There’s no question that one of the greatest paradigm shifts our economy has ever seen is the rise of eCommerce. While businesses that are exclusively brick and mortar have been hard hit, retailers that have embraced online sales have flourished. As a byproduct of this shift, carriers that ship items purchased online have benefitted greatly from increased volumes and demand.
However, this greater reliance on shipping has increased pressure on carriers to provide better, faster services. And, for some, their entire networks were built on a different model – fitting eCommerce in is like trying to get a round peg in a square hole.
As a result, a mad dash to reconfigure the way carriers ship packages has been underway, and it has begun to upend the entire market – creating some chaos in its wake.
Case in point: Earlier this week, the Wall Street Journal reported that FedEx was planning to deeply discount pricing for its air Express network – cutting them to be the same as ground shipping. The story was then picked up by a variety of sources.
However, a day later, during the FedEx earnings call, the company flatly denied the story.
According to Brie Carere, Chief Marketing and Communications Officer, “It is important to note that contrary to the erroneous and misinformed reporting in the Wall Street Journal on June 23, FedEx has made no recent pricing changes, no pricing changes to our strategy and we have certainly made no changes related to any one customer.”
While the story remains uncertain, the concept that FedEx would cut its air prices makes sense, coming on the heels of several other incidents in which carriers and other players have made seemingly big moves in an attempt to better capture the eCommerce boom. Though, the flat denial by the company to its investors might indicate that if this pricing change does eventually happen, it may not be in the time frame or the form that has been reported.
However, it is worth diving deeper into the idea of a price cut and how it fits into overall trends within the carrier space.
Given that FedEx recently ended its contract with Amazon, the largest online retailer in the world, it’s clear that they are now on the hunt for additional customers to fill the void and maintain network utilization. Slashing the prices for their 2-day air express seems like a rational way to lure online retail shippers from other competing carriers, such as UPS.
If FedEx did cut prices, it would also indicate that they want to push more of their eCommerce business away from ground and towards air.
20th Century Network Supporting 21st Century Needs
FedEx, as well as other carriers, have been grappling with how their existing networks can deal with the explosive growth in eCommerce shipping and how and where to invest. In particular, to meet the consumer expectation that those packages will be delivered in a 1-2 day window.
Amazon has almost single-handedly changed customer expectations when it comes to the entire online shopping experience, including shipping. What was once seen as a luxury, fast shipping is now a given. However, depending on a shipper’s network and the location of its end customers, ground shipping may not be the ideal method for faster shipping – especially if it’s across the country. To adapt, carriers and shippers have relocated distribution centers much closer to customers or implemented omnichannel strategies, reducing the need for quick, cross-country flights to meet delivery commitments.
But FedEx Air also has its own problems.
FedEx Air was never envisioned to be the eCommerce shipping option of choice that FedEx now wants it to be – it was actually created to move things like legal documents and medical supplies over long distances quickly.
In order to handle the massive influx of new eCommerce business, the service will likely have to ramp up operations.
Impact on the Bottom Line
The initial story had an immediate effect on FedEx stock – and it wasn’t positive. The day after the word leaked about the price cut, FedEx shares dropped close to 3%. However, in the wake of the denial, the stock has rebounded.
As we’ve seen in so many other high fixed cost industries, any meaningful influx of new competition brings additional capacity which could eventually force a race to the bottom for prices. Where that race ends is anyone’s guess.