It’s been a year of ups and downs for FedEx Corp. Earnings forecasts have been lowered and share prices have dropped, shipping rates will be going up in January, it quit delivering packages for Amazon and plans to make it up with higher profit margin customers, its acquisition of Netherlands-based TNT Express in 2016 is costing more than predicted to integrate, there are tariffs and a slowing global economy, it sued the U.S. Department of Commerce, and company bigwigs won’t get a bonus this year. But then again, e-commerce continues to grow and there’s gold in those transactions.
So as 2019 draws to a close and the curtain will soon rise on a new decade, what are we to make of the logistics giant? Is it a glass half-full or half-empty outlook for the company? We take a look here at how far the company has come, and where it’s likely to go. We’ll address some of the players to know, what FedEx’s rivals are up to, and plot other milestones it’s hoping to achieve.
As the U.S. Senate prepared to vote back in December 2017 on a massive piece of legislation overhauling the federal tax code, Frederick W. Smith was working the phones.
The founder, chairman, and CEO of FedEx — the 30,000 local employees of which make the package shipment giant the largest employer in Memphis, not counting its more than 450,000 worldwide — at one point put in a call to Lamar Alexander, one of Tennessee’s two Republican senators. It was, in fact, the day before the Republican-controlled chamber passed the tax bill, handing a much-needed legislative win to the Trump Administration. Smith wanted to convey a simple message with his call: “Pass that bill.”
Alexander would later tell people he didn’t need the convincing, since he already knew he’d be voting “yes.” But Smith just wanted to be sure, making a number of promises to Alexander about what would directly result from the bill’s passage. It was a rare opportunity for Smith and his fellow captains of industry, many of whom had for years preached a gospel of less taxation equals more prosperity — and that Washington is strangling corporate America with a tax code that puts companies here at a competitive disadvantage to much of the rest of the world. Here at last was a chance to fix that, and during his call Smith promised Alexander that at FedEx, once the bill passes, “We’re going to spend half a trillion dollars buying new airplanes and creating lots of jobs.”
That kind of pitch won’t exactly come as a surprise to anyone with even a passing interest in FedEx and an awareness of its now 75-year-old founder whose idea for the company arguably gave birth to the idea of overnight package delivery anywhere in the world. Smith is himself a staunch Republican and a champion of global trade (which has the double benefit of championing the underpinnings of FedEx’s business) who makes public speeches and gives interviews about the topic as often as he can. In the past, he’s even been extended invitations to join Republican presidential administrations.
As such, it would make sense for one of the country’s highest-profile businessmen to bring his influence to bear in an attempt to shape policy. But in referencing that behind-the-scenes phone call, it’s the “behind-the-scenes” aspect that merits attention. Because that’s the thing about FedEx that comes with being so ubiquitous, so well-known, its brand so recognizable almost anywhere you go in the world.
There is, of course, the part you see, the sliver of the iceberg that sits in full view. Say the name FedEx in Memphis, and it connotes the sight of all those planes, parked neatly in all those rows, that compose a familiar view as you drive along the interstate shortly before arriving at Memphis International Airport. For some 30,000 workers in this area the name brings to mind the work they spend eight hours of their day on, five days a week — whether they sort packages at the FedEx hub at the airport or fill any of the company’s white-collar jobs from Collierville to Downtown Memphis. And then there are all the ancillary jobs and employers not directly connected to FedEx, but nevertheless still here because it, too, is here.
Boxes
Employers like Material Bank, a media and design technology company that opened an office in Memphis in May 2018. For Adam Sandow, the founder and CEO of Material Bank’s parent company, proximity to FedEx was the motivation to open an office here.
“Architects and designers using Material Bank can conduct complex searches and place orders across hundreds of brands and thousands of materials in seconds from a single source,” he told Inside Memphis Business as context for the expansion to Memphis. “Order fulfillment from our 80,000-square-foot, robotics-powered logistics facility, just minutes from the Global FedEx World Hub in Memphis, allows design professionals the ability to order samples by midnight (Eastern Time) and receive a single box containing their full sample order by 10:30 the following morning.”
