By Paul Ziobro
MEMPHIS, Tenn. -- Fred Smith bristles at any hint that FedEx
Corp., the global delivery giant he built over four decades, could
be disrupted by a player such as Amazon.com Inc.
"You can't just overnight decide, 'I'm going to pick up from
every person in the world and every business in the world and be
able to deliver it to every other,' " Mr. Smith said in a recent
interview. "It's fantastical."
"Fantastical" is one of Mr. Smith's favorite words to describe
the possibility of being beaten by new rivals. He also used it last
December, following a disappointing earnings report, to fend off
analysts asking about Amazon's push into the delivery business.
The next day, FedEx's stock fell more than 12%. Dave Clark,
Amazon's senior vice president of world-wide operations, tweeted: "
Ho!Ho!Ho! Have a Fantastical Holiday everyone!!!," with a photo of
an Amazon Prime branded jet model.
Mr. Smith brushed aside the quip. "What I understand about him,
he's a very hard-nosed guy, and he's a smartass," he said. "If he
wants to take a shot, take a shot."
Mr. Clark said he was just trying to rally his team with an
FedEx's 75-year-old chairman and chief executive, the man who
pioneered the business of moving packages around the world at
lightening speed, is confronting some of the greatest threats to
the company he founded.
Global trade is slowing and tariff fights have companies
rethinking supply chains. A key partner, the U.S. Postal Service,
is struggling. Amazon has morphed from a customer into a
The threats have sapped FedEx's finances at a time when the
Memphis-based company is racing to adjust to modern delivery
demands. Most of the growth in shipments is coming from e-commerce
orders, which increasingly need to travel from a warehouse to a
nearby home, not long distances overnight.
Last month, FedEx cut is profit forecast for the third time this
year. The company now estimates profit will be about $900 million
lower than projections it issued just a few months earlier. Revenue
is falling in its Express air business. Costs are rising in its
Ground business as FedEx chases e-commerce home deliveries.
FedEx shares are down 33% in the past 12 months, significantly
underperforming those of main rival United Parcel Service Inc.,
whose shares are flat over that period. UPS was early to embrace
e-commerce shipments and has been investing heavily to upgrade its
"The world has changed a lot in the last 10 years, and the
[FedEx] playbook is not very different," said Trip Miller, managing
partner at Gullane Capital Partners. He likes the recent focus on
shipping online merchandise, but said "it's something they should
have done three to five years ago." The Memphis-based hedge fund
owns about $10 million in FedEx shares.
Mr. Smith, a former Marine officer and decorated Vietnam War
veteran, started FedEx in 1971 and has been CEO for nearly its
whole history. The billionaire was preparing to hand over the
reins, but he extended his stay after two top executives, including
his heir apparent, abruptly left.
That has left Mr. Smith, who remains one of FedEx's biggest
shareholders, to revamp the business. He started with divorcing
For years, Amazon has been building up its logistics operations
to handle more deliveries itself. The online retailing giant added
tractor-trailers, hundreds of sorting centers and dozens of cargo
planes to carry millions of its packages. It now delivers nearly
half its orders, compared with less than 15% in 2017, according to
estimates from research firm Rakuten Intelligence.
In February, Amazon noted in its annual report that it views
companies in "transportation and logistics services" among its
"They had never done that before that day," Mr. Smith said. "So
we took it seriously."
Within months, FedEx stopped delivering nearly all Amazon
packages in the U.S., letting contracts worth some $900 million in
annual revenue expire. Instead, FedEx wants to be known as the
shipping company that is aligned with Walmart Inc., Target Corp.
and other merchants that compete with Amazon.
FedEx has more than 680 jets and 160,000 delivery vehicles. Just
last month, Amazon said it was ordering 100,000 electric delivery
vans, bringing its total fleet much closer to FedEx and UPS.
"In sports, business and the military, the only thing that
counts is, at the end of the day, what the score is on the board,"
said Mr. Smith, a minority owner of the NFL's Washington Redskins.
"We'll let the points be counted up at the end of the game."
Mr. Clark, Amazon's head of world-wide operations, said the
company's logistics expansion sprung from a simple realization: The
existing delivery infrastructure wouldn't be enough, in terms of
speed and size, to meet Amazon's projected needs.
"Our focus and everything we're doing today is about keeping up
with Amazon customer demands," he said. Amazon has long had a
closer relationship with UPS and the Postal Service, with whom they
have mapped out the company's future needs, Mr. Clark said, than
with FedEx. Last year, FedEx carried about 2% of Amazon's U.S.
packages, according to Rakuten.
Amazon was always a tough customer. It demanded low shipping
rates because of its high volume of packages, which yielded lower
profit margins than other accounts, according to current and former
FedEx executives. As its own delivery capabilities grew, Amazon
shipped more of its own packages in denser urban areas, leaving
other carriers with the costlier task of shipping packages further
out, Mr. Smith said.
Some former FedEx executives say they were surprised it took so
long for the company to realize the threat posed by Amazon.
