On FedEx’s June 29th Investor Day, newly installed CEO Raj Subramaniam announced what he is calling “Network 2.0”. The new initiative is intended to make better, more efficient use of FedEx’s largely separate Ground, Express and Freight networks. Historically these networks have operated independently because, as Subramaniam notes “They were designed to deliver different products to support different customer needs . . . “. But also, the Ground and Freight networks came on board through acquisitions and were largely just bolted on to the existing Express network. While FedEx has not been explicit about what the new collaboration will look like across networks and services, they have projected that they will close one hundred stations and reduce the number of pickup and delivery routes by 10% (which will presumably be serviced by other network resources). While the initiative is expected to cost FedEx $2B to complete, it is also expected to come with a $2B annual cost savings.
What will this mean for shippers? If the objective is truly to reduce redundancy across the multiple networks, rather than just a cost-cutting exercise in response to what everyone sees as the beginning of a recession, that is one thing. You will still likely see more damages and lost packages if e-commerce packages are put on FDX Freight trucks. Rationalizing the Ground/FHD/Express networks is long overdue. So long as FedEx moves forward with a clearly defined, and shipper-friendly objective, and correctly manages the implementation, it could result in minimal negative impact to transit times. Today FedEx runs an inefficient but mostly effective network. I would argue that initiatives that focus purely on efficiency and cost reduction rarely have a side-effect of improved effectiveness.
The most common objection we have heard of FedEx’s multiple-network approach is dock congestion due to separate pickups by the separate networks. While it is unclear how many of these duplicate pickups might be eliminated through Network 2.0, it sounds like some will. While this is more likely to be true in rural areas, this could open the door for a negotiated solution for shippers where dock congestion is a barrier.
Finally, let’s talk about impacts to cost. For shippers who believe that FedEx will share some of the realized cost savings with them, I am afraid I have some bad news. On last Thursday’s earnings call Brie Carere (EVP/CMO) said, “I am confident we have the tools to continue getting inflation-plus pricing.” Whatever FedEx saves out of this, it is going straight to their bottom-line, while FedEx’s stated intention is to push through price increases greater than the increases to their cost-to-serve. So, lower cost-to-serve and higher yields for investors, but no price relief for shippers then? I don’t think so.
While I trust implicitly FedEx’s desire to push prices higher, there are headwinds coming. While FedEx has been experiencing strong margins, as have most parcel carriers, U.S. parcel volumes, and particularly e-commerce volumes have been falling for the last few months. High margins on falling gross revenue still means contractions on net revenue. Parcel networks are hungry beasts, and must be fed. If volumes continue to decline, and we believe they will, expect the parcel carriers to be forced into a more price-competitive environment.