Fedex Corp

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FEDEX CORP.

With a workforce of nearly 150,000, holding company FedEx Corp. operates FedEx Express, the largest express shipping company in the world, handling more than 3 million deliveries a day. Three other subsidiaries—FedEx Ground, FedEx Custom Critical, and FedEx Freight—round out the firm's delivery services. While FedEx boasted a 51-percent share of the overnight delivery market, it spent most of the late 1990s trying to strengthen its foothold in the faster growing ground shipping market, which was being fueled by the rise of online shopping. Although FedEx made several acquisitions to build up its home delivery network, rival United Parcel Service (UPS) handled roughly 70 percent of all U.S. ground shipping in 2001.

EARLY HISTORY

In 1971, Frederick W. Smith raised $91 million in venture capital. After adding $4 million of inherited money to his funding, Smith purchased a used aircraft company in Little Rock, Arkansas. He began using the aircraft to provide overnight delivery services for envelopes and small packages being shipped within the United States. Smith eventually named his business-Federal Express. Operations at Memphis International Airport in Tennessee were established in 1973. By then, Federal Express owned a fleet of 14 Dassault Falcon airplanes and employed nearly 400 workers. Services included both overnight and two-day package and envelope delivery services, as well as Courier Pak. The firm began marketing itself as "a freight service company with 550-mile-per-hour delivery trucks." When Smith found himself struggling to pay expenses, including payroll, he approached venture capitalist General Dynamics for a loan. After his funding request was rejected, Smith flew to Las Vegas, Nevada, where he won $27,000 at the black jack tables.

Smith's tenacity paid off in 1976, when the firm achieved profitability for the first time. Federal express launched a direct mail advertising campaign to boost its visibility. With roughly 19,000 packages delivered every day, sales reached $3.6 million. In 1977, the firm benefited from a strike by employees of rival UPS and the bankruptcy of another competitor, REA Express. The U.S. government also loosened airline regulations, allowing Federal Express to use larger aircraft, such as Boeing 727s, and take advantage of more flexible flight schedules. Sales grew to $110 million, and earnings reached $8 million. In April of 1978, the firm conducted its initial public offering. The New York Stock Exchange began listing Federal Express shares that December. In 1979, FedEx began using a centralized computer system known as COSMOS to track packages, routes, weather, vehicles, and employees. Soon thereafter, a digitally assisted dispatch system (DADS) was put in place to allow clients to electronically request pickups.

By the 1980s, package delivery rates had reached 65,000 per day. The firm operated units in nearly 90 U.S. cities. Advertising agency Ally & Gargano developed the firm's first major television advertising campaign in 1981, with the tag line, "Federal Express: When it absolutely positively has to be there overnight." That year, the firm launched its FedEx Overnight Letter and began international service to Canada. By then, Federal Express had become the leading airfreight services provider in the United States. Sales reached $1 billion in 1983. The firm was the first in the nation to attain such high sales in less than a decade since its inception without making any mergers or acquisitions. A new facsimile delivery service, known as ZapMail, made its debut in 1984. It guaranteed delivery of five pages or less in less than two hours for $35. That year, the firm made its first acquisition, package courier Gelco Express. Other acquisitions soon followed, including businesses in Europe and the Middle East. International expansion continued in 1985 when Federal Express established a European headquarters in Brussels, Belgium. Sales grew to $2 billion.

The company's ZapMail service proved unprofitable. As a result, Federal Express discontinued it in 1986. To streamline operations and cut costs, the firm set up regional sorting facilities in New Jersey and California, which allowed for increased control of deliveries. Each region was evaluated via a new Service Quality Indicators program, which monitored overdue deliveries, lost shipments, packages sent to the wrong recipient, and other errors. Federal Express also began housing merchandise for its larger clients, making shipments upon request. Acquisitions in 1987 included Cansica and Island Courier Companies. The firm added to its international holdings in 1988, with the purchase of Italy's SAMIMA and three freight carriers based in Japan. Earnings grew to $188 million as sales neared the $4 billion mark. Federal Express also launched a new unit, called Business Logistics Services, which offered transportation and operations management to other businesses.

