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VOL. 127 | NO. 93 | Friday, May 11, 2012

FedEx Ground Examines Shipping Cost Problems

By Bill Dries

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Dave Rebholz hasn’t been to a shopping mall in a long time and he likes Shoes by Zappo, the e-commerce shoe site.


“They’re cheap,” Rebholz said. “They’re good and they have the big ones I need.”

But when the president and CEO of FedEx Ground got his latest pair of shoes from Zappo recently, they came in a UPS box – FedEx’s chief corporate rival.

“I told them I would rather ship FedEx. I said use my account number,” Rebholz told a Wells Fargo Securities conference Tuesday, May 8, in New York City. “My point is I don’t have the choice.”

Rebholz was one of two FedEx Ground executives on the road this week with analysts talking about e-commerce and how it is affecting Memphis-based FedEx, its rivals and the U.S. economy.

In Chicago the next day, FedEx Ground executive vice president Henry Maier told a Robert W. Baird & Co. Inc. conference that “the next great frontier in e-commerce is going to be free returns.”

Without knowing it, he was talking about a policy that Shoes by Zappo features on its website.

“Convenient returns are probably the biggest determinant for whether or not a customer who goes to a company’s website for the first time and purchases is going to make another purchase,” Maier said.

Meanwhile, Rebholz says FedEx options for shipments that retailers in e-commerce are able to pick from are creating some concerns that could eventually be eased once consumers catch up to what they are paying for.

FedEx Ground’s shipping portfolio offers retailers three options without FedEx “trading” a single price for a single option to get the business.

“The variable cost model in all cases comes to bear,” Rebholz said. “It is a religion for us. We have the appropriate venue for a client without trading down price. Trading price is where you lose the war.”

The consumers buying the goods through e-commerce are making a decision as well that Rebholz warned retailers should be more upfront about.

“In the retail sector … I hope I don’t get in trouble by saying this … a lot of shippers make money off of transportation. What you pay is not what they are charged,” he told the analysts in New York.

“If you buy now for $19.99 and you get two – just pay the extra shipping and handling, you’re getting hosed,” he said of television offers. “There are a number of clients that we recognize and we advise that they need to be cautious and confident about the quality of their product versus the transportation of their product.”

He used another example of an un-named retailer FedEx Ground works with that sells DVDs on how to use computers.

“You pay $30 for the DVD. It costs them 17 cents to make a copy,” Rebholz said. “All their money is in shipping and transportation. As an economy, we can’t afford to do that forever. I mean there isn’t enough substance – the base if you will – to allow this to happen.”

But he was quick to add that online consumers will become more knowledgeable about what they are paying for just as the companies selling them items through e commerce use the options FedEx Ground is offering them to keep their costs down.

“We, on the other hand, are very straightforward, forthright in offering options to our clients who can use any advantage we have in the market place,” Rebholz said. “If you as a consumer or a shipper want something of less value for transportation, we’ve got an option for you. … You’re going to pay for what you get.”

The difference, he added, is FedEx Ground is paying its employees off the value they produce.

“And a number of organizations don’t do that,” he said. “I think, in the final analysis what we need to do is figure out what our value is and not take it out of the market. That’s a losing proposition.”

In Chicago, Maier began his talk by running over the specifications. FedEx Ground contracts with 9,000 small businesses in the U.S. and Canada for pick up, transportation and delivery. The businesses have to be incorporated and in good standing in the states they operate in. That includes paying all of their taxes. And their drivers must be employees, not contractors.

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