Franchisees See Red After Brown Takes Over

His anticipated volume increase never arrived, while profit margins vanished as UPS cut the fees he got for handling packages. And the company opened another store nearby, which siphoned customers, the 34-year-old franchisee says…"What can Brown do for you?" his response is: "Stop competing with me."

The Wall Street Journal
May 9, 2009

Franchisees See Red After Brown Takes Over
Richard Gibson

When United Parcel Service Inc. announced it was acquiring the Mail Boxes Etc. shipping chain five years ago, franchisee Dana Houser thought his entrepreneurial dreams were finally coming true.

UPS was one of the biggest names in the business, known for prompt, reliable service. Mr. Houser figured the company's reputation would send customers surging into his Mail Boxes Etc. store in Lincoln, Neb.

UPS, he recalls, told him that outlets would see so much more volume they could easily hit $1 million in annual revenue, about four times what he was pulling in then. "They were going to make us the premiere shipping channel," he says.

But today Mr. Houser is wondering how much longer he can keep the doors open at his shop, now doing business as the UPS Store. His anticipated volume increase never arrived, while profit margins vanished as UPS cut the fees he got for handling packages. And the company opened another store nearby, which siphoned customers, the 34-year-old franchisee says.

Mr. Houser says that when he sees UPS ads that ask "What can Brown do for you?" his response is: "Stop competing with me."

Brown and Blue
The frustration in his flip remark is shared by scores of UPS franchisees across the country. They say the acquisition that held such promise hasn't improved their business — and that, in fact, things have gone downhill for many since UPS took over.

UPS, they say, laid down policies that squeezed their revenue and profit margins, while saddling them with big costs for converting their outlets to the UPS Store model. At the same time, the franchisees lost the ability to deal with other shipping companies, such as FedEx Corp., which they say hurt them competitively.

Some franchisees say they are barely hanging on. Others have walked away from the business. Hundreds have joined one of several franchisee groups openly hostile to UPS, sometimes to finance litigation against the shipping giant.

Although these franchisees represent a fraction of the roughly 4,100 UPS Store retailers in the U.S., their ire is evidence of an acquisition fraught with conflict. UPS's purchase of Mail Boxes Etc. was seen as a quick, cheap way for UPS to take business away from archrival FedEx and the U.S. Postal Service.

But it quickly became a culture clash between a corporation known for running a tight ship — it washes its fleet of trucks nightly — and a band of freewheeling individuals who chafe at being told what prices they must charge and at having to wear uniforms.

"We realize that not every franchisee is happy," says Stuart Mathis, president of UPS's franchising unit, which kept the name Mail Boxes Etc. "Our goal is to employ strategic initiatives to help drive additional customer traffic and improve [franchisees'] sales."

To do that, a spokesman adds, UPS has increased sales support to help franchisees provide better service and generate repeat sales and has sought ways to funnel more corporate business into the stores. In addition, the company says it offered "substantial subsidies" to franchisees to help cover store-conversion costs.

As for capping prices franchisees can charge, the company says it did so because "our research showed that the high rates franchisees were charging simply didn't sync with what customers were willing to pay." Customers also found differences from store to store confusing.

As for the possibility of $1 million a year in revenue, the company says that figure was part of a pitch to get Mail Boxes Etc. franchisees to convert to UPS's new format. But the number wasn't a promise, UPS says — it was simply intended to show how multiyear gains in customer counts and other factors could enhance a store's take.

Since the acquisition, a UPS spokesman says, overall sales have grown "impressively." The company doesn't break out results for its retailing chain. But sales data reviewed by The Wall Street Journal show that domestic UPS Store outlets averaged about $295,000 in revenue last year. Five of the stores had more than $1 million in sales subject to royalty. That number excludes the sale of stamps and other postage and some weekend delivery charges. Mr. Mathis adds that same-store sales, a key indicator, rose last year.

Bargain Price
Before buying Mail Boxes Etc., UPS had sought ways to expand its retail reach beyond supermarket service counters. It had even built several prototype stores. But acquiring Mail Boxes Etc. from ailing U.S. Office Products Co. in 2001 was considered a more expeditious, efficient course. Experts considered the $191 million price a bargain; three years later, FedEx would pay $2.4 billion to acquire the Kinko's chain.

After testing several names for the new venture, management settled on the UPS Store. That name "clearly did the best job of driving customer traffic, improving shipping volume and enhancing the franchisees' profit opportunity," says Mr. Mathis.

Eventually, about 87% of Mail Boxes Etc. franchisees decided to rebrand under the new name. Those refusing to convert were living on borrowed time. When their 10-year franchise license expired they would have to either switch to the UPS Store model or try to make it on their own as independents. A major motivator to switch: UPS wouldn't advertise the Mail Boxes Etc. name.

As franchisees hung up UPS Store signs, many of them found that more packages were coming in. But then the new owners made some dramatic changes. First, UPS restricted the maximum price stores could charge. Also, prices were set nationwide, with no allowance for differences in overhead costs. Finally, UPS encouraged individuals and small businesses to set up Internet accounts, where they could produce labels for their packages themselves.

