The Rise of FedEx: Tough Growth Trajectory of The Delivery Giant Within 2020
From the humble beginnings, FedEx – also referred to as Federal Express -has literally revolutionized the way global business practices are conducted and now defines speed and reliability. Best known for disrupting the parcel delivery business by introducing overnight service, this global transportation, and logistics company has become a household name, being continuously named one of the top ten of America's Most Admired Companies by Fortune magazine.
Nevertheless, its growth trajectory is by no means a straightforward path. Increasing competition pressures together with grave economic situations, especially within the past COVID-19 pandemic, have presented several challenges for such a shipping giant. So, how is FedEx's business performance over the recent years? Which specific actions have FedEx's management board taken to weather those business storms? Let’s read on to uncover!
FedEx: An Overview of Its Business Model
In general, FedEx’s revenue is generated from a broad range of transportation, e-commerce, and business services, which can be clubbed under three segments – FedEx Express, FedEx Ground, And FedEx Freight. Standing as the world's largest express transportation company, FedEx Express commits to providing fast and reliable delivery to more than 220 countries and territories. FedEx Express adopts a global air-and-ground network to speed delivery of time-sensitive shipments, by a definite time and date with a money-back guarantee.
When it comes to FedEx’s business model, FedEx is primarily involved in the delivery of packages worldwide, which is typically used by retail customers and businesses to deliver documents and goods. Whereas FedEx does cater consumers and businesses across the globe, its services of FedEx Ground, though, are available only for consumers and businesses in North America.
Within the sphere of package delivery service providers, the alternatives to FedEx include UPS, DHL – and newly Amazon Prime Air. Other alternatives are the public postal services, such as the United States Postal Services, and Royal Mail UK, amongst others.
FedEx: Pre-2020 Revenue Growth & Some Anticipation
As regards its financial outcomes, FedEx's total revenue has grown in low double-digits since 2016, but the growth rate could possibly slow in the near term. To be more concise, FedEx Corporation's total revenues witnessed remarkable growth from $50.4 billion in fiscal 2016 to staggeringly $69.7 billion in fiscal 2019. This represents an average annual growth rate of 11.6% - then, however, it's anticipated that its revenues will be around $75.5 billion by fiscal 2021, reflecting an average annual growth rate of 4.1%.
Taking a close look, there is a strong likelihood that FedEx's revenue growth over the next two years will be driven by an expansion in-ground and freight volume, as well as an increase in their pricing.
First of all, talking about FedEx Express, its revenue has grown from $27.1 billion in fiscal 2016 to roughly $39.8 billion in fiscal 2019. And the drive behind? Such growth was primarily driven by higher packages shipped, which increased from 1.4 billion to 2.1 billion during the period from 2016 to 2019, partly offset by a decline in average revenue per package from $19.70 to $18.40 during the same period. This is attributable to FedEx’s decision to acquire TNT Express in 2016. Look into the future, volume and pricing could experience slight growth, possibly resulting in revenues of $40.0 billion by fiscal 2021.
Regarding FedEx Ground revenue, there has been a remarkable growth from $17.0 billion in fiscal 2016 to $21.9 billion in fiscal 2019 – which can be attributed to the larger number of packages shipped, which increased from 2.2 billion in fiscal 2016 to 2.4 billion in fiscal 2019, together with an escalation in average revenue per package from $7.80 to $9.00 during the same period. Looking forward, such volume growth could continue in mid-to-high single-digits while pricing could grow to $9.10 per package. This stands as a result of the growth in e-commerce, which has led to higher demand for shipments - and promisingly, this trend will likely continue in the near term.
When it comes to the service of FedEx Freight, its revenue grew from $6.3 billion in fiscal 2016 to $8.1 billion in fiscal 2019. This is mainly thanks to the growth in freight shipments, which increased from 27.3K to 29.3K, while weight per shipment hovered around 1.2 pounds in recent years. Plus, the average revenue per pound increased from approximately $0.20 to $0.23 during the same period. Looking forward, there could be a slight uptick in the freight volume and pricing, which possibly results in segment revenues of $9.6 billion in fiscal 2021.
FedEx in 2020 and Beyond: Key Milestones Disrupting Its Operation
Undoubtedly, 2020 has been a year of chaos, uncertainty, and grief for every single business around the globe – and FedEx is definitely not an exception, especially when it faces the greater competitive threat from one tech giant – Amazon.
Then, let’s go through the following highlight events that FedEx has recently undergone to anticipate the fate of this big shipping name.
#1. FedEx and Amazon War Escalation
Over recent years, the "everything store" Amazon has been aggressively building out its in-house delivery capabilities, emerging as a key competitive threat to longtime delivery and logistics partners such as UPS and FedEx.
