BUS 349: ADVANCED SEMINAR IN STRATEGIC MANAGEMENT
FedEx
To Stay Ahead
Mada Arslan
AMERICAN UNIVERSITY OF BEIRUT
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Part 1: Introduction
The shipping and transportation market is a leading indicator of the economy (Amsler et al.
2010). FedEx contributes to the U.S. economic activity by providing efficient logistics
management through its independently operating, collectively competing and collaboratively
managed companies thus producing “superior financial returns for its shareowners” (Company
website). Its business model consists of segmenting its core markets into four different
companies: FedEx Express, FedEx Ground, FedEx Freight, and FedEx services. This model
however creates overlapping and inefficiencies especially between FedEx Express and FedEx
Ground.
FedEx is the leader in express shipping due to mastering the hub-and-spoke model which was
pioneered by Delta Airlines in 1955; The model is shaped like a wheel where “routing all the
traffic through the hub actually makes the overall system more efficient” (Wise G). Relying on a
fleet of 663 aircrafts, 90,000 vehicles, and 300,000 employees, FedEx was able to process on
average more than 9 million daily shipments throughout 220 countries thus generating $43
billion in sales in 2012. The profit margin however in 2012 is a mere 4.76% due to the nature of
the industry where transportations companies are capital intense incurring high fixed costs. This
capital intensity coupled with the FedEx’s sensitivity to the country’s macroeconomic health is
managed by low debt levels (33% in 2012). In addition, FedEx lobbies aggressively to maintain
its legal status governed by the Railway Labor Act (RLA) which prevents its drivers from
unionizing thus minimizing employee compensation especially pensions costs.
Over the years, as FedEx matured in the early 80s, it turned to international expansion through
acquisitions. FedEx still relies on acquisitions to grow its business domestically and
internationally. In Appendix 1 we highlight FedEx’s most important acquisitions. Even though
the 2004 acquisition of Kinko’s aimed at diversifying FedEx’s product portfolio failed, FedEx
has been outperforming its rivals and has built a strong brand over the years. Its strategy of
innovation, cutting-edge technology in logistics management, and acquisitions allowed it to grow
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and penetrate 220 countries. Opportunities lie in growing market such as South Asia and the
Middle East, and in the future it needs to keep an eye on Sub-Saharan Africa. As FedEx
identified a shift in consumer preferences from express services to ground, freight, and ocean
shipping in light of the global recession; it is restructuring its FedEx Express division (Adler,
2012) by cutting jobs, retiring planes earlier in the aim of increasing profits by $1.7 billion
within the next 3 years (Schlangenstein, 2012). FedEx can strategically move into acquiring
shipping companies to keep up with this new trend and reduce its geographic concentration on
the U.S. even further: 70% of FedEx’s sales are generated domestically. This expansion should
be financed by raising capital to keep FedEx’s low leverage level.
FedEx provides its customers with “global physical transportation coupled with information
intelligence” (Farhoomand, Pauline, Conley, 2003). Information is key. Since theoretically any
company with enough capital can break the barriers to entry into the transportation industry, it is
recommended that FedEx smartly diversify its product portfolio. Amazon has already made a backward
integration move by purchasing Kiva Systems and Google bought BufferBox Canada. A move by
FedEx into cloud computing can be a good diversification.
Part 2: Data Presentation (refer to Appendix 2 for financial highlights)
As the market dipped by the end of 2008 and all through 2009 as a result of the financial
meltdown, FedEx still performed better than average allowing a stronger & steadier performance
“reaping the benefits of strategies executed during tougher times” (Company website). FedEx’s
stock performance during the last 10 years was above the S&P 500, the Dow Jones
Transportation Average, and UPS (Appendix 3). FedEx’s Return on Equity has increased in
20121 to 13.8% (9.54% in 2011). Using DuPont’s equation to segment ROE we find that the
increase is due to the increases in profit margin (4.76% in 2012 compared to 3.69% in 2011) as a
result of the increase in sales, and the increase in the equity multiplier (from 1.8 in 2011 to 2.03
in 2012) as a result of increased leverage (debt ratio is 33% in 2012 as opposed to 27% in 2011)
driven by the 163% increase in pension obligations from $2.1 billion in 2011 to $5.6 billion in
2012 “due to historically low interest rates” (Trefis, 2012); the asset turnover decreased
negligibly from 1.43 to 1.42 (2011-2012) as a result of the $4 billion capital expenditure that
increased fixed assets in 2012 offset by increased sales (asset turnover = total assets / sales). The
1
FedEx’s fiscal year-end is May 31st.
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company has healthy liquidity ratios suggesting that its current liabilities will be met; both the
current ratio and the quick ratio are above 1.
UPS on the other hand has a whopping 53.52% ROE in 20112 compared to 41.48% in 2010. This
increase in ROE is due to the increase the profit margin as sales increased, increase in the asset
turnover as assets increased offset by the sales increase, and increase in the equity multiplier as
debt increased. This huge difference in ROE is due to the fact that UPS is highly leveraged at a
debt ratio of 79.52% in 2011 whereas FedEx is merely 33% leveraged. Liquidity ratios of UPS
show that the company is having difficulties collecting its receivable: while current ratio and
quick ratio are above 1.7, cash ratio is merely 0.47; a closer look reveals that receivables have
increased 11% lowering turnover to 8.5 and increasing the collection period to 42.93 days. While
this is attributable to the credit crunch it is noteworthy that FedEx had actually improved its
collection period both during 2011 and 2012.
