The acquisition of TNT Express has strengthened FedEx's capability to serve the booming e-commerce market but the group's core business will continue to be in the B2B segment for the foreseeable future, according to executives.
Founder and chairman Fred Smith admitted to analysts on a conference call earlier this week that the rise of on-line trade had been a major factor in FedEx acquiring its Dutch counterpart.
"The whole rationale of buying TNT….. in fact it's right in the middle of this whole e-commerce debate. In this business the number one item after the line haul in upstream systems is delivery density, cost per stop, the number of stops per hour and so forth."
But while underlining that "e-commerce is fantastic and it’s going to continue to grow and we intend to be a major player in that space," Smith made it clear that it was FedEx's opinion, backed by research "from very credible sources," that on-line trade was not going to eliminate the 'bricks and mortar' retail channel.
"We know from research that the millennial generation, the largest generational cohort in American history, is not going to stop going to stores,” the FedEx CEO declared.
"What it (e-commerce) may do is change the character of retail. And one of the things that you see happening are very focused, integrated product in-store networks. Two that come to mind that are just fantastically successful are Zara which is a company that's located in Spain and well-known for its fast-cycle, small shipment replenishment of its stores, that are able to turn on a dime of what's selling and move it around the world. And in Japan, a great company called Uniqlo does the same sort of thing.
"So as these types of retail operations continue to proliferate, there will be a fair amount of B2B business…… and remember of all retail, e-commerce is now about 10%, growing fast, taking share. But it's going to be a long time before retail is threatened. And B2B, meaning the underpinnings of the business world – medical production, automotive, and things like that, in the main, is not going to be diverted to e-commerce anytime soon and that is the backbone of the FedEx network."
But for all that, e-commerce is monopolising attention and Mike Glenn, President and CEO, FedEx Services, pointed out that it continues to outpace GDP growth both in the US and globally.
"E-commerce has become a way of life for consumers requiring goods around the world. But the success of e-commerce continues to be dependent on transportation companies’ ability to reliably and quickly make residential deliveries around the world."
He said that more than 95% of e-commerce packages in the US are delivered by FedEx, UPS, and the United States Postal Service, with whom FedEx has a strategic relationship to transport its priority mail.
"E-commerce would be impossible without these companies and our expansive networks. If you were to isolate the FedEx e-commerce business, it would become clear FedEx is one of the most profitable e-commerce companies in business today."
Glenn explained that during the past quarter, FedEx had "made significant investments in expanding our global transportation portfolio and e-commerce capabilities around the world including the acquisition of TNT…..and the introduction of FedEx CrossBorder."
The latter offers e-commerce technology solutions that enables e-tailers to navigate common cross-border selling challenges such as regulatory compliance, secure payment processing, multiple currency pricing, credit card fraud protection, and also offers access to e-commerce shoppers around the world.
"CrossBorder is the relaunch of Bongo International, the company FedEx acquired in 2014. When combined with our recent GENCO acquisition, we have significantly strengthened our e-commerce portfolio of services.
"Of course demand for e-commerce increases significantly each year during the peak holiday season and we're deep into preparations for the upcoming 2016 peak season. We're closely collaborating with large e-tail and retail customers to understand their peak shipping needs including geographic mix, and package characteristics, so that we can once again have our resources positioned and ready to provide outstanding service."
Glenn added that FedEx will also be "leveraging some new and evolving services to meet the heavy demand during peak," including FedEx Delivery Manager, FedEx SameDay and an expansion in FedEx Hold at Location Services.
Delivery Manager allows US package recipients to customize home deliveries to fit their schedules including changing the time and location of the delivery, requesting a signature upon delivery, or leaving instructions for the courier.
"FedEx SameDay city is available in 24 markets across the country offering customer same day service with uniformed FedEx drivers, branded vehicles, real-time tracking, and world-renowned FedEx reliability.
"FedEx Hold at Location offers secure package pickup at more than 2,400 FedEx locations including more than 1,800 FedEx office retail stores. These hold services allow customers to redirect packages for pickup and drop-off at FedEx and many other third-party locations," Glenn concluded.
Separately, the conference call shed light on reports that FedEx is buying six Boeing 767 freighters, valued at $1.2 billion.
Fred Smith confirmed that the aircraft were among the options in an order FedEx placed with Boeing last year for 50 freighters.
He explained that the deal with Boeing for the B767Fs made provision for "10 firm airplanes per year over a number of years to a total of 50 and then there were options with given dates and these six aircraft were the first options that became due and they are for delivery in fiscal year '19 and '20.
"The next options are not due until June of calendar year 2018 when Express will decide whether it wants to exercise a tranche of six and then the next one after that is June 19 with a tranche of six. The basic deal is we have 10 firm airplanes per year and the ability to go up to 16 airplanes."
David Bronczek, President and CEO of FedEx Express, added: "The only thing I would add is that we're not adding capacity. And I think that's an important point. We’re replacing the older planes that have less fuel efficiency and higher maintenance costs with these new more modern better planes. So they’re not adding any capacity, just replacing."
