Post Office Alternative Changes Its Route : Franchising: Mail Boxes Coast to Coast has had a hard time making a profit, but selling its Long Island network has helped.


Mail Boxes Coast to Coast Inc. in Encino is the largest franchiser for Mail Boxes Etc., the San Diego-based company that has gained attention with its nationwide network of post office alternative stores and steady earnings gains.

Since it was founded in 1980, Mail Boxes Etc. has grown to $25.7 million a year in revenues and about $1.5 million in net income. Mail Boxes Etc. stores provide the usual postal services, such as letter mailing and private box rentals, plus other office and shipping services.

With its 1,300 stores nationwide, Mail Boxes Etc. has practically cornered the market on private retail postal services. Its biggest competitor, Pak Mail Centers of America in Denver, has 250 stores.


Last month, in a move that analysts say enhances Mail Boxes Etc.’s credibility, United Parcel Service purchased an option to buy at least 17% of Mail Boxes Etc. “We clearly see their success and that’s what we’re investing in,” UPS spokesman Alan Caminiti said.

But although Mail Boxes Etc. has an impressive track record, Mail Boxes Coast to Coast, a separate company that is sort of a smaller clone of Mail Boxes Etc., has had a hard time making a profit. Since Coast to Coast was founded in 1984, it has lost about $1.4 million and has never had a profit for a full year, which probably accounts for why its stock closed Monday at 37.5 cents a share. Mail Boxes Coast to Coast has the exclusive right to set up franchise Mail Boxes Etc. stores in Los Angeles County and Manhattan and now has 105 stores.

In return for training and help with marketing, advertising and setting up the stores, new franchise owners pay Mail Boxes Coast to Coast a onetime $7,800 fee and a maximum of $2,000 for overseeing site selection and construction, plus ongoing royalty payments of 2.5% of their gross sales.

In the six months that ended June 30, Mail Boxes Coast to Coast posted a profit of $63,432 on revenues of $377,975. But that profit was due to the sale of its Long Island, N.Y., franchise network, which netted the company $251,255. Without that onetime gain, Mail Boxes Coast to Coast would have reported a loss.

The figures haven’t looked good for a while. After reaching $1.33 million in revenues in 1986, Coast to Coast’s revenues have declined every year, hitting $891,815 in 1989. The company blamed the drop on its decision to sell its three company-owned stores to concentrate on building its franchise network.

The basic problem was that Mail Boxes Coast to Coast had three big franchise areas to sell: Los Angeles, Manhattan and Long Island, and it was one too many. The company let its overhead costs and debt get ahead of its ability to cash in on a growing stream of royalties.

That’s because a large share of a franchiser’s costs come when it sells franchises to prospective owners, oversees construction or leases and helps the owner set up shop. An average Mail Boxes Etc. store takes about six months to get its sales up to full speed, meaning Coast to Coast’s royalty payments in the beginning are often just a trickle.

Now Coast to Coast has opted for a change in strategy. Though it still plans to nearly triple the number of franchises in Los Angeles and Manhattan within about three years, it is also cutting back. The sale of its 10-store Long Island network to Mail Boxes Etc. in June was the first step.

“Long Island wasn’t developed as rapidly as we would have liked,” said A.W. (Tony) DeSio, president and chief executive of Mail Boxes Etc. “I think they had too much area and weren’t able to effectively develop it all simultaneously.”

The sale helped Coast to Coast cut marketing costs and reduce its long-term debt from about $350,000 to less than $40,000. Company executives said they are planning more cutbacks that will reduce overhead by $150,000 a year, but they would not elaborate.

The trick now is for Coast to Coast to grow as quickly as possible by selling more franchises in Los Angeles and Manhattan--both high-density areas where stores typically do a higher volume of business--while continuing to keep a lid on costs. That way, it can afford to wait out the time it takes for the royalties to start rolling in.

Gary Williams, Coast to Coast’s president, said the company will turn the profit corner as early as next year. “Wherever there’s a post office, we’ll have a store,” Williams said.

There are, however, some striking differences between the U.S. Postal Service and Mail Boxes Etc. stores. For one thing, the stores don’t deliver mail.

But Mail Boxes stores do provide a host of services that post offices don’t. They are outlets for Ticketron and pickup points for private carriers such as Western Union, Federal Express and DHL Airways. They also offer notary services, fingerprinting and faxes, make keys, print invitations, wrap packages and take passport photos.

Mail Boxes stores look different too. Instead of “Most Wanted” signs, the stores have brightly printed posters advertising Christmas card printing and stand-up displays with greeting cards and packaging materials. Shelves are stuffed with office supplies such as pens, pencils, glue and tape.

“We’re the 7-Eleven of business and postal services,” said Rick Young, owner of the 1,080-square-foot Mail Boxes Etc. in Canoga Park, one of the most successful stores in Coast to Coast’s network. Young said he caters to 600 to 800 customers a day and grosses about $27,000 a month.

Prices vary from store to store, but the average markup on postal services is 10% to 20%. At the Canoga Park store, for instance, Young charges 28 cents for a 25-cent first-class stamp. Box rentals, one of the most popular services, run anywhere from $12 to $20 a month, depending on the store and the box size. The most common size of post office box costs $14 for six months.

But unlike post office boxes, Mail Boxes Etc.’s boxes are accessible 24 hours a day and mail can be checked and even read over the phone with the proper authorization. Another advantage Mail Boxes Etc. touts is that instead of having a “P.O. Box” address, the address is listed as a street and suite number--lending some credibility to small business owners who work out of their homes and account for at least half of Mail Boxes Etc.’s business.

For private freight services such as UPS and DHL, Mail Boxes stores charge the regular published rates. A DHL letter sent overnight to anywhere in the world, for instance, costs $14.

Williams, 39, was a musician in 1981 when he read an ad for Mail Boxes Etc. Seeking a steadier line of work, he decided to look into becoming a franchiser. Using his savings and some backing from Mail Boxes Etc., Williams started a franchise network in Phoenix that became so successful that the company asked him to sell the Phoenix network and start selling franchises in the San Fernando Valley.

Meanwhile, Herbert Goffstein, 62, one of Mail Boxes Etc.’s founders and its onetime chairman, decided to leave the corporate suite for a more entrepreneurial role and in 1984 he and Williams joined forces to sell franchises in Los Angeles County. Goffstein is now Coast to Coast’s chairman.

In 1986, Williams and Goffstein started the Manhattan and Long Island networks. In 1987, they took the company public in an offering of units made up of stock and warrants to purchase more stock.

Williams and Goffstein together own about 50% of Coast to Coast’s stock. Williams said he believes that investment will finally start to pay off.

“We’re ready to turn the corner,” he said.