FedEx also remains an indispensable cog in the machinery of the global economy. And yet, there is (as Smith’s call to Alexander indicates) plenty about the company’s story that you don’t see — a side that’s not as visible as the one that encompasses the planes, the hubs, the jobs here and the army of Express trucks with that ever-present purple and orange logo on the sides. It’s an aspect of the company that Wall Street is certainly hungry for more insight about — to divine, for example, not only what the future holds for the publicly traded enterprise but also what it’s planning to do about the daunting challenges in front of it. Challenges that include a volatile global economy, growth in e-commerce (wherein shipping something you bought online to your doorstep isn’t as profitable as the lucrative, high-volume business-to-business contracts FedEx can strike), and Amazon’s ambitions to be a logistics player in its own right.
Pondering where the Memphis-based giant will be in, say, five years’ time, is a particularly interesting exercise. To a degree, the answers to that question are being set in motion now.
“E-commerce continues to be a driving force of total U.S. domestic market growth,” FedEx chief marketing and communications officer Brie Carere told analysts during one of the company’s most recent quarterly earnings presentations. “We are building our portfolio, networking capacity to best serve thousands of retailers in this space and we continue to differentiate, for example, with the launch of the FedEx seven-day service.”
In 2020, she continued, FedEx Ground will deliver seven days a week and year-round for customers representing 80 percent of U.S. GDP. The company would certainly be foolish not to ramp up in this area; figures from the U.S. Commerce Department show that consumers bought more than $517 billion in online goods last year, a 15 percent increase in e-commerce over 2017.
This also comes, incidentally, as Amazon — a company FedEx’s leadership is now talking about in increasingly competitive terms — said in October it plans to spend $1.5 billion in the fourth quarter to support its own ability to offer Amazon Prime customers free one-day shipping.
Smith himself has downplayed Amazon’s logistics ambitions for years, even as the Internet retailer has built up a fleet of its own trucks and planes that can serve as a first-party delivery network for Amazon packages. In March, FedEx Corp. president and chief operating officer Raj Subramaniam likewise dismissed Amazon as “not a threat” to FedEx’s business or growth. Six months later, though, came an abrupt about-face. Smith described Amazon this way to analysts:
“We basically compete in an ecosphere that’s got five entities in it. There’s UPS, there’s DHL, there’s the U.S. Postal Service, and now increasingly, there’s Amazon. That’s who we wake up every day trying to think about how we compete against and give the best services to our sales force.”
Lumping Amazon into the category of rivals that FedEx’s leadership thinks about daily also followed FedEx’s move earlier this year to end its ground and express delivery contracts with Amazon, which was seen as one more step toward further positioning the companies into more direct competition. At the time, FedEx tried to counter attention to the move as much ado about nothing — or, more specifically, much ado about almost nothing, since the portion of FedEx revenue attributable to its work with Amazon represented less than 1.3 percent of FedEx’s total revenue for the 12 months that ended in December 2018.
Nevertheless, the future is not just about things like protecting its flank against the threat from Amazon and beefing up its e-commerce delivery solutions. FedEx is also placing some high-tech bets now to keep the company on the cutting edge — bets involving technologies including drones and robotics.
This summer, FedEx started testing the practicality of using an autonomous, six-wheeled robot to deliver packages, with plans to expand the trial to more cities. The idea is to team up with brands like Walmart and Target and others to deliver anything from medicine to pizzas from a business directly to your doorstep. Speaking of the latter, Carere herself showed up for a taping in February of The Tonight Show Starring Jimmy Fallon to show off the robot delivering a pizza, and how it can deftly navigate simple changes in terrain by itself to complete its package run.
