What’s happening at Cartridge World?
Cartridge World is a “business in transition”, executive chairman Rod Young tells Franchising. The franchised business chain has had to address the changing marketplace over the past five years and the results are now on show with a refocused customer base and franchise investment profile.
In this interview, Young talks through the changes, the new look business model and what’s next for the global company.
Changing customer printing preferences, inconsistent product quality, competition and technological advancements have all had an impact on the Cartridge World business which since 1999 has been refilling cartridges – initially using what Young describes as a “drill and fill” technique.
Now the market is driven by highly complex electronics. The original print equipment manufacturers [OEM] had started including chips on their cartridges to keep customers brand loyal with software that prevents the use of other suppliers’ cartridges. In turn Cartridge World responded with a chip resetting technology.
Rod Young, executive chairman of Cartridge World
But the latest strategy has been to evolve the business further and introduce a finished goods model.
Rather than simply filling empty cartridges, Cartridge World now produces its own cartridges that Young says equal the quality of OEM printers and exhibit a much higher consistency.
“These Cartridge World ink and toner cartridges are engineered and manufactured in world-class, high-tech facilities to match the quality of the printers they are intended for and are reducing our customers’ business and consumer printing costs by at least 20 percent,” he says. “They provide the same quality printing but much better value to our customers.”
And in keeping with the concept of environmentally sound economical solutions, these cartridges can be refilled.
“The big difference is that the cartridges are disassembled and we are re-using the plastic. It’s the plastic that takes two litres of oil to make one toner cartridge,” he explains.
NEW BUSINESS MODEL, NEW FRANCHISEE PROFILE
What this means for the network at large is a refocused business model.
Now the business is more about customer choice in finished goods displayed in a showroom environment: printers, cartridges, paper and print supplies and printer servicing are all available in the new-look retail units. It’s about a total package.
And the customer profile is changing too. The real growth is the business to business [B2B] market. “In the old business model people are seeing a decline, people who are adopting the new model are seeing a 10 percent increase,” Young confirms.
The old way relied on the franchisee filling up the empty cartridges in the back of the shop – it appealed to franchisees who liked to be working with their hands.
But the old model has faced significant challenges:
- the B2C market has declined and is forecast to be at best flat
- advances in technology mean it is more likely franchisees refilling in store will increasingly be unable to match the quality needs of the brand and the market.
- labour costs and especially on-costs have risen which when added to the increased time to refill a cartridge to our quality standard has increased the actual cost to refill in store.
- franchisees focused on refilling are unable to get out of the back of the store and visit business customers.
“These stores and franchisees are in our bottom third of the network and many are showing year on year decline in sales reflective of the changing market and in a consumables business, loss of existing customers.
“On average these stores are reliant on walk-in customers, have low costs of goods sold (only 25 percent, before quality make-goods) but rising labour costs and falling quality. Often sales in these stores are under $20,000 per month. Equipment costs to refill and test cartridges have meant set up costs for these shops often exceeded $150,000.
“In contrast, our new finished goods model stores cost less to set up ($100,00 to $120,000) are averaging over $33,000 monthly turnover and growing year on year at over nine percent with a COGS of over 50 percent.”
Young says these franchisees are winning and retaining B2B customers who spend more on each transaction and each month than domestic customers.
No old model, fully refill stores are achieving more than $40,000 turnover a month and all stores enjoying more than $1 million in annual turnover have a majority finished goods and B2B sales mix, he reports.
“Here in Australia we have a growing number of $1 million stores and they are all focused on B2B customer acquisition and a majority of their sales are B2B. No old model store have even come anywhere near $1 million in sales with the best being about $500, 000.”
New skills are required from franchisees to take on this new model. White collar individuals who can communicate to B2B, local small business and branches of national brands are the target market for Cartridge World’s franchise recruitment. “We’re looking for mid to upper executives who earn between $100,000 and $150,000 per annum; we expect the owner operators to earn at least that,” says Young.
Sales and marketing experience is now more relevant than the production skills previously required.
In Australia there are 280 franchisees and about 30 territories still available. However not all the current franchisees are ready to commit to the new-look business model so some existing stores are for sale.
“Some have been in business for quite a while. We’re respectful that these folks were granted franchises 10 years ago, we’re not terminating or refusing to renew but we are vigorously demonstrating the differences between the old and new models.
“Some are converting, some are not up for the re-investment.”
Refurbishing and restocking a store will cost about $50,000, says Young.
“The business is cheaper to establish than 10 years ago. Our products are all finished goods. The margin isn’t as great in pure cost of goods but we’re finding for franchisees the model is more profitable."
The system frees up the franchisee to talk to the customer which, with good service provided, is likely to engender loyalty. And that has an impact when franchisees come to sell their business, explains Young.
“Unlike the old B2C model where you had no handle on who your customers were, you can show a potential buyer the 400 B2B accounts.”
The focus on business extends to granting the rights to a master franchise; multi-million dollar corporations can see the potential of investing in the Cartridge World model, says Young, citing the El Hakir group in Saudi Arabia which has invested $3 million for the rights to develop the Middle East region; a major recycling business in eastern Europe in the pipeline for a master franchise; and in China an agreement for a southern China master development that is likely to see the master not sub-franchise but open stores as company owned branches.
It’s a change from the multitude of smaller business masters previously associated with the brand. Young admits, “the business sold too many to too many small businesses in too many territories; we want serious players.”
In the US the master franchise portfolio has been reduced from 28 to 20 with the sold territories now company owned. “We have encouraged the better masters to acquire neighbouring territories,” he says. “It’s been a process of consolidation.”
A delivery service model, CW Express, launched in the US mid 2012; designed as a low level entry for people looking to own a fleet of delivery vans. It hasn't taken off as expected.
"We have been disappointed with the trial of CW Express we ran in the US and the UK." says Young, "and while we have rejigged the operating structure and are about to launch a new derivative of this in the UK we have not proven the concepte have not franchised with this model and unless we can prove it is profitable we will not roll this model out."
The company globally has a turnover of $300 million in an $80 billion toner and cartridge marketplace, says Young. In Australia 70 percent of the population can access a Cartridge World outlet, the figure is very different in the US where 60 percent of the population is in what Young calls “white space”, an area without access to a Cartridge World store.
So the business has just launched in the US an e-commerce model, set to be unveiled in Australia in April, which offers a click and deliver or click and collect option for online customers.
Franchisees derive an income from any customer transaction in their region and they get the customer details.
The first month of this initiative has proved successful, says Young.
Yet the business has not matched the portfolio line-up of 1,600 outlets in 60 countries from a few years ago; rationalising the store portfolio has brought it to about 1,400 units in 50 countries.
Young, who joined the board in 2009, says the numbers in the portfolio aren’t the driving force. “We’re more about revenue. I’d like to get to half a billion dollars,” he adds.
Private equity firm Wolseley invested in the global, Adelaide-born business in 2007. According to the Wolesley website states its investment goal is to double profitability of a business over a three to five year period.
"Under Rod's leadership, Cartridge World has achieved double digit growth in same store sales and has continued the geographic expansion into new markets around the world" the website also states.
“They’re not desperate to click and flick,” says Young. “They see an opportunity to grow significant value, they’re interested in crystallising value but as long as the group is continuing to grow, they are happy to have a further horizon.
“I expect we will go to market to sell the global brand in 2015,” Young predicts.
- Among the company’s clients on a global scale: the US Navy and Airforce, McDonald’s in the Phillipines, the National Health Service in the UK, and Mercedes Benz.
- The company was recently rated number 90 in the world’s top 500 franchises by Entrepreneur magazine.
Images: Cartridge World