The World of Private Postal Service Is Starting to Go First Class : Retailing: Franchised outlets for mail boxes and package delivery are thriving. They offer increasingly upscale conveniences such as fax and message taking.

Not so many years ago, private postal and packaging outlets labored under the unsavory public perception that they were back alley mail drops used by nefarious types to avoid the law, bill collectors or both.

The private postal service industry, however, has moved upscale in recent years, gaining popularity, respectability and even favor on Wall Street. The outlets--categorized by the U.S. Postal Service as “commercial mail-receiving agents”--have transformed themselves by expanding their array of services far beyond just the rental of private mail boxes.

Many of the mail centers now offer services such as fax, word processing, message-taking and printing, services that have won them a huge following among small-business owners who cannot afford to outfit and staff an office.

There are also signs that the major package and letter carriers are recognizing the value of the retail mail centers.

Mail Boxes Etc., the largest of the private mail center chains, in June announced a deal with United Parcel Service under which UPS would pay $11.3 million for stock and warrants that would give it a 17% stake in Mail Boxes.

The deal, which has not been finalized, has raised protests among Mail Boxes’ rivals, who claim that the alliance may give Mail Boxes an unfair competitive advantage.

The deal highlights the fact that private mail-box rental now represents only a small slice of the revenue pie for Mail Boxes and other national chains, including PostalAnnex and Pak Mail Centers of America.

Although a major selling point for many of these operations is 24-hour access to private mail boxes as well as call-in services allowing clients to find out if they have mail waiting, the mail centers’ largest source of revenue is package preparation and handling for such carriers as UPS, DHL and Federal Express. Mark-up on postage and fees for wrapping and handling packages is a primary profit source.

Observers credit the growth explosion in small businesses, which now account for more than half of private mail centers’ revenue, and a corresponding decline in service quality at U.S. post offices, for making the industry possible.

The popularity has helped drive the industry’s growth from 1,000 outlets in 1979 to more than 6,000 outlets nationwide today, according to Associated Mail and Parcel Centers, an Albuquerque-based trade group.

“The main reason the industry has developed is because the consumer had desperately needed a more service-oriented and convenience-oriented program than what the post offices and major carriers have to offer,” said John E. Kelly, president of Pak Mail Centers of America, an Aurora, Colo.-based 200-outlet chain that is the nation’s second-largest private mail center network.

“The packaging and shipping industry has become the travel agent for packages,” Kelly said. “If you had a mounted mako shark you want mailed back home, what would you do? You take it to a Pak Mail store because they can make all arrangements to get it crated and shipped. Otherwise, the average consumer wouldn’t even know where to start.”

The industry is not through growing, which is why Wall Street is paying attention. Nationwide, there should be room for a minimum 15,000 to 17,000 private mail outlets, said Alex. Brown & Sons analyst Christopher Vroom. Boosters say 20,000 outlets--half as many as there are U.S. Postal Service branches--is not an unreasonable projection.

International expansion is also planned. Mail Boxes Etc. recently opened its first franchise in Mexico and will soon be selling European franchises as well.

Most of the private mail centers are located in strip shopping centers with easy parking and access, two keys to a location’s success. Centers located in giant shopping malls, on the other hand, have proven less successful because of the distances customers must carry packages. Nevertheless, Pak Mail has signed a deal to open up as many as 300 of its outlets in Sears, Roebuck & Co. stores, many of them situated in shopping malls, over the next two years.

No company illustrates the success of the private mail center concept more than San Diego-based Mail Boxes Etc., the industry’s leading franchiser, which has grown from 57 outlets in 1983 to more than 1,300 today. Mail Boxes, which is now adding an average of one new franchise every day, is at the top of Alex. Brown & Sons’ list of high-growth companies, Vroom said. Both Mail Boxes and Pak Mail stock is traded over the counter.

Mail Boxes is widely credited with inventing the concept of the private postal office as a business communications center. Company President A. W. (Tony) De Sio said the franchising strategy adopted by Mail Boxes and others has changed the industry from a fragmented one with hundreds of tiny firms to one that someday will be dominated by national chains, much as 7-Eleven dominates the convenience store industry.