Along similar lines, meanwhile, FedEx representatives attended a secret meeting in Silicon Valley in mid-October that was hosted by Alphabet, the parent company of Google. Reps from other unnamed logistics and shipping industry companies were on hand, with the focus at the meeting being a discussion about how the companies might work in the future more closely with the search giant’s parent.
Speaking of Google’s parent company, it also operates a drone delivery subsidiary called Wing, which this fall started a pilot project to test the feasibility of using drones to deliver goods from FedEx Express as well as Walgreens. The project is based in a small town in Virginia called Christiansburg, so don’t expect to hear drones carrying FedEx boxes buzzing overhead in Memphis anytime soon. The project is more about testing a hypothesis, anyway — whether FedEx can use technology like drones to conquer more of the logistics industry endgame, the so-called “last mile.”
Trucks and people, of course, can only cover so much ground — though that’s not stopping everyone in this space from scrambling to see who can incrementally cover more. Which sounds like the kind of game that will be won on inches, and maybe that’s true — but what might end up tilting the scales is who throws the most money at this problem and who blinks first at the massive amount of investment that business like this requires.
Looking ahead, it’s fairly easy to imagine a future with drones, robots, and technology that makes FedEx look even more cutting-edge in five years’ time than it does now. As a reminder of how much can change in that span of time, consider how much the world has changed by going in the opposite direction, looking instead backward to 2014. At that point, Donald Trump was still a year away from announcing his candidacy. Five years from today would take us to 2024 and potentially to the final days of a Trump administration’s second term.
This is an administration whose anti-trade fervor and other unconventional policies have brought a measure of uncertainty to the U.S. and global economies — and which have in particular stung FedEx in myriad ways, including setting the company on a confrontational path with China — one that was not at all foreseeable even a year ago.
In a move that served to underscore the butterfly effect phenomenon at the heart of chaos theory, the Trump administration earlier this year effectively banned U.S. companies from doing business with Huawei. That’s the China-based telecommunications giant that is responsible for a larger share of the global smartphone market than Apple.
Like so many of the administration’s policy moves, it was a decision informed by a black-and-white ideology and not so much the minutiae of how the levers of power work. President Trump sees in China a gathering storm. So he used the global ambitions of Huawei, a company that may or may not have close ties to the powers that be inside the country, as a pretext to fight a proxy battle against one of Trump’s favorite punching bags. The finer points were left to others to sort out — and in this case the devil was very much lurking in details that FedEx ran headlong into.
At one point a few months ago, someone in Japan tried to send a package from Huawei’s office to China. They used FedEx to send the package, which FedEx then re-routed away from the destination in China and sent it instead to the U.S. — specifically, to FedEx headquarters in Memphis. That immediately sparked an international incident and put the company at the center of an argument it wanted no part of but was forced to figure out new rules for, leaving the company so entangled in confusion that FedEx eventually took the extraordinary step of suing Trump’s Commerce Department in June over what it argues is the impracticality of the Huawei-related directives. All of which, meantime, comes at a time when FedEx is also trying to ramp up its business in the Asia-Pacific region.
In October, FedEx Express announced a major Asia-Pacific expansion that’s meant to help small businesses in particular that are trying to expand their global footprint, something that today’s digital economy makes so much easier than ever before. The expansion opened up 68 more lanes from Asia-Pacific to Europe in which FedEx Express will provide its International Economy Services — a cross-border, customs-cleared, door-to-door service that promises “competitive delivery dates” for packages.
The U.S. equivalent of $1.5 trillion in annual merchandise is traded between Asia and Europe, FedEx Express Asia Pacific president Karen Reddington said at the time. “The expansion of FedEx International Economy service destinations in Europe,” she said, “helps Asia Pacific small- and medium-sized businesses who trade with Europe better capture global opportunities.” It’s all in service of helping build, as she put it, “borderless businesses.”
