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VOL. 9 | NO. 22 | Saturday, May 28, 2016

Analysis: Competition Intensifying, But FedEx Still Protected for Now

By Andy Meek

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The package shipment startup where Matthew Hertz works as director of operations is perfectly tailored to the digital age.

New technology is helping startups and other companies get into the delivery market, but FedEx founder and chairman Fred Smith says no company has the network, logistics capabilities and infrastructure to make inroads into the customer base that his company, UPS and the U.S. Postal Service serve, at least not anytime soon. (DOUG MENUEZ FedEx media relations)

California-based Shyp was set up to capitalize on the legacy cost structures and operations of traditional logistics companies. Its users snap a photo of the item they want to ship and enter an address, at which point Shyp shows up at their door and takes care of the rest.

If the company sounds like it eliminates a step or two in the delivery process faced by customers of package shippers like FedEx, that’s because it’s one example of a growing number of technology companies mounting what are perceived as disruptive threats against FedEx’s core business.

Amazon and Uber are others. Uber in late in 2015 launched its service UberRush, which uses the ride-sharing service’s drivers to ferry parcels in addition to people.

Amazon, though, has attracted the lion’s share of headlines related to its potential encroachment into FedEx’s business. In recent months, the Seattle-based e-tailer has expanded its U.S. truck fleet; negotiated the lease of 20 Boeing 767s; taken a majority stake in a France-based package shipment company; and reportedly had its China arm registered as an ocean freight forwarder.

Amazon also has been investing heavily in its own delivery services like Prime Fresh and Prime Now. The former is Amazon’s same-day grocery delivery option, while the latter is an hourly delivery option for Amazon purchases that can come straight from Amazon’s own sorting centers.

“Amazon has been working on this strategy for years,” Hertz wrote earlier this year in a LinkedIn post titled, “Why FedEx and UPS are (or should be) Scared of Amazon.”

He went on to detail Amazon’s investment in services that may eventually make it mundane for customers to have their shipments delivered within hours of placing an order – delivery times he says UPS and FedEx won’t be exactly racing to match.

The potential worries don’t end there for shippers like FedEx. Wal-Mart, for example, has signaled its intentions to invest aggressively in more e-commerce warehouses and to build out a regional delivery network.

In aggregate, it might look like an abundance of existential threats for the Memphis-based package delivery giant, which hits the 45-year mark in 2016.

If any company hopes to take a meaningful market share from FedEx, it would be Amazon, which has begun to invest more heavily in its own delivery services, and is always looking to leverage technology to its advantage. (Peter Endig/picture-alliance/dpa/AP Images)

The reality is less straightforward.

On one hand, some analysts insist, the combination of FedEx’s brand, its fleet of drivers, trucks and airplanes and the hub-and-spoke system it’s developed over decades form something of a protective moat – for now.

This is, in fact, an old story. It’s how innovation and digital disruption play out over and over again, especially so in a world where apps and websites have supplanted bricks and mortar. A company with massive scale comes to rely on a cost structure that competitors think leaves them vulnerable enough to make a run at.

Amazon hasn’t directly said it’s going after FedEx. Some analysts, though, think that may be exactly what’s going on.

“We believe Amazon may be the only company with the fulfillment/distribution density and scale to compete effectively with global UPS/FedEx/DHL, and with an investor base that historically is tolerant of margin volatility relative to the ‘profit mandates’ of traditional transportation and logistic shareholders, a significant competitive advantage in our view,” reads an October note from Baird Equity Research.

FedEx, naturally, isn’t having it. No less than FedEx founder Fred Smith, during an earnings call with analysts in March, said news articles even suggesting Amazon represents a credible logistics challenge to FedEx are “fantastical … devoid of in-depth knowledge of logistic systems and the markets which FedEx serves. As we have previously noted, network design, technology, facilities capabilities, and route/stop densities are the key elements in the FedEx, UPS and Postal Service systems that make it highly likely these entities will remain the primary carriers for e-commerce shipments in the U.S. for the foreseeable future.”

FedEx Corp. saw $12.7 billion in revenue and $692 million in net income for its fiscal third quarter, the company reported in March. FedEx executives also upped their adjusted earnings forecast for the fiscal year to a minimum of $10.70 per share, compared with the previous forecast of $10.40.

During that same earnings call, FedEx executive vice president Mike Glenn said no single FedEx customer represents more than 3 percent of the company’s revenue.

Even so, potentially disruptive threats are never something to be dismissed out of hand. Especially when the competitor is Amazon, which has steamrolled over industries like books and retail without regard to tradition or bigger competitors.

According to a recent Bloomberg commentary, “Amazon’s preferred method is to work with and learn from partners, and then run them out of town (see: Borders). All signs point to it trying to do a similar thing in the shipping industry.”

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