The Supply Chain Matters blog provides commentary and perspectives on FedEx’s sudden and unexpected warning of revenue and profitability shortfall prompting decisive actions.

Development

Last evening, global parcel, logistics and transportation services provider Fedex Corp. stunned the investment community with a warning that quarterly revenues and profitability will fall way below expectations. As a result, the carrier announced immediate and direct actions in reducing costs. They include the freezing of all hiring, the closing of over 90 FedEx offices, the parking of some air freighter aircraft and the reduction of Sunday ground delivery operations.

The financial market’s response has been immediate and as we pen this blog posting on the mid-morning of September 16, FedEx stock is trending down upwards of 21 percent, billed as the company’s biggest stock drop since 1980. Equity analysts quickly revised their analysis and outlooks for FedEx and other associated transport and logistics focused businesses. It is yet another development in this new, new normal of business and supply chain developments.

The obvious questions that are likely of high concern for our multi-industry supply chain reading audience is why this happened so suddenly, what are the potential short and longer-term implications for transportation, logistics and services providers, as well as industry supply chain strategy teams.  Another looming thought that we should poke at is whether this a “canary in the coal mine” sign for industry supply chain networks.

 

Explanations

In addressing this quarterly shortfall, newly appointed FedEx CEO Raj Subramaniam pointed to the following factors:

A $500 million shortfall for the Express business unit as a result of unexpected volume weaknesses experienced from Asia and European shipment activity. One equity investment firm indicated that the shortfall in operating income for Express business was over 75 percent lower than forecasted. The Asia shortfall was attributed to the recent manufacturing disruptions as a result of electrical power restrictions across China’s major manufacturing regions, and especially ongoing strict Covid-19 lockdowns that continue to be initiated by the government. A further factor was that air cargo rates are now down upwards of 80 percent because of lower volumes and excess capacity among carriers and commercial airlines.

Revenues for the FedEx Ground unit, this carrier’s engine of E-Commerce last-mile fulfillment, came in at $300 million below forecast. This is a likely reflection that consumers are not buying as much as they had previously giving the current high levels of inflation and thus, package volumes are indeed lower. With ground parcel rates remaining at very high levels as a resulting of multi-year rate hikes, and with fuel surcharges also thrown in, such a shortfall is concerning as to this carrier’s existing cost structure. It provides a further concern in that the carrier’s ground delivery operations are supported by independent contractors who have been communicating openly that with higher costs of fuel and maintenance, they require added compensation to keep their delivery fleets and driver needs viable. This remains a significant challenge for FedEx.

A further dynamic to point out is the perils of a CEO in today’s extremely dynamic and volatile business environment.

In its reporting, Bloomberg reminded readers that when Subramaniam formally took the company leadership role in June, amid an activist investor voicing a concern for the company’s performance, he raised the dividend level, agreed to revamp the board and outlined a multi-year plan to boost profitability levels that included optimistic numbers for the current fiscal year. Almost three months since, the brute reality of the company’s operational and financial challenges have come home to roost. So much for buying time and investor confidence.

FedEx has managed both market opportunities as well as overcoming lingering challenges.

The company’s range of diverse business services spans many dimensions of industry specific logistics, inventory management, transport and last mile services. With the onslaught of the Covid-19 pandemic, the carrier successfully marshalled its air and logistics services, especially for critical pharmaceutical, vaccine and medical equipment transport and logistics needs. There were many news videos featuring FedEx aircraft and delivery vans delivering essential medical supplies.

The company has additionally had to manage its own unique challenges in efforts to expand its business and international operational reach. The previous acquisition of TNT Logistics in Europe has been a constant challenge related to integration of operations and instilling added efficiencies.  With stronger indications that European supply chains are facing added challenges coupled with what is now likely to be an economic and manufacturing recession by year-end, the TNT challenges loom large. The carrier’s Asia based operations have a concentrated focus on moving goods from manufacturing hubs in China, Taiwan or Singapore. With manufacturers now electing to source more production in regions such as India and Vietnam, or in nearshored areas of Mexico or Northern Europe, the notions of changing global supply networks have implications going forward, not only for FedEx, but other global based carriers.

 

Added Perspectives

As Supply Chain Matters has highlighted in our monthly reviews of global and regional PMI indices, manufacturing and supply chain activity levels are trending toward contraction in many more regions. Major online retail platform providers such as Amazon and Shopify, by their actions and revised business and operational strategies, are responding to ongoing declines in online buying activity.  The sudden decline in consumer demand for either pandemic or other needed material purchases has caught many businesses with excess inventories and frankly, some surprise. FedEx’s sudden admission of a miss on expected revenues and profitability adds to overall concerns.

This fuels speculation that other transportation and logistics providers may have to warn of declining volumes and profitability. Manufacturers and retailers large and small are becoming increasingly concerned about economic downturn and the focus is turning toward instilling more enhanced working capital efficiencies including opportunities to cut discretionary and overhead costs. We further sense a lot more emphasis on assessing product demand levels both short and longer-term.

In the very short term, the upcoming holiday fulfillment period where businesses, retailers, wholesalers and transportation services providers augment their capabilities with supplemental capacity and workforce resource needs, the FedEx development again raises the question of how much a surge in order volumes will there actually be? Are holiday forecasts too optimistic? Will other carriers or businesses encounter unanticipated volume drops and added cost exposures by the end of the year?

As for the canary, the signal is definitely one of higher added concern and caution.

FedEx and rival UPS operational and financial performance are often viewed as bellwethers to business and supply chain activity levels. If the FedEx development of unanticipated declines becomes more replicated over the next three months, than many supply chain resource and playbook plans will be judiciously revisited. Financial markets and equity analysts will be keenly looking for added signals of companies that did not anticipate sudden changes in business operations.

As we have stated in many prior commentaries, there has never been a time where scenario based and contingency planning, involving both businesses and their key supplier and services partners, has become more essential. That is not performed by spreadsheets or the back of a napkin alone.

 

Bob Ferrari

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