If there’s one thing to take away from FedEx’s Q3 earnings call on March 17, 2020, it’s that FedEx’s margins will increase – on top of consistently raising rates annually.
Although the carrier suspended its 2020 profit outlook due to uncertainly cast by the coronavirus pandemic, by which they’ve been significantly impacted by declining volumes, they reported revenue earnings of $17.5 billion, roughly a 3% increase, topping consensus estimates. FedEx has only bettered estimates once in the past four quarters.
A number of investments made that, going forward, will increase FedEx’s margins by lowering the cost to service as they increase rates year-over-year. Investments have been made into ground network optimization – optimizing delivery density and buying smaller sort facilities closer to destinations – and FedEx Ground will deliver some SmartPost and day-definite Express packages. These initiatives, in conjunction with the e-commerce boom of late, give reason for FedEx to state their expectation for continued FedEx Ground revenue growth in Q4.
Alan Graf, FedEx EVP and CFO on the effect of the Coronavirus pandemic and operating costs: “To mitigate these near-term headwinds and position the company for future earnings growth, we are attacking costs throughout the company by managing capacity, retiring our oldest and least-efficient aircraft, integrating TNT Express, and lowering our residential delivery costs by having FedEx Ground deliver FedEx SmartPost and certain day-definite FedEx Express packages.”
The increased use of Ground might be boon to some shippers, in regard to Home Delivery speed, as FedEx stated their net speed advantage for these shipments increases over the course of the week – 20% faster than UPS Ground on Monday and 80% faster on Sunday. Home Delivery and Ground are, reportedly, at least one day faster than UPS Ground in 320 million ZIP pairs and cheaper in the residential final mile that the USPS further increasing profit margins. FedEx’s increased margins as a result of lower costs-to-serve come to no pricing advantages to shippers who don’t renegotiate their contracts with a comprehensive understanding of FedEx’s pricing model.
Furthermore, if faster Ground delivery is appealing to your business – whether you’re an online retailer, D2C manufacturer, CPG company, etc. – Shipware can help you explore what a UPS-to-FedEx transition would look like for you, or help you procure lower rates with UPS in light of shifting events and network optimizations within the parcel industry over the past year.
If you’re currently under FedEx contract, in this environment, what doesn’t make sense? Shippers that sit complacently on their current pricing program while FedEx raises rates and improves their margins? Or, shippers that go through an effective negotiation supported by Shipware and are now seeing pricing that reflects a willingness from the carrier to pass along the increasing margin in the form of deep discounts?