UPS's MailBoxes Etc. Buy Will Deliver Results
American Shipper, April, 2001
by Satish Jindel

In January, FedEx Corp. said it had struck a deal with the U.S. Postal Service that would bring $7 billion in revenue to FedEx over the next seven years. One of the provisions of the agreement was that FedEx would pay $126 million to $232 million to place its drop boxes in 10,000 USPS locations. By increasing accessibility to consumers, FedEx estimated the drop boxes would generate an additional $900 million in revenues over the term of the contract.

On March 2, Atlanta-based United Parcel Service issued its competitive response by paying financially strapped U.S. Office Products $191 million in cash for MailBoxes Etc. While the FedEx-USPS pact is certainly a sweetheart deal for FedEx, UPS's acquisition of MBE has major advantages with respect to consumer access, and is likely to have far greater implications on how shipping is done in the future.

In relation to access to consumer/shippers, the UPS acquisition of MBE has three main competitive advantages over any deal with the USPS:

• Exclusivity.
• Capacity.
• Proximity.

To minimize the political backlash of such a large private-public partnership, the USPS stressed in its press release that the FedEx drop-box deal is nonexclusive and other courier services will have the right to make pickups from the nation's 38,000 postal outlets. Thus, conceivably UPS could enter into a similar deal with the USPS negating FedEx's access advantage in Post Offices. Should they decide to do so, UPS could match FedEx box for box in postal locations and have MBE's 4,300 packing and shipping centers as additional access to shippers. Moreover, UPS purchased more than 4,000 shipping outlets for $191 million whereas FedEx essentially is renting 10,000 sites for as much as $232 million.

FedEx's placement of drop boxes in postal outlets presents a dilemma for the carrier. Drop boxes are designed to handle envelopes and documents and not parcels. With the proliferation of e-mail and legal electronic signatures, this is a market that is undoubtedly dwindling. FedEx essentially recognized this fact recently by breaking out its Priority Overnight Letters versus Priority Overnight Boxes on its earnings statements. FedEx Corp. made the change to show that while Overnight Letter volume is flat or decreasing the Overnight Box traffic is increasing by more than 4 percent. Thus, if more people are shipping boxes than letters, the problem arises of how many boxes will fit into a drop box. For UPS this is not a problem as the drop box is as big as MBE's backroom.

Despite the woes of US Office Products, MailBoxes Etc. is a viable business. In fact, USOP considered spinning off MBE as a public company last summer; however the deal could not be done due to USOP's significant debt. Still, some questioned why UPS would pay a Chapter 11 company $191 million for a business that some experts valued at only $125 million. The answer: location, location, location! In one swoop, UPS picked up more than 4,300 pick-up and drop-off locations, more than tripling its current number of "operating facilities" - 1,73 1. Moreover, MBE locations, operated by mom-and-pop franchisees, are in prime proximity to Small Office/Home Office (SOHO) shippers. If they weren't located in areas with enough business to sustain profitability, they would simply close.

UPS is depending on these prime locations to foster its initiative to dramatically increase market penetration with SOHO and mail/ Internet order (returns) shippers. Moreover, with UPS Capital and its recent acquisition of First International Bancorp Inc., UPS will be able to facilitate the opening of more MBE stores in the United States and overseas.

It is clear that UPS has scored a victory with this purchase. However, who the rest of the winners and losers will be remains to be seen. In the interim, some companies will have to make some difficult business decisions - companies like Parcel Plus, Pak Mail and other outlets, such as grocery stores and pharmacies, that accept parcel shipments. These companies will have to either continue to use UPS services (and thereby contribute to the profits of a competitor) or discontinue using UPS, which leaves precious few options and reduces what leverage these companies previously had with their carrier/partners. However, if handled properly, they can seek more attractive alliances with FedEx or Airborne Express, since both companies now offer both express and ground services and are looking to gain ground parcel volume.

UPS Mailboxes Etc. will very likely change the way packages are delivered and picked up, particularly to and from SOHO and residential addresses. It is also likely that the shipping costs to these consignees will be modified and UPS will make changes to its business-to-residence and reverse logistics for residence-to-business service offerings - and the pricing for these services. Possible changes include:

• Increased outbound shipping charges.
• Introduction of convenience charges.
• Reduction in the number of delivery attempts.
• Elimination of driver release deliveries.
• Revised availability and hours at UPS customer counters.

As the negotiations between FedEx and the USPS became public late last year, it seems that UPS was formulating its competitive response. And, when the time was appropriate, UPS moved quickly and decisively. This UPS move could change residential- to-residence parcel market segment for years to come.

Robert Persuit of SJ Consulting Group Inc. contributed to this article.
Satish Jindel is a principal of SJ Consulting Group Inc. During his 18 years in the transportation industry, Jindel played a significant role in the start-up and expansion of RPS (FedEx Ground) and has since lead numerous strategic assignments for SJ clients.