FedEx is increasing investment in its US ground parcel network heavily this year to expand capacity and has played down the potential threat from Amazon’s expansion of own delivery services and from technology-based delivery start-ups.
In parallel, the low-cost residential delivery service FedEx SmartPost will be merged into the much larger ground delivery business in the coming months to deepen operational synergies.
The group plans to invest about $4.6 billion in total in the 2015/16 fiscal year, mostly on expansion of the FedEx Ground network and planned aircraft deliveries to support the FedEx Express fleet modernisation programme.
About $1.6 billion of this sum will be dedicated to investment in ground parcel network, FedEx Ground president Henry Maier told analysts on the company’s Q4 results call yesterday. This would be the ‘peak’ year in terms of network investment, and the figure was likely to be about 30-35% lower in 2016/17, he said.
FedEx Ground has already invested strongly in its network in recent years and now has 33 hubs as well as more than 500 pickup and delivery stations across the USA, with 53,000 team members and a fleet of 32,000 vehicles.
Meanwhile, executives disclosed that the SmartPost business, a lower-priced and lower-cost service that uses USPS for final-mile deliveries, will be fully merged into FedEx Ground, remaining as a service option to increase synergies between the two businesses. Maier said the integration would generate “fairly significant” cost savings as Home Delivery and SmartPost shipments heading to the same address will be delivered by FedEx in future.
In the year ending May 2015, the FedEx Ground segment increased revenues to nearly $13 billion from $11.6 the previous year. The core FedEx Ground service, covering B2B deliveries and the Home Delivery service, grew to revenues of $11.5 billion from $10.6 billion, with volumes up by 5.7%. But SmartPost revenues increased only moderately to just over $1 billion and volumes dropped by 5.7%. Newly-acquired GENCO contributed $416 million in revenues.
Maier also told analysts that integration of returns logistics company GENCO, acquired for nearly $1.4 billion early in 2015, will take about 12-18 months and would be a slight ‘drag’ on results in fiscal year 2016 due to integration costs. GENCO has annual revenues of about $1.6 billion.
Meanwhile, FedEx executives underlined that FedEx Ground capacity for the forthcoming peak season would be provided preferentially to long-term customers. Maier said capacity would be based on what volumes customers generated over 11 months, not just in the final month of the year.
On the topic of peak season pricing, Mike Glenn, Executive Vice President, Market Development, stressed it was important to ensure “right pricing for 12 months of the year, not just 3-4 weeks during peak”. He described the general market pricing environment as “very rational” at present.
Asked about the potential threat of customers (Amazon) and technology-based new entrants (Uber) turning into delivery competitors, Glenn emphasised the complexity, scale, timescale and IT requirements for setting up a nationwide delivery network. Despite technology advances, basic operating costs had not changed, he commented. Glenn also highlighted the importance of having parcels delivered to homes by a uniformed delivery person.
