Nu-kote Holding, Inc.
Nu-kote Holding, Inc.
Incorporated: 1987 as Nu-kote Corporation
Sales: $424 million (1996)
Stock Exchanges: NASDAQ
SICs: 3955 Carbon Paper & Inked Ribbons; 3861 Photographic Equipment & Supplies; 6719 Holding Companies, Not Elsewhere Classified
Based in Dallas, Texas, Nu-kote Holding, Inc. is the largest independent imaging-supply company in the world, manufacturing a complete line of printing products that include typewriter, impact printer, and thermal fax ribbons; magnetic ink character recognition (MICR) ribbons for check encoding printers; ink rollers; carbon and facsimile paper; and remanufactured—and even refillable—inkjet and laser printer cartridges, which it markets under both the Nu-kote and Pelikan brand names. Some would argue that the company’s product line is a little too complete; of the more than 1,700 replacement products that Nu-kote manufactures and distributes for use in copiers, printers, and other imaging equipment, the majority are high-quality, low-cost versions of products boasting such brand names as Hewlett-Packard, Ricoh, Epson, and Canon. By company estimates, Nu-kote’s product line satisfies owners of 22,000 different models of duplicating equipment, almost 90 percent of all the laser and inkjet printers on the market.
Not surprisingly, the inroads Nu-kote has made into the market for these consumable replacement products with their high profit margins has not gone unnoticed by the giants of the imaging equipment business. As of 1996 four suits for patent infringement had been filed against Nu-kote, although none had resulted in significant constraints on the company’s business. Determined to build its niche within the burgeoning imaging supplies market, the independent Nu-kote continues to offer consumers equivalent products at between 20 to 60 percent less than those of major imaging hardware manufacturers.
Nu-kote was not always the office supply giant that it is today. Originally established as a manufacturer and supplier of carbon paper popular because it didn’t leave a black residue on one’s hands, Nu-kote by the mid-1980s had evolved into a modest division of the Burroughs Corporation. The company’s business had expanded into manufacturing and marketing ribbons for typewriters and impact printers. In the age of office automation and advances in computer technology, these were two items that were quickly being eclipsed by more high-resolution, non-impact printing and duplicating equipment. By 1986, when the Rochester, New York-based Burroughs merged with Sperry Corporation to form Unisys, tiny Nu-kote was watching orders for its products recede against the rising tide of a technology in which laser, inkjet, and thermal technologies dominated. In 1987 Unisys decided to divest itself of several small supply businesses, among them, Nu-kote.
A Changing Corporate Culture
Enter David Brigante. A former film major at Los Angeles’s Loyola Marymount University and an employee of Nu-kote since 1980, he teamed up with several of his fellow managers and, with the backing of the New York-based Clayton, Dubilier & Rice investment group, led a leveraged buyout of the ex-Burroughs division. Soon-to-be CEO Brigante began to transform the tiny company from an atrophying arm of Unisys to a viable independent firm. But this meant more than just juggling management; it meant downsizing, running leaner, loosing the extra “weight” so characteristic of larger businesses. Brigante relocated the company from Rochester to Dallas at the end of 1989, while at the same time cutting top-level corporate staff from 42 to 4, with just one secretary between them. “We’re all operating people, not corporate boardroom types,” Brigante told Steward B. Leavitt in Office Products International. “And, we’ve surrounded ourselves with people who know how to go into a factory and make it work better, and who know how to stand before a customer and make commitments we will meet.”
In 1992 Nu-kote was ready to go public. By October of that year its initial offering was being traded on the NASDAQ exchange at $6 per share. As a manufacturer of products that have already been designed, the small but growing company was able to offer customers lower prices than its competition—original equipment manufacturers (OEMs) like Hewlett-Packard and Canon—due to the fact that it did not have to carry substantial R&D or design overhead for its products. Like David pitting himself against Goliath, the company’s ability to gain increasing market share was a direct result of its agility and marketing savvy.
