FedEx and its Outlook in the Transportation Industry

FedEx Corp. released its Q3 earnings this morning and despite it showing more than double profits, its stock, which is close to a year high, tumbled 4.5% today. Bob Sechler explains in WSJ article that strong online holiday sales between December and February helped drive the profit that nearly doubled since last year. Despite these positive results, FedEx has forecasted a “below trend” growth in the upcoming months. With rising energy costs and fuel surcharges, the recent news for UPS to acquire TNT to expand its European operations, and new economic data forecasting global GDP growth of 2.3%, from a previous 2.9%, the attention has been turned to FedEx and its plans to acquire a solid strategy. FedEx chairman Fred Smith declined to comment on the UPS/TNT deal and explained that FedEx has no strategic need for big acquisitions in Europe confident with plans “to continue expansion primarily through organic growth.” To confront the strengthened rival in the constantly changing transportation industry, FedEx will need to continue sustaining innovation through major investments to protect its strategy. In order to understand the position of FedEx and its outlook in the industry, we will step back and examine the major players and changes in the industry in the past few years.

Past Major Players and Industry Changes

FedEx

FedEx successfully established itself as a leader in the US domestic parcel delivery by creating the overnight shipping business. Their initial advertising campaigns included “when it absolutely, positively has to be there overnight” and “our most important package is yours.” These messages were important in understanding the FedEx strategy; its business model revolved around the idea that you could rely on any package to be delivered the next day by 9:30 AM as long as it was dropped off at a FedEx box by 7 p.m. the night before. This model was innovative as it pioneered the overnight shipping industry and their value chain standardized and guaranteed overnight delivery.

UPS

While FedEx dominated the air, UPS controlled the ground with its big brown trucks recognized worldwide. Since the early 1900’s UPS was the first to meet the needs for private messenger and delivery services that has allowed it to grow to be the largest package delivery company by revenue today. The UPS theme, “What can brown do for you?” highlights the UPS brown trucks and the driver uniforms.

DHL

As FedEx and UPS mainly focused on the domestic market, DHL became the worldwide leader in the international transportation business. Their value proposition was “DHL ships overseas and the others don’t.” By the 1980’s DHL had a network of customers throughout the Middle East, Europe, Latin America, Africa, and was the first express company to expand and enter China. At the time, DHL had no interest in expanding to the US domestic market.

Market Share by Region

While each of these firms originally captured a different market niche, they wanted to expand to provide each other’s services. DHL acquired the trailing domestic competitor Airborne Express in 2003 to expand its North American operations and provide domestic US delivery. This strategy wasn’t too successful as it underestimated domestic competition from the big two domestic competitors and never captured greater than 10% of the domestic US overnight market. In 2008, DHL dropped its domestic services to focus on its international business. As FedEx innovated the overnight market, UPS slightly lagged behind at its own game as it underestimated the size of FedEx’s market, and quickly began to offer the overnight services and comparable technological developments to maintain efficiency and provide data communications networks. Soon both FedEx and UPS expanded to international markets, each acquired a few small international express mail companies, and FedEx added its ground and home delivery services to compete with UPS on the ground. FedEx initially had difficultly implementing its international operations and reported large losses in the first few years. In entering the China market, for example, FedEx implemented its US strategy abroad, and was not successful in adapting to regional cultures. UPS was more successful as it slowly expanded in China, relying on other carriers. Today, each carrier has notable presence in worldwide services, and can better assimilate with international expansion to new markets.

Looking Forward

In reaction to the decreased growth forecast, FedEx has reduced capacity in the US domestic express business. It has begun to trim its work force and put some aircrafts into storage until economic conditions improve. As consumers now are more attracted to the slightly cheaper rates offered by UPS, in order to re-establish itself as a more attractive domestic carrier, FedEx must sustain innovation through technology. FedEx always had technological superiority that continued to differentiate it from UPS. It was the first company to introduce electronic shipping solutions to businesses, and it should continue to find new ways to improve its efficiency and services. Providing a service feature that UPS lacks will allow FedEx to keep and expand its customers as it had done in the past. New innovative aircrafts and wireless technology to speed up data exchanges will continue to change airfreight services.

