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Cutting off the profit flow

Customers can find cheaper prices at stores that sell refills, and that's bad news for companies like Hewlett-Packard that make very little money off printers.

By ASSOCIATED PRESS
Published September 15, 2006

GRAPEVINE, Texas - Every month, Mark Barnes used to buy $600 worth of new, name-brand inkjet and toner cartridges for printers that churn out a steady stream of contracts and marketing material in his real estate office.

But lately Barnes has been taking his empty tanks to a Cartridge World shop near his office, where he buys cartridges that have been refilled with new ink.

"I'm spending about $400 a month now," Barnes said. "I like doing other things with my cash."

Customers like Barnes represent a small but growing segment of printer owners who are buying private-label cartridges from refill stores and office-supply chains and plugging them into their Hewlett-Packard, Lexmark and Epson machines. They account for less than a quarter of U.S. printer ink sales, according to Lyra Research, which tracks the industry. But analysts say the number is certain to go much higher.

That poses a growing threat to the big manufacturers, who make more money from replacement cartridges than from selling printers.

Take Hewlett-Packard Co. In its most recent fiscal year, HP earned more than half of its $6-billion operating profit from its imaging and printing group. And some analysts think that number understates the importance of ink and toner to HP because the imaging group includes printers, which HP sells at little or no profit.

Name-brand ink cartridges can run $30 to $50, more for color versions. Toner cartridges can top $100. After a few trips to the store, consumers who bought inkjet printers and businesses that bought laser printers will usually have spent more on replacement cartridges than on the machine.

The printer manufacturers say their ink is better, and they point to independent researchers who have reached the same conclusion.

But Burt Yarkin thought the high price of name-brand cartridges left room for upstarts. A few years ago, he left a children's clothing chain to lead the U.S. division of Cartridge World Inc.

Cartridge World, which was founded in Australia in 1997, has nearly 1,300 stores, including 440 in the United States, and says it will have 600 U.S. stores by year end. Refill shops like Cartridge World, Island Ink-Jet Systems Inc. and Caboodle Cartridge LP. also compete with office-supply chains such as Staples Inc. and OfficeMax Inc., which sell private-label cartridges or offer in-store refilling kiosks.

HP watches these competitors closely and has sued or threatened to sue several of them for allegedly infringing on HP ink and cartridge patents.

[Last modified September 14, 2006, 23:32:54]