From FedEx’s side, the company representative had stated in June of last year that it opted not to renew its ground-shipping and express contracts with the e-commerce giant for expedited FedEx Express service, preferring to instead "focus on serving the broader e-commerce market." And then around two months later, the companies' rift widened even more after Amazon ceased FedEx Ground deliveries altogether.
Furthermore, as Amazon continues to ramp up one-day deliveries amid the busy holiday shopping season, Jeff Bezos's empire just took another shot at its historical shipping partner. In some days prior to 2020, Amazon is reported to have been blocking its third-party sellers from delivering Prime-eligible packages through FedEx's ground delivery network, citing a decline in delivery performance heading into the final stretch of the holiday shopping season. The ban on using FedEx's Ground and Home services started in the middle of 2019 December and will last "until the delivery performance of these ship methods improves," according to an email Amazon sent Sunday to merchants.
In response to that, FedEx downplayed the impact on its business as "minuscule." To be more concise, its June statement noted that Amazon represented a mere 1.3% of the company revenue in 2018. Furthermore, the shipping company shared the chart of last-mile carrier share during its last earnings release, which highlights how little FedEx has historically contributed to Amazon's last-mile deliveries, as well as Amazon's growing proportion as it takes greater ownership over getting those packages to customers’ doorstep.
Nevertheless, up to 2020, after years of dismissing the competitive threat represented by Amazon, FedEx CEO Fred Smith finally conceded that Amazon is an emerging rival in the delivery and logistics business. "While the Amazon contracts represented only a small proportion of our revenues, the nature of our business is such that near-term profits will be adversely affected since the last bit of volume has significant flow through to the bottom line,"
Fred Smith went on, “… we basically compete in an ecosphere that's got five entities in it. There is UPS. There is DHL. There is a U.S. Postal Service. And now increasingly there is Amazon. That's who we wake up every day trying to think about how we compete against and give the best services to our sales force.” That's quite a reversal from Smith's dismissive comments in the past.
Additionally, from the perspective of other distinguished figures within the transportation and shipping sphere, Amazon stands every chance of surpassing FedEx and growing into the top player of this game. As Ravi Shanker, the Transportation Analyst at Morgan Stanley, shared, "Amazon is looking to become a logistics company in their own right. We think that Amazon will be a top logistics provider whether it's in trucking or in the air in the coming years. I think the question is just how quickly they will ramp that operation."
Also, “it is certainly within the realm of possibilities for Amazon to build itself into a legitimate logistics company in all facets,” stated Michael Vincent, Executive VP Commercial of FreightWaves.
#2. FedEx’s Suspension Of 2020 Profit Outlook Due to Coronavirus & Turnaround Pressure Weigh
Putting aside the rivalry with Amazon, in the march of 2020, the U.S. package delivery company made the tough decision of suspending its 2020 profit outlook, citing the “significant impact” of the coronavirus. Also, it is reported that FedEx was going to cut costs due to the uncertainty wrought by the pandemic.
As reported by CNBC, “FedEx has already been retiring and idling quite a number of aircraft. It's been getting quite a number of people go … Express and ground e-commerce delivery option operations starting to be merged”
Notwithstanding that, since more and more businesses turned to its international express plane service to safeguard their supply chains as Coronavirus illnesses and deaths mount around the world, FedEx’s reported quarterly revenue did beat market expectations. Actually, shares in FedEx surged as much as 5% before falling 0.5% to $94.50 in after-the-bell trading.
“The reaction to their release is a bit like driving looking through the rear-view window,” said Trip Miller, managing partner at Memphis-based Gullane Capital Partners. “There wasn’t much in there for me to feel positive about FedEx or anybody else in the next 60 days.”
In fact, FedEx joined Denmark’s DSV Panalpina, a major transportation and logistics provider, in suspending profit forecasts due to unprecedented business disruption caused by the COVID-19 outbreak. Receiving President Donald Trump’s corporate tax cut, FedEx did submit a request to the U.S. government for “liquidity support,” Chief Financial Officer Alan Graf said on a conference call with analysts.
Whereas its revenue increased by roughly 3% to $17.5 billion, the package delivery company suffered a drop in adjusted net income, declining by 53.5% year-over-year to $371 million - or $1.41 per share - for the fiscal third quarter ended at 29th of February.
Besides, FedEx’s executives did anticipate business opportunities in surging e-commerce spending since the U.S. governments in Europe encouraged people on social distancing, hunkering down at home to contain the spread of the virus. Plus, the rampant international passenger flight cancellations already have been a boon for the lucrative express business at FedEx.
As Dean Maciuba, a director at Logistics Trends & Insights., commented, “It’s like Christmas right now on the express side. They’re moving all sorts of supplies and equipment.”
