After Cuts To Express, FedEx Hopes To Gain $1.7 Billion A Year

Oct 10, 2012

FedEx Founder Fred Smith will cut costs at his flagship Express division. Smith made his announcement at a dinner at the Hilton Memphis where investors ate barbeque and banana pudding, then Smith stood up and told them his goal is to increase profits by $1.7 billion a year.

Smith will offer thousands of Express employees voluntary buyouts, close facilities, and increase automation.

“We are revamping the FedEx Express cost-structure through a combination of cost-reductions, efficiency improvements, and service repositioning,” Smith said.

Smith built his business on the idea that people need a reliable, overnight delivery service, and would pay for it. He located in Memphis because the central location meant easy access to both coasts and the mild winters meant his planes would rarely be grounded due to weather. Smith was so successful that his company’s name is now a verb.

“Until the great meltdown in ’08 that strategy was working pretty good,” Smith said, “we were right up around 10 percent margins in the express business.”

Today the operating margin (a measure of efficiency) at FedEx Express is near three percent. The division has struggled as the economy slackened and customers switched to cheaper, but slower, shipping options. Many of the customers leaving Express, especially U.S. customers, are switching to FedEx Ground, which has an operating margin near 20 percent.

“We don’t think that the express market is going to shrink to oblivion. It is just not a growth market,” Smith said.

With demand down, Smith is going to scale back his oldest and largest division—especially in the U.S.

“With slow economic growth,” Smith told his investors, “the cost-reduction programs are also essential to achieving our financial goals.”

Analyst with Thomson Reuters Greg Harrison said that many U.S. companies are cutting their way to better margins as they wait for the economy to pick up.

“It’s a pretty common situation,” Harrison said.

Smith's goal is 10 percent margins company-wide. “We believe we can do this even in a low-growth environment,” Smith said.