BUS 349: ADVANCED SEMINAR IN STRATEGIC MANAGEMENT 

2012

FedExTo Stay Ahead 

Mada Arslan 

A M E R I C A N   U N I V E R S I T Y   O F   B E I R U T  

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Part 1: Introduction

The shipping and transportation market is a leading indicator of the economy (Amsler et al.

2010). FedEx contributes to the U.S. economic activity by providing efficient logistics

management through its independently operating, collectively competing and collaboratively

managed companies thus producing “superior financial returns for its shareowners” (Company

website). Its business model consists of segmenting its core markets into four different

companies: FedEx Express, FedEx Ground, FedEx Freight, and FedEx services. This model

however creates overlapping and inefficiencies especially between FedEx Express and FedEx

Ground.

FedEx is the leader in express shipping due to mastering the hub-and-spoke model which was

pioneered by Delta Airlines in 1955; The model is shaped like a wheel where “routing all the

traffic through the hub actually makes the overall system more efficient” (Wise G). Relying on a

fleet of 663 aircrafts, 90,000 vehicles, and 300,000 employees, FedEx was able to process on

average more than 9 million daily shipments throughout 220 countries thus generating $43

billion in sales in 2012. The profit margin however in 2012 is a mere 4.76% due to the nature of

the industry where transportations companies are capital intense incurring high fixed costs. This

capital intensity coupled with the FedEx’s sensitivity to the country’s macroeconomic health is

managed by low debt levels (33% in 2012). In addition, FedEx lobbies aggressively to maintain

its legal status governed by the Railway Labor Act (RLA) which prevents its drivers from

unionizing thus minimizing employee compensation especially pensions costs.

Over the years, as FedEx matured in the early 80s, it turned to international expansion through

acquisitions. FedEx still relies on acquisitions to grow its business domestically and

internationally. In Appendix 1 we highlight FedEx’s most important acquisitions. Even though

the 2004 acquisition of Kinko’s aimed at diversifying FedEx’s product portfolio failed, FedEx

has been outperforming its rivals and has built a strong brand over the years. Its strategy of

innovation, cutting-edge technology in logistics management, and acquisitions allowed it to grow

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and penetrate 220 countries. Opportunities lie in growing market such as South Asia and the

Middle East, and in the future it needs to keep an eye on Sub-Saharan Africa. As FedEx

identified a shift in consumer preferences from express services to ground, freight, and ocean

shipping in light of the global recession; it is restructuring its FedEx Express division (Adler,

2012) by cutting jobs, retiring planes earlier in the aim of increasing profits by $1.7 billion

within the next 3 years (Schlangenstein, 2012). FedEx can strategically move into acquiring

shipping companies to keep up with this new trend and reduce its geographic concentration on

the U.S. even further: 70% of FedEx’s sales are generated domestically. This expansion should

be financed by raising capital to keep FedEx’s low leverage level.

FedEx provides its customers with “global physical transportation coupled with information

intelligence” (Farhoomand, Pauline, Conley, 2003). Information is key. Since theoretically any

company with enough capital can break the barriers to entry into the transportation industry, it is

recommended that FedEx smartly diversify its product portfolio. Amazon has already made a backward

integration move by purchasing Kiva Systems and Google bought BufferBox Canada. A move by

FedEx into cloud computing can be a good diversification.

Part 2: Data Presentation (refer to Appendix 2 for financial highlights)

As the market dipped by the end of 2008 and all through 2009 as a result of the financial

meltdown, FedEx still performed better than average allowing a stronger & steadier performance

“reaping the benefits of strategies executed during tougher times” (Company website). FedEx’s

stock performance during the last 10 years was above the S&P 500, the Dow Jones

Transportation Average, and UPS (Appendix 3). FedEx’s Return on Equity has increased in

20121 to 13.8% (9.54% in 2011). Using DuPont’s equation to segment ROE we find that the

increase is due to the increases in profit margin (4.76% in 2012 compared to 3.69% in 2011) as a

result of the increase in sales, and the increase in the equity multiplier (from 1.8 in 2011 to 2.03

in 2012) as a result of increased leverage (debt ratio is 33% in 2012 as opposed to 27% in 2011)

driven by the 163% increase in pension obligations from $2.1 billion in 2011 to $5.6 billion in

2012 “due to historically low interest rates” (Trefis, 2012); the asset turnover decreased

negligibly from 1.43 to 1.42 (2011-2012) as a result of the $4 billion capital expenditure that

increased fixed assets in 2012 offset by increased sales (asset turnover = total assets / sales). The

                                                            1 FedEx’s fiscal year-end is May 31st.

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company has healthy liquidity ratios suggesting that its current liabilities will be met; both the

current ratio and the quick ratio are above 1.

