GRAPEVINE, Texas (AFX) - Every month, Mark Barnes used to buy $600 worth of new, name-brand inkjet and toner cartridges for printers that churn out a steady stream of contracts and marketing material in his real estate office.
But lately Barnes has been taking his empty tanks to a Cartridge World shop near his office, where he buys cartridges that have been refilled with new ink.
'I'm spending about $400 a month now,' Barnes said. 'I like doing other things with my cash.'
Customers like Barnes represent a small but growing segment of printer owners who are buying private-label cartridges from refill stores and office-supply chains and plugging them into their Hewlett-Packard, Lexmark and Epson machines. They account for less than a quarter of U.S. printer ink sales, according to Lyra Research, which tracks the industry. But analysts say the number is certain to go much higher.
That poses a growing threat to the big manufacturers, who make more money from replacement cartridges than from selling printers.
Take Hewlett-Packard Co. In its most recent fiscal year, HP earned more than half of its $6 billion operating profit from its imaging and printing group. And some analysts believe that number understates the importance of ink and toner to HP because the imaging group includes printers, which HP sells at little or no profit.
HP doesn't break out results for individual items, but ink and toner 'are both nicely profitable,' says Pradeep Jotwani, the company's senior vice president of imaging and printing.
Name-brand ink cartridges can run $30 to $50, even more for some color versions. Toner cartridges can top $100. After a few trips to the store, consumers who bought inkjet printers and businesses that bought laser printers will usually have spent more on replacement cartridges than on the machine itself.
'You sell inkjets (printers) to sell them ink,' said Cindy Shaw, an analyst with Moors & Cabot. 'It's very much the razor-and-blade business model.'
The printer manufacturers say their ink is better, and they point to independent researchers who have reached the same conclusion.
But Burt Yarkin thought the high price of name-brand cartridges left room for upstarts. A few years ago, he left a children's clothing chain to lead the U.S. division of Cartridge World Inc.
'The price of cartridges has not moved down at all over the years,' Yarkin said. 'If they give us their empty ink cartridges, we sell them a refilled one, and the savings are 30 to 50 percent.' The price break on toner cartridges, which are more difficult to refill, is closer to 15 percent to 20 percent.
Privately held Cartridge World, which was founded in Australia in 1997, has nearly 1,300 stores, including 440 in the United States and says it will have 600 U.S. stores by year end.
They are run by franchisees like Sheri de Wet, who was casting about for a new career after she and her husband left middle-management jobs at a software company. They considered and rejected haircutting, sandwich and window-cleaning opportunities before opening two Cartridge Worlds in the Dallas suburbs.
'We wanted to get in on the ground floor for a product that is growing, and this made perfect sense,' de Wet said. 'Everybody has a printer.'
De Wet said her two shops have gross sales of about $110,000 a month, much of it to business customers, and she wants to open more stores. The company said franchise fees and other startup costs run $75,000 to $130,000.
Refill shops like Cartridge World, Island Ink-Jet Systems Inc. and Caboodle Cartridge LP. also compete with office-supply chains such as Staples Inc. and OfficeMax Inc., which sell private-label cartridges or offer in-store refilling kiosks.
HP watches these competitors closely and has sued or threatened to sue several of them for allegedly infringing on HP ink and cartridge patents.
HP told Cartridge World last year that four of its inks violate HP patents, and the companies settled their dispute last week with Cartridge World agreeing to pay an undisclosed settlement, said Tuan Tran, an HP vice president. HP recently lodged similar complaints about ink sold by OfficeMax and Walgreen Co., and sued a Chinese company that makes cartridges that work in HP printers.
Last year, HP sued Staples' supplier, InkCycle, for allegedly using an HP-patented recipe for metallic salts that prevent yellow and black ink from running together. InkCycle settled by paying HP an undisclosed amount.
HP employs hundreds of chemists and other scientists to develop new inks and ferret out possible patent infringement by rivals, Jotwani said.
The HP executive is unapologetic about the company's legal tactics.
'When you invest $1 billion a year in R&D, and you have 9,000 patents, I have a reasonably steady practice of looking at stuff that's in the marketplace for intellectual-property violations,' he said.
Another big printer company, Lexmark International Inc., uses technology to thwart customers from buying knockoff toner cartridges. Some Lexmark cartridges contain a chip that shuts down the printer if the unit is refilled. Company spokeswoman Barbara Leary said this is to ensure that used cartridges are returned to Lexmark and not dumped in a landfill.
Perhaps the biggest obstacle for refillers is to overcome the perception that their ink isn't as good as HP, Lexmark, Epson or Canon products. The refillers say their ink is just as good. Barnes and other customers at the Cartridge World in Grapevine said they don't notice a difference in quality.
But research company QualityLogic Inc. found that up to 70 percent of refilled cartridges leaked or printed poorly, compared to 2 percent of HP cartridges. HP is a QualityLogic client.
Consumer Reports said it tested hundreds of cartridges and found that many were inferior in print quality and fade-resistant photos but a few matched their brand-name counterparts.
'For something you want to keep, like a wedding photo, I would use a (brand-name) cartridge,' said Joy James, a consultant and former InkCycle executive. 'But for printing office documents, refills are good.'
When it comes to printer ink, there are two kinds of customers: Those who print a lot of photos or color documents and will pay premium price for what they consider top quality, and budget-conscious consumers who just want to print basic documents.
'There are a lot of products where 'good enough' is a good chunk of the market,' said Shaw, the analyst. 'Ink could be one of those.'
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