Fritz Companies, Inc.
Fritz Companies, Inc.
Fritz Companies, Inc.
Sales: $516 million
Stock Exchanges: NASDAQ
SICs: 4731 Freight Transportation Arrangement; 4226
Special Warehousing & Storage, Not Elsewhere Classified
Fritz Companies is one of the largest firms in the integrated logistics field. Extending well beyond the company’s original business of customs brokerage, integrated logistics comprises an array of services that supports the entire import and export process. These include air- and ocean-freight forwarding, warehousing, distribution, inventory tracking, insurance brokerage, shipment tracking, and numerous other capabilities. Integrated logistics differs substantially, and not merely semantically, from traditional transportation services: advances in information processing have allowed firms like Fritz to coordinate and harmonize logistical functions in truly revolutionary ways that have saved corporations millions of dollars.
Fritz Companies was founded in 1933, when Arthur Fritz became dissatisfied with his job at Harper Group (still located up the street from Fritz headquarters in downtown San Francisco, and still a major competitor). He decided to open his own four-man customs brokerage firm, i.e., a company that assists in clearing goods through customs by handling the paperwork and other duties. The company initially specialized in liquor and Chinese food products, and a significant portion of its business came from San Francisco’s Chinatown merchants.
Over the next 30 years, Arthur Fritz expanded the company both functionally and geographically. In 1937 it began to offer ocean freight forwarding services, primarily selling cargo space. In 1942 the company’s first branch offices were established in Los Angeles and New Orleans. In 1954 Fritz entered the fields of insurance services and duty drawback (that is, recovery of customs duties and taxes paid on imported goods that are later exported). In 1963 Fritz added warehousing and domestic distribution services to its menu of offerings. By 1965 Fritz had 475 employees and 750 clients, but was still a relatively small business. In the late 1960s, with annual sales of about $5 million, Fritz still couldn’t afford its own computer.
Upon Arthur Fritz’s retirement in 1971, the company was taken over by his daughter Sandra Davis and his sons Lynn and Arthur, Jr., with each acquiring a one-third stake. It was during the 1970s that Lynn, who had entered the business in 1965 while still in his early twenties, began to develop a broader vision for Fritz. He believed that as the world became more economically integrated, Fortune 1000 companies would require firms that could help them in all of the functions related to import/export, including transportation, warehousing, and transaction processing. These abilities would be expensive for each multinational to develop independently, especially compared with the cost of similar domestic services, since each firm would need to build its own staff and its own systems. Lynn Fritz foresaw that they would look for alternatives, and that companies that could manage all of their international logistics would be extremely well positioned.
Beginning in 1971, therefore, the company focused on two complementary objectives: becoming the information processing leader in the industry and targeting large national accounts that would require the use of international logistics services. In 1980 Fritz linked all of its offices by FAST (Fritz Automated System for Transportation), its on-line database network. FAST became one of the first systems that automatically linked into the United States Customs Service information database. In 1985 the on-line network was extended to its international offices, which by then included operations in the Far East. Throughout the 1980s, Fritz continued to expand its information capabilities, and as its technology improved, its roster of Fortune 1000 clients expanded as well. Between 1985 and 1989 the company’s revenues increased significantly, and by 1989 they totaled $143 million.
In 1988 Lynn Fritz purchased his brother’s and sister’s share of the business in what one security analyst said “amounted to a leveraged buyout “(in which the buyer uses the assets of the company to collateralize the loans for taking it over). As sole owner of the company, Lynn Fritz was able to focus its operations more sharply. As Fritz entered the 1990s, the work of the past 20 years in developing advanced information systems and creating a worldwide network of operations begin to show huge dividends, and the company entered a period of rapid growth. In a major coup for Fritz in 1990, giant retailer Sears gave Fritz responsibility for all of its import logistics operation, allowing the company to eliminate about 100 clerical jobs. In the 1990s, many firms were restructuring their operations to enable them to compete in the emerging global economy, and outsourcing the logistics function became an attractive alternative. The list of blue-chip companies that turned over much or all of their international logistics function to Fritz included Boeing, Federal Express, McDonald’s, Microsoft, and Polaroid.
