it can withstand the new pressures of digital competition just fine and dandy. In the past, we’ve taken a slightly skeptical look at FedEx’s response to increased competition from the likes of Amazon in an age of e-commerce retail. The courier’s stance has been one of conviction that
Whether that works out in the longer term remainst to be seen, but for now, FedEx CEO Frederick Smith can’t be faulted for sticking to his guns, if nothing else. He declares that there’s just no realistic challenger to traditional postal delivery models:
I have said this over and over again for the last couple of years. There is a continuing misunderstanding of the issue of route density, revenue-per-stop and the profundity of those metrics on the e-commerce business. There is no entity that can provide the type of route density and cost for lightweight residential delivery as the postal services both in this country and abroad. The postal service in [the US] makes 156 million stops per day.
The real question about e-commerce is what’s the future of mail and what implications does that have on the price of the delivery of packages. Put a different way, it is mail that subsidizes the delivery of packages, not packages subsidizing delivery of mail. The US Postmaster General talks about this in her calls and so forth and it has been a very, very good thing for the postal service that the big carriers, like FedEx and UPS that had these enormous upstream systems, can feed these lightweight residential packages into the postal business. They don’t have to have that investment, the hubs, the sortations and so forth.
Similarly Amazon of course now has a very substantial direct injection on their own. But there is no comparable entity to the postal service in terms of density and even the most rapid projections of e-commerce growth will not be a fraction of the density that the postal service has today. My goodness, they would have to be quantumly greater than is the case.
That’s the real question about e-commerce - what are price of those deliveries on a go-forward basis, which are driven either by density in the case of the postal service or input costs. This is the issue and is very poorly understood and I called everything I can this is not accurate.
That said, e-commerce growth does represent a significant growth opportunity for FedEx, adds Henry Maier, President and CEO of FedEx Ground, who points out that the existing 156 million unique addresses in the US is a figure on the rise:
That base is growing by 900,000 addresses a year. So this is a moving target. Even with the tremendous growth all of us who participate in e-commerce are seeing, we are really only delivering to a small percentage of those addresses every single day. We just happen to have very complex, state-of-the-art software tools that allow us to take a slug of package with what we’re presented with every day by our customers and optimize those packages for the most efficient delivery.
The situation is one that requires ongoing consideration, he argues:
Our Holy Grail here is just to improve delivery density and revenue-per-stop and the only way you can do that in our network is with the network integration we’ve been going through for the last several years, which includes the integration of ground and home delivery. Last September we announced we’re integrating SmartPost in that as well.
Over the top of this is the technology needed to manage the most optimal route of distribution of those packages every single day. Having a single contractor network, which we announced in January, [means] we’re moving to a single contract and we expect to be essentially 90% done with all of this by 2020. You lay-over our ability, beginning earlier this year, to be able to statically match packages that are destined to the same residential delivery address every single day. And next summer the ability to do that virtually, plus some additional engineering around deliveries on certain streets and neighborhoods when there’s another residential package involved. And what we end up with here is a much more efficient, much more flexible network that much lower costs, much better capital asset utilization going forward with the growth of e-commerce than the one we have today.
While all that’s going on, FedEx is also investing in technology integration following the acquisition of TNT in Europe. This has started well, following a year of planning, says CFO Alan Graf:
We expect the integration to take four years and significant investments in people, capital and expense. These are network businesses and require a combination of our pickup and delivery operations at a local level for our stations and depots, our ground and air networks and our extensive operational clearance, sales and in back-office IT systems.
It was always the case that the IT integration costs would be the greatest, he adds:
The IT investments that will be required are significant given the limited investment in IT at TNT over the last decade. This is also a key enabler of the integration and its benefits.
We plan to optimize pickup and delivery operations by implementing new technology and processes, optimizing the locations of facilities and stations without impacting service and benefiting from the new pickup and delivery efficiencies globally where parcels will utilize a lower cost integrated pickup and delivery network to achieve greater economies of scale. We plan to improve the efficiency of our staff functions and processes by optimizing our systems and processes, including IT.
I'm still unconvinced that FedEx bosses entirely appreciate the threat of 'Uberisation' here.