UPS Store franchisees send SOS

They complain that UPS has confused customers and is cannibalizing franchisee business with online sales that benefit the corporate office.

The Business Journal
September 23, 2005

UPS Store franchisees send SOS
Ellen P. Gabler

Randy Holst owns United Parcel Service's best-performing store in Minnesota. Nationally, he's ranked among the company's 100 top-grossing stores.

But business has been better.

"My profitability has definitely decreased. … I would say substantially," he said. Profits are down at least 30 percent in the Golden Valley store.

Holst — like many UPS franchisees throughout the country — is feeling squeezed, due to a franchise shake-up following Atlanta-based UPS' acquisition of Mail Boxes Etc. (MBE) in 2001. About two and a half years ago, UPS nixed the MBE name, rebranding its network of 4,200 franchised locations as "The UPS Store."

Along with the name change came a price-structure revamp. Under MBE, franchisees were allowed to set their own prices. UPS required standard pricing and dropped rates at franchised stores by about 20 percent, a company spokesman said. An increase in customer traffic was supposed to make up the difference.

But nationwide, franchisees say that hasn't happened. They complain that UPS has confused customers and is cannibalizing franchisee business with online sales that benefit the corporate office. Some franchisees have even formed an ad hoc "owners group," called The Brown Board Association, in hopes of negotiating better terms with UPS.

In Minnesota, there are about 50 UPS retail stores owned by franchisees. The Business Journal interviewed more than a dozen of them, most of whom declined to have their names used in print because they feared negative repercussions from UPS. Several other franchisees simply declined to comment.

Most Minnesota owners said they were frustrated with UPS' slow response to resolve their concerns. A few said they were selling their stores, or had considered it, because they were working harder for significantly less money.

UPS' online presence has a lot to do with it.

Valerie Harries has owned her store in Shakopee for about two years. Corporate Internet sales have "profoundly, negatively" undercut her business, she said.

When customers pay shipping fees online and drop off the package at a UPS Store, the shop gets between 60 to 65 cents, she said. When stores handle the transaction, they make about $10.

Holst said Minnesota is an especially difficult market because UPS Stores here are more diversified, with strong faxing and copying businesses. Normally that would be a good thing, but the "UPS Store" name seems to have left some customers thinking the retail store is only a spot for shipping.

Its primary competitor, on the other hand, is the newly renamed FedEx Kinko's chain, a name that sends a clear message that office services and shipping are provided.

But at Holst's store, shipping now represents about 60 percent of his sales, up from 35 percent before the name change. Since shipping is a low-margin business, and business services are highly profitable, that shift has cut into Holst's bottom line, he said.

Franchisees want help from UPS to increase profitability. To do so, they want UPS to stop competing with them over the Internet and to better promote their higher-margin businesses.

The UPS Store's corporate office wants to help, said Richard Hallabrin, a spokesman. For example, it's just wrapping up a national ad campaign targeting small-business owners that touts the stores' non-shipping services. More campaigns are in the works.

The company realizes profitability is a major concern for franchisees, he said. "Without their success, we don't have a future. We share their sense of urgency and sense of concern."

Hallabrin said UPS is listening to feedback from its franchise advisory councils, not The Brown Board Association. Franchisees elect other store owners to the councils, he said, noting that a member of The Brown Board was recently elected.

The company is also continuing to add franchisees; 500 signed on last year, between 400 and 500 are expected for 2005, Hallabrin said.

In its quarterly filing, UPS Inc. reported an 11.3 percent increase in revenue from its "non-package" division, which includes the UPS Stores and MBE operations. The increase was due to "strong double-digit franchise and royalty growth" resulting from the expanded number of stores. The stores also contributed strong profit growth to UPS.

Minnesota franchisees considered joining The Brown Board Association as a group, but few have. Brown Board's animosity toward UPS seems counterproductive, as UPS has refused to meet with its representatives, Holst said.

A representative from the Brown Board Association said about 10 of its 500 paying members are from Minnesota.

Friction between franchisees and franchisors is not uncommon, but it's not productive either, said Steve Hockett, president of FranChoice Inc., a franchise consulting firm in Eden Prairie. "You can never be successful if the franchisees and the franchisor don't get along," he said. "You have to find a way to meet in the middle."

Keeping up with the competition is important as well, he said.

"One of the biggest risks the franchisees could do is be shortsighted. … They can't stick their head in the sand and wish they could go back to what the business was five years ago."

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