E-commerce matters, but not that much yet, says FedEx
- Summary:
- FedEx doesn't see e-commerce as becoming a hefty part of its business model yet, but is laying down the foundations to take advantage of growth in that sector.
FedEx continues to have what seems to be a split-view of the online retail and e-commerce market.
On the one hand, it’s been investing heavily in expanding its capabilities in e-commerce fulfilment, not least through the acquisition of TNT.
On the other hand, it’s incredibly keen to dampen down the idea that e-commerce is what’s really important to it. Take these comments from CEO Fred Smith:
We know from research that the millennial generation, the largest generational cohort in American history, is not going to stop going to stores…e-commerce is fantastic and its going to continue to grow and we intend to be a major player in that space. But it's not going to, in our opinion and in the research from very credible sources, not going to eliminate retail. What it may do is change the character of retail.
All retail e-commerce is now about 10%, growing fast, taking share, but it's going to be a long time before retail is threatened. And B2B - meaning the underpinnings of the business world, medical production, automotive, and things like that - that in the main is not going to be diverted to e-commerce anytime soon and that is the backbone of the FedEx networks.
That said, others within FedEx pitch a more enthusiastic line, such as Mike Glenn, President and CEO of FedEx Services, who boasts:
If you were to isolate the FedEx e-commerce business, it would become clear FedEx is one of the most profitable e-commerce companies in business today.
More than 95% of e-commerce packages in the US are delivered by FedEx, UPS, and the United States Postal Service, with whom we have a strategic relationship to transport their priority mail. E-commerce would be impossible without these companies and our expansive networks.
A critical part of FedEx’s e-commerce ambitions is boosted by the acquisition of TNT, which expands FedEx’s European footprint significantly. Glenn says:
FedEx now has a strong presence in Europe with a range of transportation options from Express to Economy for both parcel and freight. This significant enhancement to our portfolio in Europe helps not only our customers in Europe, but also provides benefits for customers around the world shipping into Europe. In addition, we will substantially enhance our capabilities globally by leveraging TNT's lower-cost road networks in different regions around the world.
There’s a massive integration program that needs to be executed on now to absorb TNT, a task that in no small part falls to CIO Rob Carter. He says:
This is our largest acquisition, but certainly not our first. We’ve prepared diligently over the years with integrations of acquisitions in Mexico, Brazil, the UK, Africa, India and others around the world to become really quite good at the process of integrating customers, integrating products into the mix.
We also have been working very hard on our systems here at FedEx to modernize and simplify them in ways that really position them to be very effective integration activities. That’s a key design point for the systems that we’ve been building and pushing for, and then lastly we've had a planning and execution team on the ground.
With the teams, we've done very robust planning with regard to these integrations, including what it would take on day one, which was executed flawlessly, what our needs are at day 100 and then as we go forward the preferred future state of the organization of systems that will be needed to operate with the combined entity.
Cross-borders
It’s going to take time for the integration to complete, argues Glenn, but in the meantime there’s other stuff to get on with, not least the launch of FedEx CrossBorder:
FedEx CrossBorder offers e-commerce technology solutions that enables e-tailers to navigate common CrossBorder selling challenges such as regulatory compliance, secure payment processing, multiple currency pricing, credit card fraud protection, and also offers access to e-commerce shoppers around the world.
CrossBorder is the relaunch of Bongo International, the company FedEx acquired in 2014. When combined with our recent GENCO acquisition, we have significantly strengthened our e-commerce portfolio of services.
Of course demand for e-commerce increases significantly each year during the peak holiday season and we're deep into preparations for the upcoming 2016 peak season. We're closely collaborating with large e-tail and retail customers to understand their peak shipping needs including geographic mix, and package characteristics, so that we can once again have our resources positioned and ready to provide outstanding service.
One aspect of the e-commerce conversation that gets increasingly louder is the question of e-tailers tapping into their shipping services. Amazon has its own logistics operation, while Walmart is now offering a two day subscription service for free shipping and plans to use local and regional carriers for last mile delivery rather than turn to global carriers like FedEx. Glenn doesn’t see such developments as having a major impact yet:
Amazon continues to be a valuable customer and they’re among the large e-tailers that we stay in close dialog with throughout the year to understand their transportation needs as they continue to experience significant growth and generate demand for FedEx transportation. Because of our close relationship with Amazon and close collaboration, we have a very clear and specific understanding of their needs across the FedEx portfolio during FY17, and further we expect them to be a significant customer for many years to come.
Walmart is a long-time and growing customer. We’ve been business partners with Walmart for many, many years. We’re named Carrier of the Year on a consistent basis and I think they clearly value the service that we provide. So I expect those trends to continue in terms of our growth with Walmart going forward.
Regarding regional carriers, the fact of the matter is regional carriers simply don't have the scope and the scale to be able to compete with the networks that make up 95% of the e-commerce shipments in the US and that would be FedEx UPS, United States Postal Service. So thoroughly there's a role for regional carriers, but they cannot compete in our opinion with FedEx over the long haul.
My take
Smith is correct of course about not writing off traditional retail business, although when I think back across a month of my own retail experience, 90% of it was done online and largely through Amazon. I find the Amazon Prime delivery experience to be excellent in the main, something that I can’t say about UPS, Yodel, DPD et al.
FedEx seems to be investing for the future in terms of putting in the work to be able to tap into the e-commerce market. Whether it can continue to be quite so blasé about the plans of such as Walmart remains to be seen.