Why FedEx acquired Kinko's.

Commentary about business and finance.
Jan. 20 2004 6:13 PM

Ground War

Why the FedEx merger with Kinko's should make UPS nervous.

Illustration by Robert Neubecker

For people of a certain age—say, their mid-30s— Kinko's occupied the borderland between Slackerdom and the real world. The copy stores were the destination of choice for the last-minute laser-printing of late papers or for that hasty résumé run. But in the past several years, under the ownership of Texas private equity firm Clayton, Dubilier & Rice, the collection of franchises has morphed into an altogether jazzier and more ambitious corporation: a "global, digitally connected provider of an array of valuable business services." With 1,200 stores and sales of about $2 billion, Kinko's now peddles printing services to small businesses and document-management (read: copying) services for large corporations.

FedEx, the largest overnight-delivery company in the United States, ratified the turnaround by announcing in late December that it would acquire Kinko's for $2.4 billion in cash. Putting together a company that derives most of its revenues from sending documents and small packages overnight with a chain of stores where people go to create the sort of documents that need to be sent overnight—résumés, business plans, papers, reports—seems like a brilliant idea. For 1990.

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After all, we live in age where everything from mortgage documents to X-rays can be sent electronically at the press of a button—and virtually for free. Just about every home is equipped with a highly functional computer printer that can also make copies. And the FedEx deal seems to be a classic case of a second-mover: a carbon copy of rival UPS's 2001 move to purchase 3,000 Mail Boxes Etc. franchises and then convert them into UPS Stores.

But the merger actually reflects some out-of-the envelope thinking. It's a timely response to the long-term decline in FedEx's primary line of business and also represents an attempt to reposition the company in the eyes of the consumer. For unlike perhaps any other company, FedEx—with the long-running slogan, "when it absolutely, positively has to get there overnight"—has been equal parts victim and beneficiary of the Internet boom. On one hand, the rise of e-mail has provided a cheap way to send documents instantaneously, cutting sharply into the guaranteed-overnight-delivery business that FedEx created and still dominates. On the other hand, the rise of the eBay economy—hundreds of thousands of small-scale entrepreneurs shipping goods to customers all over the world—has created a consistent demand for services that deliver packages, only not quite as quickly. Meanwhile, a wide range of companies—from L.L. Bean to mom-and-pop bakers—are using delivery services to manage their supply chains and meet customer demand. 

FedEx took stock of its situation and concluded a run to Kinko's was the answer. The company conveniently breaks out its different lines of business—FedEx Express (the overnight unit) and the newer Ground and Freight units—as operating subsidiaries. And this Stat book shows how the business mix has changed over the past several years. Between 1998 and 2003, FedEx Express saw its shares of overall company revenues fall from 84 percent to 73 percent. Meanwhile, the Ground unit has seen sales rise from $2 billion in 1998, or 12 percent of total sales, to $3.58 billion in 2003, or 16 percent. The Freight segment, a nonentity in 2000, racked up $2.44 billion in sales last year. More important, the Express unit's operating income has fallen in both real terms—from $837 million in 1998 to $783 million in 2003—and relative terms. In 1998, the Express unit provided about 83 percent of the company's operating profits; last year it accounted for just 53 percent.

The reason? Revenues derived from U.S. overnight boxes and envelopes—the heart and soul of FedEx's business—have been essentially flat in the past five years. In Fiscal 2003, the daily volume of U.S. overnight envelopes fell 3 percent to 679,000 while the volume of U.S. overnight boxes rose a mere 1 percent. Blame e-mail. By contrast, FedEx Ground's daily average volume of packages, sent by slower and cheaper ground delivery, rose 24 percent in 2003 to 2.168 million. Thank e-commerce. Virtually all the sales that online retailers make are completed when a delivery service truck rolls up the driveway. And because consumers pay for shipping, they frequently tend to choose slower, cheaper ground options.

For the past few decades, sleek FedEx has owned the air while lumbering UPS has dominated the ground, where FedEx ranked second. In 2002, UPS—or Brown, as it likes to be known—derived only $5.35 billion of its impressive $31.3 billion in revenues from U.S. next-day air service and $15.6 billion from U.S. ground delivery services. (For more on UPS's recent operating figures, click here and open it as an Excel file.) 

FedEx now wants to use its vast customer base and skills in logistics to take a bite out of UPS's large ground business. By acquiring Kinko's, FedEx is adding a few thousand well-trafficked and centrally located areas that can handle packages of any size. The ubiquitous FedEx drop-off boxes are ideal for handling envelopes and documents but useless for larger packages. And it should be comparatively easy to fold the stores into FedEx's round-the-clock corporate culture. Before the deal, FedEx already had counters in 134 Kinko's stores, and about 400 Kinko's stores are already open 24/seven.

It's ironic that the rise of instantaneous communication has led to a growth in demand for delivery services that promise to get there slower rather than faster. FedEx, which has deployed technology to great effect to guarantee the fastest possible delivery times, is seeking to lower the pace a bit. FedEx: When it absolutely, positively has to get there in the next few days.

Daniel Gross is an editor and columnist at the Daily Beast.