Just what does international logistics entail, i.e., what exactly might Fritz do for one of its clients? Analyst J. G. Larkin of the Wall Street firm Alex Brown & Company offered an example in a 1993 report:
“Let’s assume that Client A wants to source fabric from China and manufacture 10,000 shirts at a point on the Pacific Rim. That particular decision would be made by the client’s purchasing department and then be relayed electronically to Fritz, which would arrange to have those T-shirts manufactured, packaged, and then brought via a local motor carrier in Asia to a warehouse, where that shipment of 10,000 shirts would be consolidated with shipments from other suppliers of Client A and many other clients bound for the United States. These shipments would be assembled into international steamship containers that would then be drayed to the Port of Hong Kong. For example, the container would be placed on a ship and transported to the West Coast of the United States. Once that container ship arrived at a port on the West Coast, Fritz would clear the goods through U.S. customs and arrange to have the container carrying the 10,000 shirts loaded on a stack train to be moved to Chicago.
“In Chicago, the stack train would be broken down into individual containers. The containers containing the 10,000 T-shirts along with various other shippers’ products would be consolidated. The 10,000 T-shirts may be put on a less-than-truckload carrier’s truck and then moved to the client’s distribution center in Columbus, Ohio. Accordingly Fritz will have completely handled this complex, multimodal transportation transaction for Client A. Fritz arranged for various modes of transportation and various warehousing activities, and through its systems, allowed the customer the opportunity to track that bonded shipment as it proceeded through the logistics pipeline with full inventory control and on-time delivery schedule.”
The automation platform that supported this transaction came from FLEX, the Fritz Logistics Expediting System (FLEX), which became substantially operational in 1991. Partly because of Fritz’s leadership, by the 1990s computerized inventory systems were not unusual in the industry. FLEX, however, was more ambitious: a complete on-line tracking and management system that controlled all functions, from purchase order to delivery. It was FLEX that enabled the company—and its customers—to track the flow of goods through each step during the entire transportation process.
The attractiveness of Fritz’s services were reflected in its results. In 1991 total revenues were up 25 percent to $202 million, and net income rose 21 percent to $5.4 million. The following year, revenues were up another 23 percent to $249 million, and earnings nearly doubled to $10.5 million. By that time, each year Fritz was growing substantially to offer better service to its clients. In 1992 alone, in Asia it added offices in Malaysia, the Philippines, Sri Lanka, Bangladesh, Thailand, and China; in South America, it acquired former local agents in Chile and Argentina; in Europe, it opened its first office in Belgium; and in the United States, it opened offices in San Diego and Kansas City. During the year Fritz also made an initial public offering, selling 28 percent of its shares, and was listed on the Nasdaq. According to the San Francisco Chronicle, the shares were oversubscribed by 800 percent, reflecting the enormous respect that the company commanded and the huge potential for its businesses.
In 1993 Fritz stepped up its expansion program to strengthen its worldwide capabilities. A primary focus was Latin America, where Fritz opened offices in Brazil, Mexico, and Venezuela, which together represented 80 percent of the Latin American market. It also opened offices in Laredo and Austin in Texas as a conduit to the region. Domestic offices were established in Tampa, Orlando, and Phoenix, and the company strengthened its operations in the New York/New Jersey area. Beyond the Western Hemisphere, new offices were opened in the United Kingdom, the Commonwealth of Independent States, China, Korea, Sri Lanka, and Malaysia. The company also acquired a freight forwarder in Singapore, helping to double its business in this key hub for commerce and transportation. In total, 25 new offices were added in 14 countries. By the end of the year, the company served 20,000 clients with a staff of 3,140 in a network of 121 offices and affiliates and more than 500 business partners.
Results for the year demonstrated the huge expansion in service capabilities: revenues rose 37 percent to $342 million, while net income reached $14 million. Indeed, return on equity was nearly 55 percent, placing Fritz in the number one slot in profitability on the San Francisco Chronicle’s rankings of Bay Area companies for the year. The high return reflected Fritz’s role as a service company, with relatively small investment in assets like real estate.
A particularly courageous move by Fritz was its entry into the former Soviet Union. The opportunity was vast, and the potential return appeared enormous. Moreover, it was a difficult place to ignore for a company that wanted to serve its clients in a truly international fashion. The market presented huge obstacles, though, including political instability, triple-digit inflation, poor infrastructure, inadequate legal protection, and large elements of corruption and outright thievery. Planning an operation in such an unpredictable political and economic atmosphere was enormously difficult. Indeed, in the middle of adopting an entry strategy in 1992, the U.S.S.R. became the Russian Federation, and suddenly such tightly centralized Moscow-based monopolies like the rail and transport ministries became the responsibility of 15 new nations and of increasingly independent local governments.