UPS generates more revenues than FedEx3, higher operating margins and higher profit marginsit even boasts higher volume sales with an average of 15.8 million daily packages and documents
delivered compared to FedEx’s average daily volume of 9 million yet FedEx’s share price
consistently outperforms UPS’s. In December 2011 it closed at $83.51 whereas UPS closed at
$73.19. This is due to FedEx’s advantageous economies of scale: UPS’s revenue per package is
$9.214 whereas FedEx’s is $12.995. Brand equity also plays a role: Although UPS positions at
67th on the world’s top 100 brands with a value of $9 billion compared to FedEx’s 79th position
with a value of $5.3 billion, FedEx’s better perceived by consumers and ranks 52nd whereas UPS
ranks 81st (Badenhausen, 2012). In addition, FedEx has had a series of strategic acquisition
worldwide during the noughties latest of which is its acquisition of Rapidão Cometa of Brazil
(2012), TATEX of France (2012), MultiPack of Mexico (2011), Unifreight India (2011). These
acquisition signal growth potential especially that FedEx only paid a small amount of dividends
2
UPS’s fiscal year-end is December 31st.
Even though the fiscal year-end differ by 7 months, the results reflect a year’s operations, therefore even if we
align the fiscal years the resulting comparison will be the same.
4
UPS 2011 revenues $53,105 million / average daily delivery volume of 15.8 million x 365 days (annual report
2011)
5
FedEx’s 2012 revenues $42,680 million / average daily delivery volume of 9 million x 365 days (company
website)
3
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in 2012 of $197 million (no dividends were paid since 2008) although it is mostly financed by
equity, thus the earnings are reinvested in the company for growth. On the other hand, UPS has
been consistently paying dividends averaging $1.95 billion from 2008 to 2011 although it is
financed by almost 80% debt.
It is interesting to look at EPS (either basic or diluted). FedEx in 2011 had $4.61 EPS whereas
UPS had EPS of $3.88 although UPS boats higher income. This is due to the fact that FedEx has
less number of shares outstanding (317 million v/s 965 million) even though FedEx is mainly
financed by 73% equity in 2011 in comparison to UPS’s 20% in 2011. It is wise of FedEx to
have low debt and be financed by its own retained earnings given the nature of its business and
its capital intensity (world’s 3rd largest fleet, ArabianBusiness 2012), where it is highly cyclical
and sensitive to macroeconomic factors (Devan, 2010) therefore in tough economic times, it will
fare better than its competitors; again this was evident during the recession where FedEx still
performed better than UPS, the S&P 500, and the Dow Jones Transportation Average (Appendix
3).
It is worthy to note that FedEx generates 70% of its sales domestically and FedEx Express is the
cash cow of the company generating 62% of the group’s revenues. UPS also generates 74% of its
revenues domestically.
Part 3: Macroeconomic overview, Porter’s 5, Value Chain, and SWOT analysis
Macroeconomic overview
We have looked at the United States in particular and we have looked at the world market as
segmented by the World Bank into 6 regions: East Asia and Pacific, Europe and Central Asia,
High-income economies ($12,479 or more), Latin America and the Caribbean, Middle East and
North Africa, South Asia, and Sub-Saharan Africa. Appendix 4 summarizes the findings of
general economics, population and demographics, government, communication, and society &
lifestyle. Note that some of these variables are not observable in the aggregate region as for
example the countries composing Latin America are heterogeneous in their government and
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societal structure: Brazil is more open to foreign direct investment while Cuba is not due to the
political sanctions.
GDP growth in 2011 is strongest in South Asia at 6.42%, Middle East & North Africa at 5.19%,
Latin America & the Caribbean at 4.63%, East Asia & Pacific at 3.37%. The stalling in East Asia
(China, Malaysia, Philippines, Thailand, Vietnam…) is due to the FDIs migrating or investing in
South Asia (Bangladesh, India, Pakistan, Sri Lanka…) and the slowed growth of China. This
GDP growth in South Asia comes with the highest inflation among the world at 10.13%. As a
result of FDIs taking advantage of low labor costs, these markets have grown and experience the
lowest unemployment: 4.72% in East Asia and 4.49% in South Asia. FDI as percentage of GDP
looks low in South Asia at 1.36% as opposed to 2.32% in East Asia yet East Asia is an
aggregation of 24 countries whereas South Asia is an aggregation of 8 countries.
East Asia and Pacific, some indicators of the region: average GDP growth compared to the
world: 3.37%. Services are 65% of GDP, Industry is 32% of GDP. Inflation is somewhat high at
5.23%. Import & Export activity as percentage of GDP is somewhat high at 29.58% for imports
and 32.17% for exports. Low population growth at 0.65% yet 91% of the population is below 65
years. Urbanization rate is average at 53%, internet users somewhat high at 38.55%. Second
highest ranking in air freight transport and third in railway goods transported. Looking at these
numbers, this area has entered into its maturity stage but given that it is an aggregation of 24
countries, great potential lies in the least developed ones.
South Asia, some indicators of the region: somewhat high GDP growth compared to the world:
6.42%. Services are 56% of GDP, Industry is 26% of GDP, Agriculture is 18% of GDP. Inflation
is highest at 10.82%. Import & Export activity as percentage of GDP are significant yet lower
than the rest at 28.48% for imports and 22.79% for exports. Fourth highest population growth at
1.44% and 95% of the population is below 65 years. Urbanization rate is low at 31%, internet
users is the lowest at 9.43%. Second lowest ranking in air freight transport but high in railway
goods transported. This region has great potential in the future as urbanization increases and
physical infrastructure improves.
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Europe and Central Asia, some indicators of the region: low GDP growth compared to the world:
1.95% due to the credit crunch. Services are 72% of GDP, Industry is 26% of GDP. Inflation is
controlled at 3.9%. Import & Export activity as percentage of GDP are the second highest at 40%
for imports and 41% for exports. Low population growth at 0.41% and 85% of the population is
below 65 years. Urbanization rate is high at 70%, internet users is high at 60%. Third highest
ranking in air freight transport, second highest in railway goods transported and second in roads
transported goods. This region has a well-developed infrastructure yet there is potential in
consolidating these markets.
High-income economies, some indicators of the region: lowest GDP growth at: 1.54% due to the
credit crunch. Services are 74% of GDP, Industry is 24% of GDP. Inflation is lowest at 3.33%.
