When It Absolutely, Positively Can Get There Whenever: Fed Ex Confronts A Strategic Shift

Our definition of speed has changed and some iconic businesses are learning the hard way what that means.

It used to be that the arrival of an overnight envelope or package signaled the urgency of the communication and the importance of the recipient. FedEx pioneered the modernization of global logistics and its catch phrase, 'when it absolutely, positively has to get there overnight,' established the brand's operational virtuosity as well as its reliability.

But then, like so many other businesses, Fed Ex got disintermediated. Instantaneous makes overnight look pretty dowdy. Smartphones, secure networks and electronic payment systems cut the guts out of the overnight document business. The transportation of documents, concepts, legal agreements and the paper foundations of the global economy could or would no longer wait. Longstanding adherence to ancient codes requiring stamps and signatures were amended and sometimes sacrificed in the interest of time, speed - and modernity (if not always security, safety and prudence).

Meanwhile, the producers of big, tangible products that actually had to be physically delivered found that they could manage their supply chains more efficiently by determining which deliveries required speed and which could earn competitive margins via less demanding schedules. Not everything had to be shipped at premium rates all the time, especially in the depths of a global recession. And even when conditions began to improve, the discipline learned in lean times was ensconced, often via technology, possibly never to be abandoned.

What is astonishing to Fed Ex, the securities analysts who cover it and the general population who have come to take such services for granted, is how quickly and silently this change occurred. In addition to spurring increased reliance on electronic versus physical systems, the internet provided merchants and their customers with the ease of delivery. But in searching for ways to take share from bricks-and-mortar competitors, free delivery became an advantage that morphed into a presumption. It was no longer a differentiator, it was the ante to get into the game. Given the impact on margins, overnight could not be part of the equation unless the customer was willing to pay, and what everyone involved discovered was that given the trade-off between fast and free, free won.

FedEx and UPS are well-managed and well-financed businesses. They will adapt and have already begun to do so by morphing from package delivery to logistics management enterprises. They are using their expertise to take over significant aspects of clients' operations. but the evolution of the overnight concept suggests that perceptions of basic ideas central to business like speed and value will continue to evolve. JL

Bob Sechler and Tess Stynes report in Fox Business News:

Companies simply have become more cost-conscious in managing supply chains, using high-priced overnight shipping when needed but availing themselves of cheaper options for deliveries that aren't time-sensitive.

FedEx Corp. (FDX) warned Wednesday that a restructuring plan it disclosed last autumn won't be sufficient to offset an accelerating shift by international shippers away from priority services to lower-cost options.
The Memphis, Tenn.-based global shipping giant, which reported a 31% decline in fiscal third-quarter earnings that came in below Wall Street expectations, said it is planning more cost-cutting measures in its big express division. The moves include grounding some flights to and from Asia beginning April 1 and potentially retiring some older aircraft.
"Given the persistence of the trend [away from priority shipping], additional cost-cutting efforts are under way," Chief Financial Officer Alan Graf told analysts during a post-earnings conference call. "It's a trend that has continued to accelerate this year versus our previous expectations."
FedEx's express international export package volume actually climbed 4% in the quarter ended Feb. 28, compared to the year-ago period. But the increase was driven by a 12% rise in "economy" volume, while priority volume inched up only 2%.
In January, United Parcel Service Inc. (UPS) reported a similar trend, when it said fourth-quarter international export volume climbed even as average revenue per package fell.
Increased demand for deferred shipping has been notable particularly in the market for consumer electronics and high-tech components; these manufacturers still use priority services to get new products on shelves but are quickly backing off to use of slower options for subsequent deliveries.

BB&T Capital Markets analyst Kevin Sterling noted that the shift has been under way for some time, with increasing numbers of shippers willing to wait several days for some deliveries in exchange for lower prices. But he said the degree of deterioration in FedEx's priority service still was startling.
"The trade down in express--the magnitude of how quickly that happened--really caught me by surprise," said Mr. Sterling, who downgraded FedEx shares to hold from buy late last month, based mainly on valuation.
"Consumers want free shipping now," he added. "And if you want free shipping, it can't go overnight. That's the mindset of the shipping community right now."
FedEx, which pioneered overnight air delivery in the early 1970s, acknowledged it has been carrying too many low-margin, deferred packages on its expensive-to-operate priority air network. It said Wednesday that it plans to ground some of its express flights and shift more nonpriority volume to lower-cost parts of its delivery network, such as FedEx Trade Networks, its unit that arranges third-party transportation for shippers, including using oceangoing freighters.
The company said the changes should be evident in results for its fiscal fourth quarter ending in May.
Results for the express division should be "a whole lot better" in the fourth quarter, Mr. Graf said.
FedEx shares were down about 6.2% at $99.89 in recent trading.
For the fiscal year, the company lowered its per-share earnings estimate and now expects $6 to $6.20 before restructuring-related expenses. In December, it guided for $6.20 to $6.60.
For its fiscal fourth quarter, the company forecast per-share earnings of $1.90 to $2.10, while analysts polled by Thomson Reuters most recently expected $2.07.
Last autumn, FedEx disclosed a multiyear "profit improvement" plan centered primarily on its express division. Under the plan, FedEx is aiming for $1.7 billion in improved profitability in fiscal 2016, compared to its fiscal-2013 results. The effort includes an ongoing voluntary buyout plan for U.S. employees in the express division, as well as actions to modernize its air fleet.
For the quarter ended Feb. 28, FedEx reported a profit of $361 million, or $1.13 a share, down from $521 million, or $1.65 a share, a year earlier. Excluding restructuring-related expenses and other items, adjusted earnings fell to $1.23 from $1.55. In December, FedEx had projected per-share earnings of $1.25 to $1.45.
Revenue increased 4% to $11 billion. Analysts recently forecast $10.85 billion.
Overall operating margin fell to 5.4% from 7.7%.
Revenue from the express-shipping business--by far the largest top-line contributor--grew 2% to $6.7 billion, thanks to acquisitions. However, the segment's operating income plunged by two-thirds as express segment operating margins tumbled to 1.8% from 5.3%.
International export revenue per package fell 3% due to the demand shift to lower-yielding international services, lower rates and lower fuel surcharges.
The company's board also authorized the repurchase of as many as 10 million of FedEx's shares, augmenting the remaining 188,000 shares under an existing share-repurchase program.