FedEx Fumbles

SAN FRANCISCO (01/28/2000) - Business Week and Fortune made a helluva tag team wrestling duo this week, as they took turns smacking down FedEx. The overnight delivery people should be used to beatings, since they've been taking one from UPS in the e-commerce arena. And that was the mags' point.

UPS makes more e-commerce deliveries, but FedEx is making some changes. Most important, it's establishing a residential delivery service. Hoping to snag e-commerce customers who aren't home during business hours, FedEx Home Delivery will deliver in the evening and on Saturdays. Some pundits predict the current average of three million home-delivered parcels per day will rise to eight million per day by 2004, so the market is worth targeting. "Delivering to homes is less profitable than delivering to businesses, because homes are more scattered," wrote Fortune's Brian O'Reilly, explaining that UPS charges an extra dollar for residential deliveries, "but margins should rise as the Internet boosts the flow of boxes to apartments and suburbs."

Meanwhile, FedEx is getting its pipe cleaned by, of all places, the U.S. Postal Service. The most recent figures available - from Christmas 1998, sadly - indicate that the Post Office had 32 percent of the e-commerce shipping market, compared with FedEx's unimpressive 10 percent. "Although numbers aren't available for 1999, FedEx executives acknowledge they remain largely unchanged," wrote Business Week's Davis Rocks. The USPS is developing a tracking system that will rival UPS' and FedEx's. And since the Post Office already delivers almost everywhere, the extra cost of dropping off a package or two with the mail will be low. Operating tax free doesn't hurt, either.

But it's UPS that sits in the catbird seat, munching 55 percent of the e-commerce pie. Big Brown holds the lead partially because it's made deals with e-shops like Amazon, but also because it's profited from FedEx's mistakes.

FedEx bought the trucking company RPS to help with two-to-five-day deliveries (which online buyers seem to like), but "poor integration of the two units have kept it from capturing much Net traffic," wrote Rocks. For instance, the companies were run as two separate businesses, which confused and annoyed customers.

"Over the long term, FedEx is placing its biggest bets on the build-to-order revolution under way in manufacturing, epitomized by Dell Computer," wrote O'Reilly. In other words, FedEx wants to help part makers all over the world ship parts to plants and customers. A custom Dell computer, for instance, would ideally arrive at the customer's door - in several shipments, from several places - all at once. This shipping concept has been around for decades, but it used to require expensive private data networks. The Internet has made it easy.

Good plan, but so far, pointed out a different article, FedEx hasn't convinced Dell itself. "We want to see how they execute the residential side of their strategy before thinking about a switch," Dell VP Richard Hunter told David Rocks.

Neither the journalists nor the nay-saying analysts they interviewed seemed to notice the irony: FedEx is getting slammed for not making enough money. If it were a Netco, that red ink would be an expected part of the package.

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