FedEx – no ‘Uber-ization’ to come in e-commerce delivery market

SUMMARY:

FedEx, UPS and the US Postal Service are the big guys in e-commerce delivery fulfilment in the US – and that’s how it’s going to remain, according to FedEx management, despite Amazon’s ambitions in that direction.

FedEx_Express_truckOver the past couple of months, a number of businesses have come out with ‘counter-intuitive’ statements about digital transformation of their industry sectors.

TV network CEO Adam Crozier argued that digital is losing out to traditional TV as the preferred advertising platform of choice, Sainsbury CEO Mike Coupe dismissed Amazon Prime’s one hour delivery capabilities as not a killer threat, while Urban Outfitters CEO Richard Hayne reckons that the death of the retail store is greatly exaggerated.

All three however were mealy-mouthed in their convictions compared to FedEx Chairman Fred Smith, who roars:

The concerns about industry disruption continue to be fuelled by fantastical – and let me emphasize I chose this word carefully – articles and reports which are devoid of in-depth knowledge of logistic systems and the markets which FedEx serves.

Network design technology, facilities capabilities and route/stop density are the key elements in the FedEx, UPS and Postal Service systems that make it highly likely these entities will remain the primary carriers for e-commerce shipments in the US for the foreseeable future.

OK, message received and understood. No ‘Uber-ization’ threat here. That said, as I noted last month, the success or failure of an e-commerce transaction can easily be decided in the last ten years to the front door, when the delivery service completes the retail experience perfectly or dumps your goods on the street outside the front door because they couldn’t be bothered to ring the door bell.

So for the likes of FedEx, e-commerce retailers are a major growth engine. Just to take the latest quarter, FedEx Ground revenues were up 30% year-on-year with average daily volume up 13%, largely driven by demand for residential deliveries off the back of online consumer purchases. FedEx CEO Mike Glenn notes:

The 2015 peak season was historic by many measures and it was driven by the continued growth of e-commerce. Demand for residential deliveries across the industry surpassed expectations as consumers increased online shopping in record numbers, not only with their higher volumes, but the types of goods purchased online increased.

FedEx experienced record demand including multiple days of greater than 25 million packages delivered which is more than double our average daily volume. We are proud of our team members and the incredible job they did with more than 325 million packages delivered during the peak period. We worked very closely with our large e-tail and other peak customers to prepare for their needs and to deliver the holidays.

Changed dynamics 

With that in mind, and competition growing in the delivery sector as well as some major retailers, such as Amazon and Argos, looking to grow their own logistics and delivery operations, it’s essential that FedEx ensures that its e-commerce fulfilment is optimised so as to exploit fully the changing demands of the retail market. As Glenn observes:

It is very clear that e-commerce is now enabled as the full scale of retail revolution.

This leads to some necessary changes in the operational thinking of the likes of FedEx, he argues:

Referring to a specific peak day is quickly becoming a thing of the past. As evidenced this year, there were multiple days where volumes exceeded 25 million packages as consumer buying habits are changing. We view this as a positive, as Mother Nature can sometimes play habit with last minute e-commerce shoppers.

Smoothing sales throughout peak season is a trend that will benefit retailers and transportation companies alike. We believe online shoppers will have increasing incentives to order earlier in the holiday season.

There’s also a major shift among retailers towards fulfilling e-commerce orders from individual stores rather than distribution centers. This ‘store-to-home’ delivery trend is well suited to FedEx’s existing skills and services in areas such as metro delivery and same day services, says Glenn.

There’s also a change in what is being bought online, with Glenn citing items such as mattresses to new swing sets and big screen TVs just to name a few. This increases the levels of potential delivery business on the one hand, but poses certain pricing challenges on the other. Glenn explains: 

It is important that we price these items accordingly to account for the operational complexities such as manual sortation to person delivery et cetera. As a result, we will be adjusting the initial handling surcharge for FedEx Ground. Today, if a package length is greater than 60 inches additional handling surcharge will be applied. Beginning June 1, the maximum length will be reduced from 60 inches to 48 inches. We believe 48 inches is appropriate as it is the standard length of an LTL  [Less than Truck Load] pallet.

Another potential change may come from the expansion of delivery slots, fuelled by demand from weekend online shopping. While the home delivery FedEx Ground hasn’t delivered on a Monday, a pilot in Tennessee earlier this year has led to plans to expand to a six day a week service. Glenn says:

We’re looking very hard at whether or not we just run this network six days a week year round. We get much more turns out of the assets. While we talk a lot about peak, e-commerce buying behavior is really shifting to a peak all around. We are extremely heavy on Monday because of the e-commerce orders that flow in and are fulfilled over the weekend. Long term I think six day a week operation is probably the best operation to run because these e-commerce stores never shut down.

Amazonian threat

Amazon has recently been pitching its Amazon Prime one-day delivery option very hard, but this is an area that FedEx sees as being of minority interest, although it does offer same-day delivery in 23 markets.

But where Amazon may become a rival as a well as customer for FedEx is in its efforts to build out its own direct transportation capabilities.

For now the FedEx party line is that Amazon is a valuable and long-standing customer whose transportation needs are understood and that any investment in their own fleet is about a need for “supplemental capacity”. This shouldn’t be something to be concerned about, argues Glenn:

I think Amazon’s strategy is clear –  the more distribution facilities they put up, the more they would like to be close to the end consumer, which by definition makes more deliveries on a local basis.

He adds:

Large retailers have long had their own transportation capabilities, primarily to enable movement and positioning of inventory across their store and fulfilment locations.

Glenn is equally dismissive of the idea of a new entity emerging to take on the three main carriers in the US:

The reality is it will be a daunting task requiring tens of billions of dollars in capital and years to build sufficient scale and density to replicate existing networks like FedEx.

But there will be fresh competition at local level, he concedes, servicing the so-called ‘last mile to the front door’:

There are hundreds and thousands of local delivery companies in every market in the country delivering parcels. All you have to do is Google ‘local delivery’ in the city where you live and you’ll find hundreds of companies that deliver parcels on a local basis every day. That’s not the market that FedEx competes in on a day-to-day basis. We run a broad global network.

Trust and scale are factors that matter in the digital commerce and online retail age, concludes Glenn:

It is important to remember that the primary value proposition of e-commerce is the ability to order a product online and have it reliably deliver to the consumer. In that regard, FedEx is and will continue to be a key enabler for e-commerce in the years ahead.

By our estimates, more than 95% of all e-commerce orders today are delivered by one of three entities in the United States – FedEx, the United States Postal Service with whom we have a strategic relationship to transport the priority mail and UPS.

In fact, if we were to isolate our e-commerce business one could argue that FedEx is one of the most profitable e-commerce companies in business today.

My take

Unlike the likes of Yodel! and DPS, I’ve always found FedEx to be reliable – comparatively speaking. The firm is clearly conscious of the potential of scaling the business around increased e-commerce activity.

I’m less convinced by the – at least in public – blasé dismissal of Amazon as a potential threat, although commercially in FedEx’s revenue model, no single customer accounts for more than 3%. Amazon can see clear benefit in owning its own delivery channels and not being at rish of brand damage from third-party couriers.