Fritz persevered, eventually opening a local, wholly owned subsidiary in 1993. Its staff initially consisted of a few Russian-speaking U.S. expatriates and one Russian staff member. Fritz brought in specialists from accounting to air-freight management to train the staff. Within a year, Fritz’s operations had grown to 35 people in seven cities in five of the new republics. The company gained a great deal of hard-won experience in a market that frightened many Western businesses. Whether the effort and expense in penetrating these markets will ultimately be justified in high returns remained to be seen, but Fritz’s mettle in taking up the challenge could not be denied.
During 1994 Fritz maintained its sterling performance. Revenues were up almost 51 percent to $516 million from $342 million a year earlier, and earnings rose 40 percent to $19.6 million from $14 million. The company continued its rapid expansion of offices and facilities. It acquired the Canadian international logistics firm Starber International, which had 500 employees and 50 service locations in Canada. The buyout was particularly noteworthy in light of the passage of the North American Free Trade Agreement, which lowered trade barriers throughout North America. Further expansion occurred in the United Kingdom and other European markets. Notably, Fritz took over I-DIKA Milan SRL, which not only strengthened Fritz’s services in Italy, but also brought unusual expertise and relationships in the fashion industry. Thus, Fritz’s growth comprised not only geographic expansion but strategic penetration of selected industries. In late 1994, Fritz took over Air Compak, a Rochester, New York-based global freight provider and third-party logistics provider with over 100 employees and offices throughout the United States, Canada, Europe, and Australia.
Fritz’s heady expansion and stunning results made it a darling of Wall Street: between January 1994 and March 1995, the stock price soared from $26 to $65. While the stock was also helped by a secondary stock offering that had raised outstanding shares by 1.2 million, thus improving the equity’s liquidity, the stock’s performance was based on strong fundamentals and the potential for growth. Indeed, Fritz’s share of the total logistics market was estimated in early 1994 at less than one percent, and while competition was becoming stiffer, there was still enormous opportunity in the business. In 1993 the company’s diverse customer base included many of the Fortune 1000 multinational corporations, which sourced or distributed products globally. In addition, Fritz was also targeting medium-sized firmst for future growth. As Kant Rao, a professor of business logistics and transportation at the University of Pennsylvania, told International Business, “Fritz has built a reputation as a company that will go in and understand the problems of their customers.” That capacity, coupled with the company’s continuing commitment to information technology and its stable, superior management, appeared to ensure the company’s success in the second half of the 1990s.
In May 1995, Fritz completed a merger with Intertrans Corporation, an international air freight forwarder based in Irving, Texas. Under the merger agreement, each outstanding share of Intertrans common stock was converted into.365 of a share of Fritz stock. Thereafter, Intertrans and Fritz’s air freight division were combined and renamed Fritz Air Freight. Commenting on the merger, Fritz chairperson, president, and CEO Lynn C. Fritz observed,’ Through this exciting transaction we are creating an even stronger company that is well-positioned to meet the increasingly complex logistical requirements of our customers worldwide.”
Air Compak International, Inc.; FCI Logistics, Inc.; Fritz Air Freight; Frontier Container Line, Inc.; Unlimited National, Inc.; TG International, Inc.; Dumanex N.V. (Belgium); Fritz Companies Nederlands B.V.; Fritz Companies France S.A.; Trace S.A. (France); Fritz Companies (U.K.) Limited; Fritz Companies Canada, Inc.; Fritz Chile S.A.; Fritz Companies Mexico S.A. de C.V.; Fritz Companies India (H.K.) Limited; Fritz China Services (H.K.) Limited; Fritz Air Freight (Taiwan) Co., Ltd.
Bowman, Robert, “Decisions, Decisions,” World Trade, October 1994, pp. 72–76.
Feller, Gordon, “O, Pioneer,” Profit, July/August 1994, pp. 23–26.
Mencke, Carl, “Fritz Cos.: Pacing the Pack in Global Transportation,” Investor’s Business Daily, September 13, 1994.
Pelline, Jeff, “Logistics Firms Circle Globe,” San Francisco Chronicle, January 17, 1994, p. B1.
Plotkin, Hal, “Profiting from Logistics,” International Business, August 1993.