Last week, FedEx formally reported its financial results that essentially missed Wall Street expectations. However, what is of more importance for supply chain teams anchored in online commerce is FedEx’s intention to raise rates on oversized packages related to B2B/B2C online commerce.
For the August-ending quarter, FedEx posted an operating profit of $692 million compared to $653 million in the prior year quarter. Operating margin improved from 9.1 percent in 2015 to 9.3 percent. Yet in today’s often volatile investment environment, this was perceived as a disappointment. The global parcel carrier primarily blamed weaker demand for its transportation services and increased costs for its FedEx Ground operating unit for the shortfall in expectations. That was in addition to missing expectations for its June-ending quarter as well.
Regarding its latest reporting, CEO Fred Smith was quick to point out that without the need to have to boost self-insurance reserves, the carrier would have met expectations. However, self-insuring is a cost of doing business, especially as FedEx places more emphasis on both its Ground segments, eliminating its last mile Smart Post dependency with the U.S. Postal Service, and in expanding 3PL services via acquisitions.
As we have noted in prior Supply Chain Matters commentaries, FedEx has been more exposed than its competitors to declining parcel air freight volumes emanating from China and other parts of Asia. However, operating income for the FedEx Express division improved nearly 45 percent in the latest quarter, a reflection that right sizing and modernization efforts direct at air assets has begun to provide positive results.
While global providers DHL, FedEx and UPS are all quick to point out that the exploding growth of online and Omni-channel commerce have changed the dynamics of transportation, they continue to exercise strategies to leverage additional revenues from these trends. The argument is that higher volume with lower average shipment value equates to added network and labor costs.
Of more importance was the announcement that FedEx Express, FedEx Ground and FedEx Freight will increase shipping rates an average of 4.9 percent effective January 4, 2016. FedEx is additionally increasing surcharges for shipments that exceed the published maximum dimensions (“unauthorized packages”) in the FedEx Ground network and updating certain fuel surcharge tables at FedEx Express and FedEx Ground effective November 2, 2015. Supply Chain Matters has thus far heard from an informed source that the unauthorized package surcharge is quite significant. According to the FedEx announcement: “The changes related to fuel and unauthorized surcharges are in response to changing industry demand dynamics, including increases in average package size and weight and increased residential deliveries.”
FedEx was the first global parcel provider to announce dimensional priced pricing starting this year. The argument was that higher cubed packages require added handling, logistics and transportation expense which FedEx was not being compensated for. Rival UPS quickly followed in announcing dimensional based pricing. Earnings announcements thus far from both carriers point to positive benefits from these rate increases.
The announced rate increases from FedEx will surely be similarly announced by UPS and perhaps other package carriers.
Last year, we noted that dimensional pricing implied a major revisit of packaging and transportation practices for bulky items as well as policies related to free shipping, the lifeblood of online commerce. Once more, while larger online firms such as Amazon and Wal-Mart have the scale and influence to push back on such rate increases, smaller firms or online consumers themselves have little leverage.
Survey data related to online consumers continually indicates that online shopping carts are often abandoned when shipping costs are deemed too expensive or free shipping is not offered. Once more, as the volume of online commerce continues to grow, it will involve the selling of even more bulky items.
To no surprise, many online consumers now opt to pick-up their online orders at local retail outlets, since this option often results in free shipping. The U.S. Postal Service has become a major beneficiary of added business from online retailers and that trend will continue until pressure for USPS profitability reignites on Capital Hill.
The most significant takeaway for industry supply chain teams is that there remains a discernible set of strategies on the part of logistics providers, carriers and transportation service providers to constrain available capacity while layering on additional pricing to boost individual balance sheets. Some providers will argue that rate increases are justified in order to make more expensive capacity and technology investments. Shippers and online providers will have to be the best judge and jury to the merits of such arguments. Meanwhile, a whole new wave of major acquisitions involving 3PL providers continues in the prize is increasingly locking-up capacity and customer logistics fulfillment contracts. The most controversial to-date has been the XPO Logistics acquisition of 3PL provider Con-Way Inc..
In the wake of the current environment, software technology and service providers who provide the added intelligence to help online firms, retailers and shippers discern the most cost-efficient transport channel option, along with recommending best packaging methods, will likely thrive.
During the holiday surge two years ago, UPS served as the butt of criticism for a last-minute breakdown in its delivery network. Last year, U.S. West Coast ports and longshoremen were widely cited for significantly impacting holiday business. In the coming months we may well observe a prominent online retailer as the headline victim of a far more expensive and capacity constrained package delivery transport network.