It Looked Good On Paper…FedEx Kinkos

In what was intended to be a merger to bolster the alignment between operating and business models, FedEx Kinkos was a mistake from Page 1.

 

FedEx Kinkos – Looked Good On Paper…

In the early 2000s, FedEx was faced with a difficult proposition.  The delivery business was finding it challenging to compete with its changing rivals.  FedEx’ first strategy was to differentiate it’s service and focused on overnight services and air delivery.  However, this important niche advantage disappeared relatively quickly when UPS created a network of 4,500 retail shipping locations through an acquisition of Mail Boxes Etc. and increasing relevance of its strength on the ground.

FedEx was finding challenges in catching up with its chief rival, seeing business stagnate for five years.  In the biggest move in the company’s 32-year history, FedEx purchased Kinko’s copy and print business from private equity firm Clayton, Dubilier & Rice in 2003 to counter.

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Getting Physical – Operating Model

Fedex employed technologies to become the leader in fast guaranteed delivery and had been known for their slogan “When it absolutely, positively needs to be there overnight.”  FedEx was a pioneer in many ways: focusing and investing in air delivery, launching the overnight service and offering tracking capabilities for consumers to track their orders.  Previously, much of FedEx’ business was handled through drop-off boxes and already owned space within 134 larger Kinko’s ecosystem.

In acquiring Kinko’s, FedEx sought to counter UPS move into the physical space.  Through their 1,200 Kinko’s locations, FedEx would be positioned to open shipping kiosks at all locations while maintaining the paper copy business that Kinko’s had developed.  While the natural synergy between the companies produces a one-stop shop for individuals and businesses sending documents needed overnight, Kinko’s also offered an established customer base of small businesses that FedEx could cater to.

In integrating the two businesses, FedEx was hoping for synergies to take place and to steal ground revenues from UPS.  However, there were critical issues at play during the integration process.

An additional flaw with the purchase was the lack of foresight in a need for a change with FedEx’ operating model.  Business needs were rapidly shifting away from mailed and faxed documents, moving more into the digital space.  40% of FedEx’ business in 2001 was manuscripts, legal briefs, contracts and other urgent business documents, but the transfer of these documents was increasingly made possible through digital delivery and e-mail.  The acquisition of Kinkos did not take this into account, and occurred at precisely the wrong time – nearly immediately, FedEx Kinkos needed to invest in new products and services to keep current with technology change.

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Getting down to business

A deeper look reveals FedEx’ main revenue source from sending documents and small packages.  However, revenues from these sources had been flat from 1998 to 2003.  In fact, revenues from express shipping following the merger were less than that of 1998.  The shift in businesses shows a further weakness for FedEx – in 2001, UPS had 55% of the e-commerce delivery market, compared to 10% of FedEx.  Additionally, FedEx had avoided investing in ground transport with the hopes that the majority of its business to remain in air shipping, but the ground transportation business increased due to shoppers preferring low-c ost options at checkout.

Kinkos had the possibility to diversify this revenue, but ultimately the macroeconomic decline in copy and physical paper business needs slowed this growth as well and caused Kinkos to become a liability, struggling financially.  Profit margins for Kinkos businesses have fallen and employee turnover was consistently in the double digits for the years following the merger.  Availability for copy services abound, as well – customers easily could obtain these services from competition with very little consumer loyalty.

Ultimately, the marriage between FedEx and Kinkos was intended to be a match between the operating and business models of the two companies, but in reality served to detract from the original.  In offering both shipping and copy/print services, the businesses could be quite complimentary on paper.  FedEx saw dropping revenues due to its operating model decisions, and sought a change – but acquiring Kinkos’ storefronts did very little to address the issues.  Operating storefronts and attempting to handle culture change and employee turnover was an ongoing distraction for the business, which should have been refocusing on the growing e-commerce and digital delivery areas.  Not only was the operating model not well coupled to create sustained revenues, but the competitive advantage was nonexistent due to the easy replication of Kinkos’ key strengths by competitors.

Ultimately, what was intended to be a union in operating models became a negative distraction for FedEx’ business model issues, and the company made the costly decision to drop the brand name entirely in 2008.  Moving forward, FedEx should refocus on its shipping business and invest further into technologies to improve the user experience.

