Kodak Is the Picture of Digital Success


Digital cameras were in demand this Christmas, flying off the shelves along with Microsoft's Xbox game consoles and low-cost DVD players. And the supreme hot seller? No, it wasn't Nikon or Canon that came out ahead. Instead, the hit product was from perennial also-ran Eastman Kodak.

Thanks to its new digital offerings, struggling Kodak was suddenly looking awfully sharp. At Best Buy, Wal-Mart, and countless other stores across the country, Kodak's EasyShare digital cameras, introduced on Apr. 23, were often sold out well before Dec. 25. Says Kodak Chairman Daniel A. Carp: "We'll stay in the game long-term with [EasyShare]."

While the final numbers on 2001 aren't in, EasyShare sales clearly boosted Kodak's market standing. In a December survey of 90 major retailers by Salomon Smith Barney, 50% listed Kodak as their best-selling digital camera, compared with 29% in June. Second-ranked Olympus was a best seller at only about 35% of stores in the December survey, followed by Fuji and Sony. If the trend holds, Kodak will surely gain swiftly on Sony, which had 25% of the digital market in 2001, compared to Kodak's 14% share, according to International Data Corp.

POSITIVE DEVELOPMENT. The Kodak digital cameras -- there are five in the product line, ranging from about $200 to $400 -- are a hit because they help resolve significant problems that have plagued digital-camera owners. These include difficulty downloading images and short battery life.

The timing couldn't have been better. Kodak hasn't had a big hit in a long time -- and never has it needed one more than now. The company relies heavily on sales of traditional film to consumers, a business that has been hit hard by both the recession and September 11, as well as the shift to digital photography. Consumers last year cut back sharply on the use of traditional film -- by as much as 5%, according to Goldman, Sachs & Co.

In recent weeks, analysts have been steadily dropping Kodak's 2001 profits estimates, to just $667 million, down more than 54% from the prior year, according to UBS Warburg analyst Benjamin A. Reitzes. Now at $29, Kodak's stock is 41% off its high last June.

PLUMMETING PRICES. Having a hot new product line will help -- though only so much. Digital cameras accounted for just $500 million of Kodak's estimated $13.1 billion in sales in 2001. That compares with $2.6 billion for the declining film business, according to Warburg's Reitzes. As a result, he contends, digital is chipping away at sales of traditional cameras, film, and photo-processing services, but isn't yet boosting the bottom line much.

What's more, as sales of digital cameras soar, the prices they command are plummeting. As a whole, camera makers sold nearly 9 million units in 2001, almost triple the number they unloaded in 1999. But the average price per camera has fallen to just under $300, from around $460 two years ago.

It is also unclear whether Kodak can successfully leverage the popularity of its digital cameras into higher-margin ancillary lines. Kodak is eyeing future profits from photo-quality inkjet paper and the company's Ofoto.com online photo sharing and printing service. With 2 million members, Ofoto -- one of three-photo printing services featured in Microsoft's new XP operating system -- is now growing 12% a month.

PAPER PROFITS? The home photo-paper business may be tougher to crack. Right now, only 15% to 20% of digital images are ever printed. Kodak is banking that EasyShare's simplicity could boost demand for home printing, thus spurring sales of high-margin paper. But that in turn could eat into Kodak's existing sales of paper to printing labs.

Kodak has avoided the intensely competitive home printer market. Instead, it is pushing printing kiosks in retail stores such as CVS and Kmart. Customers can get their own prints by feeding a CD-ROM or memory card into some 24,000 kiosks that Kodak claims have been profitable since 2000.

Add it all up, and as big a success as Kodak's EasyShare cameras are, they may not be enough. Keeping the momentum going -- and the profits rolling in -- will be no easy task. By Geoffrey Smith and Faith Keenan in Boston


Later, Baby
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