that would be an extremely expensive proposition to pull off after a year like 2020. It’s more likely that an OEM is taken from the public space to private and that some OEMs exit the business altogether in the next five years.
The channel has been much better at planning for the future, and more agile and resilient in responding to rapidly changing market demands and dynamics. The changes many in the channel had already made before last year (and the cash reserves built by the print business cash cow) are most likely what kept them afloat. Print will continue to be an important piece of channel business, but print opportunities will continue to migrate to commercial and packaging printing. Those customer bases are much lower in number than traditional office print customers and so, over time, competitive pricing will lower revenues and profits even in these areas. In the short term, the channel may see aggressive pricing deals from their OEM partners as those OEMs try to claw back revenue lost in the past year. However, those actions, if they do occur, will be short-lived as the OEMs must not only try to regain lost unit placements and revenue, but also do it profitably.
Reflecting on what happened in 2020 requires us to stare straight into the workforce changes that took place that changed our industry forever. Our minds have been stretched by the events of the past year and will never go back to the working assumptions of the pre-COVID era. Those OEMs and channel resellers that understand this and are actively and sincerely rebalancing their revenue and profit models to be less dependent on print are in positions of strength for future growth and survival.