FedEx had more positive outlook with its international express business, and volumes have been improving. With regards to the UPS/TNT deal, UPS will now capture the largest portion of the European market, with DHL second, and FedEx third. FedEx should stay in the European market and expand through organic growth, by continuing to acquire smaller players in the market. FedEx was successful in acquiring Kinko’s in the US, which greatly increased the presence of FedEx offices; it will slowly continue to expand in Europe by following a similar strategy. The French express carrier, Geopost could be an attractive buy to establish FedEx stronger service in Europe. FedEx has also greatly invested in China as it currently captures 21% of the Asian Market, behind DHL at 36%. Concentrating on expanding in emerging markets with less competition will give FedEx a competitive advantage over UPS. International companies with manufacturing products in Asia would prefer a single carrier for their logistics, so FedEx must remain a strong player in Europe. In addition, FedEx may want to consider expanding in the Middle East or Africa through small acquisitions. The Jordanian express carrier Aramex has also been expanding in China and FedEx could potentially use their resources to expand in emerging markets.

What else could FedEx do to better improve its services and fuel its growth now that UPS could be a threat?

Move over Zipcar: The next public transportation innovation

Overview

Tired of using the same old bus or taxi to get from Point A to Point B? Don’t want to commit to the annual fees of a Zipcar membership? Looking for a fun, convenient way to get around town? As Ariel Schwartz writes in her article in Fast Company, look no further than Scoot Networks, a San Francisco based start-up aimed to provide rental scooters to users in convenient locations across the city. The arrangement, which is currently only being tested in San Francisco before being rolled out to other major US cities, is centered around the utilization of the user’s smartphone. Not only do customers locate and reserve nearby scooters with their phones, they also place their phones in the scooter’s center console upon arrival to unlock the vehicle. The phone then turns into a virtual dashboard for the duration of the trip, complete with map and speedometer applications. Scoot Networks’ vehicles reach top speeds of around 30 miles per hours and can travel roundtrip to any location in the city. Although currently scooters must be brought back to the location they were taken from, the company’s founders believe as the business grows out of its trial phase users will be able to drop off their scooter at any Scoot Network location.

What separates Scoot Network from Zipcar?

With losses every year from 2006 through 2009, the hourly vehicle rental business model has not proven profitable for Zipcar. One major source of market failure for the company is its inability to come up with an efficient logistical strategy to ensure the correct number of cars are available in every location. As Zipcar founder Robin Chase mentions in Zipcar, Inc., “It’s a brutal and complex business…you have to get the operations right.” However, Scoot Networks maintains a key advantage over Zipcar: the incredibly low cost of each scooter. Scoot utilizes cheap Chinese manufacturers who turn out about 10 million electric scooters per year. This allows the start-up to purchase scooters at a mere $1,000 per unit. As CEO Michael Keating explains, “We’re able to take advantage of a huge investment China has made in electric vehicles.” Due to significantly lower costs for its vehicles than Zipcar, Scoot does not have to maintain the same level of logistical perfection to survive in the industry. This is because the service can afford to stock some locations with more vehicles than it thinks necessary without unloading a major percentage of its earnings. This flexibility will ensure users are able to use a scooter when they want it, despite the occasional inaccurate market forecast.

Will the product succeed?

In short, yes. Scoot’s substantially lower vehicle cost is not the only benefit it enjoys over Zipcar. When evaluating both products in terms of Rogers’ criteria of new product success, it is clear Scoot Networks is in a more advantageous market position. In this case, the factors that stand out are relative advantage, trialability and observability. In his article Note on Sensing Opportunity, Robert J. Dolan defines relative advantage by saying, “The more compelling the customer value proposition, the more likely [the product] will be successful.” In my opinion, riding an electric scooter around town with your iPhone as the center console is the definition of compelling. Users are not paying simply for the transportation—they are paying for the experience. Whereas Zipcar offers nothing new in transportation (plus the added pain of parking a full-size car in an urban setting), Scoot Networks promises a hip alternative to get around. Thus, the company’s target customer is the car-less young adult,who is willing to give unconventional transportation a shot.

A high level of trialability is also a strongpoint for Scoot Networks. Unlike Zipcar in which customers pay a $25 one time application fee and $60 annual membership fee, first-time Scoot users pay only a single-ride fee. This minimal commitment gives incentive to potential customers to try the product out risk-free.

Finally is Scoot Networks’ easy observability. Watching a person walk up to a parked motorized scooter and unlock it with a cell phone is bound to grab attention, especially in crowded urban areas. Young people who see their peers getting around on motorized scooters will be inclined to inquire about the company themselves. Further, each scooter is fitted with the “Scoot” logo on the front and both sides as well as “scootnetworks.com”, making it easy for pedestrians to see the company name and website while walking by the vehicle. The more popular rentable scooters become around the city, the more exposure Scoot Networks will gain with the general public, triggering a growth in sales until Scoot catches on as a San Francisco mainstay among young adults.