Is Blue Dog’s Bark Enough to Rouse Xerox Patrons?

Xerox is going trendy.

The business-machine maker has launched the most expensive advertising campaign in its history, featuring Blue Dog, the popular pup with bright yellow eyes who has a cultlike following.

The choice of Blue Dog--the subject of paintings by New Orleans artist George Rodrigue--is no accident for a manufacturer often seen as a stodgy, Old-Economy company.

At a cost of more than $200 million, Xerox hopes the ads will spread the word that it makes high-tech inkjet printers for the small- and home-office market for as little as $149.

The company’s outdated image--it’s best known as a maker of old-style, high-priced copiers--is just one of the problems at Xerox, once considered a symbol of corporate success.

Profits are down sharply, a botched sales-force reorganization has alienated customers and the company and the Securities and Exchange Commission are investigating accounting irregularities in its Mexican operations.

Xerox’s stock price has plummeted to one-third of its value a year ago. The stock has hovered around $16 a share, near its recent low of $14.56 and far below its high of $50.13 a year ago.

The last year had been expected to be strong for Xerox. In April 1999, the company named as its chief executive officer Rick Thoman, a former IBM executive credited with helping to engineer that company’s turnaround.

Thoman, who had joined Xerox in 1997, had already been instrumental in the company’s push to sell its digital products in low-end retail outlets such as Staples and Office Max.

At the time, Xerox was already struggling to reduce costs as it shifted from old-style copiers that operate with lenses and lights to multipurpose digital models that can be upgraded to print, scan and fax documents when connected to personal computers.

The company was also in the midst of cutting 9,000 jobs, or just under 10% of its worldwide work force. (In March, the company announced it would slash another 5,200 jobs and close manufacturing plants to cut costs.)

But the sales-force realignment was executed clumsily and slowed productivity and sales. As a result, Thoman was fired in May, just 13 months after he became chief executive.

Paul Allaire, who Thoman had replaced as CEO, agreed to come back temporarily. The company elevated Anne Mulcahy to president and chief operating officer and made it clear she was being groomed to be CEO.

A month later, Xerox had to report that several managers in its Mexican operations had collaborated to circumvent Xerox accounting policies, allegedly creating false product orders to inflate revenues.

That resulted in a $78 million charge against second-quarter earnings to cover bad debt and unrecorded liabilities. Xerox fired several top executives in Mexico.

The $78-million charge, coupled with a revenue decline for certain products, helped push second-quarter earnings down 68 percent to $145 million, or 19 cents per share.

In July, during a conference call with analysts, Xerox executives were candid about the extent of the company’s problems.

Allaire warned analysts to lower their expectations for the second half of the year. And Mulcahy said things had gotten so bad that “Xerox people have lost confidence in management.”

Mulcahy said employees had grown increasingly frustrated with the company’s slow reaction to the competition. “Our issues kept us focused internally instead of on the market and the competition,” she said.

But Mulcahy said the reorganization of the sales force is now complete and the turnover rate for salespeople has dropped.

Both Allaire and Mulcahy declined requests for interviews for this story.

Analysts say the company’s internal problems are really just symptoms of a larger problem.

“The cause of their problems really has to do with the fact that they’re caught between a rock and a hard place,” said Shebly Seyrafi, an analyst at A.G. Edwards & Sons. “Their core market is the copier market and that copier market is in decline.”

The market is down, in part, because many workers prefer to use printers linked to their computers rather than copying machines.

In the digital copier market, Xerox has been No. 1 for two years in a row. In 1999, the company had 37% of the market, followed by Sharp, at 18%, according to figures provided by IDC, a market-research company based in Framingham, Mass. But in the total copier market--analog and digital--Canon led with 31%, followed by Xerox at 29%.

It is in the small- and home-office market that Xerox really lags behind its competitors.

In the inkjet market of multifunction machines--those that can copy, fax and print all from a computer--Hewlett-Packard is crushing Xerox and other competitors. Hewlett-Packard had 52% of the market in 1999, compared to only 8% for Xerox.

Xerox has tried to make inroads in the small- and home-office market. In March, the company announced an alliance with Sharp and Fuji Xerox to develop and manufacture inkjet products for small and home offices. Xerox has also formed a partnership with Dell Computer, under which Dell will sell Xerox laser printers.

The new Blue Dog advertising campaign is aimed at showing customers that this one-time maker of old-style copiers now also makes products for small and home offices.

In new television commercials, brightly colored paintings of various small businesses are featured in an art gallery, with the Blue Dog prominent in each, while an announcer extols the virtues of a $149 Xerox printer. “They’re just a smarter breed of inkjet printer,” he says.

But will the new campaign work?

“The market sees them as this purveyor of antiquated or older technology and the market has moved on. Copying was big in the ‘60s; printing has been big for 10 years,” said Seyrafi.

Analysts have praised the company’s decision last year to purchase the color-printing division of Tektronix Inc., a move that makes Xerox second only to Hewlett-Packard in the office color-printing market. But the analysts say it may be a while before Xerox can pull out of its recent slump.

“They may be coming out of it, but if they do, they are going to be coming out of their problems in the 2001 time frame, not any time this year,” Seyrafi said.

Keith Kmetz, a director at IDC, said Xerox will be able to turn things around, but not in the near future.

“They’re too much of a major player and a dominant provider of products to just crumble and die,” Kmetz said. “I would expect to see Xerox rally.”