The 1990s: Growth Through Acquisition
In February 1992 Nu-kote also began a policy of acquisition by welcoming International Communication Materials, Inc. (ICMI) into its corporate family. One of the largest U.S. manufacturers of toner for laser printers and copiers, ICMI would change the future of Nu-kote, bringing its product line technologically up-to-date through the introduction of non-impact technology and positioning the company for future growth. The combined efforts of the company’s 962 employees grossed sales of $95.4 million, largely through Nu-kote’s introduction of toner cartridges to its product line. The resulting net earnings for 1992 were $1.5 million.
In early 1993 the company acquired Future Graphics. Based in California, Future Graphics was an international leader in the business of recycling—remanufacturing plastic laser printer cartridges—as well as a distributor of cartridge components and other supplies. Remanufactured laser cartridges sell at between 30 and 50 percent less than OEM products, providing retailers with a more attractive profit margin. Another plus is the reduction in the number of used cartridges that end up in landfills each year, a fact that would prove to enhance the product’s value still further in the environmentally conscious 1990s. Nu-kote’s acquisition of Future Graphics expanded its technology base through the addition of remanufacture and inkjet technologies, while also boosting its work force to 1,100 people. Nu-kote’s 1993 sales rose to $120 million. Net income for the year was posted at $7.5 million; this figure would climb even higher—to almost $8 million—by the close of fiscal 1994.
Imaging Giants Wage Duplicate Legal Battles
Characteristic of other technological advancements, the retail prices associated with printers, fax machines, personal copiers, and other imaging hardware have dropped relative to their level when first introduced to the consumer market. OEMs including Hewlett-Packard and Ricoh counted on profit margins of up to 70 percent on sales of their own brand-name replacement cartridges and ribbons to offset these falling hardware prices. Like the pricing relationship between razors and razor blades, the repeat costs associated with replacement parts far outstrips the cost of the actual imaging device over the equipment’s lifetime. And in the case of laser toner cartridges (each one which can set the consumer back up to 10 percent of the cost of the printer itself), the ink supply accounts for a fraction of the total cost. The bulk of the manufacturing costs go to producing the electronic print head that dispenses toner evenly. Although the print head has a life-span that far outlasts the ink supply, consumers have no way of refilling the cartridges and so discard the whole assembly. “It’s a little like gluing the gas tank of your car onto the engine, so that every time you run out of gas you have to get a new engine,” Brigante maintained in Forbes.
By extending the life of OEM cartridge assemblies, Nu-kote had become the top independent in the replacement product industry. It purchased new cartridges from OEM suppliers and modified them with a replaceable ink supply, or collected used ones from office supply stores, then refilled them with toner and sold them as remanufactured cartridges. The company would also develop a two-piece, refillable cartridge that dramatically cuts printing costs for the consumer. Not surprisingly, OEMs were not content to watch Nu-kote benefit from their technology and expand its 15 to 20 percent share of this lucrative market any further. In 1993 Ricoh filed a trademark infringement suit against its ambitious and multifaceted rival. The suit was partially settled in 1994, after Nu-kote/ICMI redesigned its Ricoh-compatible replacement toner cartridges.
Meanwhile, PC-giant Hewlett-Packard decided to test its own case against the company, accusing Nu-kote of patent and trademark infringement in September 1994. Not to be left out, Japanese computer giants Canon and Epson joined with Ricoh and Hewlett-Packard in 1995, accusing the Dallas-based independent of patent infringement on their inkjet technologies. “It’s a joke,” Brigante declared to Teresa Riordan of the Wall Street Journal in late 1995. “They flood the Patent Office with dubious applications until some poor examiner finally grants a patent for something as obvious as a round edge on a vial. It’s clearly a way to obstruct competition. It doesn’t have anything to do with creating new science.” Nu-kote responded to the suit by filing counterclaims against Hewlett-Packard, Canon, and Epson, citing trademark misuse and antitrust violations. “We’re going to be seeing more and more cases like this because after-markets have become so valuable,” a lawyer for Nu-kote was quoted as saying in the Wall Street Journal. “Our society needs to decide how much protection it wants to give patent holders at the expense of consumers.” Although litigation was expected to last several years, the suit with Epson was resolved in 1996, in large part in favor of Nu-kote.