One third of all mail and package handling centers are now franchised by chains such as Mail Boxes Etc. and PostalAnnex, both headquartered in San Diego, and Pak Mail. Ten years ago, virtually all private mail outlets were independent and company owned.

Mail Boxes began as a chain of company-owned stores but found out that a business with such a heavy customer-service orientation thrived when the owner was on the premises supervising day-to-day operations. For that reason--and to facilitate rapid growth of the essential national network--the firm turned to franchising.

The strategy is starting to pay off. Mail Boxes Etc.’s system-wide revenue increased to $338.4 million for the year ended April 30, up 44% from the previous year. Company revenue was $25.7 million for the year, up 33% from fiscal 1989. Its net income was $1.5 million, down from $2.4 million the previous year, a decline that reflects a one-time charge of $2.8 million to settle litigation in 1990.

“Business-to-business services” such as the private mail handling outlets are currently among the fastest-growing franchising categories,” said Peter Holt of the International Franchising Assn., a trade group based Washington. “Mail Boxes is an excellent example of a company that identified a niche that wasn’t being serviced and built a franchise around it.” “These are the businesses that basically are geared to helping the businessman getting their products mailed. . . . They also target a consumer who hates the lines at the post office,” Holt said.

The turnkey cost of a Mail Boxes franchise runs about $65,000, about half of which the firm will finance through equipment-leasing programs. That start-up cost includes an initial franchise fee of $19,500. Each franchisee also pays out 7% of store revenue in royalties.

Under terms of its stock deal with Mail Boxes, UPS would have the right to raise its stake to 35% after one year and to appoint a board director.

The deal sent ripples through the private mail industry and beyond. Mail Boxes executives, who say UPS packaging represents 40% of a typical franchisee’s revenue, have touted the investment as the precursor of an undefined “strategic relationship.” Just what the relationship could entail be has not been made clear although some kind of joint marketing effort is likely, company officials say.

UPS may even buy the rest of Mail Boxes stock someday, which would help give the package carrier the retail presence it now lacks. Long-distance letter and package carriers have felt the need for accessible retail outlets, but most have been unable to make them profitable, analysts say, pointing to problems that Federal Express has had with its retail counters.

“It took eight years, but UPS finally realized that private post offices are increasingly becoming the place for pickup and delivery of packages,” said Blaine Roberts, president of Morgan Roberts & Co., a La Jolla investment firm whose clients hold more than 5% of Mail Boxes Etc. shares. Knowledge of the relationship UPS has with Mail Boxes Etc. “can drive customers into the stores, letting UPS centralize their pickups.”

For its part, UPS says it acquired the Mail Boxes Etc. stock for investment purposes only and has no intention of taking control. The $12.4-billion corporation said the Mail Boxes Etc. investment is just one of many that it has made in transportation and communications stocks, although UPS acknowledged that the Mail Boxes stock buy is its first in a commercial mail service.

The news of UPS’ investment raised the hackles of Mail Boxes’ competitors. Despite UPS’ assurances to other private mail centers that its investment will not cause it to give Mail Boxes Etc. any break on rates, many rivals worry that an alliance with UPS, which controls 95% of the nation’s package volume, would give Mail Boxes Etc. an unfair advantage.

Jim Baer, president of Associated Mail and Parcel Centers trade group, said his group has sent letters to legislators and government agencies protesting that the relationship could lead to unfair trade practices, given UPS’ “monopoly on ground parcel shipping.”

“The scenario could be that (UPS) will somehow market this relationship, possibly end up acquiring Mail Boxes Etc.,” Baer said. “UPS could be after a combination that will control the delivery of packages through UPS and the receipt of packages through Mail Boxes Etc.”

“What this is going to do is damage small businesses and by doing so hurt the general public.”

Neither has the Postal Service overlooked the deal. Richard Strasser, senior assistant postmaster general, said that the deal “makes it a little challenging (because) it gives them a retail presence and avoids them having to run it themselves. . . . It will help them in competition with us and with Federal Express.”