Import & Export activity as percentage of GDP are somewhat lower than the rest at 28.03% for
imports and 27.88% for exports. Low population growth at 0.63% and 84% of the population is
below 65 years. Urbanization rate is highest at 80%, internet users is highest at 76%. Highest
ranking in air freight transport, highest in railway goods transported and highest in roads
transported goods. This region is very well-developed in terms of communication, the potential
lies in consolidating these markets and differentiating from competitors.
Latin America and the Caribbean, some indicators of the region: somewhat high GDP growth at:
4.63%. Services are 63% of GDP, Industry is 30% of GDP. Inflation is somewhat high at 5.13%.
Import & Export activity as percentage of GDP are somewhat lower than the rest at 23% for
imports and 22.6% for exports. Population growth is average at 1.11% and 93% of the
population is below 65 years. Urbanization rate is high at 79%, internet users is low compared to
the urbanization level, 39%. Lower air freight transport given its lower import/export activity, no
data available on transport of goods by railway or roads. This region has a big potential as the
communication infrastructure develops and it is the third highest industrialized with a young
population.
Middle East and North Africa, some indicators of the region: somewhat high GDP growth at:
5.19%. Services are 42% of GDP, Industry is 50% of GDP. Inflation is average at 4.39%. Import
& Export activity as percentage of GDP are highest at 39% for imports and 45.5% for exports.
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Population growth is average at 1.85% and 95% of the population is below 65 years.
Urbanization rate is somewhat high at 62.5%, internet users is average compared to the
urbanization level, 31%. Low air freight transport and railway goods transport given its high
import/export activity, no data available on transport of goods by roads. This region has a very
big potential as the communication infrastructure develops and it has the highest industrialized
economy with a very young population.
Sub-Saharan Africa, some indicators of the region: average GDP growth at: 4.15%. Services are
58% of GDP, Industry is 31% of GDP. Inflation is average to high at 5.67%. Import & Export
activity as percentage of GDP are average at 35% for imports and 33% for exports. Highest
growth and youngest population at 2.53% and 97% respectively. Urbanization rate is low at
36%, internet users is also very low at 12%. Low air freight transport and railway goods
transport given its high import/export activity, no data available on transport of goods by roads.
This region has a huge potential in the future as the communication infrastructure develops.
Porter’s 5 Forces Model
Substitute Products
MODERATE
ICloud, 3D Printers,
Retail Stores
Supplier’s Power
Existing Rivals
Buyer’s Power
LOW to MODERATE
HIGH
HIGH
FedEx, UPS, DHL…
High Demand Elasticity,
Low Switching Costs
FedEx’s size
Potential Competitors
MODERATE
Amazon, Google, InHouse delivery
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Existing Rivals: The competition among existing firms is intense given the nature of the
industry where firms incur high fixed costs due to their capital intensity; consumers are price
sensitive and there’s low to no differentiation among the firms which add up to low switching
costs. FedEx’s main competitor domestically is UPS even though “USPS offers lower prices due
to government subsidies…both firms spend heavily on advertising and often match each other
when it comes to fuel surcharges, increases/decreases in pricing, and even acquisitions (UPS
purchased Mailboxes Etc.; FedEx followed suit with its purchase of Kinko’s)” (Amsler, Cullen,
and Erdmenger, 2010). FedEx’s main international competitor is DHL especially after DHL
exited the US market (Amsler et al., 2010).
Supplier’s Power: FedEx’s suppliers typically exercise low power over it given the sheer
volume FedEx trades in; i.e: FedEx orders supplies in big volumes where it packaging materials,
vehicles, or planes. In addition, FedEx’s employees exercise low bargaining power since the
business is highly automated and the drivers are contract workers; however, the pilots are the
only unionized employees, which gives them some bargaining power. The Federal Aviation
Administration (FAA) does exercise bargaining power over FedEx since it’s got the right to
grant or restrict access to airspace and landing rights (Amsler et al., 2010).
Buyer’s Power: the transportation industry exhibits high demand elasticity given the price
sensitivity of consumers and the lack of differentiation among competing firms. As a result of the
2008 financial crisis that drove the world into a recession consumers need to cut costs thus they
have switched to slower shipping services which triggered the restructuring of the FedEx
Express division (Adler, 2012).
Threat of New Entrants: although the nature of the industry requiring shipping companies
to be capital intense (airplane fleet, vehicles, ships) is a barrier to entry, companies that have
purchasing power are potential competitors such as Amazon and Google6; even in-house delivery
is a threat, i.e: companies such as WalMart can develop their own delivery system. However, the
knowledge and expertise acquired over time is the biggest barrier to entry. FedEx has 40 years of
experience optimizing its delivery services, studying its customers’ needs, and responding to
domestic and global trends.
Substitute Products: trade is a natural activity of or an innate function to humanity. Thus
there is no substitute for transportation of goods. However, the advancement of technologies
6
Google acquired BufferBox Canada in 2012 (Roberson, 2012)
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such as the internet with e-mails and fax machines can cut into FedEx’s revenues especially in
delivering documents. Other emerging technologies such as the ICloud and the 3D Printers with
“personalized manufacturing”7 can also cut into FedEx’s revenue stream but it is not enough to
affect or disrupt the transportation industry.
Value Chain
Primary function:
Input/Resources:
Operation:
Output:
Physical Assets
Human Resources
IT
Logistics of Delivery (JIT)
IT backbone
Services
Service Completion
(products reach destination)
Output:
Support (shipment tracking)
Output:
Data (information
intelligence)
Output:
High Volume-Low Profit
Average daily volume of 9
million shipments- profit
margin less than 5% in 2012
FedEx intertwines its physical assets of 663 aircrafts, 90,000 vehicles, and thousands of dropoff
locations with its drivers, pilots, and other staff supported by cutting edge IT infrastructure to
guarantee delivery of goods and services to its customers. Those resources are molded into a
hub-and-spoke model that allows transportation through efficient routes. In addition, FedEx’s
operations rely heavily on IT and automation to ensure reliable delivery (products reach their
destination) and support through their online shipment tracking system: “The information about
the package is just as important as the package itself”- Fred Smith (Company Website). FedEx
relies on secondary functions as well to complete its value chain: the firm infrastructure, HR
management, technology development/Innovation. Marketing is an important secondary function
as well since the intense competitive nature of the business coupled with low switching costs
entails heavy marketing and advertising to capture or orient the consumer awareness to the
FedEx brand.