While printer manufacturers battle for market share against a backdrop of declining hardware prices and almost constant shifts in sentiment about who has the “hot” printer, Nu-kote is in the enviable position of profiting by sitting on the sidelines. For every printer that is sold, no matter who sells it, we have an opportunity. And that opportunity is to sell consumers comparable quality, lower cost supplies for their printers, not just once, but over the entire life of every printer they buy.
While OEMs contend that Nu-kote’s cartridges are inferior in quality and potentially damaging to their hardware when used by consumers, company products have been found to be of equal quality to those of the OEMs—by both consumer end users and the OEM’s themselves. In its European plants, contracts to produce replacement imaging supplies under the OEM brand names accounts for 25 percent of Nu-kote’s business. After all, Brigante would argue, OEM’s are like any other customer—they want high quality at a competitive price: which is what Nu-kote offers.
Expands Share of European Market Via Pelikan
In the imaging supplies market, one of the biggest growth centers was in the office superstore arena, where Office Depot, Office Max, and Staples were battling for control of the ever-growing small business/home office market. Nu-kote’s chief competitor in the superstore arena was Pelikan Holding AG, a $658 million producer of pens, inks, stationary, and typewriter and printer ribbons located in Zug, Switzerland. With a home-court advantage, Nu-kote was steadily making inroads into Pelikan’s U.S. customer base, reversing the loyalties of former Pelikan customer Office Depot in early 1994. However, the campaign was becoming costly for both companies. Instead of continuing a pricey advertising campaign to compete for superstore loyalties, Brigante orchestrated a unique agreement that avoided an imminent price war and sharpened both companies’ competitive edges. In mid-July 1994 Pelikan signed a letter of intent agreeing to sell its Hardcopy (imaging products) division to its U.S. rival for $100 million. In exchange, Nu-kote would transfer between 20 to 30 percent of its stock and a percentage of its corporate debt to the Swiss manufacturer.
Under the arrangement with Pelikan, Nu-kote expanded its inkjet technology and made inroads into Europe, leveraging its own products within an expanded customer base under the Pelikan brand, a household word throughout the continent. Pelikan, which had been operating at a loss due to the European recession, was now finally able to concentrate its energies on its core business—a quality line of writing instruments and stationary—and reap the profits of owning a percentage of its former competitor. Nu-kote’s absorption of Pelikan’s strong R&D and manufacturing divisions—in the acquisition it gained hundreds of patents and potential new products, as well as plants in Switzerland, Germany, Columbia, Mexico, China, and Scotland—meant that both companies could now reduce both manufacturing and administrative overheads by condensing duplicate marketing and production operations within their new network of manufacturing plants and offices.
The acquisition of Pelikan Hardcopy effectively tripled Nu-kote’s size; sales for fiscal 1995 would jump from $151 million to $193 million, although net earnings reflected over $14.5 million in restructuring expenses associated with the company’s expansion with a loss of $12.4 million. Despite this temporary setback, the growing company expanded its sales force to 3,100 during the year.
The Pelikan merger also freed up capital within Nu-kote, allowing it to expand its own production of non-impact replacement products. The market for laser and inkjet printer and copier toner cartridges effectively doubled during the latter half of the 1990s; the replacement ink market alone was worth approximately $9.5 million by 1996. Meanwhile, sales of ribbons for typewriters and first-generation printers like the daisy wheel still generated sales of $1.6 billion in the United States—and accounted for 55 percent of company revenues in 1994. While the demand for this outdated technology was declining relative to the more advanced laser imaging systems, by the late 1990s many smaller firms were not ready to leave their noisy, but less-costly-to-operate daisy-wheel printers out at the curb. Sales of impact-related Nu-kote products in the international market actually doubled between fiscal 1995 and 1996, partially as a result of the Pelikan Hardcopy acquisition. Indeed, 1996 would be a banner year for the. company, as it posted net earnings of $13.1 million on sales of over $424 million.
