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Business Observer Thursday, Apr. 2, 2009 13 years ago

Dreams, Refilled

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A big-dreams entrepreneur ditched Europe for the U.S., right before the boom turned to bust stateside. Will his dreams live on?
by: Mark Gordon Managing Editor

A big-dreams entrepreneur ditched Europe for the U.S., right before the boom turned to bust stateside. Will his dreams live on?

REVIEW SUMMARY

Businesses. Phoenix Ink, Lakewood Ranch
Industry. Cartridge ink refill, retail
Key. Company is seeking to diversify its presence in retail and grocery stores.

David Scanlan's original plan for his startup ink cartridge business was an ambitious one: To become Europe's leading company providing ink refills for home and business printers.

Scanlan, a onetime telecommunications executive and British Army officer, hatched the idea in the late 1990s. It was long before the concept of refilling printer cartridges became an environmental- and cost-friendly alternative to simply throwing it out and buying a new one. Nowadays, stores from Walgreens to Costco to dozens of online portals offer the service.

But a series of financial troubles and business tribulations forced Scanlan, a native of Southwest London, to cross the Atlantic to the U.S. three years ago. He had run the business in England, and later in Spain.

Now Scanlan has a new goal: Conquering the ink cartridge refill market of the United States.

“We decided Europe was a huge mass of land divided by lots of countries,” Scanlan says. “We looked at America and realized everyone there spoke the same language.”

Scanlan's instrument for conquering America is Lakewood Ranch-based Phoenix Ink. The company, which encountered another set of new challenges upon relocating to the States, first in Chicago, has grown its revenues 29% over the last three years, from $11 million in fiscal 2007 to $15.5 million in fiscal 2009.

Executives are projecting even higher double-digit percentage growth in 2009, although they declined to elaborate on exactly how much. They base this recession-fueled optimism, at least some of it, on the rapidly changing printing refill industry.

Indeed, while the refill method of ink cartridge replacement is more popular now than ever before, it is still a burgeoning market. Simply buying a new ink cartridge remains the more dominant purchase point, albeit a more expensive one in many instances.

“Customers are still trained to go buy a new one when their ink runs out,” says Phoenix Ink chief executive Ted Helgesen. “Many potential customers don't realize they can do this.”

In late 2005, with thoughts of those customers on his mind, Scanlan headed for the U. S. Says the admittedly impatient Scanlan on the slow-crawl pace of European entrepreneurialism, especially in Spain: “Everything there is manana.”

Diversified risk
Coming to America, however, hasn't been total nirvana. For starters, the company's greatest challenge of late has also been its greatest accomplishment: It's the exclusive partner and distributor of ink cartridge refill machines for
OfficeMax, the suburban Chicago-based office supply giant.

The OfficeMax deal, which Scanlan won while still running the company in Spain in late 2005, was the culmination of years of big-dream cold calling. It's a lucrative contract, worth more than $10 million a year to Phoenix Ink, through its revenue-sharing business model.

The model works by Phoenix Ink providing a combination of the machines; the training for store personnel; and the ink and all related products down to the package wrap and the UPC codes. In return, a retailer will provide the marketing, advertising and actual sales work. Both sides then spilt a share of each store's ink refill revenues.

The flip side to the OfficeMax deal however, is Phoenix Ink is about 90% tied to one retail partner — a supersized risk of non-diversification.

The company has some smaller deals with Grand and Toy office supply in Canada and a few Giant Eagle grocery stores in the U.S. And it's in the process of taking its first big step in diversifying this month: It recently kicked off a 90-day test contract to put machines in 35 Jewel-Osco grocery stores, a chain with a high concentration of stores in the Midwest.

Phoenix Ink hopes its calling card with the retailers will be the high quality of its machines, a computer-controlled kiosk that retails for $27,900. The patented contraption has no knobs, dials or switches and every step of the process is guided through an audio presentation.

But while the company has and will sell the machines outright, it sees its real growth potential in partnering with retailers. This way, the company can maintain a symbiotic relationship with its partners.

The business model has allowed the company' machines to refill more than two million printer cartridges over the last three years, executives say.

“We are not in the business of selling equipment,” Helgesen says. “We are in the business of selling cartridges and refills direct to the consumer.”

Abundant hope
Scanlan, the president of Phoenix Ink, is optimistic the Jewel-Osco test will open a new revenue stream for the company. The ultimate goal is to have machines in destination marketplace stores such as OfficeMax and in high-traffic marketplace outlets such as grocery and convenience stores.

That was also part of Scanlan's plan 10 years ago, when he started the business with the help of a British venture capitalist and a few technology junkies excited about creating an ink cartridge refill station. The company's growth was stunted however, first by waiting for the technology to catch up to Scanlan's dreams.

But hope was abundant in 2004, says Scanlan, when that company, then based in Spain, went public in London on the U.K.'s version of the over-the-counter trading market. Scanlan says the company raised $18 million in nine months and also raised a lot of interest in U.S.-based retail executives seeking to get into the printer cartridge refill business.

The bad news: The company's board of directors, says Scanlan, burned through almost all the money in a year, putting it on the brink of bankruptcy just as the OfficeMax deal was in its final stages.

So Scanlan eventually bought out his previous investors and moved to the U.S., taking his majority ownership stake in the company with him.

Scanlan first moved the company to Chicago, to be closer to OfficeMax's headquarters. The move paid off in at least one way, when he met Helgesen, an Office Max executive assigned to supervise the Phoenix Ink account.

Scanlan and Helgesen hit it off so well that the former hired the latter to be Phoenix Ink's chief executive.

Scanlan also hired a company in Sarasota to service and maintain its machines that were scattered at nearly 700 OfficeMax stores. While Scanlan declines to reveal the name of that company, he says it wasn't a good fit.

“The service was so bad it was unbelievable,” says Scanlan. “It required us to come down to Sarasota very often.”

So often, that by the end of 2008, Scanlan decided to pack up again and move the company from Chicago to Sarasota. The company, which now has about 12 local employees, found space in a Lakewood Ranch office park. It still has nine employees in Spain and another 30 or so employees in Chicago and other markets.

No worries
The company has had to overcome two other challenges since moving to Sarasota: Financing and manufacturing.

On the first hurdle, executives say the current financing dead zone is especially troubling, as their business is capital intensive due to the precise technology necessary to run the machines. Scanlan says the company has $7 million worth of machines ready to be deployed, if and when the company receives some loans.

The Phoenix Ink lending story is typical of many Gulf Coast businesses: We love your story, the bankers say, but no, we won't lend you any money, not right now.

Company executives have heard that line several times in the last six months. But more recently, says Helgesen, a relationship with the local office of BB&T Bank is starting to pay off in some lending. The company is also eligible for a small loan through the federal Environmental Protection Agency because of the recycling components of its business plan.

While the search for financing has produced heartache, so has the quest to find a local manufacturing partner that could work on Phoenix Ink machines. Scanlan, for instance, says he received no interest in a $150,000 fabrication contract he put out for bid soon after relocating to the area late last year.

“I couldn't even get a phone call back,” says Scanlan, despite the economic malaise. “I couldn't believe it.”

With the assistance of groups such as the Sarasota Area Manufacturers Association, Scanlon met up with the local office of S & B Metal Products, a branch of a suburban Cleveland-based manufacturing business. That company has since proved to be a valuable addition to the company, working on both old machines and on designing new models.

Despite these challenges and the uncertainty of when the economy will rebound, Scanlan isn't bogged down in worry.

“Worry doesn't keep me up at night,” Scanlon says. “How we can handle the opportunities — that's what keeps me up at night.”

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