CPI Corp.

1706 Washington Avenue
St. Louis, Missouri 63103
U.S.A.
Telephone: (314) 231-1575
Fax: (314) 621-9286
Web site: http://www.cpicorp.com

Public Company
Incorporated: 1942 as Rembrandt Studio
Employees: 8,500
Sales: $319.1 million (1999)
Stock Exchanges: New York
Ticker Symbol: CPY
NAIC: 541921 Photography Studios, Portrait

CPI Corp. is a consumer services company best known for its chain of photography studios located inside Sears stores. CPI operates close to 1,000 Sears Portrait Studios in the United States and Canada, and approximately 65 more photography studios located in malls or other non-Sears locations. The company has been an exclusive Sears concessionaire since 1973, and its chain of portrait studios grew alongside the larger retailer. About 90 percent of the U.S. population lives within 30 minutes of a Sears store, so CPI has gained vast market exposure through its Sears relationship. CPI controls a major share of the preschool portrait market in the United States. It offers professional portraiture, with pictures ranging from wallet size to 16” by 20”. CPI also produces passport photos and photo greeting cards, and sells photographic accessories such as picture frames and albums. The company had related consumer services businesses until the late 1990s. CPI ran a chain of one-hour photofinishing labs across the country until 1997, and it also operated quick printing shops until 1996. CPI announced that a chain of poster and framing stores it owned, called Prints Plus, was up for sale in 2000. CPI has been a public company since 1982. A 1999 private buyout arrangement fell through.

Small Beginnings

The company that became CPI Corp. began as a single photography studio in St. Louis, Missouri. It was opened by Milford Bohm in 1942, and he called it Rembrandt Studio. Bohm and his family expanded the business over the next decade, opening a chain of portrait studios. By the late 1950s there were 20 Rembrandt Studios spread across the middle of the country from Wichita, Kansas, to York, Pennsylvania. Besides opening new studios, the business also expanded by sending single photographers out across the countryside to take pictures wherever people would pay for them. CEO Alyn Essman described the early business in a June 6,1983 interview with Forbes magazine: “We’d hire a young guy, put him in a car with a camera and ship him out. A year later he might get home.” In addition to hiring traveling cameramen and opening new shops, Rembrandt Studios established relationships with several mass merchandisers including Montgomery Ward and Sears. The portrait studio operated out of the stores, as a concession. The big chain stores pressed into numerous locations, and both the stores and the portrait studios benefited from mutual promotions.

Producing finished portraits was a laborious business, requiring the customer to make several trips. The photographer would set up the shot and take a series of pictures. After these proofs were developed, the customer had to return to the studio to decide which ones he or she wanted printed. And then the customer had to make yet another trip to pick up the portraits when they were done. Rembrandt came up with a revolutionary finishing system in 1964, allowing the company to produce finished portraits in a variety of sizes in much less time. The next year, Rembrandt also began producing color portraits for the first time. Previously, color portraits had to be hand-tinted, and this was both costly and time-consuming.

Subsidiary Company in the 1970s

Rembrandt Studios flourished, expanding across the country and increasing the sophistication of its services. But it needed greater financial backing in order to grow more. In 1968, founder Milford Bohm sold the family-owned company to a larger company called Chromalloy American Corp. Bohm continued to head the company, which was renamed Chromalloy Photographic Industries, or CPI Corp. (the acronym would ultimately be redefined as Consumer Programs Incorporated). Chromalloy American was a St. Louis-based conglomerate that had grown to own hundreds of subsidiaries in industries as diverse as metal fabrication and men’s and women’s clothing. The company owned barges and textile mills, made gas turbines, and offered financial services. As a subsidiary of Chrom-alloy American, CPI had access to its parent company’s deep pockets to fund a larger rollout of products and locations. The year before the buyout, Rembrandt had established its first permanent mall studio, a store called Children’s Photographer in Evergreen Plaza in Chicago. The company saw the suburban mall as the place to be, and opened more mall stores over the next few years. CPI gradually phased out its traveling photographers, and continued to work with Sears, Montgomery Ward, and other chain retailers. CPI began operating portrait studios in Canada in 1970, working again through the Sears chain.

In 1973, CPI President and CEO Milford Bohm decided to give up the company’s other retail accounts and work exclusively with Sears. Sears by that time was the leading retailer in the world, and CPI had portrait studios in hundreds of Sears stores. But there were hundreds of other Sears locations that would become available to CPI if it could negotiate an exclusive deal. So CPI resigned its accounts with Montgomery Ward and other retailers, and asked Sears for approximately 300 square feet of floor space in all possible locations. In exchange, CPI agreed to pay 15 percent of each studio’s gross sales to the retailer. CPI would benefit from national advertising and the prominence of the Sears name, and Sears would collect a much higher amount of sales per square foot on the space it allocated to CPI than on the rest of its store. CPI packed a lot of business into its corner of the store, and turned over about $450 per square foot on average, versus a little less than $300 per square foot on average for the rest of the store.

