FedEx Strong-Arms Retailers, Strains to Manage Holiday Surge

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The FedEx and ecommerce relationship is changing

FedEx by Kentaro Iemoto
FedEx by Kentaro Iemoto

In a reminder that digital sales can face real world obstacles, FedEx is attempting to strong-arm some ecommerce shippers as the surge of holiday shopping packages becomes increasingly difficult to manage.

Executives at the package delivery giant, with quarterly profits squeezed by its spending on new facilities and staffing to handle peak holiday volumes, said they are intent on forcing some customers to pay higher prices, and even dropped some retailers who would not comply, according to The Wall Street Journal.

“You can get a lot of volume that is completely non-compensatory and just not make any money,” said Fred Smith, chief executive at FedEx, to the WSJ.

The expenses of FedEx outpaced revenue in both the FedEx Ground and FedEx Freight businesses in the quarter ended Nov. 30. As a result, the company’s operating profit margin shifted down to 7.8%, as compared to the 9.1% in the same period a year earlier.

FedEx, according to executive who spoke with the WSJ, opened four distribution hubs and 19 automated sorting stations, which helped the company handle more than one million packages a day. While the additional facility and staff helped with the peak holiday volumes, it depressed profits.

The executives also stressed that the majority of FedEx’s $ 60 billion in annual revenue isn’t delivering packages for Amazon.com Inc. and other e-commerce customers. (The executives did not give a specific percentage impact of the ecommerce packages).

“E-commerce continues to drive revenue growth which provides great opportunities as well as significant challenges,” said Alan Graf, the company’s finance chief.

The profit challenges facing FedEx this year may reveal a very real road block for ecommerce companies in the future.

Amazon, in an effort to combat this issue, announced in August the purchase of 40 cargo planes, dedicated to shipping capacity for peak periods and flexibility for normal operations as its Prime business grows.

However, many ecommerce companies selling non-digital products do not have the capacity to run their own transportation operations.

If profit margin issues persist for FedEx, more ecommerce companies may find themselves on the outside looking in come future holiday seasons.

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