7
MakerBot replicator: www.makerbot.com
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SWOT analysis
Strengths:
 Brand Equity
 Domestic leader in the express delivery
market
 Technology infrastructure: IT
 Physical Assets: impressive fleet of
aircrafts and vehicles
 Drivers are not unionized (saves costs)
Weaknesses:
 International leader is DHL and domestic
ground leader is UPS
 Capital intensity: high fixed costs
 Major Clients: the USPS contract
 No differentiation from competitors
 Geographical Concentration: USA
Opportunities:
 International expansion: South Asia,
Sub-Saharan Africa
 Growing global trade
 Growing e-commerce/online retailing
 Acquisitions and business diversification
Threats:
 General state of the economy
 Disruption to the technology and/or
transportation infrastructure
 Changing laws and regulations including
labor unionization, additional safety
measurements, environmental, etc…
 New entrants
Part 4: Strategic Analysis
FedEx has an interest in the United States’ nationwide economic activity (Company website) as
well as wanting “to connect the world responsibly and resourcefully” (Annual Global Citizenship
Report 2011). With the government deregulating the airline industry (1977-1980) allowing
FedEx to make use of the hub-and-spoke model by construction “networks based on logic” and
with FedEx pioneering a new printing methodology of bar-code-readable numbers for their
tracking system, FedEx was able to fundamentally change the way businesses managed their
supply chain, moving to Just-In-Time inventories and actually reducing logistics costs from
“16.5% of GDP to 9.5%” within 25 years (Bloomberg, 2004).
FedEx’s sustainable growth stems from its ability to provide its customers timely information
about their shipments: “we have continued to offer information up to our customers as a strategic
advantage and use that same information inside of our company to ensure our quality and
productivity as we grow”- Robert Carter, Executive Vice President and Chief Information
Officer at FedEx Corporation (Knudson, 2007). For FedEx to be able to offer up timely
information, their business model is built around speed and flexibility (Annual Report 2012).
These attributes are the result of the hub-and-spoke model, the IT infrastructure, and the
knowledge and expertise accumulated over 40 years.
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FedEx has segmented its business into four distinct entities operating independently to serve
their core markets, but compete collectively as one brand, and are managed collaboratively under
FedEx Corporation: FedEx Express generated 62% of total revenues in 2012, FedEx Ground
generated 22%, FedEx Freight generated 12%, and FedEx Services generated 4% (Appendix 2).
However there’s a concern over such a model where there’s a chance of delivery overlap with
the Express and Ground segments (Amsler et al., 2010) that may result in inefficiencies and
additional costs: a business may require both express and ground services from FedEx thus a
different driver from each segments picks up the packages (Vincent, 2011); proper controls or
systems’ integration should recognize these transactions and eliminate delivery overlaps.
FedEx understands that operational effectiveness can only take you so far. It has been
successfully growing since inception by first developing domestically, maturing in the 80s, and
recognizing the potential in international expansion. FedEx first offered international shipping in
the mid-80s. Thus FedEx’s growth throughout its existence has been driven by acquisitions
(Amsler et al., 2010). Appendix 1 highlights the most important ones. In its pursuit of strategic
growth through international expansion FedEx is balancing its geographical concentration. In
addition, acquisitions allowed FedEx to diversify its portfolio extending in services with
businesses relevant to its core activity: in 2004 FedEx acquired Kinko’s for $2.4 billion (Annual
Report 2006) thus providing office services such as printing, copying, and binding to its
customers as well as expanding its retail outreach to the 1,200 Kinko's stores (Appendix 1). It is
noteworthy to mention that FedEx’s purchase of Kinko’s was an attempt to match UPS’s retail
presence with MailBoxes Etc.8 but the acquisition is yet to prove profitable with FedEx writing
off $1.6 billion in impairment charges (Amsler et al., 2010) when it has originally recorded $1.8
billion in goodwill in relation to the acquisition (Annual Report 2006); the biggest impairment
charge was in 2009 for $810 million (Annual Report 2009).
FedEx relies on alliances with business as main drivers of sales. It has successfully stricken deals
with major retailers as well as governments to integrate FedEx in their value chain as logistics
and/or transportation solution providers: FedEx is one of the biggest defense contractors (Turse,
2011), Apple (Hardawar, 2012) and HP (Close-Up Media, 2012) rely on FedEx, Ebay teamed up
with FedEx “to offer shipping discounts and label printing” at home (Kucera, 2012), and
8
www.mbe.com
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WalMart added FedEx office locations to its site-to-store pick up points9. Amazon does not
exclusively rely on FedEx and it is biggest threat especially that it had invested $775 million
purchasing Kiva Systems in 2012 that constitutes part of its back-end systems in an effort to cut
operational costs (Kanellos, 2012); however Amazon relies on FedEx to allow its cloud
customers to “bypass the Internet by shipping storage devices via airmail” (Brodkin, 2010).
FedEx keeps a low debt structure (debt ratio is 33% in 2012) since it is faced with high fixed
costs in a high-volume/low margin industry (average profit margin from 2000-2012 is 3.7%10):
net fixed assets are 58% of total assets and wages and salaries for its 300,000 employees make
up 41% of operating expenses or 38% of revenues. This contributes to the company’s volatility
with respect to fuel price fluctuations and regulation changes. However, FedEx hedges against
fuel price fluctuations and passes on additional costs to its customers through fuel surcharges
(Ackerman, 2008). As for wages and salaries, pension and benefits costs are minimized since
FedEx is governed by the Railway Labor Act (RLA) that does not allow its drivers to form “local
unions” (Garofalo, 2010). FedEx has been aggressively lobbying to maintain its preferential and
advantageous legal status under this act thus protecting its thin profit margins. For the period
2008-2010, FedEx is said to spend $50.81 million on lobbying “compared with paying federal
tax bills of $37 million” (McGuire, 2012). Other changes such as tighter environmental
regulations to decrease the company’s carbon footprint (aircrafts’ CO2 emissions is currently at
1.3lbs/ATM11) can be costly; yet FedEx is aware of the change in the energy and transportation
markets and has replaced several aircrafts with ones that are more fuel efficient. In addition,
FedEx is taking a leap into the future and contributing to social innovation and environmental
change by operating 130 electric cars from Nissan (Haindl, 2012) and becoming an “early
adopter of the electric drive in the parcel delivery market” (Electrification Coalition, 2012).
