FedEx purchased Kinko’s for 2+ Billion Dollars. Kinko’s doesn’t exist any more, but I think we can all agree that Paul Orfelea built an empire.
Dave Young:
Welcome to The Empire Builders Podcast, teaching business owners the not so secret techniques that took famous businesses from mom and pop to major brands. Stephen Semple is a marketing consultant, story collector, and storyteller. I’m Stephen’s sidekick and business partner, Dave Young. Before we get into today’s episode, a word from our sponsor, which is, well, it’s us, but we’re highlighting ads we’ve written and produced for our clients. So here’s one of those.
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Dave Young:
Welcome to The Empire Builders Podcast. Dave Young here with Stephen Semple. And we were talking about empires. We’re talking about things that started small and ended up really darn big. And Stephen whispered today’s topic into my ear just as we were counting down, and it’s like, “Man, we’ve been on a run of nostalgic trips to our youthful times.”
Stephen Semple:
That’s kind of true, isn’t it? I hadn’t thought about that. But yeah, we kind of have been.
Dave Young:
So today we’re talking about Kinko’s. Kinko’s, the copier place.
Stephen Semple:
Kinko’s the copier place.
Dave Young:
If you didn’t have a photocopier at your disposal, you had to find a Kinko’s. That was it. That was your only other choice. Or find a print shop and wait a couple weeks.
Stephen Semple:
And it’s easy because Kinko’s sort of isn’t around any longer. It’d be easy to go, oh, well, they failed, and no, they didn’t. The reason why they disappeared was that in February of 2004, they were bought by FedEx for $2.4 billion. So when you look at all these FedEx stores, they were Kinko’s that basically FedEx took over. When you sell something for 2.4 billion, I call that an empire.
Dave Young:
I think so. I think so. How did they get started, and when?
Stephen Semple:
They basically started back in 1969, 1970 is sort of the starting point. It was founded by Paul Orfalea, and he started literally with 100 square foot shop across street from the University of California. And you got to remember, back then, photocopiers were really large. So his 100 square foot store, customers couldn’t come in.
Dave Young:
That’s mostly a photocopier, in those days.
Stephen Semple:
Customers would come up to the window and they would basically hand the stuff and it’d be copied and it would hand it back out the window. There was no room for customers in 100 square foot shop.
Dave Young:
Young people right now thinking about the size of a photocopier. When you’re talking 1970s, think of your deep freeze in the garage and add about a foot to the height of it, a chest type deep freezer. And I mean, this was serious technology, super expensive piece of equipment, but up until things like this, the only way to get a copy of anything was to run a piece of carbon paper through your typewriter with the original.
Stephen Semple:
Well, here’s how innovative photocopying was. And it wasn’t originally called photocopying. It was originally called Xerography. That’s the actual technical name for it, which is the reason why. It also then became known as Xeroxing things, but-
Dave Young:
Making a Xerox.
Stephen Semple:
And then for a bunch of reasons evolved in the photocopying, but I wish I remember which Bond film it was, but there was one of the really old Bond films where 007 breaks into an office, they lift up a photocopier from a crane and put it over so that he can photocopy some of these secret documents. When it’s being done in a Bond film, it’s amazing technology. Today we find it almost laughable. But going back to Paul, so Paul grew up being very business-minded. His whole family were entrepreneurs. His dad made clothes, he had uncles with various businesses with restaurants and all sorts of things. He enjoyed college, never missed a class. He had this mind for business. But while in school, this idea came to him because what he saw was this long lineup at the photocopy shop. So it’s 1969, copiers are big, but they’re getting more common. And the store is doing copies for three cents a copy, and there’s literally a lineup around the block. And Paul thinks to himself when there’s people in line, that’s a sign of success. Right? It’s a clue there.
Dave Young:
Well, opportunity for sure.
Stephen Semple:
Opportunity for sure. And his girlfriend is in Santa Barbara and he’s up in Santa Barbara. And guess what? The college at Santa Barbara, there’s no copy shop there. What’s happening is everyone’s going into the library, the library’s copying it for five cents, and the library’s not open as often, and things along that lines. And he starts realizing, look, if I could do high volume, I could do this at three cents. So he buys a copy machine and he leased some space. He borrows $5,000 from Bank of America. His dad co-signs on it. Here’s the thing that’s hilarious. When he rents his Xerox machine, Xerox at this point is still a pretty small company, but is growing really fast. They’re so screwed up in their billing. They’re not sending out bills for 90 days. He basically gets this 90-day float right out of the gate.
Dave Young:
That’s a headstart. That’s a headstart.
Stephen Semple:
Headstart. And to give you an idea how expensive photocopiers were, basically it was $1,100 a month, rent the photocopier in 1960 dollars.
Dave Young:
Yeah, these are six figure machines.
