By now everybody must know that FedEx, one of the largest package delivery services in the world, has decided to acquire Kinko’s, probably the largest copy shop in the world. FedEx is paying $2.4 billion in cash. It would be easy to say that FedEx is buying Kinko’s to imitate the UPS purchase of Mail Boxes Etc., but that is only part of the story.
Most columnists have gushed over the fact that FedEx has had only a limited presence in about 134 of the Kinko’s stores, but that this move will allow them to take advantage of all 1,200 Kinko’s locations. All agree that some consolidation with FedEx’s 1,155 service centers may be necessary. However, FedEx already has over 50,000 express-only package drop locations worldwide. It should also be noted that UPS’ acquisition of Mail Boxes Etc. brought almost triple the number of storefronts into the company, most of which were already handling UPS, and most of whom have now dropped the handling of FedEx shipments under the UPS Store banner. And from our viewpoint, there appears to be far more synergy between a store that already packaged and shipped, than with Kinko’s where, despite a prior agreement, FedEx was having trouble getting its shipping services into the stores.
So perhaps the real question relevant to the printing industry is how this acquisition affects Kinko’s unique role as an on-demand printing enterprise. Will it move Kinko’s more toward a Mailboxes Etc. model (limited printing and greater focus on packaging and delivery) and away from its burgeoning position as the largest quick printer? Kinko’s developed an advanced and very successful "retail" model for printing, a sharp departure from printing’s industrial and manufacturing roots. It has only short-run expertise; no offset printing has ever been incorporated. It has merged computer services, printing, copying, poster making, digital conferences and more recently, signage and digital photo services.
Under its current business plan and ownership, Kinko’s is profitable and would likely continue to grow and prosper. FedEx indicates that it will run Kinko’s independently. Still, we have to wonder if FedEx really understands the Kinko’s business model and whether, even unwittingly, their ownership, with its basic need to grow package delivery, will eventually force Kinko’s more into the Mail Boxes Etc. model of limited copying and most other services oriented around the package to be shipped? Or is FedEx smarter than we think, looking at this set of capabilities as an opportunity to deliver documents and other print materials faster and less expensively by completing it locally?
In the printing and imaging market that we know well, there is very little evidence of successful acquisitions of "different" companies, even if their product or service was an important, but small, piece of the buying companies model. So, we don’t know if FedEx will be successful in keeping Kinko’s growing beyond the medium term, but we can postulate what some of the possible successes will be over the next few years.
To understand this acquisition better, we need to look at a number of issues:
• How is it being financed?
• How has FedEx handled other similar and dissimilar integrations?
• Does past experience have any value in believing the synergies that should occur?
• What does Kinko’s have that FedEx really needs, and vice versa?
Money Matters
Let’s look at the financing part of that equation first. About one third of the funding will come from cash on hand, while the balance will come from the company’s current $1 billion credit facility plus a new $2 billion credit facility. The financial rating facilities, Standard & Poor’s and Moody’s Financial Services have both expressed caution about the acquisition because of the large additional risk debt burden and the need to learn a new business and integrate operations. From past experience we know that if things don’t go well, FedEx will need to change emphasis in order to meet the lenders’ needs, rather than its own.
The USPS Experience
Looking at FedEx’s past Storefront Integration Experience has us ask, do you remember the deal with the U.S. Postal Service that put our airmail on FedEx’s planes and put FedEx drop boxes at every Post Office? There was no integration here. The USPS is no help in sending FedEx packages, and if you don’t have an account, like most individuals, you can’t even use the boxes. Perhaps FedEx has learned that their growth relies on reaching more small and medium sized businesses, rather than individuals and families, and that’s what the Kinko’s deal should allow them to achieve. This step towards diversification does not appear to have worked except to give FedEx more shipping revenue through USPS mail volume.
Synergies Anyone?
Does anybody remember ZapMail? This was a proprietary service to deliver critical documents quickly by converting them to electronic documents at the origin and then printing for delivery at the destination. This FedEx big push into the electronic document world became doomed when the fax machine became ubiquitous, and later legal, for many documents.
And how is the integration of FedEx Air, Ground and Freight, previously multiple companies with different cultures and computer systems, really working? UPS, now known as "Brown," and DHL/Airborne have both been taking pot shots at FedEx because FedEx operates its empire as separate divisions. Today, a customer is not able to track overnight, ground and freight waybills at the same time. At least to the user, it does not appear that FedEx has integrated these separate freight services, to the extent that only FedEx Overnight packages can be left at non-manned locations. We have to wonder how well FedEx and Kinko’s will be able to integrate, and not just become new package drop locations with management conflicts. A better integration between FedEx and Kinko’s is hoped for, but by no means a sure thing, based upon these past executions.
The Future
Kinko’s is a worthy addition to FedEx, but based upon prior execution we’re not holding our breath about domestic integration of basic services. We believe that the benefits to FedEx will really come from the web-enabled Kinkos.com and that Kinko’s can really use FedEx’s buying strength and its international reach.
Kinko’s has established a good distributed printing capability through Kinkos.com. At the end of 2003, we understand that they were receiving about 25 percent of their business this way. Hopefully that will continue to grow. However, this percentage seems to have become a limiting number in other endeavors in our industry. Instead, the bigger opportunity will probably be through FedEx trying to resurrect a modern version of what they were trying to do with ZapMail by making use of the Kinko’s Internet capabilities to deliver locally produced documents to print much more quickly than shipping across the world. In this rapidly shrinking world, two day delivery to the farthest reaches and one day domestically are no longer sufficient. If FedEx doesn’t learn how to maintain its relevance through shorter delivery cycles enabled by remote printing, somebody else will likely innovate here and take the lead. If this endeavor is what FedEx really has in mind, and is successful, then FedEx will need the Kinko’s capabilities that public has come to love to help it succeed in the Express business.
We can also see FedEx trying to use its size and contacts to leverage suppliers and significantly reduce the already low prices that Kinko’s pays for supplies and equipment. FedEx already has a large in-house print requirement for aircraft and truck service manuals and for shipping documentation, so it probably already has many similar suppliers.
Outside the U.S.
FedEx also has a really big presence overseas where Kinko’s has only about 110 stores. Because Kinko’s doesn’t have much of a presence there, it is more likely that business synergies can come faster overseas than they are likely to develop domestically. This is particularly true because there aren’t dual organizations overseas to fight over the growth opportunity. Also, because the need for remote printing of documents to enable faster delivery times may be more critical overseas than it is here in the U.S.