In line with its innovative culture and keeping pace with the socio-economic trends, “The FedEx
Institute of Technology at the University of Memphis houses ten research centers that focus on
an array of global studies and issues: to apply how emerging technologies can help shape the
global information economy” (Knudson, 2007). This innovative spirit and the ability of FedEx to
identify trends lead it to be at the forefront of the social commerce: a market where social media
is used to buy and sell goods. This market is forecast to reach $30 billion by 2015; thus FedEx
9
http://www.walmart.com/cp/Site-to-Store-Shipping-with-FedEx/1069504
Calculated by obtaining historical financial data through Compustat database
11
Annual Global Citizenship Report 2011
10
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has developed the Ship to Friends facebook application “that allows people who use Facebook to
prepare and pay for a U.S. domestic shipment without ever leaving Facebook” (BusinessWire
(2012).
The most beneficial domestic and global trend that affects FedEx is online shopping. The
increase of online shopping increases sales in value and in volume. Thus, FedEx collaborated
with American Express to support small businesses in the form of “giving away 40,000 $25 gift
cards” (a total of $1 million) to be spent at local businesses (DividendChannel, 2012) and with
average revenue per package of $12.99, FedEx would have theoretically encouraged online
spending with effectively less than half the $1 million spent12.
FedEx continuously pursues operational effectiveness in cutting costs and increasing quality as
the industry’s demand is highly elastic. FedEx has recently identified a permanent shift of
customers from express services to ground, freight, and ocean shipping in light of the global
recession; thus FedEx is restructuring its FedEx Express division (Adler, 2012) by cutting jobs,
retiring planes earlier which will allow it to increase profits by $1.7 billion within the next 3
years (Schlangenstein, 2012).
Part 5: Recommendations
Opportunities lie in growing market such as South Asia and the Middle East, and in the future
FedEx needs to keep an eye on Sub-Saharan Africa as they develop their communication
infrastructure and their social-economic trends evolve towards e-commerce. International
expansion reduces FedEx’s geographic concentration on the United States. In fact FedEx is right
on track with international expansion by acquisitions: in 2012 FedEx acquired 3 companies in
Brazil, France, and Poland; in 2011 FedEx acquired 2 companies in Mexico and India; in 2007
FedEx acquired 3 companies in India, China, and Hungary (Appendix 1).
FedEx benefits from an increase in the volume of e-commerce. As FedEx collaborated with
American Express to support small businesses in the U.S. they can induce online shopping in
international markets thus pushing and/or supporting the communication infrastructure. For
example, Latin America and the Caribbean have the second highest urbanization level among the
6 regions of the world as segmented by the World Bank yet internet usage is relatively low at
40%. Similarly, in the MENA region urbanizations is at 63% while internet usage is at 31%.
12
40,000 gift card x $12.99 = $519,600
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FedEx can induce online shopping through socially conscious and developmental programs thus
building brand awareness in that region. Such programs help FedEx achieve its corporate
citizenship goals by “sustainably connecting people and places and improving the quality of life
around the world” (Company website) and build a loyal customer base in an industry governed
by low switching costs.
FedEx is successfully replacing old planes with new greener and more efficient ones thus it is
proactively mitigation any environmental or safety regulations that could be imposed in the
future. In addition, FedEx actively lobbies to keep its drivers from unionizing thus minimizing its
employees’ remunerations especially pension costs. FedEx should avoid reclassification from a
company specialized in aerial shipping governed by the Railway Labor Act (RLA) to a company
specialized in ground shipping governed by the National Labor Relations Act (NLRA) like UPS;
this is the reason FedEx’s pilots are unionized while its drivers are not. If FedEx’s status changes
it can face an increase in wages up to 14.2% of sales in comparison to UPS: UPS spent $27.6
billion in their last fiscal year (2011) or 52% of sales to compensate their 398,300 employees
whereas FedEx spent $16.1 billion in their last fiscal year (2012) or 38% of sales to compensate
their 300,000 employees. Thus, UPS’s cost per employee was $69,232 whereas FedEx’s cost per
employee was $53,663. This $15,569 spread per employee is attributable to the unionization
effect where unionized employees command higher bargaining power when it comes to
compensation and benefits.
Other strategic moves may be in maritime shipments since FedEx relies on aircrafts and vehicles
given that 70% of its sales are domestic. So far, FedEx is expanding internationally yet it could still
acquire maritime shipping companies. To do so, FedEx could benefit from its brand equity and
high stock price to raise capital through share offerings since given its capital intensity and high
correlation to overall market volatility it is recommendable to maintain its low leverage level.
In addition, since clients may become competitors with in-house delivery system development
and/or backward/forward integration, FedEx should hedge this risk by diversifying its product
portfolio. So far diversifying its product line did not payoff for FedEx. The acquisition of
Kinko’s did not serve its purpose. In 2009, management chose to impair the goodwill booked in
2004 in relation to the acquisition in an effort to “to phase out the use of the Kinko’s trade name
and reduced profitability at FedEx Office over the forecast period” (Annual Report 2009). The
emerging ICloud technology is a way for FedEx to diversify its portfolio. With over 7,000 IT
Mada Arslan
16
expert, owning their own satellites, and with 40 years of accumulating market information FedEx
can leverage those advantages into providing customers with computing resources delivered as
services over the internet. In fact, FedEx is actually pursuing cloud computing (Babcock, 2011)
proving that they are reading the market’s needs right.