Stephen Semple:
He’s got that going. But his variable cost is a half a cent, and his average sale is four and a half cents. Because when people buy copier, copies, they also buy pet. He’s got all the other incident or they decide they want to have it in color, and that’s a little more expensive. So his average sale is four and a half cents. So he starts with this 100 square foot counter copier, window out to the street. And the name Kinko’s came because that was his nickname as a kid. He had kinky red hair and everyone called him Kinkos. So he said, “I’m just going to call it Kinko’s.” And it turns out to be a great name. Right? Super memorable name.
Dave Young:
Yeah, it’s brilliant because man, you and I have talked about this before, but naming a business, it’s tricky. It’s tricky, because you need to have something that just kind of rolls off the tongue and it’s almost better if it doesn’t mean the thing. There’s almost nothing worse than a business that’s named by some generic, descriptive term, right? He could have called it Bob’s. What’s his name?
Stephen Semple:
Well, in terms of founder, Paul. Yeah.
Dave Young:
Paul, he could have called it Paul’s Copies. And where would that lead? Kind of nowhere. I’m going to just attribute it to luck, but let it be a lesson.
Stephen Semple:
Absolutely.
Dave Young:
Let it be one of the key lessons.
Stephen Semple:
It was. It was. And he even says it was, and he even in interviews, talks about how it was brilliant. It was like a brilliant accident.
Dave Young:
It’s alliterative with the word copies.
Stephen Semple:
But at the same time, we’ve experienced this last time and give people a great idea, they don’t necessarily run with it. So he is finishing college at USC. He’s working a couple of days a week, and he has an employee, around the six-month mark having this business, he hires a manager, and then he does a store a year later in Irvine in an even smaller space. But what he suddenly realizes he should hit college campuses. So he starts going teach one of the college campuses across the country and opening this up. And because billing was so slow from Xerox, each one of these stores are cash flowing right away. Bam. Bam. Right out the gate. And he starts looking at around his industry, and what he notices is the big printers, the big players in the space were printers where they did copying as a sideline. So he said, “You know what? I should copy that.” And it was a disaster.
Dave Young:
The printing part was?
Stephen Semple:
Yeah, because presses would break, if it wasn’t the camera, it was this, if it wasn’t that, it was the other thing. He had no idea what he was doing. And he looked at it and went, “This is nuts.” So he sold off the print shops and said, “I’m just going to focus on the photocopy.”
Dave Young:
I’m guessing this development happens before these machines get turned into laser printers/copiers.
Stephen Semple:
Correct.
Dave Young:
Okay. So we’re talking about an entirely different technology buying printers. Yeah, yeah, yeah.
Stephen Semple:
But the interesting thing is he looked at his industry and he said, “I should copy what the people in the industry are doing.” And what he realized was he should not be doing that. He should be just focusing on the photocopying.
Dave Young:
Yeah. Because the next development’s going to take them out.
Stephen Semple:
But it’s this trap, right? I’m going to chase the leaders. You don’t become the leader by chasing the leader. You become the leader by setting a new game. So in 1973, he sells the print shops, focuses just on photocopiers. Then he has an idea, what he discovered in the universities. If a professor was referring to a book and it was only a small section of the book, they wouldn’t force the students to buy that book. They would just put that book on reserve and the students would have access to it, but it was limited. So they have the short access where they could get some copies or whatnot done to it. And what he did is he approached the professors and he said, “Let me know what books you’re doing with this. I’ll pre-photocopy the sections and sell them to the students.” And the professors actually loved it.
The professors absolutely loved it. They would basically leave a copy of the section on file with Kinko’s. Kinko’s would copy it for the students. Professors love this program, and how we know they love the program? We’ll come back to this in a minute. So as he grew, he didn’t franchise, he did the co-ownership thing. And what would happen is somebody would be working in the shop, in the company and see how much money it’s making and approach him to sort of go, “Hey, could I do this?” And what he would do is he put up part of the money, they would put up part of the money, and then Paul would run all of the back-office stuff. So the payroll and the accounting and all those other things. So he also knew how much money they were making and that’s how they grew. And it’s kind of interesting.
That’s kind of like how 1-800-GOT-JUNK? is growing these days. The people who are getting 1-800-GOT-JUNK? franchises are people who are working and really standing out in the franchise and then go on to become franchisees themselves. So they would put up about half the investment, they’d run the store and he would run the back-office, the accounting and whatnot. So between 1970 and 1980, he opens 80 stores. They’re really getting going, but structure’s a little haphazard. There’s no franchise model or anything like that. And he didn’t really control the brand, but he was reconciling bank statements, doing the accounts receivable. He’s in control.
Dave Young:
He’s doing a lot of work for 80 companies.
