Why there's a war over your used printer cartridge

January 4, 2013
By Meribah Knight | Crain's Chicago Business

First came gold and then came clunkers. Now there is cash for cartridges.

Clover Technologies Group LLC, the world's largest remanufacturer of printer cartridges, can no longer rely on places like OfficeMax Inc. and Staples Inc. to collect and supply it with used cartridges. So Hoffman Estates, Ill.-based Clover recently launched Evolve Recycling, a company with the sole purpose of gathering secondhand cartridges directly from consumers.

Depending on the model, Evolve pays customers up to $10 per cartridge. It also supplies collection boxes, shipping boxes and prepaid labels so there is no out-of-pocket expense for those looking to cash in on their worn-out cartridges.

While Evolve may be a bright idea, it was one born of necessity. Printer company profits are shrinking, and the companies increasingly are unwilling to share the cartridge market, which accounts for a significant portion of their income.

In its third quarter, Lexmark International Inc.'s net income was zero, down from $67 million the previous year. Canon Inc.'s third- quarter net income plunged 36 percent. Original equipment manufacturers are collecting used cartridges — "empties" or "cores" in industry lingo. They grind them up for their own reuse or toss them into landfills before recyclers can scoop them up. As a result, companies like Clover are scrambling to find enough cartridges to fill demand from office supply chains and individual businesses.

"We need Evolve Recycling to kick in and collect more empties because right now our business will be stagnant if we cannot collect more," says Jim Cerkleski, Clover's CEO. "The empties industry is changing drastically because of the original equipment manufacturers' pressure to want those empties back. Now it's a fight for who is going to pay more for the cores."

The brawl comes as a result of Clover's success selling rehabbed and refilled cartridges for up to 50 percent less than manufacturers such as Tokyo-based Canon, Seiko Epson Corp. of Nagano, Japan, Hewlett-Packard Co. and Lexmark. Since Clover's founding in 1996, it has grown from 15 employees and $180,000 in annual revenue to 15,000 employees, including 500 in Illinois, and close to $1 billion in annual revenue.

Since 2010, Clover — a portfolio company of San Francisco-based Golden Gate Capital — has acquired 12 companies ranging from $2 million to $250 million in revenue. Its closest competitor, Mr. Cerkleski says, is Van Nuys, Calif.-based Micro Solutions Enterprises Inc., which is roughly an eighth of Clover's size. Clover sells about 2 million ink and laser cartridges per month, primarily in North America. (Retail prices for new cartridges range from $20 to more than $300, depending on the make and model.)

Killer chips

In 2008, remanufactured cartridges cornered 11 percent of the U.S. market for ink and toner cartridges. By 2011, that number increased to 15 percent, according to InfoTrends Inc., a Weymouth, Mass.-based market research firm. Lexington, Ky.-based Lexmark's annual report shows laser and inkjet supplies made up 70 percent of its total revenue last year. At Hewlett-Packard, a substantially larger company, supplies made up 13 percent of revenue.

To combat companies like Clover, big makers have made design changes, including screws that destroy the cartridges' threads when removed, ultrasonic welds that make it difficult to open a cartridge without damaging it and "killer" computer chips that disable cartridges after they are refilled.

"They have tried everything they can to prevent us from remanufacturing their products, and we have prevailed," says Patricia Judge, executive director of the Las Vegas-based International Imaging Technology Council.

Hewlett-Packard says it prides itself on not employing tactics like killer chips. "We believe in fair competition," says Thom Brown, a supplies technologist at the Palo Alto, Calif.-based company. Mr. Brown says that up to 70 percent of the company's cartridges contain recycled materials. While Hewlett-Packard considered venturing into remanufacturing cartridges, the company decided it was not a prudent move. "We just can't guarantee that the remanufactured cartridges can work the same as a new one," Mr. Brown says.

Still, some companies are dipping a toe into the aftermarket. Mr. Cerkleski says Norwalk, Conn.-based Xerox Corp. sells toner to Clover, and San Fernando, Calif.-based Mitsubishi Kagaku Imaging Corp. is one of the company's largest vendors.

Evolve is collecting 11,000 cartridges a month from individuals and offices including all six U.S. offices of Chicago-based law firm Kirkland & Ellis LLP. Mr. Cerkleski says Evolve aims to collect a million empties a month by the end of 2013. Evolve's rehabbing operations are concentrated in Erie, Pa. The company also has remanufacturing operations in Michigan, West Virginia and Mexico.

"This is the first bigger business that is saying, 'We really see a market here,' " says Jeffrey Hayzlett, former chief marketing officer of Rochester, N.Y.-based Eastman Kodak Co. and an advocate for cartridge remanufacturing. "The only people that lose," he adds, "are those guys making ink that is more expensive than human blood."

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