Kinko's chief: 'Willing to take short-term pain'

NEW YORK (Fortune) -- Five years ago Kinko's CEO Gary Kusin tried to poach Ken May from FedEx (Charts) to serve as his chief operating officer. Happy working for the global shipping giant, May declined, but as fate would have it, he ended up in that role anyway after FedEx bought Kinko's in February 2004.

So far, the acquisition has been an utter disappointment, as critics clamor that Kinko's has nothing to do with FedEx's core business. But May, the Memphis native who's now CEO of the $2 billion FedEx Kinko's division, has a new plan to profitably grow this struggling business and to better integrate it into FedEx's $34 billion empire. He detailed the strategy to Matthew Boyle during a visit to Fortune's offices this week.

What went wrong with Kinko's?

We were focused on the high-end commercial print business, but that was not a sustainable business model. We were competing against Xerox (Charts) and Ikon (Charts), and they are trying to provide copy services to sell machines. We don't sell machines. They could use copying as a loss leader. So we were underwater on quite a few of the deals we signed, with negative margins.

What's the new strategy?

The new strategy focuses on three customer segments - small and medium-sized business, mobile professionals, and convention centers and hotels. We took our sales force off the street and retrained them on [those segments]. In early December we got them back out on the street, and our contract flow has picked back up.

There are 40,000 new customers we're calling on that we didn't call on before. On the convention side, we're in the Javits Center, we're negotiating the McCormick Center, and we just signed the San Diego Convention Center this week.

We're also expanding: Over the last five years we hadn't opened up 100 stores. But next Monday in Miami we will open the 100th store of this fiscal year. Our plan is to open 200 stores this year, 300 the next, and 400 the year after. The traditional FedEx Kinko's was 6,000 square feet, but the new ones are 2,000. It's more intimate, but we still provide the same breadth of services.

What about international expansion?

When Gary [Kusin] was here, our plan was to expand domestically and internationally simultaneously. But [CEO] Fred Smith agreed to put international on the back burner. This year, we will open 10 stores outside the U.S., and 38 next year, mainly in China.

How long will this turnaround take?

You will not see an appreciable margin improvement at FedEx Kinko's for three years because of the investment in training, new products and stores. Our operating margins will stay around 1 percent. We are willing to take short-term pain to build a sustainable enterprise. For example, we spent $15 million retraining everybody at Kinko's on quality customer service. That's 20,000 people, including me. Since then our customer complaints have been cut in half.

How do you differentiate Kinko's from the UPS (Charts) Store?

We're company owned and they are franchised, so you get the same customer experience in all of our stores. They are a shipping company trying to say they offer copy services, but they are not digitally connected. If you go to a Kinko's and need large job done, because we have a digital network, we have the ability to move the work around to different stores. They don't have that ability.

Do you forecast a slowdown in GDP growth this year?

We're in line with a 2.2 percent increase. That said, you're not going to see less retail shipping coming through our stores. That's why we bought Kinko's in the first place: it wasn't for the copy and print business but [to gain] access to small and medium-sized businesses. The ability to bundle solutions is important. There are times we go in [to a client] with Kinko's as the loss leader, so we can hook that company's shipping business.

You started your career at UPS; why did you move to FedEx?

I worked for UPS for three years in college and became a part-time supervisor. To become full-time, you had to drive a truck. I said, I am not driving a truck with a college degree. At the same time, FedEx was looking for night shift supervisors at its Memphis hub, and I got a call for an interview. I showed up at Memphis and shipped 162,000 packages my first day. I thought I would be here six months. I had no idea.