FedEx Pricing Power Isn’t Working and Won’t Last

After slashing the market value of FedEx Corp. last week when it withdrew its annual guidance and announced preliminary results well below expectations, investors were in a more lenient mood on Thursday for the full quarterly report. They lightly praised FedEx’s efforts to cut up to $2.7 billion in costs over the next 12 months to offset the slump in package volume, particularly in the Express unit. Shares rose 0.8% on a day when the S&P 500 index fell 0.8%.

No doubt, the cuts are necessary. Express unit parcel volume fell about 11% in the fiscal first quarter from a year earlier due to disruptions in China due to severe Covid lockdowns and in Europe due to the war of Russia in Ukraine. Express operating profit fell to $174 million from $567 million a year earlier.

What should alarm investors, however, is that revenue per parcel at Express was $24.33, up nearly 16% from a year ago. This is just below the record prices of the previous quarter. The same thing happens to the ground unit. Revenue per package jumped 12% from a year earlier to $11.48, an all-time high.

The big question is why FedEx can’t increase its profits when it has never had so much pricing power. The company said on Thursday it plans to raise prices in January by an average of 6.9% for Ground and Express and up to 7.9% for its cargo business, and that’s not counting surcharges. that FedEx and United Parcel Service Inc. have accrued generously since the pandemic. These price increases do not allow FedEx to catch up with inflation. Revenue per parcel at Ground is up 26% compared to the same quarter in 2019 and 31% at Express.

If the deterioration in demand is as alarming as CEO Raj Subramaniam alluded to last week, it should be difficult for FedEx to keep the upper hand on prices for its customers. The rapidly rising costs of e-commerce deliveries have already pushed major retailers, including Target Corp. and Walmart Inc., to research their own solutions for getting packages to their customers. The pendulum of pricing power has clearly swung in favor of FedEx and UPS during the pandemic and at some point will swing back in favor of shippers. When this happens, senders will happily play against each other for good business. Many shippers feel like they’ve been taken advantage of during the pandemic when they had no choice but to increase e-commerce sales to stay alive. FedEx and UPS have raised prices, added surcharges and limited the volume of large shippers.

FedEx still has the upper hand on pricing, Brie Carere, chief customer officer, said in a Thursday conference call with analysts. FedEx is negotiating big increases for contract renewals, she said. “We continue to execute on our revenue quality strategy and pursue businesses that offer attractive returns,” she said. “We continue to offer new pricing capabilities.”

Asked by Morgan Stanley analyst Ravi Shanker if January’s record 6.9% general rate hike would put further downward pressure on volumes, Carere said inflation was the main motivating factor for such a significant price increase.

“We had continuous cost increases throughout the year, so we felt the 6.9 was appropriate,” Carere said. “We will monitor adherence after implementation. And, of course, we’re constantly balancing output and volume and making sure we’re getting the right volume levels.

FedEx and UPS suspended their service guarantees when the pandemic hit. Under these guarantees, shippers would receive a refund if couriers miss a delivery window. It wouldn’t be surprising if UPS, which has experienced far fewer service interruptions than FedEx, were the first to return these service guarantees. That would put more pressure on FedEx, which is struggling to keep up with the turnover of contractors doing last-mile deliveries for the ground unit.

During the peak season in December last year, FedEx’s on-time delivery performance dropped to 89% while UPS’s percentage was in the 90s, according to ShipMatrix, which compiles data on the parcel industry. ShipMatrix said earlier this week that it expects “huge excess capacity” during peak season this year. Couriers, including the U.S. Postal Service and Inc., will have the capacity to handle around 110 million packages a day over the holiday season, while daily demand will increase only marginally to 92 million. packages, the consultancy said. Demand will be weaker this year as more consumers shop in stores as concerns about Covid-19 diminish and people spend more on services and entertainment. Inflation is also eating away at their holiday budget. Last year, delivery demand exceeded capacity by about 1.3 million packages per day, ShipMatrix said.

None of this is good news for FedEx. Clearly, it will not be able to rely on prices to shore up its profits when the pendulum swings back to shippers. It’s much harder to cut costs and improve operations in a notoriously inefficient network.

More from Bloomberg Opinion:

• FedEx problems are about FedEx, not the world: Thomas Black

• FedEx investors need this data. They Don’t Have It: Thomas Black

• Industrial CEO tenures are getting shorter and busier: Brooke Sutherland

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.

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Edward N. Arrington