Global parcel logistics and transportation carrier FedEx reported fiscal first quarter financial performance this week with the implications resounding across online and E-commerce business circles. The Supply Chain Matters blog provides a perspective that this is the added narrative of what may likely result in 2020 sales and operations planning and budgeting decision-making. FedEx

What captured major business media headlines was a reported 11 percent decline in first quarter profitability which was principally attributed to weakness in the carrier’s Air Express unit. Quarterly profit was reported as $745 million compared to $835 million in the year-earlier period.  Quarterly revenue was essentially flat at $17 billion.

The carrier elected to cut its profitability forecast in a range from 16 to 29 percent for the remainder of the fiscal year, anticipating higher costs in re-engineering its online E-commerce support. That sent the stock plummeting in after-hours trading.

While some industry media attribute the bulk of FedEx’s profitability slide to its decision to drop all existing air and ground services to Amazon, our Supply Chain Matters belief is that there is more at-play internally.  The carrier’s prior acquisition of European based TNT Express continues to bleed additional integration costs.

More importantly, continued global trade conflicts and consequent contractions in global manufacturing and supply chain activity levels are the telling tale for cutbacks in air transportation and ground movements. In December of 2018, commenting specifically on fiscal Q2 2019 financial performance, CEO Fred Smith made blunt remarks indicating that most of the challenges facing the company were the result of politicians around the world. That reportedly included making bad decisions concerning the U.S. corporate tax reform law and unilateral tariffs, creating a rather difficult business situation with Brexit, the immigration crisis in Europe and the mercantilism of state-owned enterprises in China. Those remarks also prompted a stock decline. Yet, now in hindsight, such remarks foretold of what is unfolding.

FedEx now indicates it will execute additional cost controls including the reduction of air capacity. According to reporting from The Wall Street Journal, the effect of dropping Amazon provides an $900 million revenue shortfall that must be made up with recruiting or expanding services among other online entities.  That effect is yet to impact, but likely motivated the need to sharply cut the company’s profitability forecast for the next three quarters.

More concerning for manufacturers and retailers is FedEx’s declared intentions to once again raise Air Express and Ground rates by an average of 4.9 percent effective in 2020.  The question is whether UPS or other carriers will match that level of increase. While significant annual increases in parcel rates have unfortunately become the norm over the past five years, they have provided the impetus of industry disruption, including the entry of Amazon as its own logistics and transportation provider. Political interference with the U.S. Postal Service (USPS) prevents that carrier from taking full advantage of the structural shifts and E-commerce opportunities.

Supply Chain Matters Perspective

In our December 2018 commentary reflecting on FedEx financial performance as a bell weather of what is to come in global supply chain activity, we deferred towards additional trending data beyond just one global carrier to ascertain whether international shipment volumes will significantly decline.

As global supply chains ramp-up for the all-important Q4 2019 holiday fulfillment surge, it would appear that the evidence of what is to come is indeed evident.

While politicians will continue to mask signs of economic or manufacturing slowdown, supply chain strategists must deal with the building realities of lower volumes and higher transportation costs. That is a cocktail that leads to a rather painful 2020 sales and operations planning and budgeting cycle for the year to come. Assumptions related to future growth markets, online and digital business models will likely be challenged or have to be revisited.

Similar of FedEx’s decision to bite the bullet on servicing a high profile but marginally profitable customer, similar types of discussions and/or decisions will come to the forefront among many industry sectors.

 

Bob Ferrari

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