 

 

Sources

“FedEx to Buy Kinko’s for $2.2 Billion.” WSJ. Ed. Rick Brooks. Wall Street Journal, 31 Dec. 2003. Web. 09 Dec. 2015.

Boyle, Matthew. “Kinko’s Chief: ‘Willing to Take Short-term Pain'” Fortune.com. Fortune, 17 Jan. 2007. Web. 09 Dec. 2015.

Deutsch, Claudia H. “Paper Jam at FedEx Kinko’s.” The New York Times. The New York Times, 04 May 2007. Web. 09 Dec. 2015.

Beck, Ernest. “FedEx Ditches Kinko’s.” Bloomberg.com. Bloomberg, 09 June 2008. Web. 09 Dec. 2015.

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4 thoughts on “It Looked Good On Paper…FedEx Kinkos

  1. After reading your post, I’m not entirely sure that I’m sold that this was actually a bad business operating decision. I see the issues surrounding the two business running into problems with similarly declining markets – being primarily a fast paper delivery service wasn’t a particularly good idea in the early 2000s. However, even though their business strategy was flawed, I still think that operationally it was a good idea. In order to compete with UPS, they needed a broader network in order to be able to reach their customers, with convenient, accessible locations for consumers. Kinko’s provided just that network, a reasonable stand-alone business model (think Mail Boxes Etc. would have been exposed to the same declining market problems), and a stand alone business which made sense with Fedex’s existing business model. Also, had Fedex pursued a stronger ground shipping strategy or better captured some of the e-commerce delivery opportunities, acquiring Kinko’s still seems like it would have been an operationally sound decision in order to provide coverage for those services.

  2. Anyone who has ever walked into a FedEx-Kinkos store with the hopes of getting something done rapidly or efficiently will appreciate this post. This analysis brings up some insightful limitations of the FedEx model. Rapid transit of important business documents overnight seems to be a niche that FedEx will occupy for the foreseeable future. As you bring up, their ability to adapt to new technologies and our increasingly digitally-oriented society has been relatively poor. In light of these pressures it will be interesting to see if FedEx looks to double-down on physical space or seeks to divest Kinkos.

    Nice touch with the office space image.

  3. Hi Steve,

    Great post! I think what’s interesting was that FedEx dropped the Kinkos name without selling off the entire business. Clearly, FedEx sees SOME value in keeping Kinkos’ operations around (e.g. stores, equipment, labor, etc.), yet it doesn’t see value in the Kinkos name? I always felt that if I need to get copies made I go to Kinkos, not FedEx.

    In any case, what DOES FedEx see in keeping Kinkos? I agree with Adam, I am interested to see whether FedEx ultimately divests Kinkos. What’s also interesting is how FedEx has partnered with OfficeMax, using its stores as convenient drop-off locations. I wonder what would have happened if FedEx decided to create a strategic partnership with Kinkos, similar to its partnership with OfficeMax, rather than engage in a full-out merger. Also, do you think FedEx’s partnership with OfficeMax cannibalizes in-store shipping services from its FedEx-Kinkos locations?

    Ultimately, I think senior management at FedEx doesn’t have a clear vision on its business model, which is why its hard to see how the FedEx-Kinkos operational model makes very much sense. You’re right in that the company should refocus on what it does well: shipping documents and packages.

    Again, nice work!

    Best,
    Alex

  4. Steve, your post really highlights how difficult it can be to respond well to a competitor’s actions, especially in a rapidly evolving marketplace. UPS clearly gained the upper hand in the e-commerce space, and in doing so forced FedEx to react. While the acquisition of Kinkos provided the necessary touch points that FedEx needed, but their timing couldn’t have been worse. Your observation (and Jane’s comment) about how this deal looked good on paper but failed in execution points to the difficulty of “seeing around corners” as Jack Welch says. The move toward digital communications clearly undercut Kinkos’s business model, and many of the synergies that FedEx hoped to realize. Sadly my experiences at Kinkos have been similar to Adam’s, and it appears that their under-investment in technology at their stores has made them grossly behind the times and bordering on obsolete. Recognizing how unaligned these models have become, I have to believe FedEx will be looking to either significantly shift Kinkos’s model, or exit the business.

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