Investors quickly shaved off more than a fifth of the company’s market capitalization. Before the market plunges into a prolonged panic based on FedEx statements, it would be prudent to check with United Parcel Service Inc. and the DHL unit of Deutsche Post AG to see if they are experiencing the same sudden calamity. .
There will be more details next week when FedEx releases its fiscal first quarter results on Thursday, but investors should keep in mind that FedEx has had serious operating issues since the pandemic hit and has a long history of wrong direction. On a weighted scale, this is probably more of a FedEx problem than a global economic problem. In its 2019 fiscal year, the last full year before the pandemic hit, the company set guidance, raised it and then lowered it twice. The year before, FedEx introduced an adjusted profit target, lowered it and then raised it twice. In fact, in nine of the 10 years that FedEx has set an annual full-year earnings per share target, the company has cut the target at least once.
Now, less than three months after Subramaniam presented to investors and analysts in an auditorium at FedEx headquarters in Memphis and set out ambitious long-term goals, the company now says it was caught off guard by sudden weakness in Europe and Asia. Let’s see: Russia’s war against Ukraine started in February. China’s Covid-zero policy was already becoming disruptive in March, and that was the month the Federal Reserve began raising rates.
Even before the Investor Day meeting, which was the first in a decade, Subramaniam gave in to the demands of activist investor DE Shaw just two weeks after taking over as CEO on June 1 from legendary FedEx founder Fred Smith. But instead of coming up with a bold plan to introduce structural changes or make FedEx more efficient, FedEx announced it was adding board members chosen by DE Shaw, increasing the dividend and cutting capital expenditures. Wall Street cheered and stocks jumped 14% in one day.
If DE Shaw had spent more time peeking under the hood of FedEx operations instead of running models of shareholder return that could be extracted from the business, the activist investor would have noticed persistent problems.
The most glaring difficulties relate to the FedEx Ground unit, which hires about 6,000 independent contractors to transport packages from sorting facilities to the end customer. This company has been struggling with declining profit margins since 2012 and is plagued by inefficiencies, such as clumsily handing over packages to contractors and increasing turnover from contractor drivers. Problems with the contractor model have been magnified by the pandemic, which has triggered labor shortages and increased fuel, maintenance and labor costs. The conditions of the subcontractors deteriorated to the point that they began to organize to force FedEx to give them better conditions. It remains unclear how FedEx plans to resolve this dispute and whether a contractor revolt will hurt service during this year’s peak season which begins in November.
The company’s Express unit, which is the company Smith founded in the 1970s and changed the parcel delivery industry by introducing overnight deliveries, was never very profitable. The company’s operating margins have been below 7% for the past five years and have averaged 5.7% since 2008. Express delivery is a capital-intensive business – it costs a lot money to buy, fly and maintain large aircraft. The unit hinged on continued growth in global trade, which has likely peaked and could be in decline as companies seek to shorten their supply chains.
FedEx has an overall structural problem of operating two separate networks. An Express driver, who is on the FedEx payroll, can deliver a package to the same location that a driver working for a ground contractor had just stopped. Some investors have called on the company to combine its two networks and emulate UPS, which cites its unified network as its main strength. This is becoming increasingly apparent as UPS margins rise and FedEx falls, but the company still defends its dual-grid system.
Investors hoped Subramaniam would take the reins and bring about real change. It’s hard not to compare the new CEO to Carol Tome, who took over UPS in June 2020 at the height of the pandemic and got off to a flying start. She focused on efficiency and said UPS would be “better, not bigger,” which meant taking the higher-value packages without overloading UPS’s network with low-yield or large packages. complicated packages. Tome has made strategic acquisitions, such as the largest same-day parcel delivery company Roadie and a European healthcare delivery company Bomi Group. FedEx has just consolidated its disastrous 2016 acquisition of European TNT Express.
During a breakfast meeting with analysts on September 6, UPS reaffirmed its guidance for 2022. The slide deck from the meeting stated, “We control what we can control and are confident in our ability to achieve our guidance for the full year, despite a dynamic macro environment. The analyst notes that followed shone on Tome’s new theme: “Moving from Better Not Bigger to…Better and Bolder.”
Subramaniam should take a page from Tome’s book and be willing to take a fresh look at how the business works and break with tradition. It should combine FedEx’s networks into one, not with contractors but with FedEx employees who are well paid and motivated to stay for decades, as is the case with UPS.
More writers at Bloomberg Opinion:
• FedEx Power Play is a bad message to contractors: Thomas Black
• FedEx finds out that if you pay them, they’ll come: Brooke Sutherland
• How companies can help solve the supply chain mess: editorial
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Thomas Black is a Bloomberg Opinion columnist covering logistics and manufacturing. Previously, it covered US industrial and transportation companies as well as Mexican industry, economy and government.
More stories like this are available at bloomberg.com/opinion