A Blog by Jonathan Low

 

Jun 26, 2019

To Compete With Amazon, FedEx Slashes Shipping Prices

UPS may be the extant competition, but Amazon has made its intentions clear.

This is what happens when your biggest customer becomes your biggest competitor. JL


Paul Ziobro reports in the Wall Street Journal:

FedEx is ending an air-shipping contract with Amazon, is offering discounts to woo online merchants to its network as it seeks to refashion a delivery system ill-equipped for the rise of e-commerce. Online shopping will double  packages shipped in the U.S by 2026. For customers ordering online, it is more important to deliver shipments by a particular day rather than a particular time. E-commerce has put distribution centers closer to where people live, reducing the need for cross-country flights. FedEx expects delivery distances will shrink. “The vast majority of growth will be fulfilled and delivered in the same metropolitan area.”
FedEx Corp. FDX -3.06% is offering big discounts to woo online merchants to its air network as it seeks to refashion a delivery system ill-equipped for the rise of e-commerce.
The shipping giant, which is ending an air-shipping contract with Amazon.com Inc. later this month, is cutting prices for some customers of its Express network, according to people familiar with the matter. That includes offering guaranteed two-day air service for the same price as shipping items through its Ground division, the people said.
The deals are being given to try to win over shippers from FedEx rival United Parcel Service Inc. and to get them to switch from what has historically been a lower-price shipping option in FedEx Ground, these people said.
FedEx is grappling with how the Express air network fits in a shipping economy increasingly dominated by online orders for everything from toothpaste to T-shirts. Founder and Chief Executive Fred Smith started the Express unit four decades ago to ferry shipments like legal documents and medical supplies over long distances.
FedEx is projecting growth in online shopping will double the number of packages shipped in the U.S. to 100 million a day by 2026. It is trying to capitalize on that growth after initially balking at handling too much of the lower-margin e-commerce shipments.
A FedEx spokeswoman said the company hasn’t changed its pricing strategy and added that the two-day Express service “has been very successful and continues to deliver tremendous value to small and medium businesses competing in the e-commerce market.”
UPS is overhauling its network to adapt to the online-shopping boom, spending billions of dollars to build large automated sorting facilities and delivering packages six days a week.
A UPS spokesman said the company “competes aggressively to win and retain business” by providing a range of solutions to help customers meet their goals.
The problem for FedEx is that its legacy air network, where shippers pay premiums to have goods delivered by 8 a.m. or 10:30 a.m., wasn’t built for e-commerce.
For customers ordering online, it is more important to deliver shipments by a particular day rather than by a particular time.
The e-commerce revolution also has put distribution centers much closer to where people live, reducing the need for quick, cross-country flights to meet delivery commitments. Amazon has about 400 fulfillment centers, sorting centers and air hubs in the U.S., according to supply-chain consultants MWPVL International Inc. Other retailers are using neighborhood stores to pack and ship orders placed online, so their shipments travel dozens, not hundreds, of miles.
FedEx expects that delivery distances will continue to shrink. “We know the vast majority of growth will be fulfilled and delivered in the same metropolitan area,” FedEx Chief Marketing Officer Brie Carere said in an interview last week.
One way it is adapting its Express network is with a service called Extra Hours, by which drivers do a sweep of AutoZone Inc., Best Buy Inc., Target Corp. and other stores late at night to pick up online orders bound for nearby homes. The packages are then brought to a nearby hub, where packages brought in on jets are sorted. They all go out on FedEx Express vans for delivery the next day.
FedEx still needs cargo for its planes, and one way it is wooing customers is with the discounts. Its domestic Express business has already seen yields, or the average revenue per package, decline by 2% to $17.93 in its third quarter.
That was led by a decline in its deferred shipments, which includes two- and three-day deliveries but excludes the costly overnight deliveries by airplane. The yield there fell to $14.76 a package, down 5.7% from a year earlier. FedEx said the decline was due to more lighter, smaller e-commerce packages.
Discounting air shipments to close to what FedEx charges in its Ground network would push yields down further. FedEx Ground’s yield was $8.87 in the third quarter.
For some package weights, the gap between shipping via Express service and Ground is as little as 10%, according to Satish Jindel, president of SJ Consulting Group Inc., a parcel-industry research firm. He said it is no surprise that FedEx would look to fill planes with lower-yielding e-commerce packages instead of reducing its fleet. “At FedEx, the thinking is, ‘I have this network, find me packages to put in it,’ instead of saying, ‘Let’s put some planes out to pasture,’” Mr. Jindel said.
FedEx has made a flurry of changes in the weeks leading up to its fourth-quarter earnings report, scheduled for Tuesday. The changes show a pivot toward a deeper tie to e-commerce shippers. The company in May said it would deliver packages seven days a week starting in 2020 to serve online shoppers. It also plans to shift some two million packages out of the U.S. Postal Service network and deliver them on their own.
Then in June, FedEx said that it would end its domestic air-shipping contract with Amazon, which makes up 1.3% of FedEx’s annual revenue, so that it can focus more on serving the broader e-commerce market, including large retailers like Walmart Inc. and Walgreens Boots Alliance Inc.
FedEx also is vastly expanding its physical presence with plans to open on-site locations in about 8,000 Dollar General Inc. locations. That gives FedEx a wider rural footprint, where shoppers can pick up and drop off packages, including returns.

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