PostalAnnex+ Joins Mail Franchise Stampede

Jack Lentz, founder of Postal-Annex+, was small potatoes when he agreed in late 1985 to attend a lunch meeting with Anthony DeSio, president of San Diego-based Mail Boxes Etc., the nation’s leader in privately owned postal-service stations.

At the time, Lentz owned three postal-service outlets--in University City, San Ysidro and El Cajon--and was planning for the day he would lay claim to 18 stores of his own.

The lunch was arranged because DeSio was interested in buying one of Lentz’s sites to add yet another franchise to what was then Mail Boxes Etc.’s 230-outlet chain, the largest provider of private mailbox rentals and related services.

“He asked me if I had a price, and I said, ‘No, I haven’t thought about that,’ ” recalled Lentz, a retired insurance executive who had entered the postal-service business with encouragement from a similarly employed friend.

Instead, Lentz left the fateful meeting with a concept he had never considered: franchising.

Since then, PostalAnnex+ has sold 83 franchises, including the three originally owned by Lentz. Last month, less than five years after the meeting with DeSio, Entrepreneur magazine ranked PostalAnnex+ among the top 25 new franchises in the nation. In fiscal 1989, the company grossed $1.5 million, more than doubling its 1987 revenue, and is expected to pull in $2.5 million in fiscal 1990.

In total outlets, PostalAnnex+ still trails Mail Boxes Etc., a publicly held company that has more than 1,100 franchises worldwide and recorded $2.4 million in profits in fiscal 1989. But the up-and-comer, PostalAnnex+, is rapidly gaining on a field of contenders for second place, led by Denver-based Pak Mail Centers of America, with 238 outlets.

Lentz and DeSio have not spoken since their luncheon, which appears to have left a bitter taste in DeSio’s mouth.

“He brought up the possibility of selling that store (in University City) and the others,” said DeSio, whose recollection of the meeting differs substantially from Lentz’s. “We really weren’t interested. The other stores were in pretty bad locations, losing a lot of money. As a result, we decided just to go ahead and take our franchisee elsewhere.”

Each company pursued its own expansion plan, eventually making San Diego County home to more than 100 alternative postal-service outlets, more locations per capita than any county in the nation, industry experts say. Mail Boxes Etc. lays claim to 55 of them, PostalAnnex+ to 40. The rest are in the hands of other chains and independent operators.

Lentz and DeSio agree that the marketplace for alternative postal-service stations--which offer customers everything from post-office boxes and office supplies to facsimile and answering machine services--is far from achieving its potential. Although there are now more than 6,000 alternative postal outlets nationwide, estimates of the number of outlets the national market could bear range from 20,000 to 40,000.

“The indications are that we’re far from the point that would indicate we are near any point of saturation,” said Roger Lipton, managing director of Ladenburg, Thalmann & Co., a New York investment banking firm specializing in the franchising industry. “Ten years ago, people thought McDonald’s had already saturated the marketplace. Today, they’ve got almost three times the number of stores.”

If the market could support just one private postal-service station for every U.S. Post Office in the nation, he said, it would mean there is room for more than 40,000 alternative outlets.

“The services provided (by companies such as Mail Boxes Etc. and PostalAnnex+) are substantially broader and different from those provided by the Post Office,” Lipton added. “And what we have found with other examples is that if service providers do their job professionally, the market has proved to be broader than anyone expected.”

Alternative postal outlets were born of a market niche created in 1979, when high labor costs forced the U.S. Postal Service to stop building post offices. The Postal Service vowed instead to place mail stations in gift shops and other retail outlets, to be run by independent operators.

But the policy left a shortage of post-office boxes in many major cities. And, as the population base expanded, the demand for postal services increased.

Mail Boxes Etc. entered the scene in 1980, offering post-office boxes to clients in free-standing stations for a quarterly fee comparable to that charged by the U.S. Postal Service. Despite the ability of companies such as Mail Boxes Etc. to provide some services more inexpensively than the government, the U.S. Postal Service did not welcome the commercial mail-receiving outlets.

Indeed, the U.S. Postal Service refuses to forward mail to anyone who receives mail at a commercial station.

U.S. Postal Rate Commissioner John Crutcher, one of five commissioners appointed by the President and an outspoken critic of the U.S. Postal Service, said: “It’s ridiculous for the postal service not to negotiate with these people to handle all of the normal mail services that people need. . . . If, instead of fighting with them, they would make common cause with them, then the postal service would be relieved of the necessity of manning all those substations.”

But U.S. Postal Service spokeswoman Sharon Hamilton denied that there is any fear of competition with commercial outlets and described the government’s service as more reliable and convenient.

When Mail Boxes Etc. first opened, the bias against commercial outlets reached beyond the U.S. Postal Service.

“Initially, these businesses were called post-office drops, mail drops. It had a bad connotation,” said Blaine Roberts of La Jolla, a member of Mail Boxes Etc.’s board of directors whose father, Norman, is a stockholder. “The idea was a lot of shady operators used them because that way people couldn’t find their home. But now it has evolved to be a very practical and perfectly legitimate way to do business.”

During Mail Boxes Etc.’s first year in business, it began selling franchises, a dynamic expansion method that proved to be extremely successful and cost-efficient. Housewives, retired postal workers, schoolteachers and even marine biologists bought franchises.

“When we started this company, if we put a mirror under their nose and it steamed up, we gave them a franchise,” Mail Boxes Etc. Vice President Bob DeSio said. “We qualify them a little more now.”

Mail Boxes Etc. virtually invited competition, however, when it misjudged the market. The company now acknowledges that it granted its first franchisees larger than necessary territories, which, in effect, opened retail holes for competitors such as PostalAnnex+.

Patricia Langan, a real estate agent who, along with her husband, Patrick, bought a PostalAnnex+ franchise in mid-1988, said they were attracted to the business after becoming regular customers at a PostalAnnex+ in Solana Beach.

“We were familiar with it, we used it all the time,” Langan said. “And we saw it being a business of the times, one that a lot of people want to use. We also thought it was a clean business. We’re not slicing tomatoes.”

The fast-food analogy, though not entirely appropriate, has become a persistent theme among those in the postal-service industry. Mail Boxes Etc. President Anthony DeSio frequently promises to turn his business into the McDonald’s of commercial postal services.

Says competitor Lentz of PostalAnnex+, “If he wants to be the McDonald’s, I’ll be happy to be his Jack in the Box.”