In its largest purchase to date, Federal Express paid roughly $885 million for Tiger International Inc. in 1989. Tiger operated an air cargo delivery service known as the Flying Tigers, which held runway rights in major metropolitan airports in Asia, Europe, and South America. The purchase allowed the firm to strengthen its airfreight services, particularly overseas, where sales nearly doubled. However, it also brought with it government safety regulation issues and additional debt. When the deal was completed, Federal Express was forced to contend with a debt load of more than $2 billion. As a result, the firm's international arm posted a loss of $194 million, despite the higher sales.

By the start of the 1990s, Federal Express held 43 percent of the express transportation market, compared to the 26-percent market share of its largest rival, UPS. The firm effectively brought a price war to its close when it upped its rates for the first time in seven years. The Malcolm Baldridge National Quality Award for service companies was bestowed up Federal Express in 1990. The following year, the company launched international cargo service EXPRESSfreighter and a new subsidiary known as FedEx Aeronautics Corp. The firm also decided to divest a 50-percent share of its operations in the United Kingdom. In May of 1992, Federal Express shuttered its domestic operations in Italy, Germany, France, and the United Kingdom, focusing instead on shipping freight to and from Europe, rather than from one destination to another within the nation. By the end of the year, sales had grown to $7.6 billion. The Business Logistics unit established a base office in Singapore and secured contracts from IBM Corp. for early morning parts deliveries, and from Laura Ashley, for inventory and transportation management.

Express packages delivered daily averaged 1.4 million in 1993. By then, Federal Express had grown into the largest overnight delivery service on the globe. During contract negotiations with Federal Express, the Airline Pilots Association began pushing for major raises, better benefits, and increased job security for Federal Express pilots. However, a tentative agreement was not reached until three years later. In 1994, Federal Express changed its name to FedEx. To compete with the same-day delivery and early morning delivery services offered by UPS, FedEx began offering similar services for both packages and letters in 1995. The firm also began making deliveries to eight countries located in the former USSR. In early 1996, a blizzard took a $20 million toll on FedEx. Targeting the rapidly growing small business and home office markets, FedEx convinced OfficeMax to let it place self-service drop boxes at OfficeMax stores nationwide. The firm also became the first U.S. cargo carrier allowed to fly in China. A 15-day strike at UPS allowed FedEx steal market share from its rival. By then, the firm's fleet had grown to 590 airplanes and 38,500 vehicles.

MOVE TO THE INTERNET

According to a November 1997 article in Fortune, FedEx had been engaged in e-commerce since the 1970s with its COSMOS and DADS systems. Its PC-based automated shipping system, known as FedEx PowerShip, had first been implemented in 1984. The company's handheld bar code scanner system, known as SuperTracker, had been in place since 1986. "Smith figured out two decades ago that FedEx was in the information business, so he stressed that knowledge about cargo's origin, present whereabouts, destination, estimated time of arrival, price, and cost of shipment was as important as its safe delivery. He has therefore insisted that a network of state-of-the-art information systems—a sophisticated melange of laser scanner, bar codes, software, and electronic connections—be erected alongside the air and vehicle networks." By the late 1990s, more than 60 percent of clients were using FedEx desktop terminals and software to create their own labels and send electronic messages to the firm when their shipments were ready for pickup. Eventually, FedEx was able to use this information technology to determine the profitability level of each customer and negotiate price increases with those who actually had been costing the firm money. The firm also began offering supply chain consulting services, helping clients to streamline order fulfillment processes electronically.

In 1994, FedEx launched its Web site, which allowed clients to track package shipments online. Software known as FedEx Ship permitted shipment processing via desktop terminals. It was two years later that FedEx made its first major move toward conducting operations on the Internet. The company released its first version of FedEx interNetShip, the first service that permitted clients to manage shipping via the Internet. interNetShip also allowed users—both shippers and recipients—to access shipping information via the Internet and print shipping documentation. FedEx began offering e-business tools related to FedEx shipping and tracking processes in 1997. One year later, the firm launched FedEx Logistics to oversee its growing supply chain services operations.

