FedEx Kinko’s synergies gain traction

DALLAS —Further acceleration of FedEx Kinko’s expanding retail network is improving consumer access to the company’s service and product offerings while creating new marketplace dynamics for office superstore, express shipper and print and document service competitors.

With its fiscal year that began June 1, FedEx Kinko’s enters year two of a five-year expansion program that calls for the company to open a total of 2,000 stores, the majority of which measure less than 2,000 square feet and are referred to internally as “compact cars.”

“We are ahead of our plans right now,” said Tom Leverton, evp and chief development officer with FedEx Kinko’s. “We exceeded our goal of 200 new compact cars last year and our target for this year is 300 and we are very well on our way. Next year we will ramp up to 400 new stores and those are all domestic.”

FedEx Kinko’s retail network at the end of its fiscal year consisted of 1,676 locations, of which 1,517 are domestic. That’s up from the approximately 1,200 stores Kinko’s operated at the time of its acquisition by FedEx Corp. in early 2004. Since then, the company has developed an aggressive, two pronged growth strategy. In addition to the rollout of the compact car format, the company is converting former Kinko’s locations, which tend to average around 6,000 square feet, to a format called an “SUV” that contains an assortment of 2,500 office products.

“The compact car is our format for organic growth while the SUV is more of a conversion approach where we are improving the utilization of the square footage,” Leverton said. “We are very bullish on the compact car model that we have and we now have five markets up and running with SUVs that we are continuing to study and revise.”

Compact cars are being opened in markets nationwide whereas SUV conversions are taking place in specific cities, the first of which was in Orlando last year. They have since included St. Louis, Boston, Minneapolis and most recently Las Vegas. Next up is San Diego.

To facilitate the rapid pace of growth, FedEx Kinko’s has created a structure that breaks the country into eight regions that are staffed by development managers who are responsible for real estate and site selection. The key consideration in determining where a small format store is located is the concentration of nearby small- and medium-size businesses that represent the core customer segment and account for more than half of the division’s revenues.

“The small- and mediumsize customer is the one where we can really provide value and, in turn, they become our most loyal customers. Our small footprint lets us get closer to them than we could in the past,” Leverton said. “We view small businesses as those that have 10 or more employees because when they reach that size they start to generate document needs where we can really help them out.”

While the FedEx Kinko’s growth strategy looks good on paper and sounds even better when explained by Leverton and vp of retail Jeff Heyman, financial results so far have failed to impress. Even with the addition of 200 small-format stores during the fiscal year ended May 31, the FedEx Kinko’s division saw sales declined 2.3% to $2.04 billion and operating profits declined 21% to $45 million.

Those figures are easy to overlook in the overall results of the FedEx Corp. which last year had revenues of $35.2 billion, net income of $2 billion and earnings per share of $6.48. At that level, the roughly $2 billion in annual revenue generated by the FedEx Kinko’s segment represents only 5.8% of total company revenues and only 1.4% of total company operating profits of nearly $3.3 billion. Given the relatively small contribution of the FedEx Kinko’s segment, it doesn’t attract much attention from analysts, whose primary concerns following the release of year-end results related more to the impact of fuel prices, capital investments in aircraft and package volume in China.

That is likely to change as the retail network is built out in the coming years and it plays an increasingly important role in the overall FedEx strategy by increasing shipping revenues. The FedEx Kinko’s segment already accounts for $800 million in express and ground shipping revenues, although those figures are not included in the division’s total.

“The overall FedEx strategy is for the operating companies to operate independently, compete collectively and manage collaboratively,” Leverton said. “As long as we can generate incremental package volume for the overall corporation, we are doing our part and that is what really matters.”

In addition to those contributions, a closer look at fourth quarter results suggest the retail strategy is beginning to be effective. Revenues dipped slightly to $532 million, but operating profits grew 28% to $23 million and operating margin increased more than 1% to 4.3%.

Wall Street may not be paying attention to those numbers, but competitors should be, especially as FedEx Kinko’s looks to drop roughly 700 new stores in markets across the country this year and next.