The new relationship with Sears worked well for CPI. Milford Bohm resigned in 1973, and Alyn Essman, a longtime accountant with the company, took over the top job. Under Essman, the CPI chain grew to include roughly 400 Sears locations by the end of the 1970s. Essman was keen to expand more. However, he ran into resistance from CPI’s parent, Chromalloy American. The parent was not as eager to back its subsidiary as it had once been, and Essman and other CPI executives faced a yearly struggle to get their growth plans approved. CPI was just one facet of a sprawling business, and Chromalloy was undergoing major changes following the death of its founder in 1977. Tired of fighting for approval of its expansion, Essman decided to split from the conglomerate. In 1979 Essman and ten other CPI executives pooled their assets and raised $1 million in cash and an additional $6 million in preferred stock, and bought CPI from Chromalloy.

Expansion into Other Businesses in the 1980s

Free from the constraints of the parent company, CPI began to grow in new ways. The company had enticed customers into its portrait studios by offering a low-priced deal, and then made money when it was able to sell additional sets of prints or other services. However, many customers settled for the cheap deal alone, meaning CPI’s profits were low. In 1979, the average customer spent only $14, and those taking just the loss-leader bargain spent only 99 cents. Essman eliminated the bargain, which resulted in lower costs and an actual increase in the amount of services sold. CPI also moved into selling other services, on the advice of Sears. The company began viewing itself as a customer service company rather than a photography business, and it tried to reach Sears shoppers by offering residential carpet cleaning and upholstery cleaning. CPI hoped to diversify into several complementary business lines, and in 1981 it acquired a small firm that marketed office telephone systems. The bulk of CPI’s business remained its Sears portrait studios, and by the mid-1980s it had roughly 700 studios in the United States and Canada. The company went public in 1982. It was making money extravagantly, with sales tripling between 1979 and 1983, and per share earning over those four years was growing at a 78 percent compounded annual rate.

By the mid-1980s, it was clear that the market for Sears portrait studios was slowing down. There were simply not enough Sears stores left to accommodate CPI’s earlier growth rate. CPI opened over 100 studios in 1980, then 60 in 1981, 36 in 1982, and then only 21 in 1983. The studios continued to be highly profitable at both old and new locations. In fact CPI was far more profitable than Sears itself. But the company seemed to need something else to shore it up, as its market matured. In 1984 CPI bought the first of several sets of photographic finishing labs, chains of “photomats” or “mini-labs” that offered consumers finished photographs in one hour. CPI had great hopes for its mini-labs. It hoped to build or acquire hundreds of the labs, looking for prime shopping mall locations. In 1985 CPI divested itself of its residential cleaning business and its office telephone business, and focused on the photofinishing labs. The labs lost money at first, not turning a profit until 1986. By that time, CPI had put together a chain of 180 labs, and was one of the biggest players in the market.

CPI entered another new market in 1988. It bought part of a chain of quick printing shops in California, acquiring 17 Copy Mat stores in California for $10 million. By the end of 1988, CPI had bought more California CopyMat franchises and opened its own quick print shop in St. Louis, Copy USA. Quick printing seemed roughly analogous to the mini-lab market CPI had entered a few years earlier. The quick printing industry was growing rapidly, and it was extremely fragmented, split among thousands of small shop owners. CPI hoped to build itself into a major player in the market, just as it had with photographic finishing. The company entered into an agreement with CopyMat to open more locations, and it used CopyMat as a model for the stores it was operating under the Copy USA name. These stores offered highquality photocopying and desktop publishing, binding, mailing, and other services. The industry was estimated to be worth $4.5 billion total, and it was expected to grow rapidly in the 1990s.

Meanwhile, CPFs portrait studio business continued to be highly profitable. The amount customers spent on average increased to $48 per portrait session by the end of the 1980s, up from only $14 a decade earlier. The company was so profitable that it was a potential takeover target, and CPI took pains to buy back some of its stock in 1989, to discourage an unwelcome acquisition. The company also found some new market niches. It opened a chain of portrait studios geared for upscale department stores, called Portraits of Distinction, and also embarked on a joint venture with a department store-based gift wrapping business called Tender Sender. Though these new businesses were not immediately profitable, they were illustrative of the company’s attempts to diversify as it reached an inevitable plateau in the number of new Sears portrait studios it could open.

Divesting Businesses in the 1990s

By the mid-1990s, CPI was the biggest operator of one-hour photofinishing labs in the country. It had acquired Fox Photo in 1991, which gave CPI another 300 mini-labs. CPI also had a significant business in quick printing shops. The company had also moved into poster framing with its acquisition in 1993 of a 102-store chain called Prints Plus. The new businesses began contributing a larger portion of the company’s earnings, bringing in around 40 percent by the mid-1990s.