Stephen Semple:
But what he notices is there’s three keys for the person who’s running the store do. Motivate the staff, understand the customers, balance the books. That’s it. And management’s job is to remove obstacles, leave the customer loving you. In many ways, he was very surprised because the business would be actually quite easy to copy, no pun intended, quite easy to copy, but people didn’t do it. And he kept people loyal. And how he kept them loyal is gave them a good salary, they got a car, they had a pension plan, all that other stuff. And the other thing he would reinforce, he would say, “This may seem just copying, but we’re actually impacting people’s lives. We’re helping somebody get a job, because we’re copying their resume. We’re helping somebody have a really special 10th birthday.” And he would really reinforce that we are actually changing people’s lives. And that would really motivate the staff. And I thought, that’s a great lesson, because this would go, “What do you do?”
“I just doing this photocopy things.” Like, no, “Actually today help somebody get a job.” At a certain point, they wanted to start standardizing things, and that became a real, real challenge because he found some people were really great, wanted to push forward, others resisted. You know about that whole game.
Dave Young:
Sure. It is like a McDonald’s franchisee wanting to put soup in.
Stephen Semple:
Right. Right. Exactly. Exactly. Now imagine when you don’t even have a franchise agreement, how much fun that is. But here’s where things get really interesting, really interesting.
Dave Young:
Hey Stephen, I want to interrupt ourselves. That’s not proper grammar, but I did it anyway.
Stephen Semple:
There you go.
Dave Young:
In lieu of our commercial, this time, I thought maybe you and I could just chat for a minute.
Stephen Semple:
Absolutely. Sounds great.
Dave Young:
Our goal with The Empire Builders Podcast is to talk about business building strategies that have worked for people that started out small and became empires. We want to help you. If you’re a business owner and you’re listening to The Empire Builders Podcast because you want to build your own empire, we’ve got a pretty sweet offer for you. And that is to just spend 90 minutes chatting with us. It’s not a sales call on our part. It’s a 90-minute session where beforehand you do a little bit of homework and give us some basic background information about your business. And then we get on a Zoom call and we learn a little bit more about you, and we give you the very best advice we can give in a 90-minute session.
Stephen Semple:
And I’m going to say it is miles away from it. I hate these dog and pony sales calls, where, “I’m great, I’m amazing. Here’s samples of our work. You should hire us.” Which is part of the reason that makes us different is the fact that there is the scorecard and questionnaire that goes out that the owner sends back to us because it allows us to take a couple of days, do some research, put some thought, and come with some solid recommendations. Because it’s my belief that if we can provide some good insights that somebody may be more interested in hiring us, and certainly that’s a way better experience than meeting with some sales guy who runs you through a dog and pony. It’s lots of fun. It’s great value. People get a recording of it. I highly recommend people take us up on the offer.
Dave Young:
Easy to find us. You’re listening to our podcast, so find a way to request your 90-minute session with us. Looking forward to talking to you. Let’s get back to the story.
Stephen Semple:
Back to the story. So one of his partners, one of the partners also owns some convenience stores in the sheets market brand. And it’s a brand not… I was trying to find whether this was around any longer, but at the time was a big convenience store. Okay?
Dave Young:
Okay. Yeah, I’m not familiar with it.
Stephen Semple:
And they were open 24 hours. And one of the things that they would notice is they would do about $30 worth of business at night, and they do like 6,000 during the day. So they decided to close from 12:00 PM to 6:00 AM, and as soon as they closed at night, daytime business dropped 50%. Really? And this owner sharing this with Paul, and Paul goes, “We’re going to go 24 hours then.” And it took quite a while for him to convince somebody to go 24 hours, but as soon as they opened 24 hours, guess what happened? Daytime business went up 50%. Now here’s the thing that’s really interesting about this, and they still sold almost nothing at night. But here’s the weird thing, and when I was listening to an interview on it, there was all sorts of debates about why this happened and all sorts of theories on the psychology and whatnot.
I don’t care about any of that. Here, to me is the interesting lesson, and we see this over and over again. You get measuring things. Measure, measure, measure, measure, measure, measure, measure. “Oh, I’m measuring things from midnight to 6:00 AM we’re not selling anything. We’re losing money. Let’s close.” Easy measurement, right? But wait a minute, makes no sense that my daytime business would drop 50% when I close at night. That’s weird. That’s weird. But maybe that’s when you did your first client acquisition, because you’re the only one that’s open. Maybe your stores are far more noticeable because they’re driving by the strip plaza and they see it because the lights are on. Maybe it just holds a place in our brain because of that reliability. It doesn’t matter. The bottom line is being open longer, created more sales. And we’ve seen this in other places. Like I was thinking about Hoots and Thomas, our partners who do things in nonprofit, and they ran an experiment early on where they had a charity that didn’t send out letters through the summer because people didn’t give money in the summer.