As for FedEx’s overlap in deliveries due to their business model where their core markets are
segmented and served by 4 different companies; it is advisable that FedEx develops an integrated
platform to avoid such overlaps thus reducing costs and increasing efficiencies.
FedEx needs to also hedge its risks from losing major contracts like the USPS contract (Annual
Report 2012) by building strategic alliances domestically and internationally. As mentioned in Part
4: Strategic Analysis, FedEx deals with the U.S. military, Apple, HP, Ebay, and WalMart.
Part 6: Lessons Learned
Awareness: Frederick Smith (founder of FedEx) took advantage of economical, social, and
political changes to create FedEx: the deregulation of the transportation industry in 1977 allowed
full exploration of the hub-and-spoke model. Even as the company grows or reaches maturity it
can always spot those opportunities to create value to its stakeholders.
Speed and flexibility: a company operating globally, keeps an eye on the global market and takes
advantages of changes in social, economic, and political conditions predicting hot spots, spotting
ripe acquisitions, and weaving alliances. Therefore, to be able to move with speed and beat the
competition to the market, the company needs to be flexible.
Financial health: a key component for such companies to be profitable in such an industry is cost
control given the low profit margin levels.
Be proactive: companies need to be proactive in tipping the scale to their advantage. For
example, induce customers into online shopping by giving out credit increases the volume of ecommerce; aggressively lobby to avoid unfavorable laws and regulations.
Changing strategy: as the company reaches its organic growth limits, smart diversification is
essential for growth. IBM and Siemens are great examples of companies realizing when their
strategic advantage is no longer enough to sustain growth and create value. Google is no longer
just a search engine, it is developing the driverless car and has recently made a move in the
distribution industry with its BufferBox acquisition.
Mada Arslan
17
Appendix 1: Acquisition History
Federal Express Corporation is founded in Little Rock, AR in 1971 by Frederick W. Smith
1984: Gelco Express International
FedEx dramatically expands its presence outside of the U.S. with the acquisition of Gelco
Express, a worldwide courier with service to 84 countries.
1989: Tiger International Inc.
With the integration of the Flying Tiger Line, FedEx becomes the world's largest fullservice, all-cargo airline. The acquisition includes routes to 21 countries, a fleet of cargo
aircraft including Boeing 747s, facilities throughout the world and Flying Tigers'
expertise in international airfreight.
1998: Caliber System Inc.
FedEx creates FDX Corporation (later renamed FedEx Corporation) and grows its
portfolio of services with the addition of ground small-package carrier RPS (now FedEx
Ground), Western U.S. less-than-truckload carrier Viking Freight (now part of FedEx
Freight), Caliber Logistics (now FedEx SupplyChain Services), Caliber Technology (now
part of FedEx Services) and Roberts Express (now FedEx Custom Critical)
2000: Tower Group International Inc., WorldTariff Ltd
FedEx Corp. creates FedEx Trade Networks. Today, FedEx Trade Networks is one of the
largest-volume customs entry filers in North America and provides FedEx customers
with end-to-end transportation and customs clearance solutions around the world.
2001: American Freightways Corp.
FedEx Corp. acquires this less-than-truckload carrier serving the Central and Eastern U.S.
to complement Viking Freight. Rebranded as FedEx Freight in 2002, these companies
combine to make FedEx Freight a leader in the regional less-than-truckload shipping
industry.
2004: Kinko's Inc.
FedEx Corp. expands its retail access to all of the 1,200 Kinko's stores. With the backing
of a FORTUNE 100 corporation, Kinko's gains the resources and expertise needed to
continue expansion of its corporate document outsourcing business and international
operations.
2004: Parcel Direct
FedEx Corp. broadens its residential delivery portfolio with the acquisition of Parcel
Direct, a leading parcel consolidator. Parcel Direct becomes a subsidiary of FedEx
Ground and is renamed FedEx SmartPost. The company offers a proven solution to
customers in the fast-growing e-tail and catalog industries seeking a cost-effective means
of shipping low-weight, less time-sensitive goods to residential customers.
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18
2006: ANC Holdings Limited
FedEx Corp. acquires ANC Holdings Limited, a United Kingdom domestic express
transportation company for £120 million. This transaction will allows FedEx Express to
directly serve the entire UK domestic market.
2006: Watkins Motor Lines
FedEx Corp. acquires Watkins Motor Lines, a leading provider of long-haul LTL
services, for $780 million.
2007: Flying Cargo Hungary Kft
FedEx Express acquires its Hungarian global service participant, Flying Cargo Hungary
Kft, giving FedEx a wholly-owned operation in one of the region's dynamic markets.
2007: Tianjin Datian W. Group Co., Ltd.
FedEx Corp. acquires Tianjin Datian W. Group Co., Ltd.'s ("DTW Group") 50 percent
share of the FedEx-DTW International Priority express joint venture and DTW Group's
domestic express network in China for approximately US$400 million in cash.
2007: Prakash Air Freight Pvt. Ltd.
FedEx Express acquires its primary Indian service provider, Prakash Air Freight Pvt. Ltd.
(PAFEX), for approximately $33 million.
2011: AFL Pvt. Ltd./Unifreight India Pvt. Ltd.
FedEx Express acquires the logistics, distribution and express businesses of AFL Pvt.
Ltd. and its affiliate, Unifreight India Pvt. Ltd. This acquisition provides FedEx more
robust domestic transportation and added capabilities in India.
2011: Servicios Nacionales Mupa, S.A. de C.V. (MultiPack)
FedEx Express acquires the operations of MultiPack in Mexico. MultiPack's existing
operations include its pick-up and delivery network, warehousing and logistics services,
48 distribution centers, 13 warehouses and more than 500 retail outlets, all of which will
be consolidated into the FedEx business.
2012: Opek Sp.z o.o.
FedEx Corp. acquires the Polish courier company Opek Sp.z o.o. (Opek) for $54 million.