The profitability of the portrait studios started to fall in the 1990s, as more and more competitors moved into the market. J.C. Penney, Kmart, and Wal-Mart all began opening their own in-store photographic studios in the late 1980s, and by 1993 there were 2,500 rival studios in the United States and Canada. CPI ran about 1,000 portrait studios at that time. Increasing competition had brought about price cuts. Though CPI had close to 30 percent of the family portrait market, its operating margins fell. Profits from its portrait studio business went from $34 million in 1990 to $23 million in 1992. In 1993 CPI vowed to invest $50 million on upgrading its studios over the next year, and planned to spend another $75 million by the end of the decade. CPI began adopting digital imaging technology in the mid-1990s, hoping to gain a technological edge over its competitors. In 1994 it announced its Portrait Preview System, a digital imaging system that let customers see what their pictures would look like before they were snapped. In 1995 CPI began further development of digital photography at its Sears studios.

Heightened competition had forced CPI into lower operating margins, and made the company spend money on technological improvements. CPI had spread itself into three major operating divisions—photography studios, photo finishing, and quick printing—in order to cushion itself against a slow-down in its portrait business. Yet by 1996, the company had changed its outlook. It now began to focus on photography studios as its core business. It sold off its quick printing operations for $4.8 million in 1996, getting the company out of that business entirely. In 1996 CPI also agreed to sell 51 percent of its Fox Photo photofinishing business to Eastman Kodak for $56 million. At the same time, CPI sold off 50 of its poorer performing photo labs. In 1997 CPI went ahead and sold the remaining 49 percent of Fox Photo to Kodak.

The sell-offs left CPI with its portrait studios and its chain of Prints Plus poster and framing stores. Seeking to mollify stockholders disappointed with the company’s decreasing profitability, CPI put itself up for sale. In 1999 a New York-based investment firm called American Securities Capital Partners agreed to buy out CPI for $482 million. The deal was expected to close at the end of October, but American Securities pulled out several weeks shy of the deadline. The buyout group claimed that reported lower-than-expected third quarter earnings represented a development that would significantly hurt profits. Both American Securities and CPI sued each other over the collapse of the agreement.

In 2000, CPI announced that its Prints Plus chain was for sale. A group formed by top managers of the chain negotiated to buy the business, but talks terminated in August and CPI continued to look for other possible buyers. Meanwhile CPI concentrated on controlling its costs and implementing its new technology to bolster its portrait business. By its second quarter of 2000, the company recorded earnings higher than in any year since 1992, when competitors began to squeeze CPI badly. Though sales continued to be lackluster, the increasing level of profitability sounded a hopeful note. The company had lost money in 1999, but CPI seemed to be returning to profitability again in 2000, even without a big increase in sales.

Principal Competitors

Lifetouch Portrait Studios Inc.; PCA International Inc.; Olan Mills Inc.

Key Dates:

1942:

First Rembrandt Studio is founded in St. Louis.

1968:

Business is sold to Chromalloy American; corporate name is changed to CPI.

1973:

CPI becomes exclusive Sears concessionaire.

1979:

Chromalloy sells CPI to executive group.

1982:

CPI becomes a public company.

1984:

Company enters photofinishing business.

1988:

Company enters quick printing business.

1997:

CPI divests itself of most non-portrait photography business lines.

1999:

New York investment firm withdraws from buyout agreement with CPI.

Further Reading

Burgert, Philip, and Gerry Khermouth, “Chromalloy Gets in Trim for Profits,” American Metal Market, October 3, 1983, p. 5.

Byrne, John A., “Profits from Portraits,” Forbes, June 6, 1983, pp. 107-108.

Curley, John, “CPI to Buy 32 More One-Hour Minilabs for Photofinishing,” Wall Street Journal, January 4, 1984, p. 30.

Derks, Sarah A., “CPI Focuses on Sears Studios with $75 Million Spending Plan,” St. Louis Business Journal, December 27, 1993, p. 1A.

“Fox Photo to Be Acquired by Concern for $62 Million,” Wall Street Journal, July 19, 1991, p. C14.

Moore, Rob, “CPI Enlarging Picture with 60 New Sites,” St. Louis Business Journal, May 28, 1990, p. 15A.

——, “CPI Ignores Skeptics, 15 Quick Print Stores Opening,” St.Louis Business Journal, March 12, 1990, p. 4C.

——, “CPI Opens Copy USA Store, Expands Franchises to 22,” St.Louis Business Journal, December 26, 1988, p. 9A.

Rosenberg, Hilary, “CPI and Sears,” Financial World, August 22, 1984, p. 17.

“Sitting Pretty,” Barron’s, March 19, 1984, pp. 46-47.

Slovak, Julianne, “CPI Corp.,” Fortune, March 13, 1989, p. 73.

Slutsker, Gary, “Look at the Birdie and Say ’Cash Flow’,” Forbes, October 25, 1993, pp. 100-02.

Stamborski, Al, “New York-Based Investment Firm’s Reversal on Takeover May Spark Suits,” Knight-Ridder/Tribune Business News, October 13, 1999, p. OKRB99286187.

Troxell, Thomas N., Jr., “Striking Pose,” Barron’s, February 17,1986, pp. 88-89.

“Where Pictures Help the Earnings Picture,” Fortune, June 23, 1986, pp. 132-137.

—A. Woodward