FedEx decided this year to cut ties with Amazon after concluding
that other retailers had become large enough that they could
provide enough daily packages to create routes with enough stops
close together. Unlike Amazon, those companies aren't building out
their own distribution networks and need FedEx and other carriers
to deliver everything.
Targeting online shopping while shunning the largest player is a
tall order, said Amit Mehrotra, an analyst at Deutsche Bank. "It's
hard to lean into something when you're leaning away from the
biggest contributor to growth in that market."
Mr. Smith hatched the concept of an express delivery network in
a term paper at Yale University. Creating a company with quick
delivery that handled shipments from end to end would allow
businesses to count on replacement parts, medicine or electronics
arriving the next day. Once the operation took off, it found a
market of shippers willing to pay premium rates, largely connecting
businesses to each other.
Online retailing is a different animal. Dropping one or two
packages at a single home is a costlier proposition than dropping
off a large number of packages at a retailer or office. Mr. Smith
was wary of accepting too many packages from online merchants, with
their low prices and high delivery costs.
FedEx was happy to let UPS take much of that business. FedEx
would move packages long distances on planes and trucks, then
deposit them at local post offices for a fee. Postal carriers
brought them to homes on their mail routes. Each day FedEx handed
about two million packages to the Postal Service.
The arrangement worked well, but Mr. Smith said he was growing
worried about his partner. The Postal Service's finances have been
strained by the declining volume of first-class mail, the most
profitable part of its operations, and high retiree and
post-employment benefit costs. The Postal Service has incurred
losses of nearly $75 billion since 2007.
"The Postal Service is imploding," Mr. Smith said. He contends
the agency needs to cut service, reduce compensation for its
unionized employees and possibly ask the federal government for
subsidies to deliver packages -- all unlikely options, he said.
The Postal Service says its finances are hampered by structural
issues. It is obligated to deliver mail to customers in all areas,
but is restricted in how much it can raise prices. "We remain very
confident that our problems, while serious, are solvable," said a
Postal Service spokesman.
To reduce its reliance on the U.S. mail, FedEx decided to build
up its Ground network. Acquired in 1998, the business operates
independently from the Express division. To deliver packages to
residences, FedEx Ground relies on a fleet of independent
contractors who control local territories and trucks.
Over the past five years, FedEx has added more than 36 million
square feet of sorting capacity to its Ground network, including
nearly 70 facilities. That is allowing it to pick up shipments from
more merchants and handle final delivery of many of the packages it
had been leaving at post offices.
Some FedEx Ground contractors and Wall Street analysts question
the company's decision to open up its network to e-commerce
packages, and the extra costs that will come from actions like
adding Sunday delivery.
"This is the exact opposite of discipline and risks swamping the
network with lower yield product," Sanford C. Bernstein & Co.
analyst David Vernon wrote on Oct. 9 when he slashed his one-year
price target for FedEx shares to $153, from $201. The stock is
trading around $150.
Rival UPS also has been spending billions to add capacity,
modernize its sorting facilities and move more packages by
aircraft. UPS, which handles about 20% of Amazon's U.S. packages,
wants more of Amazon's business. It also is deepening ties with the
Postal Service, including by tapping the postal delivery fleet to
help roll out home delivery on Sundays.
A UPS spokesman said it has decided to work with Amazon and the
Postal Service after evaluating what is best for UPS customers and
FedEx's buildup of its Ground network has raised more questions
about its Express network, where growth has stalled. FedEx
continues to pour money into new aircraft and expanding air hubs in
places such as Indianapolis and Memphis.
Mr. Miller, the Memphis hedge-fund manager, said FedEx should
consider slowing some of its capital expenditures until Express
FedEx executives say the upgrades are needed because the new
planes are more efficient and reliable than older ones. The company
has trimmed some spending plans and offered a buyout program to
Express employees, and could cut spending further if the economy
The company has resisted calls to integrate its delivery
networks. Drivers for Express and Ground operations pick up and
drop off packages separately, sometimes arriving at the same place
within minutes of one another, according to former FedEx
Mr. Smith said keeping the operations separate is vital to
maintaining the promise of speedy delivery by Express. If a
snowstorm delays an arriving flight, he explained, Ground drivers
can start their routes while Express carriers can wait for
time-sensitive deliveries such as essential medical supplies.
This month, the World Trade Organization forecast that global
merchandise trade volume would increase by 1.2% this year, down
from the 2.6% growth it forecast in April. Over the past year, Mr.
Smith has often appeared in Washington to make his case for
defusing the U.S.-China standoff, which is at the core of global
Mr. Smith wasn't planning to be as involved as he currently is.
The FedEx board changed its retirement rules to let Mr. Smith stay
on after he turned 75 in August. His heir apparent, a longtime
lieutenant, abruptly retired in February. Mr. Smith declines to say
how long he plans to stay CEO.
"I'm very focused on the here and now," Mr. Smith said. "I don't
care about any legacy. The legacy will be the success of the
Write to Paul Ziobro at Paul.Ziobro@wsj.com
(END) Dow Jones Newswires
October 17, 2019 11:09 ET (15:09 GMT)
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