FedEx Gears Up for All-Out War With Amazon
By: David H. Freedman
Tags: Fedex, Amazon, Business, Ecommerce, Pandemic

FedEx CEO Smith was taking a week off with his family in February when emails suddenly started flooding his inbox. “It wasn’t much of a vacation,” he recalls. “I was on the phone day and night.” The immediate crisis was that China and other Asian countries were grounding flights and quarantining pilots who landed there, throwing operations at FedEx — the world’s largest cargo airline — into turmoil. Smith, a self-proclaimed “logistics network geek,” oversaw a massive juggling of the company’s 670 aircraft, 5,000-odd package sorting facilities, 180,000 ground vehicles, and half million employees, in order to try to work around the restrictions.

As the pandemic took hold in the U.S. in March, the juggling expanded to diverting employees and packages away from facilities in the hardest-hit areas, like New York City, and finding a way to move personal protection equipment to health care organizations. The company directed more than 150 flights and 1,000 ocean cargo containers to move PPE into and around the U.S., and set up 28 new flight legs just to process Covid tests. “We can flex our networks better than anyone in the business,” boasts Smith.

Meanwhile, FedEx’s customer help lines were being flooded with callers mostly looking for the answer to one question: Are you delivering packages? In spite of some initial delays, the packages were still getting through — even on Sunday, a new service FedEx happened to roll out just before the pandemic hit, and which turned out to be a special boon for shipments of perishable food items to consumers who were cut off from in-person shopping. It didn’t hurt that FedEx employees were also declared essential workers.

FedEx’s reputation for fast or reliably on-time shipping services goes back to its founding by Fred Smith in 1971, famously inspired by a paper he wrote as a Yale undergraduate. The paper described a delivery service for urgent or valuable items — think medicine, jewelry, or high-tech parts — that involved flying all packages to one central location every night for sorting, and then flying them back out for delivery the next day. In other words, Smith had dreamed up a service that was almost comically inefficient, but fast and dependable. (Legend has it that Smith received a “C” on the paper, but he himself has never made that claim.)

After founding Federal Express to do just that, Smith ensured the company became one of the first in the world to exploit information technology strategically, pioneering then-radical innovations such as bar-code scanning and sharing tracking data online. That tech-forward sensibility continues today, including the company’s September announcement that it can now use Bluetooth sensor chips on packages to let customers track almost every inch of the journey in real time.

FedEx pricing is complex — the company’s standard pricing list is 79 pages long — and further varies with an array of discounts and surcharges. But to use some rough, typical numbers, the increases and surcharges levied since the start of the pandemic have already added about $3 to the $14 cost of shipping a relatively small, light package via FedEx Ground, with more increases scheduled for the holidays and beyond. UPS and Postal Service rates, while up, remain a few dollars cheaper for small, light packages in most cases. (While the high-urgency FedEx Express is the heart of the company’s business, FedEx Ground is its cheapest and slowest service, which competes more directly with the Postal Service and UPS.)

The percentage of consumers who do more than half their shopping online has nearly tripled from 16% to 45% since the start of the pandemic — and 73% of new online shoppers say they enjoy it more than they expected.

A few dollars is a big difference on an e-commerce order of, say, $25, and FedEx’s pricing disadvantage tends to grow with package size and weight. But while an $11 shipping fee might be cheaper than $14, it’s still a lot to pay for shipping on a small order — especially when you’re running a small business. Chandler Tang opened her San Francisco artsy gift shop PostScript in November last year, only to have to scramble to throw up an online store just four months later when the pandemic hit. After a self-taught crash course in shipping, Tang went with USPS for most in-state sales, and UPS for more distant customers. What about shipping via FedEx? Never, insists Tang. “It would cost at three times as much as the Postal Service,” she says, adding that FedEx makes it too difficult for small businesses to negotiate the corporate discounts that makes FedEx’s services more competitive.

But while FedEx might have less small-business-friendly pricing than its competitors, the bigger problem is that shipping is just too expensive for an economy that’s increasingly buoyed by e-commerce. Glenn Gooding, president of consulting firm iDrive Logistics, estimates that in recent years about half the packages shipped by FedEx and UPS have gone to homes rather than businesses. But during the pandemic, he says, that’s jumped to as high as 80% with rocketing e-commerce sales. This trend is only likely to grow. A Pitney Bowes survey found that the percentage of consumers who do more than half their shopping online has nearly tripled from 16% to 45% since the start of the pandemic — and 73% of new online shoppers say they enjoy it more than they expected. FedEx itself has predicted this growth rate in e-commerce in past years’ earnings reports; but the company estimated it would take three years longer to reach this level. In other words, the pandemic has been a powerful accelerant for an ongoing trend.

As shoppers move to buying more and more online, the added costs of shipping will become a bigger and bigger inhibitor. Sucharita Kodali, an e-business analyst at research firm Forrester, notes that the average e-commerce order is for about $50, making shipping costs of $8 to $20 a real burden. “Consumers are highly price sensitive, and delivery fees can make the difference,” she says.

When Tang, the gift-shop owner, first started shipping early on in the pandemic, she offered it for free, but after a few weeks of losing money on the deal she began tacking on a $5 fee for local deliveries and $10 for all others. “We had a surge of orders from people who wanted to beat the shipping charges, and then we had a big dip when the fees kicked in,” she says. “I’d say we’re losing about a quarter or third of our customers because of the fees.” And that’s in spite of the fact that her fees don’t cover her own shipping costs. To try to recapture some of those customers, Tang is experimenting with dropping the fees on larger orders, while raising item prices to recover some of the costs.

So consumers ultimately pay for the shipping one way or another. Or do they? That notion — along with everything about e-commerce shipping — becomes a little convoluted when Amazon enters the picture.