FedEx purchased Kinko’s for 2+ Billion Dollars. Kinko’s doesn’t exist anymore, but I think we can all agree that Paul Orfelea built an empire.

Subscribe: Apple Podcasts |  Google Podcasts |  Amazon Music |  Blubrry |  RSS |  More

Dave Young:
Welcome to The Empire Builders Podcast. Dave Young here with Stephen Semple. And we’re 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. 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 of 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. 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 the street from the University of California. And you have to remember, back then, photocopiers were really large. So his 100 square foot store, customers couldn’t come in.

Dave Young:
That’s mostly the size of 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 a 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, a 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 remembered 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 restaurants, and all sorts of things. He enjoyed college, and 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 are people in line, that’s a sign of success. Right? It’s a clue there.

Dave Young:
Well, an opportunity for sure.

Stephen Semple:
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 those lines. And he starts realizing, look, if I could do high volume, I could do this at three cents. So he bought 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.

Stephen Semple:
And to give you an idea of how expensive photocopiers were, basically, it was $1,100 a month, to 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 half a cent, and his average sale is four and a half cents. Because when people buy copies, they also buy pens. He’s got all the other incidentals. 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 the 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. And he even says it was in interviews. He 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 he suddenly realizes he should hit college campuses. So he starts going to each 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 is cash flowing right away. Bam. Bam. Right out the gate. And he starts looking 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.

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 sold the print shops, focusing just on photocopiers. Then he has an idea of 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.

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 do 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 the structure’s a little haphazard. There’s no franchise model or anything like that. He didn’t really control the brand, but he was reconciling bank statements, and 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 are three keys for the person who’s running the store. Motivate the staff, understand the customers, and balance the books. That’s it. And management’s job is to remove obstacles and 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 he 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 thing.” Like, no, “Actually today help somebody get a job.” At a certain point, they wanted to start standardizing things, and that became a real challenge because he found some people were really great, and 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. 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. So one of the partners also owns some convenience stores in the Sheets market brand. At the time it 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 shares 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, when I was listening to an interview on it, there were 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, it makes no sense that my daytime business would drop 50% when I close at night. 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 brains because of that reliability. It doesn’t matter. The bottom line is being open longer is creating more sales. And we’ve seen this in other places. 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 and 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 have 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 shop.” 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 a 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 have 30,000 people, 500 people in the head office. And in 1989, they were 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 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, rolling 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.

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 600 or 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 finishes at 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? They could have easily done 24 hours but never did it because they got focused on 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 who 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 the 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 questions@theempirebuilderspodcast.com.

Latest posts by Stephen Semple & Dave Young (see all)