That mention of FedEx Express, by the way, is a good point at which to stop and unpack the Russian doll corporate structure the FedEx brand encompasses. You can have a rough idea about the basic transaction at the heart of the entire FedEx operation — someone needs to send a package from Point A to Point B — but that belies all the associated services and core FedEx competencies that branch out from there.
For example, it could be an individual sending a package from their home to a family member. A business to another business. A business to an individual by way of fulfilling an e-commerce order. How fast the package needs to be shipped also determines how it’s routed through the giant FedEx pipeline — and who delivers it along the last mile.
A keen observer might also begin to imagine the creative solutions FedEx could offer, by way of continuing to branch out from that idea of a basic package delivery transaction. Maybe you’re a business owner and not even sure how you want to go about what you want to do yet. After all, you’re not an expert on cross-border shipments, how to deal with customs and the like. Maybe you just want recommendations and advice on how to get the ball rolling.
There’s also the company’s customer-facing real estate footprint, which can be thought of, in a way, as yet another extension of the package delivery transaction. You can send off packages there, at a FedEx Office location, as well as secure a host of other services you might need related to those packages, such as making copies, scanning documents, and the like.
FedEx Logistics is the subsidiary of the company that in February announced a move of if its global headquarters from the East Memphis Crescent Center office building to Downtown’s former Gibson Guitar Factory. There, multiple FedEx Logistics office locations will be consolidated into one space, housing almost 700 employees. (It’s operating in a temporary space Downtown at 100 Peabody Place as of the time of this writing while work on the permanent space continues.)
“As one of Memphis’ great corporate citizens and largest employers, we’re very proud to have FedEx choose to plant roots in Downtown Memphis,” says Downtown Memphis Commission president Jennifer Oswalt. “We believe this choice speaks volumes about the attractiveness of the Downtown office campus and the future of Downtown. … In addition to wage growth, these employees will be patrons of the current and future commercial ecosystem of restaurants, retail, and other small businesses [Downtown].”
FedEx Logistics’ role within the corporate portfolio of FedEx companies involves connecting 95 percent of the world’s gross domestic product via a suite of specialty logistics solutions. Those include providing air and ocean freight forwarding, supply chain solutions, specialty transportation, cross border e-commerce technology services, customs brokerage, and more.
The lease for FedEx Logistics is set to begin in April 2020, with the move having spurred the construction of a new mezzanine in the Gibson Guitar building to grow its 154,000 square feet to almost 200,000. “This will be a great space for collaboration among the different aspects of our business and a true home for our growing company as we attract new talent for the future of FedEx,” said Smith’s son, Richard Smith, who was the CEO of FedEx Logistics until August, when he was named regional president and executive vice president of the U.S. domestic and U.S. international region for FedEx Express.
All of that, and more, encompass one aspect of the company’s story, wherein direct, tangible effects can be seen and felt here in its hometown. There’s also a wealth effect that can impact the Bluff City — and beyond. In October, the price of FedEx shares was down around 25 percent. A drop like that is the kind of thing that affects stock portfolios and 401(k)s and causes some investors to feel less wealthy — at least on paper. But rebalancing a suite of investments is one thing. When the company’s fortunes rise and fall, it can also have a direct impact on its army of workers in Memphis, who in turn produce a 30,000-person-strong ripple effect in the slipstream of the city’s economy.
In recent weeks, a 2 percent cost-of-living pay increase started showing up in FedEx employee paychecks. However, according to a FedEx spokesman the company’s performance hasn’t been robust enough over the past year to merit annual employee bonuses. Citing a challenging business environment, the company’s position released via a spokesman is that “we unfortunately do not expect the level of operating income in FY20 to be enough to fund an Annual Incentive Compensation payout at the end of the fiscal year.” When FedEx revised its profit forecast down last month — predicting that it will fall about $900 million short of projections — it was the third time in a year the company had done so. As mentioned earlier, e-commerce is an area of focus at the moment, but it’s an area where costs are rising. FedEx wants to capture more home delivery business as a result of that e-commerce growth, which continues to be white hot, and as a result the company will add Sunday delivery service for residential customers starting in January. And that means the arrival of 2020 will mark the first time FedEx is delivering to residences every day of the week.
