PIP Battles to Make Buyout Pay : Printing Chain Grapples With Competition, Technology

PIP Printing, the nationwide chain of printing and copying stores with a reputation for getting jobs done quickly, was anything but quick when it came to selling itself.

It took more than two years from the time PIP’s directors first explored selling the company until last February, when the company’s management and the Tarrytown, N.Y., investment firm of Kane-Miller Corp. completed their purchase of the Agoura Hills company for $72 million.

PIP’s management ended up owning 18% of the company, and the Kane-Miller group controls the other 82% stake.

Now that the buyout is finished, PIP, which has the nation’s largest chain of printing franchises, faces a number of challenges in order to make the deal pay off.

Sometimes called by its former name of Postal Instant Press, PIP Printing faces increasing competition from scores of national printing companies, regional chains and small mom-and-pop copy and print shops. Technology is also changing quickly with the emergence of “desktop publishing,” which makes it possible for many people to do high-quality printing chores on home computers and laser printers.

In addition, a large number of PIP franchisees, such as John Mendolia, are restless. Mendolia owns PIP franchises in Bellflower and Long Beach and serves as president of the PIP Owners Assn., which represents franchisees who own about 550 of the 1,225 PIP stores nationwide. He complains that the franchisees’ voice is not heard often enough. “They have not recognized us. I think they perceive us as a union--rabble rousers and that sort of thing.”

Advertising ‘Ineffective’

Another complaint is that their franchise fees, which usually are about 8% of a store’s sales and another 1% for national advertising, are too high. They also complain that the company’s national advertising is not very effective and that it is difficult for franchisees to install high-tech printing systems when profits are squeezed by intense competition.

Franchisees also say PIP’s national advertising is ineffective because the company cannot afford to saturate the networks with commercials. They contend that the advertising dollars might be better spent in local markets. “We are not McDonald’s,” Mendolia said.

Saturation of printing stores is a problem cited by many PIP franchisees. Mendolia said there are eight PIP stores alone within a five-mile radius of his store in Bellflower. That doesn’t count the many non-PIP printing stores. In one Los Angeles Yellow Pages, for instance, there are 15 pages of ads for printing companies. In Southern California, there are 175 PIP stores.

Although PIP has more printing franchises than its competitors, PIP’s sales are relatively small. In its fiscal year ended June 30, 1988, it earned $4.1 million on revenue of $24.6 million, which came primarily from franchise fees. It owns only eight of its 1,225 stores.

“The industry is changing. It’s going from a quick printing industry more toward a commercial printing business. The products we are using are falling behind our competitors,” complained Dale Lang, who has a PIP franchise in El Toro and serves as vice president of the PIP Owners Assn.

Franchisees also are uncertain about their future in the wake of the buyout, concerned that the company’s primary goal may become selling more PIP franchises to increase revenue rather than improving the lot of current franchisees.

“It’s very hard to even try to guess what will happen with this thing,” Mendolia said.

Upgrading Encouraged

But officials from PIP and Kane-Miller say only that a minority of franchisees have complaints. Thomas C. Marotto, a former Xerox executive who is PIP’s president and chief executive, calls disgruntled franchisees a “10%-to-15% factor.”

Marotto argues that in any franchise operation a small segment of the franchise holders will be unhappy. He adds that franchisees are represented in committees and help management oversee such programs as advertising.

He added that PIP is actively encouraging owners to upgrade their stores by helping them finance purchase of equipment and remodeling, part of PIP’s attempt to transform its image so people view it as a printer for businesses rather than a photocopy shop.

PIP executives said the company’s ongoing advertising campaign, which features a man called “Mr. Success,” is a key to establishing PIP’s name. They add that franchisees help them decide on ads through committees.

Founded by Los Angeles commercial printer Bill LeVine in 1968, PIP grew into the biggest chain of printing franchises, ahead of such national chains as Sir Speedy based in Laguna Hills and Kwik Kopy in Houston. LeVine has sold his stock and is no longer involved in the company. Last year, PIP moved from its Los Angeles headquarters, which it had outgrown, to a new business park in Agoura Hills.

The cost to start a PIP franchise is $106,500. That includes a $40,000 flat fee, $60,100 for equipment and fixtures and $6,400 for supplies such as paper. The company requires a down payment of at least $25,000, with PIP typically financing the rest. In addition, franchisees must show that they have about $35,000 in working capital.

Franchisees estimated that a store typically grosses from $250,000 to $350,000, although some of them gross more than $1 million a year from their stores. A store may clear $25,000 to $75,000 a year, they said, and many stores are family-run operations in order to save money on salaries.

In late 1986, Kane-Miller, a food company that has been increasingly turning into an investment firm, bought 6% of the company’s shares and began adding to its stake, ultimately controlling more than 20% by late last year. Kane-Miller’s initial purchases helped trigger the sale of the company.

Kane-Miller’s involvement in PIP is reminiscent of the story businessman Victor Kiam tells about buying Remington Products, the electric shaver company that he purchased after he was impressed with a shave he got with one of the company’s shavers.

Harold Oelbaum, Kane-Miller executive vice president, said that shortly before his company bought stock in PIP it turned over a large printing order to a PIP shop in Westchester County, N.Y. It was a large order of papers concerning its pension fund that had to be distributed to its employees.

“We were terrified. We wondered if this little store could do it, and they did it,” Oelbaum said.

PIP’s Marotto said relations between the company and Kane-Miller were always friendly. Still, PIP was soon “in play”--meaning that the public company was attracting large investors and its sale was likely. Two other firms, Orion Capital and Fisher Foods, bought large stakes.

Marotto and other PIP executives decided that they wanted in on the act. “If the company was going to be put up for sale, we wanted to be one of the bidders,” Marotto said.

25% of Deal in Cash

A PIP management bid backed by a Chicago investment group, the Golder, Thoma, Cressey Fund, fell apart because of a lack of money. Then PIP’s managers called Kane-Miller and put together a leveraged buyout.

In a leveraged buyout, or LBO, money is borrowed to buy a company and is paid off through the sale of assets or with money generated from operations. In many cases, as much as 90% or of the purchase price is borrowed.

In this case, about 25% of the PIP deal was in cash. Kane-Miller supplied $18.5 million, with management supplying $650,000. Another $53 million was borrowed from Citicorp.

Kane-Miller’s Oelbaum said the buyout is not highly leveraged, compared to other buyouts. He added that Kane-Miller is interested in expanding the business and upgrading existing franchises, particularly in areas such as Chicago and Atlanta where he said the PIP franchise system has been underdeveloped.

“We should be viewed as a strong financial partner who is growth oriented,” he said. “We are not looking to sit back and not grow this company. If we did, there would be a lot better places to invest our money.”