So they stopped doing it. Well, they did a split test, sent half the list that way, the other half sent stuff through the summer. And guess what? The fall donations were so much higher, high enough that it actually paid for that summer campaign. So we got to be careful how we measure things. We’ve got to look at the big picture of this, looking at each individual piece and thinking this piece doesn’t impact, the other piece doesn’t happen. You got to step back and look at the big picture. And look, the other thing I admire Paul on, it would be easy to go, “Well, that’s a convenience store. That’s not a copy.” He had a copy shop, and he looked at it and went, “Huh, that’s interesting. Let’s do that.” I could imagine us taking that to a customer and going, “Well, that’s a convenience store. Yeah, but that’s convenience store and that’s milk and we’re doing copying. Our customers are business people and the likes of that.”
Anyway, it’s a big game changer. It’s mid ’80s. Competition is growing. But OfficeMax and Office Depot are coming into the business. And what Paul’s amazed at is none of them copy the 24-hour. So they own that. They continue to own that. And laser printers are getting cheaper. Now it’s the late ’80s. They’re nationwide. By 1990, they have 480 stores. They got 30,000 people, 500 people in the head office. And in 1989, they’re hit with a lawsuit from the big textbook manufacturers. Remember that whole thing?
Dave Young:
There you go.
Stephen Semple:
Remember that whole thing of copying part of the textbooks? Well, they got hit with copyright infringement. Remember earlier on when I was saying the professors loved them? The professors actually testified on his behalf but they lost. Congress then went on to codify what could be copied. And the professors still agreed with Kinko’s and still lost.
But what they started to notice was at this point was the business locations were starting to work better. So they basically started to wind down the college locations, moved away from the colleges, repositioned in the commercial locations with good, visible locations, and really became the office away from the office. New technology was really changing things. And they brought on more professional managers. And by 1996, they have 851 stores. They’re in every state, four countries, and he owns 100 stores outright. And at this point then, he’s starting to look for an out, an investment firm comes along, offers him $200 million for 30%, and they start making some changes, roll up partnerships into a single entity. He takes six months off. When he comes back, he realizes it’s not going to work. They buy the rest of him out, and then 18 months later sell to FedEx.
Dave Young:
Oh, they sold it to FedEx [inaudible 00:19:24]?
Stephen Semple:
But he still did well. So you think about it, he sold 1/3 for 200 million, and then he sold the rest. So he probably still got six, 700 million.
Dave Young:
He’s fine, he’s fine.
Stephen Semple:
He’s fine. Look, I don’t think he’s holding any yard sales to make payments.
Dave Young:
I can remember looking for a Kinko’s in the middle of the night when I was in college, because I’m a procrastinator. If I have an 8:00 class tomorrow, the paper that I was writing for it, probably finish it up about 3:00 in the morning.
Stephen Semple:
So the thing I want people to take away here, there’s a bunch of things. And one is, again, his observation. He noticed this thing in one town, and it wasn’t in the next and that got him started. But the other one is this whole idea of measuring. I love how this lesson from a convenience store, he transferred over to Kinko’s. Clearly OfficeMax and Office Depot were looking at him and going, they’re nuts because they’re losing money at night. Why would you ever do that? Because they could have easily done 24 hours, never did it because they got focused on the measuring by the hour rather than looking at the big picture. And things are not always as they seem.
Dave Young:
How hard would it be to keep an Office Depot open?
Stephen Semple:
Kinko’s was able to do it, but I think the problem is they were unable to get their head around, being open at night, affected the day.
Dave Young:
Man, as an entrepreneur, these are people that are burning the midnight oil. And if your office chair is all of a sudden just super uncomfortable and you just finally decide in the middle of night to get a new one, now I guess you go to Amazon.
Stephen Semple:
But the crazy thing is they weren’t even doing a lot of sales at night. It was just being open at night impacted the day. It’s crazy.
Dave Young:
It kept them in my top of mind awareness because I knew that I could go anytime I wanted to. The minute they say, “Oh you can’t go at night now.” I’m like, “Oh, well that doesn’t make them as special.”
Stephen Semple:
That part of the story I thought was really, really quite amazing. And so I want people to think about when you’re measuring things, be careful, don’t get super micro. The world doesn’t work that way. Things are far more interconnected than one would seem.
Dave Young:
Yeah, systems. It’s systems thinking.
Stephen Semple:
Yep.
Dave Young:
So keep that in mind. Oh, great story. That’s always fun talking about those businesses that we-
Stephen Semple:
The good old days.
Dave Young:
The good old days. I don’t know how good they were, but they were the old days, weren’t they?
Stephen Semple:
Yes, they are.
Dave Young:
Thank you, Stephen.
Stephen Semple:
All right.
Dave Young:
Thanks for listening to the podcast. Please share us. Subscribe on your favorite podcast app and leave us a big fat juicy five star rating and review. And if you have any questions about this or any other podcast episode, email to [email protected].