In a related move, FedEx also has taken over some home ground deliveries previously handled by the U.S. Postal Service. An estimated 2 million packages a day, to be more precise. Instead of FedEx moving those packages through its network to local post offices, carriers for which would then take those packages along the last mile, FedEx is now carrying those smaller packages the rest of the way itself as a cost-saving move.
It’s certainly all a heck of a long way to come from what began as a term paper idea from a then-Yale University undergraduate named Fred Smith back in 1965. At the time, the thing that seemed to most seamlessly zip around the world was music. It was the year before the Summer of Love, when the hit parade was stacked with landmark releases from The Beatles, Bob Dylan, The Rolling Stones, The Beach Boys, The Byrds, and so many more.
The way Smith saw it at the time, though, airfreight shippers ought to break away from the passenger route systems they relied on, in order to be better able to deliver time-sensitive packages that could include anything from computer parts to medicine that might be needed right away. It was one of those ideas the eventual founder, even back then, saw as inevitable — never mind the fact that the professor who gave Smith an average grade on the paper didn’t regard it in quite the same light.
The company that Smith would eventually name Federal Express conveyed its intent and brand right there in those two words. The “express” part of the name gave the appropriate impression of speedy delivery, while the world “federal” was chosen to convey the notion that this company was supporting an activity in the national interest. A variety of other fortuitous circumstances helped lay the foundation for what FedEx would grow to become.
Its headquarters was placed in Memphis because of the city’s central location. It also didn’t hurt that Memphis International Airport was happy to make improvements needed to accommodate FedEx, and that the airport rarely let bad weather force its closure. The company’s first day in operation was April 17, 1973, when 14 planes took off from Memphis and delivered almost 200 packages to 25 cities around the country. By the 1980s, the company was growing at a rapid clip of about 40 percent a year and hit $1 billion in revenue in 1983 — the first time in American history a company reached that milestone within 10 years of launch all by itself, without a merger or acquisition to juice the growth along the way.
By the close of the millennium in 1999, FedEx’s future seemed assured — it was at that point when it became the leading global overnight shipper, moving more than 2 million packages to a couple hundred countries every day.
Smith was talking to a reporter some years ago about, of all things, how some lessons about innovation could be drawn from the collapse of the local newspaper industry. He was noting how other delivery mechanisms like TV can replace the need for information instantly, depriving newspapers of some of their usefulness on that front — leading, indeed, to something of a “death cycle” of relevancy for local papers.
And then he came to his point, including his core beliefs about risk-taking, innovation, and entrepreneurship. Said Smith: “It’s at that point that the innovator says to himself, ‘Now’s the time that I ought to take a risk. I see the threat on the supply side. I see the opportunity on the demand side. And, oh, by the way, I’d like to do something new and useful and important.’ And when all of that happens, that’s when organizations tend to innovate.”
What’s notable is that Smith was laying all that out to a reporter for Inc. magazine back in, if you can believe it, 1986.
Maybe Smith’s future, and that of his eventual company’s, was preordained, thanks to the entrepreneurship that runs in his family. Before his father died when Smith was still a young boy, he owned the Dixie Greyhound Bus Lines, the Toddle House restaurant chain, and made himself a millionaire. Smith launched his company on the strength of an idea, naysayers be damned, and proceeded to eventually transform it into a holding company of sorts — with FedEx Corp. now the umbrella entity for a portfolio of solutions including FedEx Ground, FedEx Express, FedEx Office, and much more.
Future success will no doubt follow a version of that same trajectory — and depend on whether or not there’s a similar boldness of vision that helps the company, like its fleet of planes, soar to newer and more commanding heights.
