Agfa Strategy Shift? A Conversation with Tom Saggiomo

By Cary Sherburne, Senior WTT Editor

December 5, 2006 -- Agfa recently notified a number of dealers that it would no longer be utilizing their services.  While there was no public announcement, there was significant chatter in PrintPlant.com’s Computer to Plate Pressroom.  WhatTheyThink spoke with Tom Saggiomo, President of Agfa Graphics, to get the scoop.

WTT:  Tom, it sounds like there has been a significant shift in strategy relative to Agfa’s dealer channel.  What is behind it and how is this strategy shift playing out in the market?

TS:  When we have spoken over the past couple years, I have talked about both change and focus.  This most recent action is just another phase in the transformation that we are making here at Agfa.  We have taken this next action to change our distribution strategy because we are intent on getting closer to our end user customers, distributors and generally closer to the marketplace.  That is the underpinning of this whole thing.

WTT:  According to the chatter on PrintPlanet.com’s Computer to Plate Pressroom, there seems to be some unhappiness over the way Agfa rolled out this channel consolidation, which resulted in Pitman contacting customers before their dealers did and perhaps an uncomfortable transition.  Can you comment on the process you used to communicate this new strategy?

TS:  At the top of the list was to make sure that we gave the greatest comfort possible to our end user customers.  Dealers continue to be an important part of our go-to-market strategy.  We contacted our total channel, starting at about 3 PM, including folks that will be staying with us and folks that will not.  The very next morning, we began a full court press to contact most end users to give them their options to continue to purchase Agfa products.  I am sure we didn’t catch 100%, but we had our entire selling organization on the telephone talking to our customers to explain what we have accomplished and what was going to happen over the next 30 days. So I am surprised that people are saying that Pitman and Xpedx were ahead of the curve. 

This was hard work, because all of us here have been in the industry for many years and we know lots of people at our dealers, on both a business and personal level.  When one makes a business decision to go a different way, it is difficult for both sides of the equation. We thought long and hard as to how best to do this without being disrespectful to the industry and to our partners.  We wanted to do it up front and so we informed everyone what was going on within in a short period of time. 

WTT:  How many dealers will Agfa now have?

TS:  The number is now in the vicinity of 10 in the U.S.  Canada and Mexico are separate; we have very different strategies in those regions.  In Canada, we only have a limited number of distributors, and we have a fair amount of dealers in Mexico.  The changes that we made were U.S. only.

WTT:  Since Pitman and Xpedx also represent your competitors, how do you see them benefiting you more than independent dealers who were dedicated to Agfa products?

TS:  A couple of interviews ago, I talked about alignment.  We looked for partners that are aligned with Agfa that can represent the Agfa brand.  That doesn’t necessarily mean that one has to be a dedicated Agfa distributor. 

WTT:  Besides the two national dealers, who else are you keeping on board?

TS:  Alaska Printer Supply, Anderson & Vreeland, the Oldham Group, Walker Supply, National Graphics Supply, LaCrosse Litho, and ABDick, which is now known as ABD.  We hold open the possibility of adding one or two more to round out the concept of having two national distributors and a group of regional distributors. There are some areas where the strategy is not yet fully in place. 

WTT:  What markets are you serving factory-direct, and what percentage of your sales do you anticipate will be factory direct a year from now?

TS:  Part of the strategy says that there are segments of the marketplace, particularly the newspaper segment, that are better served directly.  We expect that segment to be about 90% direct. On the commercial side, we are focusing on the corporate accounts with a reasonably limited number of sites and large, predictable volumes.  We want to be close to that market, and we feel we can do a good job of servicing those accounts direct. 

For those that have multiple sites and large volumes, our distribution channel can handle them well. This means that we will have fewer distributors, but by no means are we suggesting that we are anti-distributor.  At the end of the day, we need to ensure we can service the end user effectively.  For some period of time, there have been some end users that have asked to deal with us directly, while others only want to do business with us through a local dealer who can respond quickly. 