Despite the firm's early e-business savvy, most analysts believed that rival UPS had gotten the upper hand in Internet-based shipping. This partly was because it focused on deliveries to residences, which began dramatically increasing as businesses and consumers alike started to purchase everything from books and CDs to computers and software on the World Wide Web. Hoping to compete with UPS and its leading domestic ground delivery service, FedEx paid $2.4 billion for Caliber System, a trucking company with a fleet of 13,500 trucks, in January of 1999. The deal was designed to strengthen FedEx's small foothold on the business-to-business ground shipping market and also allow it to launch business-to-consumer delivery services. FedEx established FedEx Home Delivery to handle its new residential ground delivery operations. The firm also established the FDX Corp., a holding company under which was placed the FedEx air shipping operations, as well as Caliber and RPS, a former Caliber unit that was the single largest ground shipment rival of UPS. Online holiday shopping, which accounted for $650 million in 1997, grew to roughly $4 billion over the holiday season of 1999. At that time, FDX handled shipping for only 10 percent of all goods sold online, compared to the 55 percent handled by UPS, which had forged alliances with the likes of e-tailing giant Amazon.com. The FedEx Marketplace was designed that year as a hub for e-merchants using Federal Express shipping.

In early 2000, FDX diversified into customs brokerage with the purchase of Tower Group International, a unit that eventually formed the core of a new subsidiary, FedEx Trade Networks Inc. The trading unit also provided trade consulting and international transportation and logistics services. In April, FDX changed its name back to FedEx Corp., and the core Federal Express business shortened its name to FedEx Express. Ground delivery operations, including RPS, were renamed FedEx Ground. The firm forged a deal with Orbit Commerce Inc. to jointly offer e-commerce services to small businesses—those with less than 100 employees—via a new FexEx eCommerce Solutions unit which would provide site design, online catalog development, transaction processing, and shipping services. According to a June 2000 article in B to B, the new venture faced many challenges. "For starters, FedEx is late to the party. Web portals such as Yahoo! have for some time offered store-building services, as does nearly every Internet service provider. Closer to home, competitor United Parcel Service of America has provided e-commerce services on its Web site since 1997, through vendors Harbinger Corp. and IBM Corp." FedEx began offering its eCommerce Builder Internet platform free to clients in July. Along with e-commerce services, it included hosting on the FedEx MarketPlace site, with 5MB of storage and 50MBps bandwidth, and four Web pages.

Also in 2000, in an alliance with Amazon.com, FedEx agreed to deliver 250,000 copies of a new Harry Potter release to residential customers. The firm upgraded its NetReturn system in November, realizing that e-tailers were seeking ways to avoid many of the problems encountered with merchandise returns made by online shoppers after the previous holiday season. The enhanced program allowed shoppers to print return labels from their own computers and provided maps to sites that accepted drop-offs for returns. FedEx also continued to offer its traditional NetReturn service, which involved actually retrieving the package from the online shopper and sending it to the location specified by the e-merchant. To expand its less-than-truckload freight operations, the firm paid $1.2 billion for American Freightways Corp. in December. FedEx merged American Freightways with former Caliber Systems unit Viking Freight into its FedEx Freight arm. As part of the deal, FedEx assumed $250 million in American Freightways' debt. This concerned some analysts, since FedEx already was spending billions of dollars each year to maintain its costly infrastructure. By the end of 2000, more than 20,000 client Web sites were linked to the FedEx MarketPlace, and the eCommerce Builder unit had secured roughly 2,000 customers. Earnings totaled $688 million on sales of $18 billion.

In February of 2001, the U.S. Postal Services agreed to put FedEx boxes in roughly 10,000 post offices across the nation. A month later, in conjunction with w-Technologies Inc., FedEx began making its FedEx.com site available on most wireless devices, like cell phones. FedEx also continued working on the expansion of its home delivery network, which it expected to complete by 2003. As the Internet continues to change the way businesses operate and consumers shop, major shipping and logistics firms like FedEx likely will continue to benefit. However, whether or not the firm's new ground shipping and home delivery operations will help FedEx steal market share from competitor UPS remains to be seen.