In addition to laser and inkjet technology, Nu-kote was able to make inroads into the replacement market for bubble-jet printers, ordinarily a market where Canon has had exclusive domain as the holder of numerous patents. In July 1994, through its newly acquired Modular Ink Technology AB (MIT) subsidiary, Nu-kote gained strategic patent rights of Jarfalla Industry Competence Centre, a Swedish-based technological innovator in the area of printer technology. A former R&D subdivision of IBM, Jarfalla/MIT had engineered “piezoelectric” inkjet technology, which was expected to crack the bubble-jet market due to its speed, versatility, and reduced costs. Nu-kote was quick to begin marketing their proprietary inkjet technology to the OEMs, entering into several relationships with hardware manufacturers in the months that followed.
By early 1996 Nu-kote could boast manufacturing plants in five states, as well as in Colombia, South America, the United Kingdom, Germany, and Switzerland. Administrative offices are also positioned in these locations, allowing the company to facilitate orders between its manufacturing centers and its network of distributors and wholesalers worldwide. First-quarter earnings for 1996 posted at $4.9 million, with sales of $104 million as a result of the influx of Pelikan-generated European business.
With its strong position in numerous markets around the world, Nu-kote was now in a position to benefit from the dynamic growth within the global imaging supplies marketplace. China and India were two markets that the company was aggressively pursuing by the end of the 1990s. Its ability to offer quality products at competitive prices, which gained it such lucrative accounts as the Sears department store chain, promised to make Nu-kote’s products increasingly attractive as the office supply industry continued its competitive momentum. And the steady increase in the retail price of replacement parts—especially for popular color print technologies that multiply the cost-per-page fivefold—were expected to grow the imaging supply market, with much of the growth going to suppliers like Nu-kote, which could provide quality products at a substantial savings to consumers.
Nu-kote has also begun to look beyond re-producing products based on those of the OEMs; with its enhanced R&D capabilities and its emphasis on developing reusable and recyclable products, the company would expend over $12 million in the area of development in fiscal 1997 alone. Among its most popular company-developed products have been the Pelikan “Easy Click” and Nu-kote “Cartridge Plus” inkjet systems, both compatible with Hewlett-Packard’s Deskjet printer models. Nu-kote expects the gross profit margin for these and other company-developed products to increase with sales volume and as these products are integrated into the company’s cartridge recovery and remanufacture program. Increasingly consolidating its manufacturing and distribution operations, Nu-kote has carried its global vision to the supply side of the business equation, seeking out suppliers from all corners of the globe that can best fulfil the raw-material requirements of its plants.
As imaging technology continues to advance, new product lines will continue to open up. Nu-kote remains particularly focused upon becoming a vertically integrated supplier of ink jet cartridges, which are among the fastest-growing segment of the imaging supply market due to their proliferation among home computer users. In 1996 alone, of the 210 new products introduced by the company, 62 were ink jet supplies. Nu-kote has utilized the technological advances of its MIT subsidiary to position it as a leader in this lucrative market. In the duplicating business, Nu-kote’s success has yet to be duplicated.
Nu-kote International, Inc.; Nu-kote Imperial, Ltd.; International Communications Materials, Inc.; Viro-kote, Inc.; Nu-kote Imaging International, Inc.; Future Graphics, Inc.; Nu-kote Latin America, Inc.; Interfas Holding, S.A. (France); Greif-Werke GmbH (Germany); Pelikan Scotland, Ltd.; Pelikan Produktions AG (Switzerland); Modular Ink Technology AB (Sweden); Nu-kote Italia s.r.l. (Italy).
Berry, Kathleen M., “Clear Image: Nu-kote Holdings Sets Tone Selling Toner,” Investor’s Business Daily, October 16, 1995.
Leavitt, Stewart B., “Entrepreneurial Nu-kote: The Cinderella of Imaging Supplies,” Office Products International, March 1995.
Palmeri, Christopher. “Copycat,” Forbes, January 22, 1996.
Riordan, Teresa, “Patents: The Battle for Office Machines,” Wall Street Journal, October 30, 1995.
Silverman, Susan D., “All’s Fair in Business,” International Business, October 1994.
—Pamela L. Shelton