Where Does FedEx Fit in the New Shipping Landscape?
The global shipping industry is changing rapidly, and these changes present significant implications for the core business of FedEx — premium air delivery service. The company’s “split” with Amazon plus a recent poor earnings call have brought to light many issues the giant carrier is contending with.
Taken all together, the signs indicate a company trying to find its place in a new delivery landscape.
Financial warning signs
In its Q4 2019 earnings report, after 11 consecutive profitable quarters FedEx announced a quarterly loss of almost $2 billion, a negative swing of over $3 billion from the same point last year (Q4 2018, $1.13 billion net profit). In this past year, the company’s Express business has experienced a 12% fall-off in revenues per package. This downward trend in the carrier’s core air delivery service is an indication of its struggle to adapt to the demands of the growing ecommerce market.
On the flip side, FedEx stated that adjusted profit was $5.01 per share, which is down $5.91 from the previous year, but nonetheless better than had been forecast.
One of the underlying causes of the poor performance in FedEx’s Express segment is slow growth in the global economy. The effects of this macro trend are being exacerbated by the ongoing trade dispute between the U.S. and China, which is hurting the carrier’s package volume in several key lanes. Then, of course, there is the decision by FedEx not to renew its air delivery contract with Amazon. And for the cherry on the sundae, FedEx recently sued the Commerce Department over export rules it feels are unreasonable.
All of these disparate elements combined result in FedEx having air freight capacity that needs to be filled, and they are also indicative of deeper, longer term problems. FedEx’s air network has been its strength and its differentiator, but that service is aimed at B2B commerce. Now that the strong (rapid) growth in small parcel delivery is occurring in online retail and B2C, FedEx’s positioning in the upper right-hand quandrant of speed + security at a premium cost point is becoming a weakness.
Ecommerce customers care about delivery speed, but precision and security are less of a concern. Absent a change in the trend from B2B toward B2C, which is improbable, the carrier will continue to lose delivery market share and profit margin if its planes are not at capacity enough to offset the operating expense of air transportation.
That’s the external environment. Signs of uncertainty are also emerging from the internal environment.
On June 23, the Wall Street Journal reported that FedEx would be “offering two-day air for same price as ground, hoping to lure customers from UPS and boost [its] flagging Express network.” In response, FedEx CEO Fred Smith called the WSJ article “erroneous and misinformed reporting,” stating that FedEx had not made any recent changes to either its pricing or its strategy. A spokeswoman for the company stated that its Express service is successful and adds value to the company and its customers.
At this point, FedEx’s primary visible strategy is to grow its ground network to shorten the “last mile” of delivery for ecommerce, in a bid to gain a sizeable portion of the 100 million packages — double the current volume — that the company expects to be shipped daily in the U.S. by 2026.
So far, FedEx has announced it will expand its delivery schedule to seven days a week next year and increase the number of part-time drivers it employs, as well as establish more pick-up and drop-off locations in retail stores. Already in place is the carrier’s Extra Hours service, in which its drivers make nighttime pick-ups at retail stores of packages that will be sorted and go out on Express vans the following day.
Still unknown is whether FedEx will make any significant changes to its pricing structure. While we wait to learn the answer to that question, stay tuned for further moves by the erstwhile innovator and disrupter as it tries to find its niche in the new delivery marketplace.