Operations

Ecommerce shipping: FedEx, UPS face financial pressure

Bainbridge Growth digs into recent earnings reports from top shipping companies.

A FedEx Express truck
FedEx is making cuts. (Photo by Bannon Morrissy on Unsplash)

This post originally appeared on the blog of Bainbridge Growth. It is being republished by The Current with permission.

Rising shipping costs have been a clear trend over the course of 2022, causing headaches for operational planning, and pressuring financial performance. Many shipping and logistics companies, large and small have found it difficult to correctly forecast package volumes. Amazon spoke specifically earlier this year on its challenges around excess capacity.

The large and diversified US-based shipping companies have raised prices to customers this year but still failed to retain their pandemic stock price and profitability gains. FedEx’s new rates for 2023 are poised to increase 7% to 8%, while the US Postal Service recently warned on continued increases with higher holiday rates. Supply networks have been constrained for over two years, and searching through the data published by these transport giants reveals the financial pressure they’ve faced as the ecommerce boom normalizes.

FedEx

FedEx’s share price fell a massive 21% on September 15 after pre-announcing earnings and withdrawing guidance. The stock is now 41% below the 52-week high. FedEx’s business mix has always leaned heavily toward its airmail Express segment which has held at 48%-52% of total revenue over the last twelve quarters. Top line and margin pressures in this segment have weighed on the company as Europe and China slowed significantly.

The company has decided to pursue significant cost savings in the coming nine months, including reducing flight frequencies and temporarily parking aircraft. FedEx Ground will see closings of sort operations and suspension of certain Sunday operations. These actions will drive $1.6B in savings in Express and $400M In Ground. FedEx has a substantial challenge to bounce back from the 69% YoY decline in Express segment operating income. They heavily touted their decision to cut 11% of transpacific flights and 9% of transatlantic. Deeper cuts were made to the Asia/Europe route of a whopping 17%. They implemented these cuts late in the quarter and will see the full impact by October.

The ecommerce-oriented Ground segment has fared better, growing in the quarter 6% as the Express segment was flat. Ecommerce shipments have become a more integral part of the business, rising to 35% of revenue from 30% pre-pandemic. Contractors working for the company have grumbled recently to the media that FedEx’s holiday projections are likely to be over optimistic. Some of these independent companies have remarked that they are not scaling up operations to support the Q4 sales season. The CEO pushed back on this media storyline on the recent earnings call, saying that of the company’s 6000 contractors in the Ground segment, 96% have signed on to the peak incentive program. Finding cost cuts in Ground centers around consolidating sorting centers and canceling several ground network capacity expansions. They have also cut Sunday deliveries in 170 locations.

FedEx revenue. (Source: FedEx)

UPS

UPS has also faced similar challenges, falling 31% off its 52-week high. The company has fared better as it has significantly less exposure to international and airmail shipping, with about 46% to 49% of its business coming from Ground shipments over the last three years. UPS is also heavily domestic-focused because of this orientation towards Ground delivery, with 65% of revenue coming from the US in the recent quarter. Operating margins are in the low teens as UPS’ business mix helps it significantly outperform FedEx‘s recent operating margins of low single digits. UPS’ 288 aircraft are less than half of FedEx’s nearly 700, helping them avoid some of the pressure from associated jet fuel, plane maintenance, and costly demand/capacity misalignment.

UPS revenue. (Source: UPS)

UPS has significantly more exposure to attractive segments in ecommerce, with small and medium-sized businesses and an at-scale offering to the healthcare and pharmaceuticals industry. UPS has made key acquisitions to assemble their ecommerce service offerings. Ware2Go helps SMBs optimize their inventory. Roadie offers customers a same-day delivery option for items that are not compatible with the small package network.

They also recently acquired Delivery Solutions, which allows customers to optimize their deliveries across dozens of physical networks through a single API connection. This range of tech-enabled offerings has allowed UPS to retain and grow small and medium business clients, and win in the Domestic B2C residential delivery shipping segment.

UPS customer mix. (UPS Sell-Side Analyst Breakfast, Sept 6, 2022)

Pricing

In the high inflation environment, a carrier that offers relatively predictable cost increases is ideal. As carriers announce their holiday and 2023 rate increases, it is valuable to look back at the trajectory of the cost ascent. While FedEx and UPS started at a lower base than USPS, their ongoing cost pressures have pushed their revenue per package (including fuel, weight, and peak surcharges) above rates seen by the US Postal Service.

FedEx and UPS have increased a steady 10% to 12% YoY increases in Revenue Per Package over the last six quarters, while USPS has averaged 5%. FedEx management faced biting pressure on their recent earnings call, facing blunt questions on why prices are still rising as volumes decline. Executives offered the ever-present “inflation” excuse, revealing an ethos that still sees quick financial wins from price hikes and cost cuts as more favorable than lowering shipping rates to draw in demand.

Revenue per package(Source: FedEx, UPS)

Package volume. (Source: FedEx, UPS)

Conclusion

From the perspective of an online direct-to-consumer brand, you want a relationship with a shipping carrier that has a broad and deep network supported by technology that gives you the data and service performance you desire. Clearly, UPS leads in this B2C area, while FedEx is more expensive but holds unmatched international shipping capabilities that appeal to enterprise customers.

It remains to be seen how the mix of inbound freight shipping will change as ocean freight costs decline rapidly. Watching who cuts prices first in this domain will be imperative for DTC brands, as an analyst on the FedEx call mentioned: “Falling prices always eventually follow falling volumes."

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