Searching for Shippers

Searching for Shippers

Copyright 2004, Traffic World, Inc.

The cargo carrier search for shippers is breaking boundaries with FedEx''s buy of Kinko''s.

Looking to go beyond kiosks and drop boxes in the bid to build retail volume, FedEx Corp. will buy office services giant Kinko''s in a $2.4 billion purchase that one-ups UPS in its storefront strategy.

It also puts the express giant in a new and potentially risky business outside of its core cargo transport discipline, one with 1,200 storefronts that come with thousands of shippers along with a different culture and new concerns.

"It seems a bit bold given that photocopying is not critical to success in the parcel industry," said Morgan Stanley transportation analyst James Valentine.

Memphis-based FedEx announced the $2.4 billion deal on Dec. 30. The move comes two years after FedEx''s chief competitor UPS bought Mail Boxes Etc., which it renamed UPS Stores in 2003.

"We expect the acquisition to drive additional volume, particularly in FedEx Ground, one of our fastest growing and most profitable businesses," said FedEx Chairman, President and CEO Fred Smith.

The purchase capped a year of major transactions in freight transport. Moves such as DHL''s purchase of Airborne Express and the merger of LTL giants Yellow and Roadway have consolidated big players in the cargo field, with those deals and acquisitions on smaller scales aimed at bringing carriers new volume and revenue.

FedEx is taking the acquisition strategy a big step further, however, adding a business in which shipping is a byproduct of the broader business services that have made Kinko''s a durable and respected brand. It suggests that FedEx believes that as the economy - and competition for shippers - heats up, acquiring suppliers, partners or even customers is a viable way to win new business.

FedEx will buy Kinko''s from New York-based Clayton, Dubiler & Rice Inc., which owns 75 percent of the company, and other minority shareholders.

The deal is subject to federal regulatory review but it is not expected to face notable opposition. FedEx plans to make Kinko''s a fourth operating company within its corporate umbrella, joining FedEx Ground, FedEx Express and FedEx Freight.

The Kinko''s management team, including President and CEO Gary Kusin, is expected to stay in place, as are Kinko''s 20,000 employees. Kusin has been with Kinko''s since 2001 and previously worked in the office management, software and cosmetics industries. FedEx will leave Kinko''s headquarters in Dallas.

The acquisition consummates a relationship that stretches back two decades - FedEx has been the exclusive delivery company for Kinko''s since 1988 and has its own counters at 134, or 11 percent, of the 1,200 Kinko''s stores around the world. It plans to place FedEx employees at all Kinko''s stores within six months of the sale closing, which is slated to happen during the first three months of 2004.

"I expect once we get our counters expanded to these 1,100 U.S. stores, we''re going to see a very good increase in our volume," FedEx Ground President and CEO Daniel J. Sullivan told Traffic World.

Sullivan would not say exactly how much new volume FedEx Ground hopes to reap but he said the company''s retail shipping is showing "solid double-digit" growth year-over-year. He said the acquisition will boost the retail presence of a FedEx Ground operation built on a business-to-business model.

"Since we''ve been with FedEx, we''ve really just launched into the retail side of the business. We didn''t focus on that back in the RPS days," said Sullivan, an RPS co-founder. "We still need a lot more access points for our customers. I feel that this transaction is going to be tremendous for us."

Having FedEx employees help customers ship goods means employees can steer shippers to higher-yield - and lower-cost for shippers - ground products rather than air. Regardless of what mode they use, infrequent shippers tend to be profitable for integrators because they generally pay full price, unlike larger customers who get discounts.

It also comes as FedEx is seeing some of the strong growth of recent years slow down and competition in the parcel market growing. The carrier has seen domestic volume almost flat in the past couple of quarters and is in the midst of a rare staff cutback in its FedEx Express unit, the heart of the company''s identity but a division going against the tide of cheaper, deferred package shipping.

Analysts believe FedEx is giving back some market share to UPS and both operators have more competition on the horizon in a well-financed DHL-Airborne combination.

