Fed Ex: Going Nowhere Fast In Cyberspace

So far, the company has only a toehold in e-commerce deliveries

Just last spring, FedEx Corp. was a hot-but-safe Internet play. The company's shares soared as investors realized that someone would have to deliver all those books, CDs, and whatever else American consumers might order from the World Wide Web. And that someone, many thought, would be Federal Express. In less than four months, the company's stock price nearly doubled, to a May high of 62.

But FedEx shares have since crashed back to around 44 as the company failed to deliver on its Internet promise. The Memphis-based company leads in overnight air delivery, but is getting trounced by arch-rival United Parcel Service Inc. in the growing business of delivering e-commerce parcels and packages. FedEx counted on its purchase of trucking outfit RPS Inc. two years ago to give it a leg up in the market for two-to-five-day deliveries--the less costly option preferred by most Internet customers. But poor integration of the two units have kept it from capturing much Net traffic. Concedes FedEx Chairman and CEO Frederick W. Smith: "UPS sells both air and ground together, and they do it very well."

That's a tough admission for 55-year- old Smith, a former Marine pilot who in 27 years virtually invented overnight express. But on Jan. 19, FedEx changed its corporate name from FDX Corp. and unveiled a restructuring aimed at taking on UPS more effectively. At its heart are plans to rebrand the RPS unit as FedEx Ground, beef up deliveries to residential neighborhoods, and unify its marketing.

Certainly, change was needed. The company's operating income for the second quarter ended Nov. 30 fell by 10%, to $305 million, on revenues up 8.6%, to $4.6 billion. The flagship FedEx air operation saw growth in its domestic parcel business slip to less than 3% in the quarter, from 14% in fiscal 1998.

The biggest problem: UPS has done a far better job than FedEx in winning deals from e-merchants such as to deliver the piles of packages that consumers order online. During the 1998 holidays, UPS had some 55% of the e-commerce delivery market, the U.S. Postal Service 32%, and FedEx just 10%, according to Redwood City (Calif.)-based market watcher Zona Research Inc. Although numbers aren't available for 1999, FedEx executives acknowledge they remain largely unchanged. And the stakes of missing out are huge: Already, online vendors shipped an average of nearly 650,000 packages per day last year. By 2003, according to Internet specialists Forrester Research Inc., that could grow to more than 4.2 million daily shipments.

ARM'S LENGTH. Third place is not exactly what FedEx had in mind when it bought RPS and several related companies two years ago for $2.7 billion. At the time, FedEx knew it needed to offer its customers ground shipping services if it wanted to meet UPS head-on.

But FedEx feared integrating the two companies too closely might tarnish the FedEx brand, so RPS was kept at arm's length. The two units have been run as separate companies, each with its own sales force and information systems. That made things tough for corporate customers who wanted to ship both on the ground and overnight. Instead, they have had to deal with two salespeople, call different numbers to order a pickup, and check different FedEx-run Web sites to track shipments. "For a company as professional as FedEx, it was almost an embarrassment," says's Transportation Director William R. Transue.

By contrast, UPS offers one-stop shopping. Customers can contract for services ranging from same-day and overnight delivery to shipping that takes a week. The same UPS truck picks up the parcels, and the same UPS representative handles complaints. The convenience has allowed it to attract many clients, especially smaller Web businesses, that FedEx failed to woo. Just as important, cross-selling its services lets UPS offer volume discounts. "FedEx is realizing that customers value a full portfolio of services and they're trying to get into position to mirror what we've got," says Joseph M. Pyne, senior vice-president for marketing at UPS.

Indeed, FedEx's reorganization aims to bring its offerings much more closely in line with those of UPS. The air and ground services will combine sales forces and information systems. The new FedEx Ground, meanwhile, will beef up its residential routes, reaching half of all American homes this spring.

So far, the shakeup is winning plaudits. "They're going to go right at the heart of UPS," says Jeffrey L. Pittsburg, head of research house Pittsburg Institutional Inc., which holds a small number of FedEx shares. "I like what I'm hearing." It could also improve FedEx's falling margins, which now stand at less than half of UPS' 14.7% level. One big reason: Big Brown's delivery trucks carry more packages and make more stops in a neighborhood, lowering operating costs.

But customers are likely to take a look-see before leaping. Although Dell Computer Corp., for example, uses FedEx planes to haul microchips and computer memory from manufacturers in Asia to its plants in Nashville and Austin, Tex., many of its customer deliveries go by UPS trucks. "We want to see how they execute the residential side of their strategy before thinking about a switch," says Richard L. Hunter, Dell's vice-president for supply-chain management.

Some question whether FedEx has gone far enough. For now, Smith says he has no plans to merge the two fleets of truck drivers or the package-sorting operations. Yet that could improve economies of scale. "Running two separate distribution networks doesn't make any sense," says Joel P. Fishbein Jr., a portfolio manager for New Jersey's pension fund, which holds 1.6 million shares.

Smith counters that the FedEx and RPS networks were designed with different cost structures--and built to offer different levels of service. The express portion of the business is designed for maximum efficiency and reliability, while RPS' ground network is designed to trim costs. "The average FedEx package is scanned 14 times," he says. "You can't afford to scan a ground package 14 times and still expect to make a profit." Perhaps. But FedEx can't afford to take half-measures if it expects to bolster profits, either.

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