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Published: August 28, 2006

 
 

FedEx Delivers on the Deal

The FedEx team didn’t want to lose Kinko’s close connection to smaller businesses, but they did want to position the company for growth. In recent years, Kinko’s had been focused on controlling costs and raising margins rather than on expansion. FedEx wanted to encourage that discipline, but it also wanted to prep the chain for a surge of expansion around the world. Now Mr. Smith and his team had to figure out how to put it all together profitably.

Making the Match
Kinko’s had been in play for several years before FedEx stepped in and announced in December 2003 that it was buying the copy chain. Founded in 1970 in Santa Barbara by Paul Orfalea, the famously curly-headed entrepreneur (thus the name Kinko’s), the chain began with a single photocopy machine in a 100-square-foot shop next to the University of California, Santa Barbara, campus. At the time FedEx stepped in with its checkbook, Kinko’s had grown to 1,200 stores around the world connected by a fast digital network.

Mr. Orfalea valued entrepreneurialism in his executives. He encouraged store managers and franchisees to try new approaches, to tweak pricing and services to find the best mix for their particular customers. That approach worked for more than 20 years as Kinko’s established itself as the largest player in the retail photocopying business.

In 1996, the private equity group Clayton, Dubilier & Rice (CD&R), whose investments range from car rental company Hertz to printer manufacturer Lexmark and arms maker Remington, started investing in Kinko’s and eventually gained control of about 75 percent of the company. Then CD&R quickly began rolling up more than 125 separate corporations that owned and managed Kinko’s stores into one single organization. At the same time, it accelerated the push to expand Kinko’s customer base beyond the core academic crowd into commercial accounts and the growing population of mobile workers. The customers’ needs shifted from do-it-yourself copying and classroom text duplication to more complex and much larger jobs printing materials for marketing and other corporate functions. Selling to these customers required not only different kinds of services, but a more consistent, and more sophisticated, business approach. Each store, for example, could no longer set its own prices and services.

“They wanted to bring uniformity to the operation,” says Enrique Ramirez, managing director of strategy and operations growth at FedEx Kinko’s, who held the same position at Kinko’s in the CD&R era. To meet this new goal, Kinko’s deployed centralized budgeting, financial planning, procurement, real estate, and IT. The IT part was especially critical as Kinko’s began to build out a digital network to connect all its stores.

The next transformation — and the final break from the Orfalea era — happened in 2001, when newly installed CEO Gary Kusin packed up the Kinko’s main office and moved it from the beach town of Ventura, just north of Los Angeles, to Dallas. Until Mr. Kusin took the reins, Kinko’s profit margins never met expectations. “To change a corporate culture, you have to get people out of their routines,” Mr. Kusin told a gathering at the University of Texas McCombs School of Business in 2003. “One of the easiest ways to do that is to move headquarters.” It worked; few Kinko’s managers chose to transfer to Dallas from Ventura, where workers often went surfing during their lunch breaks. Mr. Kusin thus armed himself with a new senior management staff and a mission to get the financially flagging Kinko’s ready for an IPO or a sale.

Over the next three years, Mr. Kusin and his team kept a tight rein on spending, while still serving the expanding needs of a growing list of corporate clients. In 2002, Kinko’s showed a small profit on about $2 billion in revenue. Perhaps even more attractive to potential buyers and the public markets was that operating margins at Kinko’s were finally moving in the right direction, hovering close to 8 percent by the end of 2003, up from around 3 percent in 2001, when Mr. Kusin took the reins. Mr. Kusin’s fiscal discipline had turned heads in Memphis, and in late 2003, Fred Smith stepped up and announced FedEx wanted to pay $2.4 billion to buy the company.

 
 
 
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Resources

  1. Gerald Adolph, “Mergers: Back to ‘Happily Ever After,’” s+b, Spring 2006: Why growth through acquisition is becoming popular again. Click here.
  2. Madan Birla, FedEx Delivers: How the World’s Leading Shipping Company Keeps Innovating and Outperforming the Competition (John Wiley & Sons, 2005): How FedEx became a leading global brand by tapping into the creativity of its employees.
  3. Nicholas G. Carr, “Top-Down Disruption,” s+b, Summer 2005: Epoch-making technologies, products, and business models don’t always come from industry newcomers. Sometimes they come from the established leaders. Click here.
  4. Geoffrey Colvin, “The FedEx Edge,” Fortune, March 20, 2006: CIO Rob Carter discusses how FedEx manages to ship 6 million packages a day. Click here.
  5. Charles Fishman, “Face Time with Fred Smith,” Fast Company, June 2001: Mr. Smith on what he learned in the Marines and why he’s obsessed with speed. Click here.
  6. Ellen Florian et al., “Special: CEOs on Innovation,” Fortune, March 8, 2004: Mr. Smith and others weigh in on the need for constant change and open-mindedness. Click here.
  7. Gary L. Neilson and Bruce A. Pasternack, Results: Keep What’s Good, Fix What’s Wrong, and Unlock Great Performance (Crown Business, 2005): Contains a section on FedEx’s culture as an example of a resilient company that learns from its customers’ complaints.
  8. Rob Norton, editor, CFO Thought Leaders: Advancing the Frontiers of Finance (strategy+business Books, 2005): Includes an interview with Cathy Ross, chief financial officer of FedEx Express, describing how culture and controls reinforce each other. Click here.
  9. C.K. Prahalad and Venkatram Ramaswamy, “The Co-Creation Connection,” s+b, Second Quarter 2002: Companies spent the 20th century managing efficiencies. They must spend the 21st century managing the consumer experience. Click here.
  10. Michael Sisk, editor, The Whole Deal: Fulfilling the Promise of Mergers and Acquisitions (strategy+business Books, 2006): Overall guide to world-class M&A strategy for those who would emulate — or surpass — Fred Smith. Click here.
  11. Fred Smith and Brian Dumaine, “How I Delivered the Goods,” Fortune Small Business, October 1, 2002: Mr. Smith explains his management philosophy. Click here.
  12. James C. Wetherbe, The World on Time: The 11 Management Principles That Made FedEx an Overnight Sensation (Knowledge Exchange, 1996): What managers can learn from Fred Smith.
  13. For more business thought leadership, sign up for s+b’s RSS feeds. Click here.