How the biggest boom FedEx has seen in years could turn into a nightmare scenario, according to logistics experts

(C) Provided by Business Insider The impact of the pandemic accelerated package volume growth by three years compared to FedEx’s expectations, according to the company.

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  • Pre-pandemic, FedEx struggled to increase profits amid the ongoing shift to e-commerce.
  • Recent drops in on-time delivery rates threaten the brand’s reputation in the eyes of customers.
  • FedEx has a limited window to turn things around, according to industry experts.
  • See more stories on Insider’s business page.

Nearly two years into the pandemic, FedEx appears to be riding high. At the end of the most recent fiscal year, in June, Chief Operating Officer Raj Subramaniam called the past year “pivotal,” noting record revenue and profits. FedEx Ground posted its most profitable quarter in the company’s history earlier this year.

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But industry experts say surging online shopping – a result of the COVID-19 pandemic – might be masking unresolved issues that have plagued the shipping giant for years. And these issues, without significant action, could lead FedEx into a nightmare scenario. Before the pandemic, FedEx was in a precarious spot.

The e-commerce boom was shifting delivery demand from businesses to homes. FedEx hadn’t done enough to make the most of less efficient home deliveries, and it showed in the company’s results. Gross margin fell fairly consistently quarter over quarter from 2016 until the pandemic hit, and the stock price was dropping.

The last quarter of 2019 included one of the most dramatic declines in profitability in FedEx history. Heading into that year’s holiday shipping season, the cost to move each package was up 6%, while the revenue from each package was flat. To cut costs, the company offered buyouts, ended its pension program for new hires, and parked planes.

“I am not pleased with our financial results,” Subramaniam said on the company’s December 2019 earnings call.

The pandemic keeps the packages coming

The pandemic accelerated package growth by three years compared to FedEx’s expectations, according to the company, but it also presented FedEx with two levers. First, (along with UPS) it suspended its on-time delivery guarantees in late March 2020. Both carriers have partially reinstated the guarantees now but not on basic ground shipments, and some industry experts expect they never will.

Second, FedEx and UPS levied peak surcharges on top of virtually every package. In June 2020, FedEx Chief Marketing Officer Brie Carere called the fees “the new normal.” But soon after FedEx pulled those levers, its delivery speed lagged.

Pre-pandemic, 95% or higher on-time performance was pretty much a given for both major carriers, said Matthew Hertz, a cofounder of the e-commerce consultancy Second Marathon and a former operations specialist at Birchbox. With recent data putting FedEx’s on-time rate at 87%, Hertz called FedEx’s 2021 performance “shocking.” It’s a far fall for a company that made its reputation on reliability with famous slogans like, “When it absolutely, positively has to be there overnight,” and “If it’s important, send it Federal Express.”

And it’s a problem for retailers, who typically care much more about on-time performance than cost, according to Ashley Dellinger, vice president of digital transformation for the last-mile software platform OneRail. It’s also how FedEx could leave the pandemic period weaker than before.

Pre-pandemic bets

Before COVID-19 hit, FedEx placed a big bet on the future of its delivery network that could partially explain its recent deceleration. The company changed the way it deals with its cheapest, slowest delivery service.

Instead of handing these packages off to the United States Postal Service for final delivery, it now delivers most of these packages – millions per day – all the way to the doorstep. The move was meant to make FedEx more efficient, as more deliveries per stop and more stops per mile make each more profitable. Logistics experts say those additional packages, combined with the pandemic volume, have contributed to FedEx’s delivery slowdown.

Carere told Insider in the long run, it was the right call, but “as we grow, for sure, growth puts pressure on service levels.” She added that FedEx’s growth adds much-needed delivery capacity to the e-commerce industry in contrast to rival UPS, which is carefully choosing packages under CEO Carol Tome. FedEx has committed to spending £7.2 billion to shore up its network in the next year. It’s also overhauling the tech behind delivery estimates so that even if deliveries are slower than expected, consumers will at least have an accurate picture of when they’ll arrive.

The nightmare scenario

Still, whatever the cause, FedEx customers are increasingly frustrated with the more expensive, less reliable service.

“I’ve heard from a few brands that they’ve struggled with FedEx and have made changes over the last several months,” Hertz said. “The longer FedEx continues to have poor performance, the more prevalent it’ll be in customers’ minds that they’re unreliable.” Moreover, FedEx’s sluggishness is bolstering a slew of new competitors. “We are starting to see the effects of their on-time performance issues and pricing surge benefit last-mile delivery startups, like us,” said Nancy Korayim, founder of New York City-based delivery service Metrospeedy of FedEx.

According to industry experts, by the time e-commerce growth stabilizes and retailers have more freedom to choose who they ship with rather than scrounge for any available truck, FedEx might have permanently lost its shine. In the nightmare scenario, it loses its place in a 50-year duopoly with UPS. Spending and tech investment could help avoid the worst case, but time is of the essence, said Nate Skiver, founder of LPF Spend Management and a former logistics manager at Gap.

“FedEx services are still well-respected, generally speaking, as they’ve provided fast, consistent service in competition with UPS for many years.

But I think the duration of the service issues have changed the perception of some shippers,” Skiver said. “Retailers can only withstand persistent delays for so long.”

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