This acquisition gives its FedEx Express business unit access to a nationwide domestic
ground network with an estimated $70 million in annual revenue and 12.5 million
shipments annually.
2012: TATEX
FedEx Corp. acquires TATEX, a leading French business-to-business express
transportation company, for $55 million. This acquisition gives its FedEx Express
business unit access to a nationwide domestic ground network which carries 19 million
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19
2012: Rapidão Cometa
FedEx Corp. acquires Rapidão Cometa, one of the largest transportation and logistics
companies in Brazil, for $398 million. This acquisition brings more than $500 million of
annual revenue, and is the latest step in the company’s strategy for profitable growth in
FedEx Express's Latin American and Caribbean (LAC) region.
Source: Company website
Mada Arslan
20
Appendix 2: Financial Highlights (source: annual reports)
FedEx
Liquidity ratios
Current Ratio
Quick Ratio
Cash Ratio
Asset Management ratios
Accounts Receivable Turnover
Average Collection Period
Fixed Asset Turnover
Total Asset Turnover
Equity multiplier
Debt Management ratios
Debt Ratio
Debt/Equity
Times Interest Earned
Profitability ratios
Profit Margin
Basic Earning Power (BEP)
Return on Assets (ROA)
Return on Equity (ROE
Market Value ratios
Price-to-Earnings Ratio
Price-to-Cash Flow Ratio
Basic EPS
Diluted EPS
UPS
2012
2011
2010
2009
2008
2011
2010
2009
2008
1.69
1.60
0.53
1.70
1.61
0.48
1.57
1.48
0.42
1.57
1.49
0.51
1.35
1.27
0.29
1.89
1.71
0.47
1.96
1.76
0.57
1.49
1.38
0.25
1.13
0.99
0.06
9.07
40.23
2.47
1.43
2.03
8.58
42.54
2.53
1.44
1.80
8.34
43.75
2.41
1.39
1.80
10.47
34.87
2.65
1.46
1.78
8.71
41.92
2.82
1.48
1.76
8.50
42.93
3.01
1.53
4.88
8.80
41.45
2.85
1.47
4.18
8.44
43.26
2.52
1.42
4.14
9.28
39.32
2.82
1.62
4.70
32.78% 26.59% 25.89% 25.14% 22.39% 79.52% 76.05% 75.86%
66.56% 47.85% 46.67% 44.72% 39.51% 388.20% 317.51% 314.28%
81.54
30.42
27.68
12.47
38.33
16.72
14.95
6.93
78.73%
370.19%
11.52
4.76%
10.63%
6.80%
13.80%
3.69%
8.55%
5.30%
9.54%
3.41%
7.89%
4.75%
8.57%
0.28%
3.04%
0.40%
0.72%
2.96%
8.08%
4.39%
7.74%
7.16%
16.77%
10.96%
53.52%
6.74%
15.75%
9.94%
41.48%
4.34%
9.67%
6.17%
25.57%
5.83%
15.97%
9.42%
44.29%
13.84
6.82
6.44
6.41
20.31
8.67
4.61
4.57
22.09
8.34
3.78
3.76
178.81
8.34
0.31
0.31
25.20
9.29
3.64
3.60
18.86
12.64
3.88
3.84
21.60
14.05
3.36
3.33
29.12
15.38
1.97
1.90
18.64
11.43
2.96
2.94
Mada Arslan
21
Appendix 2 (continued)
Income Statement
Revenues- FedEx
EBIT- FedEx
Net Income- FedEx
Revenues- UPS
EBIT- UPS
Net Income- UPS
Operating margin- FedEx
Operating margin- UPS
2011
$ million
39,304
2,342
1,452
53,105
5,820
3,804
6.05%
11.45%
2010
$ million
34,734
1,965
1,184
49,545
5,293
3,338
5.75%
11.39%
2009
$ million
35,497
736
98
45,297
3,083
1,968
2.10%
7.74%
2008
$ million
37,953
2,070
1,125
51,486
5,090
3,003
5.47%
10.45%
Cash Flows
CF operating activities- FedEx
CF investing activities- FedEx
CF financing activities- Fed Ex
CF operating activities- UPS
CF investing activities- UPS
CF financing activities- UPS
2011
$ million
4,041
-3,419
-287
7,073
-2,537
-4,862
2010
$ million
3,138
-2,781
-692
3,835
-654
-1,346
2009
$ million
2,753
-2,383
400
5,285
-1,248
-3,045
2008
$ million
3,465
-2,897
-617
8,426
-3,179
-6,702
y-2011
$ millions
39,304
27,461
69.87%
11,843
30.13%
y-2010
$ millions
34,734
24,852
71.55%
9,882
28.45%
FedEx
Total revenues
U.S.