In terms of cost-cutting, FedEx had been attacking costs by restructuring the company to move more express packages through its ground network. However, it seemed to still lag UPS, whose integrated express and ground network is more efficient. “I do believe it’s a turnaround story, but it’s going to take forever,” said Maciuba, adding that it could probably take up to three years to get FedEx margins back to 7-8% from less than 3% at that time.
Furthermore, Trip Miller, the Founder and Managing Partner of Gullane Capital LLC, also noted that FedEx’s stock was trading at roughly the same level as 15 years ago. “The top 5 executives, plus the board, have made $870 million over the last 15 years, while shareholders have made nothing,” he stated.
#3. FedEx’s Announcement of Multi-Year Strategic Partnership with Microsoft
On the 18th of this May, FedEx and Microsoft announced a new multiyear collaboration with a view to transforming commerce by combining the global digital and logistics network of FedEx with the power of Microsoft’s intelligent cloud. The ultimate aim of such partnership is claimed to create opportunities for their customers through multiple joint offerings powered by Azure and Dynamics 365 that will leverage data and analytics solutions to reinvent the most critical aspects of the commerce experience as well as empower businesses to better compete in today’s increasingly digital landscape.
“FedEx has been reimagining the supply chain since our first day of operation, and we are taking it to a new level with today’s announcement,” officially stated Frederick W. Smith, chairman, and CEO, FedEx. "Together with Microsoft, we will combine the immense power of technology with the vast scale of our infrastructure to help revolutionize commerce and create a network for what’s next for our customers.”
For the time being, FedEx networks link more than 99% of the world’s gross domestic product across 220 countries and territories while Microsoft Azure is trusted by more than 95% of Fortune 500 companies. By combining the breadth and scale of the FedEx network and the Microsoft cloud, businesses will have an unprecedented level of control and insight into the global movement of goods.
"Now more than ever, organizations are counting on an efficient and capable supply chain to remain competitive and open for business," said Satya Nadella, CEO, Microsoft. "Together with FedEx, we will apply the power of Azure, Dynamics 365, and their AI capabilities to this urgent need, building new commerce experiences that transform logistics for our mutual customers around the world.”
Taking a deeper look over the drive behind such partnership, some realize that Microsoft has made a habit of partnering up with Amazon's competitors – typically Walmart, who are reluctant to adopt the latter's AWS (Amazon Web Services) cloud for obvious reasons. And when it comes to FedEx, it is indirectly gaining thousands of customers for its cloud services, which will ultimately hit Amazon's core business in the future.
#4. FedEx’s Largest Post-Earnings Surge in Four Years
By the 1st of this July, shares of FedEx jumped staggeringly 9.4% in late trading as quarterly results top expectations. This package delivery company posted stronger-than-expected fourth-quarter earnings as a surge in pandemic-fueled domestic deliveries offset a sharp decline in business activity during the peak of the coronavirus pandemic. These results suggest that FedEx is navigating well amid coronavirus, even as the pandemic has shifted business to costlier residential shipping routes.
FedEx said that Christmas-like levels of online shopping boosted its business, and it is seeing tentative signs that the global economy is recovering from the coronavirus pandemic. Furthermore, the delivery giant experienced a jump in international cargo during the fiscal fourth quarter, enabling it to offset the significant decline in commercial shipments as thousands of businesses closed due to broad lockdowns.
Whereas the revenue at FedEx Express, which skews toward commercial deliveries, fell 10% and operating income dropped 56%; FedEx Ground, which handles more e-commerce home deliveries, reported a 20% revenue increase for the quarter and a 17% drop in operating income.
“Profitability doesn’t necessarily improve when you’re sending more packages to far-flung places,” Edward Jones analyst Matt Arnold said of home deliveries. FedEx executives said they were attacking residential delivery costs as business-to-business shipments begin to show signs of recovery. In fact, FedEx shares, which hit a record high of almost $250 in October 2017, were up $13.20 at $153.30 in after-hours trading on Tuesday.
As above mentioned, as regards its outlook, FedEx is not providing an earnings forecast for fiscal 2021 since the timing and pace of an economic recovery are uncertain. Notwithstanding that, “…we expect to benefit from the global recovery as we leverage the strength of our unmatched air network and U.S. residential capabilities, our yield management efforts and multiple initiatives to improve our financial performance,” said Alan B. Graf, the executive vice president, and chief financial officer of FedEx.
The Bottom Line
Beyond any doubt, this year seems not to be a smooth year for FedEx. Whereas some hurdles and obstacles still exist, there has been a sign of recovery and growth, especially with its record-breaking post-earnings surge recently. In general, the delivery giant has done a great job of weathering the economic storms – its growth prospect remains strong as long as the proper course of action is taken to handle well fierce competition within the transportation and shipping sphere.
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