WTT:  In recent PRIMIR research that John Zarwan and I conducted on trends in the small commercial and quick print market, 74% of respondents indicated that graphic arts dealers are a source of consumables supply for them.  However, by 2011, only 47% indicated that graphic arts dealers would be their primary source.  Some of that volume will be moving to the Internet.  Does Agfa have a manufacturer’s direct Internet channel and what are plans in that regard going forward?

TS:  We have no plans to open up an Internet store.  Keep in mind that the U.S. market is made up of tens of thousands of printers, depending on whose statistics you use.  If you Pareto the printer marketplace, the tip of the pyramid represents the very large printers with high demand. The base is still comprised of many small printers.  We don’t see an economic feasibility in serving that market direct.

WTT:  Do you believe there is still a role for the independent dealer in the industry? NAGASA has shut its doors. And that seems kind of ominous.

TS:  If you look at the complexion of our dealer network now, three are big guys, including ABD, and the rest, fundamentally, are independent dealers although they are regional in nature.  It all depends on how people adapt.  In the past I spoke about Darwin and the issue of how do you adapt to the marketplace. If the independents don’t adapt, they will have difficulty.  It is all about delivering more than just a box of goods to the end user.

WTT:  What is your current ratio of sales, equipment vs. supplies, and how has that changed? Is bundling of supplies and equipment still the primary sales strategy?

TS:  We are fundamentally a supply company.  Our consumables business is a substantial piece of our revenue.  We have electronics, software, inkjet, and we have service.  These are the components of our business.  I would say that about 75% of our turnover in the U.S. is consumables.  We are a consumables company, and like our key competition, we have electronic equipment as well.

WTT:  Agfa Graphics made a pretty significant restructuring announcement just prior to Graph Expo.  What is happening relative to implementation of that restructuring and is the dealer channel realignment related to that?

TS:  We, in fact, had a restructuring event.  It is part and parcel of what we call ATP—the Agfa Transformation Project—taking one mega company with nearly $4 billion in revenues and creating three discrete businesses owned by Agfa-Gevaert NV.  Effective January 1, 2007, we become Agfa Graphics as a separate legal entity. Then there will be Agfa HealthCare and Agfa Materials Group, our film platform, which is shared by both Agfa Graphics and Agfa HealthCare.  ATP is on track. We just announced our third quarter results, and group sales were up when you account for exchange rates, by 3.3%.  In the Graphics business, our revenue for the first nine months was flat.  But as you know, we have led the way in 2006 and have been absolutely in the vanguard of trying to bring reason to pricing as raw material costs have escalated.  We took a very bold step by saying it is impossible to continue without an increase.  So we in fact had some pricing actions that had an effect on revenues.  All in all, you always want to grow, but we look at the situation as not so bad given all of the activities we have undertaken in 2006.  The other piece of the results is that group EBIT  for the first nine months of 2006 was up about 32%; in Graphics, our EBIT for the first nine months of 2006 was up nearly 17%.

WTT:  Tom, thanks so much for sharing the story behind the actions.  Is there anything else you would like to add before we close?

TS: Focus. Focus on products that matter most. We have been very focused on our digital products. We have been working on price adjustments in line with raw material costs. We have been working on that all year.  And my favorite…we are focused on designing an Agfa organization that is more in tune with our customers.  It is hard work but when you get it right, everybody wins: the end user, the dealers and Agfa.

We have made some changes, and we realize that some of them have created some stress within our customer base.  We acknowledge that, but we are in front of the customer, on the front line as we speak, trying very hard to make this transition as painless as possible. This is the 10th year anniversary of Agfa really being in the digital plate business.  We have gone from almost nothing to where we believe we are number one in global market share for plates.  That’s pretty interesting.  I will close with that thought and say to our customers that we appreciate their support, understand their stress, and are working to eliminate that.

This Interview was conducted by Cary Sherburne. She can be reached via email at cary@sherburneassociates.com, online at www.sherburneassociates.com and by telephone at 603-430-5463.

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