FedEx announced plans to increase profits by $1.7 billion a year at a two-day meeting for investors this week. Most of that increase will come from cuts to the company’s oldest and largest division—FedEx Express.
In a story that is now legendary, FedEx Founder Fred Smith argued for the need for a reliable, overnight delivery service in a term paper he wrote while at Yale. He built a company that rakes in more that $40 billion a year on that idea, but demand for FedEx’s Express services has shrunk in the slack economy. Many customers have switched to cheaper and slower options, like FedEx Ground.
Profits at FedEx Express fell almost 30 percent last quarter, and that hurt the company as a whole—income fell $5 million, or about one percent.
Smith will offer thousands of Express employees buyouts, close facilities, and increase automation. He’ll also use his company’s technology to adjust delivery routes and make them more efficient. All in all, Smith says these measures will boost profits at Express by $1.6 billion a year.
The cost-cuts pleased Arthur Hatfield, an analyst at Raymond James. He thought the company was only going to be able to find a billion dollars of savings.
“This is really a new effort for this company and kind of a real change in philosophy,” Hatfield said. “Historically, they’ve always been about growth, they’ve always been focused about going to where they think the growth is going to be, and much less so about near-term cost-focused.”
Gregory Harrison who researches companies on the Standard & Poor’s 500 for Thomson Reuters said, “A lot of companies are, and have been, doing cost-cutting to maintain their margins.” This quarter is shaping up to be the dreariest Harrison has seen in three years.
“For twelve straight quarters we’ve seen positive earnings growth, now we are expected to see earnings decline. So, there definitely is a wider trend where companies are struggling to maintain their earnings, especially as their revenues fall.”
Rival UPS has seen declining returns on express mail, too, but that hasn’t hurt UPS’ bottom line as much as it has hurt FedEx because UPS’ business is much more centered around its ground service, and trucks, rather express mail and planes.
FedEx is so synonymous with overnight delivery that the company name has become a verb. So, how does Founder Fred Smith think about the changes at Express?
“I guess the best analogy is for years and years Coca-Cola sold drinks with sugar in them and with a red label,” Smith said, “and over the last 25 years they’ve gone into Sprite, which is a green can, and they have Diet Coke which is a silver can….So, the same thing happened to FedEx.”
Smith pointed out that FedEx offers ground and freight transportation, too, but that doesn’t mean the company has given up on Express. “The worldwide system and the Express business has changed,” Smith said, “and we’ve broadened the product line.”