FedEx Corp. is in the middle of a record peak season for package volume, even after trimming its retailer customer base.
“As e-commerce grows, so does the challenge of peak, with multiple days of volume levels approaching or surpassing double our average daily volume,” Mike Glenn, president and CEO, FedEx Services, said this week on the carrier’s fiscal second quarter 2017 earnings call.
To better manage the peak season volume (from Thanksgiving through Christmas) and improve its margins, FedEx has cut ties with some retail customers, though it declines to say how many or which ones.
“Over the last several months or so, we have made some decisions to discontinue relationships with a few customers where we couldn’t candidly agree on pricing and capacity requirements for this peak season,” Glenn said. “That’s something we do on a regular basis, but we made that decision earlier this year. And as a result of that, we have been managing volumes and we will continue to do that. But clearly it’s had some effect on this peak season. That was intentional on our part and we will continue to do that going forward,” he said, according to a Seeking Alpha transcript.
FedEx this year did not project the number of packages it expects to handle this holiday season but said in September that it expected package volume to increase about 10% year over year. FedEx delivered 350 million packages during the 2015 holiday season, so the carrier is likely to deliver 385 million packages this year. FedEx is the shipping carrier for 313 retailers in the Internet Retailer 2016 Top 1000.
Average daily package volume for FedEx Ground, which is where the bulk of e-commerce orders are handled, was 8.0 million in the quarter ended Nov. 30, up 5.3% from 7.6 million in the year-ago quarter. FedEx Ground’s revenue per package in fiscal second quarter was $7.95, up 4.1% from $7.64 last year.
While FedEx aims to be a leader in the e-commerce market, “it’s important to recognize that non-e-commerce deliveries to residences and business-to-business traffic represents the vast majority of FedEx Corp.’s estimated $60 billion in fiscal year 2017 revenues,” chairman and CEO Fred Smith said.
“E-commerce is basically residential deliveries, and you have to keep in balance the business-to-business and the business-to-consumer e-commerce or you can put extreme pressure on our Ground business. That is exactly what we were doing in making the decisions on these accounts that Mike mentioned,” Smith said. The U.S. Postal Service is the biggest carrier for business-to-consumer e-commerce, he said, and “it makes no money out of it. That should tell you something right there. They are making millions of stops a day.”
Fewer than 50 large retail and e-retail customers are responsible for the majority of FedEx’s peak demand, “so it’s extremely important that we understand their forecast well in advance to allow us to plan resources properly,” said Alan Graf, chief financial officer. “While a few customers this year have experienced demand below their forecast, the majority of our large retail and e-tail customers are meeting expectations.”
FedEx Ground revenue increased 9.1% for fiscal Q2 ended Nov. 30, but growth in e-commerce has prompted the carrier to spend more on facilities, and that’s cutting into margins and profitability.
“After challenges from higher-than-expected volumes in certain parts of the country during last peak [season], Ground invested in increased capacity and technology,” Graf said. “This year, we completed 185 facility projects, including four major distribution hubs, 19 fully automated stations and 69 relocations. This equates to more than 10 million square feet of additional sortation space in the network.” Higher costs came with that expansion as FedEx hired additional workers and paid contracted service providers to pick up, deliver and transport a growing number of packages, Graf said.
For the fiscal second quarter of 2017 ended Nov. 30, FedEx reported:
- Total revenue of $14.93 billion, up 19.9% from $12.45 billion in the same period last year.
- FedEx Ground revenue of $4.42 billion, up 9.1% from $4.05 billion.
- Revenue from FedEx Express of $6.74 billion, up 2.3% from $6.59 billion.
- Net income of $700 million, up 1.3% from $691 million.
For the first six months of fiscal 2017, FedEx reported:
- Total revenue of $29.59 billion, up 19.7% from $24.73 billion in the same period last year.
- FedEx Ground revenue of $8.71 billion, up 10.5% from $7.88 billion.
- Revenue from FedEx Express of $13.40 billion, up 1.7% from $13.18 billion.
- Net income of $1.42 billion, up 2.9% from $1.38 billion.
- Ground average daily package volume of 7.7 million, up 6.9% from 7.2 million.
- Revenue per package (Ground) of $8.02, up 3.2% from $7.77.