A light snow is falling in Memphis on what is one of the coldest New Year’s Days on record. Earth has just completed another extraordinary trip around the Sun. Ed Sheeran has the most popular song in America; Amazon CEO Jeff Bezos spent half a day as the world’s richest man; and Donald Trump, the man who was once on the receiving end of a “Stone Cold Stunner” after shaving Vince McMahon’s head at WrestleMania, has been sworn in as President of the United States.
It’s January 1, 2018, and FedEx stock is at an all-time high. What a time to be alive.
If you could somehow have foreseen everything that would happen during the two years since, you probably still wouldn’t have believed it. FedEx has lost 40% of its value while analysts and pundits clamor to determine what will become of one of the world’s most admired companies. Operating income was down over 50% for FedEx in the last quarter, and its operating margin fell to 3.3%. Suffice it to say; it has been a tough couple of years.
FedEx has made clear its intention to shift toward small- to mid-sized B2C shippers to better align itself with today’s e-commerce economy. Its moves to bring its low-cost SmartPost service in house by the end of the year and to deliver packages every day of the week lay bare its commitment to this tectonic shift.
And while the company’s leadership has come under fire – viewpoints range from replacing Founder Fred Smith as the company Chairman and CEO to FedEx being an outright acquisition target – it’s worth considering whether they’ll end up being right all along.
Consider the company’s well-publicized break from Amazon. For FedEx, Amazon business was primarily about density. Despite low margins, Amazon would pump packages into a FedEx network built for volume and ostensibly cover a lot of the cost to get the FedEx fleet into consumers’ neighborhoods. FedEx could then attack margins more aggressively on remaining customers.
That strategy began to take shape on the tail end of its successful $1.6 billion incremental profit campaign, which ended in 2016. That initiative was widely regarded as a success, and part of the haul was to be earmarked to help ramp up capital spending in its Ground segment to meet growing demand.
So what happened? Well, Amazon continued to grow exponentially. And though most industry insiders agree that public statements by FedEx (and UPS) portraying a general lack of concern for Amazon as a legitimate competitor were merely posturing, it is possible that FedEx didn’t take the threat seriously enough.
Few, if any, business relationships remain mutually beneficial forever. Amazon’s growth so outpaced peer companies that its additional capacity requirements conceivably crossed a marginal threshold for FedEx. In other words, they were growing so fast that FedEx had less and less room to subsidize Amazon’s low-margin business with high-margin hauls for other customers.
FedEx’s recent rough spell runs deeper than its split from Amazon, but the move put the company’s sweeping strategic changes in the spotlight. Evidenced by the trend Amazon has shown to be sustainable, combined with the macro upside of e-commerce, it wasn’t a matter of if FedEx would pivot, but when.
And that’s where things really get interesting. It doesn’t matter what trends analysts see in the stock or how long an industry expert has been plugged into internal backchannels – it really doesn’t even matter if you’re Fred Smith – when you consider that e-commerce sales still only represent about 11% of total retail sales, according to the U.S. Census Bureau.
So, while the clouds over Memphis certainly look ominous, there’s a lot we just don’t know about what the future holds for FedEx.
What is clear, however, is that there is enough potential upside to support the case for FedEx’s bold new strategy.
Brandon Staton is President and CEO of Shipmint, Inc. and has spent the last decade helping corporate shippers plan and execute sustainable cost-control and cost-containment strategies. Brandon earned an MBA in Entrepreneurship, Leadership and Strategy from UNC Kenan-Flagler Business School.
This article originally appeared in the January/February, 2020 issue of PARCEL.