% from total sales
International
% from total sales
y-2012
$ millions
42,680
29,837
69.91%
12,843
30.09%
Mada Arslan
22
Appendix 2 (continued)
Revenue in $ million
Revenue: FedEx v/s UPS
60,000
50,000
40,000
30,000
Revenues‐ FedEx
20,000
Revenues‐ UPS
10,000
0
2011
2010
2009
2008
FedEx Segments Revenue
Express
Ground
Freight
4%
12%
22%
62%
Services
Mada Arslan
Appendix 3: Stock performance
Source: Company Investor Factsheet 2011
23
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24
Appendix 4-A: Macroeconomic Overview of the United States of America
Value- 2011
General Economics (source CIA factbook)
GDP (world rank #2)
GDP Real Growth Rate (world rank #157)
Per Capita GDP (world rank #11)
GDP Composition By Sector
Agriculture
Industry
Services
Consumer Inflation Rate (world rank #65)
Unemployment (world rank #103)
Export (world rank #4)
Canada
Mexico
China
Japan
Other
Import (world rank #1)
China
Canada
Mexico
Japan
Germany
Other
Population & Demographics (source WDI)
Total Population
Population Growth Rate
Age Structure:
0-14
15-64
65+
Rural population as % from total
Urban population as % from total
Government- Laws and Regulation (source: The
economist, Heritage, CIA factbook, DoingBusiness)
Government Stability
Economic Freedom
Openness to FDI
Legal System
Paying taxes
Communication: Physical infrastructre & IT
(source: CIA factbook, WDI)
Roads and Highways (KM) (world rank #1)
Railways (KM) (world rank #1)
$15.08 trillion
1.80%
$48,300
1.20%
19.20%
76.60%
3.10%
9%
$1.497 trillion
19%
23.30%
7%
4.50%
46.20%
$2.236 trillion
18.40%
14.20%
11.70%
5.80%
4.40%
45.50%
311,591,917
0.72%
20.06%
66.64%
13.30%
17.62%
82.38%
5.3 (110th)
76.3
1
Constitution-based federal republic;
strong democratic tradition
34% progressive scheduel
6,506,204
224,792
Mada Arslan
Airports (world rank #1)
Heliports
Navigable Waterways (world rank #4)
Ports
Fixed Telephone Market (world rank #2)
Wireless Telephone Market (world rank #3)
Internet Users (world rank #2)
Air transport, freight (million ton-km)
25
15,079
126
41,009
22
150 million
313.848 million
245 million
50,743
Logistics performance index: Ease of arranging
competitively priced shipments (1=low to 5=high)
3.56
Logistics performance index: Frequency with which
shipments reach consignee within scheduled or
expected time (1=low to 5=high)
4.21
Logistics performance index: Quality of trade and
transport-related infrastructure (1=low to 5=high)
4.14
Railways, goods transported (million ton-km)
2,468,738
Roads, goods transported (million ton-km)
1,889,923
Transport services (% of commercial service exports)
13.57%
Transport services (% of commercial service imports)
21.63%
Transport services (% of service exports, BoP)
13.08%
Transport services (% of service imports, BoP)
Internet users (per 100 people)
Society & Lifestyle
19.90%
78.24
capitalistic and individualistic consumer society
growing internet use for convenience and time-saving
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26
Appendix 4-B: Macroeconomic Overview of the World
latest numbers available from 2005 to 2011
East Asia
and Pacific
Europe and
Central Asia
High-income
economies
Latin
America and
the Caribbean
Middle East
and North
Africa
South Asia
Sub-Saharan
Africa
General Economics
GDP (constant 2000 US$) year 2011 in billions
GDP growth (annual %)
11,946
3.37%
11,516
1.95%
31,377
1.54%
3,081
4.63%
1,502
5.19%
1,296
6.42%
574
4.15%
GDP per capita (constant 2000 US$)
GDP Composition By Sector
Agriculture
Industry
Services
Inflation, consumer prices (annual %)
Unemployment, total (% of total labor force)
Exports of goods and services (% of GDP)
Imports of goods and services (% of GDP)
5,391
12,872
27,645
5,176
3,854
782
655
3.39%
31.67%
64.94%
1.88%
26.39%
71.73%
1.31%
24.36%
74.33%
7.35%
5.23%
4.72%
32.17%
29.58%
3.90%
9.43%
40.98%
39.97%
3.33%
8.45%
27.88%
28.03%
6.25%
30.29%
63.46%
5.13%
8.00%
22.61%
22.92%
50.32%
42.33%
4.39%
9.76%
45.49%
38.72%
17.88%
26.41%
55.71%
10.13%
4.49%
22.79%
28.48%
10.82%
30.81%
58.37%
5.67%
2,216
895
1,135
595
390
1,656
876
0.65%
0.41%
0.63%
1.11%
1.85%
1.44%
2.53%
20.92%
70.44%
8.64%
47.33%
17.37%
68.10%
14.53%
29.76%
17.26%
66.90%
15.84%
19.50%
27.49%
65.49%
7.02%
20.90%
30.21%
65.21%
4.58%
37.48%
31.12%
64.02%
4.86%
69.07%
42.28%
54.49%
3.23%
63.53%
52.67%
70.24%
80.50%
79.10%
62.52%
30.93%
36.47%
35.33%
42.31%
37.65%
47.21%
32.26%
40.20%
57.82%
n/a
33.11%
34.70%
Population & Demographics
Total Population in millions
Population Growth Rate
Age Structure:
0-14
15-64
65+
Rural population as % from total
Urban population as % from total
Government- Laws and Regulation
Total tax rate (% of commercial profits)
Mada Arslan
Foreign direct investment, net inflows (% of
GDP)
27
2.32%
3.98%
2.63%
2.42%
2.86%
1.36%
2.33%
61,095
47,516
146,364
5,981
17,094
2,453
2,432
3.08
3.07
3.37
2.71
2.80
2.59
2.47
3.55
3.54
3.86
3.11
3.24
2.93
2.84
3.03
3.16
3.58
2.58
2.68
2.38
2.30
6,326
7,844
8,285
n/a
1,911
6,187
n/a
n/a
17,757
28,585
n/a
n/a
n/a
n/a
26.52%
21.52%
20.51%
12.99%
27.18%
19.42%
31.15%
32.20%
25.68%
32.21%
24.39%
19.59%
21.91%
23.99%
18.24%
22.30%
39.57%
16.69%
29.57%
35.57%
22.42%
26.74%
49.20%
11.77%
42.28%
40.55%
24.18%
35.20%
38.55
59.65
75.60
39.39
30.72
9.43
12.31
Communication: Physical infrastructre & IT
Air transport, freight (million ton-km)
Logistics performance index: Ease of arranging
competitively priced shipments (1=low to
5=high)
Logistics performance index: Frequency with
which shipments reach consignee within
scheduled or expected time (1=low to 5=high)
Logistics performance index: Quality of trade
and transport-related infrastructure (1=low to
5=high)
Railways, goods transported (million ton-km)
Roads, goods transported (million ton-km)
Transport services (% of commercial service
exports)
Transport services (% of commercial service
imports)
Transport services (% of service exports, BoP)
Transport services (% of service imports, BoP)
Internet users (per 100 people)
Source: World Bank
Mada Arslan
28
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