FOR OUTSIDERS, FedEx is synonymous with the business it pioneered: the overnight delivery of packages. For insiders, it might just as well be called FredEx. It is virtually indistinguishable from its founder, Fred Smith, who has been boss since 1971. The 75-year-old, who came up with his idea for air freighting packages at Yale University, is the stuff of folklore. Some of it is apocryphal, such as the story that he got a C at Yale for a paper outlining his idea (he can’t recall the grade). But one tale is, if anything, too good to check. In its early days, as the firm flirted with bankruptcy, he saved it with a lucky wager at a blackjack table in Las Vegas.
Mr Smith is an entrepreneur of the old school. The ex-marine dispatched his first 14 planes in 1973—on the first day they carried 186 packages. FedEx is now the biggest cargo airline in the world, with 681 aircraft and an average volume of 15m packages a day. He has played politics as he plays cards, be that securing deregulation of the air-cargo industry in the 1970s, winning protection from American unions or schmoozing congressmen at the FedEx Field, home to the Washington Redskins. Among American firms, FedEx has long been one of the most recognisable, admired and popular to work for. In January the board in effect gave Mr Smith tenure for life, by waiving the firm’s retirement age of 75 for executives. “Like a Supreme Court judge,” chuckles one admirer.
Shareholders are less giddy. As one of the biggest parcel carriers in America, FedEx ought to benefit from uninterrupted GDP growth. Yet since 2009, when America began its longest economic expansion on record, the company has underperformed the S&P 500 by almost 100 percentage points. This year it has suffered from the Sino-American trade war, growing competition from Amazon and problems integrating Europe’s TNT Express, which it bought in 2016 for $4.4bn. Such squalls are not good for its financial health, yet FedEx has been investing more than $5bn a year since 2017 to keep deep-pocketed rivals like Amazon and the e-commerce giant’s Chinese counterpart, Alibaba, out of its delivery business. This is a game of chance that Mr Smith is not guaranteed to win.
The biggest stakes are at home. FedEx built its name as a high-end business-to-business firm, offering guaranteed time slots for delivering parcels and factory goods along the supply chain. But e-commerce is raising the importance of delivery to homes, at faster speeds and lower costs. FedEx has responded by expanding its trucking service, which will soon reach most American homes seven days a week. But that clobbers margins. Meanwhile, Amazon is spending heavily on same-day delivery. It is also building an aircraft fleet that, though still a midget compared with FedEx’s, will amount to 70 aircraft by 2021. According to Satish Jindel, a logistics consultant, Amazon has leapfrogged its rivals to become the biggest firm in the world at organising warehousing and transport for other companies’ goods (as well as its own). Only a few years ago Mr Smith mocked the idea of competition from the likes of Amazon as “fantastical”. But in the past two months FedEx has severed its (albeit tiny) remaining ties with Amazon to focus on building its relationship with retailers like Walmart and Target instead. Its main rival, UPS, is sticking with Amazon. This sets the stage for a potentially bruising price war that could further crimp profits.
Its second big challenge is overseas. Besides having to fix TNT, FedEx has found itself in the awkward position of being on the wrong side of both adversaries in the trans-Pacific trade war. In recent months it was forced to apologise to China for diverting packages belonging to Huawei. FedEx said that this was owing to an error. Nonetheless the Chinese government is reportedly threatening to put FedEx on its own blacklist. And the company has also sued its own government, saying it should not be deputised to “police the contents” of any packages it sends to check that they do not violate export bans.
Besides the ugly geopolitics, global competition is also rising for FedEx. One of the biggest threats comes from Cainiao, a Chinese rival backed by Alibaba that in 2017 pledged to invest $15bn in cross-border logistics. FedEx claims that its own vast network, extending to 220 countries, safeguards it from such incursions. But it is not used to having tanks the size of Amazon’s and Alibaba’s on its lawn; their troves of data on customers may give them an edge in the delivery wars.
In response, both FedEx and UPS are investing large sums to modernise their fleets and expand their delivery hubs. But though FedEx’s revenues of almost $18bn in the last quarter have nearly caught up with UPS’s, its profit margins are weaker and it is generating less cash. That worries investors. It could seek to reassure them by reducing purchases of costly items like aircraft, or combining two of its independent businesses in America, FedEx Express and FedEx Ground, to cut costs. But it has rejected both ideas, insisting it is best to invest in growth.
Stand down and deliver
It may be wise to double down this way. However much risk-averse investors may prefer share buy-backs to ambitious capital-spending plans, halting investment could be seen as a flag of surrender by the likes of Amazon. That said, FedEx’s failures—to respond more quickly to the changing e-commerce landscape, to read the runes of geopolitics and to end its stubborn refusal to join its two businesses—reflect a company whose management is long in the tooth. Including Mr Smith, FedEx’s ten top executives average more than three decades at the firm, which is extraordinary.
It is hard not to misread the changing rules of business when you once rewrote them—even harder when some of your oldest friends are your sounding board. It is clear that the directors have no stomach for replacing their chairman in the foreseeable future. But unless Mr Smith brings in fresh executives, and then listens to them, his days at the business blackjack table should be numbered. Think FredExit, in other words.■