FedEx in recent years has been bolstered by a sprawling contract with the U.S. Postal Service. But the Kinko''s purchase may add a wrinkle to that relationship. The Postal Service sees storefronts such as Kinko''s and MBE as competition - the USPS has even redesigned some post offices to add a more customer-friendly shine as well as a few extra services in response to the retail outlets.

But analysts question whether the acquisition will bring new business to FedEx. Bear Stearns transportation analyst Edward M. Wolfe does not expect the Kinko''s purchase to make a sizeable difference in FedEx''s retail numbers.

"We don''t see additional counter space in Kinko''s as a likely material driver of new volumes for FedEx," Wolfe said. "FedEx has been the exclusive shipper for Kinko''s since 1988, so we don''t see why FedEx should see a material improvement in volume growth."

Wolfe acknowledged that adding FedEx employees and counters in Kinko''s stores will make shipping more convenient for walkup customers, but he said he doesn''t expect the addition to generate a significant number of new customers.

And new customers could come at a high price, some observers warn, if management of Kinko''s diversified services distracts FedEx from its core delivery business.

"We would defend FedEx''s efforts if it were acquiring a freight forwarder or international ground-based operations as UPS and DHL are ahead on these fronts, but Kinko''s is nowhere on the competitive landscape," said Morgan Stanley''s Valentine.

FedEx officials brushed aside such concerns, noting that they expect Kinko''s to add to the company''s bottom line by fiscal year 2005, which for FedEx begins June 1, 2004.

One thing everyone agrees on: at $2.4 billion, FedEx''s latest buy is a big, big deal - for $2.4 billion you could go to Kinko''s and make about 40 billion photocopies.

Analysts said the price tag was rather steep, considering Kinko''s pulls in about $2 billion a year.

"We remain perplexed why FedEx would want to enter the document imaging business in such a hands-on way as we see this as a lower return, long-term slower growth business than FedEx''s core global package and freight business," said Wolfe.

In a letter to investors, he said Kinko''s was purchased at "a premium to its comparables (Staples, Office Max and Office Depot) in every metric." He pointed out that FedEx paid less than $2 billion for Caliber System in 1998, the deal which gained it RPS (now FedEx Ground), Roberts Express (now FedEx Custom Critical), Viking Freight (now part of FedEx Freight) and Caliber Logistics.

Wolfe and other analysts compared the deal unfavorably with UPS''s $185 million acquisition of Mail Boxes Etc., which had 3,500 domestic and 1,000 international locations. Unlike Kinko''s stores, which are company-owned, Mail Boxes Etc. stores, now rebranded as UPS Stores, are franchised. That means that while UPS bought a company, FedEx bought a company plus all its assets. "FedEx will operate these copying and imaging stores," Wolfe said.

On a per-store basis, FedEx paid $2 million compared with UPS''s $43,000. However, the company that owned Mail Boxes Etc. had just filed for bankruptcy when UPS bought it.

"Assuming that FedEx and UPS were primarily concerned about increasing their presence on Main Street (in an effort to drive more parcel volume through their networks), UPS got much more bang for its buck," Valentine said.

But others call direct comparisons unfair. Mail Boxes Etc. customers used the store primarily for shipping needs while Kinko''s core business is providing essentially the back office functions for copying and other document services, said UBS analyst Rick Paterson.

"We believe that Kinko''s has a different strategic fit for FedEx than Mail Boxes Etc. had for UPS," Paterson said. "While we expect FedEx to expand its profitable shipping business from Kinko''s stores, we also view Kinko''s as a service expansion. Rather than simply being a feeder to the package network, Kinko''s puts FedEx in the copying and printing business."

Some observers see that as a smart step for FedEx. Kinko''s has grown by developing its digital document business, offering computerized document management services to large companies as well as small businesses. For example, Kinko''s last year teamed with Sant, PlaceWare, and Encounter Collaborative to develop an online system that lets customers create, present, print and deliver sales presentations and proposals via the Internet.

Now FedEx will own that "document chain," helping customers create, manage and store documents as well as delivering them overnight - or sending them electronically.

"There''s no question that electronic documents have proliferated and will continue to do so," said Sullivan. "We expect that will continue. It''s where the technology is taking us."