Those accounts enjoyed discounts from the retail prices UPS Stores charged. Franchisees got $1.10 for handling prelabeled packages, rather than several dollars more. Many store owners complained they were becoming largely drop-off sites.

Franchisee groups sprang up openly critical of the new owners. One of them, Platinum Shield, has brought a lawsuit set for trial this November in state superior court in Los Angeles. The group, whose name is an allusion to UPS's symbol, a gold shield, alleges that the shipping company "systematically destroyed" the Mail Boxes Etc. franchise network and replaced it with UPS Stores.

The group alleges, for instance, that UPS asserted that franchisees that didn't convert would go out of business, partly because their brand no longer would be supported. Also, franchisees would lose their exclusive operating territory.

UPS's Mr. Mathis won't comment specifically on any pending litigation. But he says, "We're confident we're going to prevail in court," and terms many of the allegations "without merit." He adds, "Nobody wants to be in litigation with any franchise owner."
Other franchisees, intent on negotiation rather than litigation to win concessions, have formed the Brown Board Owners Association. "We seek a dialogue which can result in relief for a larger percentage of the UPS Store network," the group said in a recent letter on its Web site. The letter contends that "the health of the UPS franchise network is not sound." Among the changes it seeks: a higher rate for handling drop-offs.

UPS says it is aware of various franchisee concerns and is addressing them. Mr. Mathis, for one, acknowledges that although customer traffic is up, it isn't "growing as fast as we would like."

"There is no benefit to UPS to see franchisees unhappy or struggling," he says. Calling franchisee profitability the No. 1 issue, he says the company is pushing document services, among other offerings, as part of an integrated marketing plan to improve the bottom line for store operators. "We want to rearrange our sales pie," he says.

Changing Hands
At the same time, Mr. Mathis, who envisions a network of at least 5,000 domestic outlets within two years, says he's pleased with the growth of the chain. Last year, the number of stores rose by 316, a significant increase for a franchiser. Restaurateur Applebee's International Inc., the nation's largest casual-dining chain, for example, added 92 franchised units in fiscal 2005. UPS's goal this year is 300 new stores, Mr. Mathis says.

Still, UPS Store turnover is significant. From 2002 to 2005, a total of 1,936 stores either were transferred to new franchisees or had their franchises canceled, terminated or not renewed. Last year there were 513 such changes, representing 11.7% of the retail outlets then open.

"Anything over 5% is too high," says Susan Kezios, president of the American Franchisee Association. But Rich Hallabrin, a spokesman for UPS's franchise unit, counters: "When you consider that we have opened an additional 1,000 centers since the rebranding, our turnover continues to be well within the typical range for a system our size."

Changing consumer habits also figured in the fortunes of some franchisees. Arthur Brestlin, who recently closed his two UPS stores in Staten Island, N.Y., blames some of his problems on the growth of online shipping.

"Ladies would come in with packages of Victoria's Secret garments they wanted to return," he says. Often, these online merchants had cut a special shipping rate with UPS and included a return mailing label with the goods. In handling a prelabeled package that was simply dropped off at his store, Mr. Brestlin would be paid $1.10 from UPS. Had he been able to wrap, label and otherwise prepare the package for the customer, he says, he stood to take in $10 or so.

A former floor broker at the New York Stock Exchange, Mr. Brestlin thought he had done his homework before investing in the franchise. He undertook extensive due diligence, visiting UPS Store outlets throughout the New York metropolitan area.

"We got mostly rosy pictures, with great expectations for the future," Mr. Brestlin recalls. But once he opened in July 2004, he mostly saw red. Along with Internet retailers, he blames various other culprits, including delays in obtaining signage for his first store.

Then the big year-end holiday shipping season, on which such operations depend, didn't generate enough business to tide him over, Mr. Brestlin says. Within weeks, he found himself having to "kick in a fair amount of money" to keep both stores going. Soon it became apparent that his venture into franchising wasn't paying off as he'd hoped, and he walked away from the business. "I had to stop losing my money," he says.

Some franchisees say they're making a decent living, and have few complaints. Audrey Jones, who with her husband owns a UPS Store in downtown St. Louis, says their venture is faring well. That's partly because the construction company that recently completed a new baseball stadium nearby used the store to ship documents, drawings and parts.

Still, Mrs. Jones wishes that UPS drivers and other company representatives would refer more business to her. "Cross-marketing is missing that could really help us," she says. "They need to emphasize our other services, so people don't think we just ship."

Suburban Philadelphia UPS Store franchisee Daniel Brady, whose family operates six outlets, says they converted from Mail Boxes Etc. stores immediately because it seemed advantageous to take on what he calls the strongest name in the shipping business. Even so, "I don't sniff the roses every day," he says.

For one thing, Mr. Brady says, UPS used to be one of Mail Boxes Etc.'s biggest competitors. The fact that the chain now must "go to UPS to negotiate all kinds of things for this franchise…makes me uncomfortable." But, he says, "UPS is starting to understand retail. Before us, they didn't know retail at all."

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