UPS on the other hand has a whopping 53.52% ROE in 20112 compared to 41.48% in 2010. This

increase in ROE is due to the increase the profit margin as sales increased, increase in the asset

turnover as assets increased offset by the sales increase, and increase in the equity multiplier as

debt increased. This huge difference in ROE is due to the fact that UPS is highly leveraged at a

debt ratio of 79.52% in 2011 whereas FedEx is merely 33% leveraged. Liquidity ratios of UPS

show that the company is having difficulties collecting its receivable: while current ratio and

quick ratio are above 1.7, cash ratio is merely 0.47; a closer look reveals that receivables have

increased 11% lowering turnover to 8.5 and increasing the collection period to 42.93 days. While

this is attributable to the credit crunch it is noteworthy that FedEx had actually improved its

collection period both during 2011 and 2012.

UPS generates more revenues than FedEx3, higher operating margins and higher profit margins-

it even boasts higher volume sales with an average of 15.8 million daily packages and documents

delivered compared to FedEx’s average daily volume of 9 million yet FedEx’s share price

consistently outperforms UPS’s. In December 2011 it closed at $83.51 whereas UPS closed at

$73.19. This is due to FedEx’s advantageous economies of scale: UPS’s revenue per package is

$9.214 whereas FedEx’s is $12.995. Brand equity also plays a role: Although UPS positions at

67th on the world’s top 100 brands with a value of $9 billion compared to FedEx’s 79th position

with a value of $5.3 billion, FedEx’s better perceived by consumers and ranks 52nd whereas UPS

ranks 81st (Badenhausen, 2012). In addition, FedEx has had a series of strategic acquisition

worldwide during the noughties latest of which is its acquisition of Rapidão Cometa of Brazil

(2012), TATEX of France (2012), MultiPack of Mexico (2011), Unifreight India (2011). These

acquisition signal growth potential especially that FedEx only paid a small amount of dividends

                                                            2 UPS’s fiscal year-end is December 31st. 3 Even though the fiscal year-end differ by 7 months, the results reflect a year’s operations, therefore even if we align the fiscal years the resulting comparison will be the same. 4 UPS 2011 revenues $53,105 million / average daily delivery volume of 15.8 million x 365 days (annual report 2011) 5 FedEx’s 2012 revenues $42,680 million / average daily delivery volume of 9 million x 365 days (company website)  

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in 2012 of $197 million (no dividends were paid since 2008) although it is mostly financed by

equity, thus the earnings are reinvested in the company for growth. On the other hand, UPS has

been consistently paying dividends averaging $1.95 billion from 2008 to 2011 although it is

financed by almost 80% debt.

It is interesting to look at EPS (either basic or diluted). FedEx in 2011 had $4.61 EPS whereas

UPS had EPS of $3.88 although UPS boats higher income. This is due to the fact that FedEx has

less number of shares outstanding (317 million v/s 965 million) even though FedEx is mainly

financed by 73% equity in 2011 in comparison to UPS’s 20% in 2011. It is wise of FedEx to

have low debt and be financed by its own retained earnings given the nature of its business and

its capital intensity (world’s 3rd largest fleet, ArabianBusiness 2012), where it is highly cyclical

and sensitive to macroeconomic factors (Devan, 2010) therefore in tough economic times, it will

fare better than its competitors; again this was evident during the recession where FedEx still

performed better than UPS, the S&P 500, and the Dow Jones Transportation Average (Appendix

3).

It is worthy to note that FedEx generates 70% of its sales domestically and FedEx Express is the

cash cow of the company generating 62% of the group’s revenues. UPS also generates 74% of its

revenues domestically.

Part 3: Macroeconomic overview, Porter’s 5, Value Chain, and SWOT analysis

Macroeconomic overview

We have looked at the United States in particular and we have looked at the world market as

segmented by the World Bank into 6 regions: East Asia and Pacific, Europe and Central Asia,

High-income economies ($12,479 or more), Latin America and the Caribbean, Middle East and

North Africa, South Asia, and Sub-Saharan Africa. Appendix 4 summarizes the findings of

general economics, population and demographics, government, communication, and society &

lifestyle. Note that some of these variables are not observable in the aggregate region as for

example the countries composing Latin America are heterogeneous in their government and

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societal structure: Brazil is more open to foreign direct investment while Cuba is not due to the

political sanctions.

GDP growth in 2011 is strongest in South Asia at 6.42%, Middle East & North Africa at 5.19%,

Latin America & the Caribbean at 4.63%, East Asia & Pacific at 3.37%. The stalling in East Asia

(China, Malaysia, Philippines, Thailand, Vietnam…) is due to the FDIs migrating or investing in

South Asia (Bangladesh, India, Pakistan, Sri Lanka…) and the slowed growth of China. This

GDP growth in South Asia comes with the highest inflation among the world at 10.13%. As a

result of FDIs taking advantage of low labor costs, these markets have grown and experience the

lowest unemployment: 4.72% in East Asia and 4.49% in South Asia. FDI as percentage of GDP

looks low in South Asia at 1.36% as opposed to 2.32% in East Asia yet East Asia is an

aggregation of 24 countries whereas South Asia is an aggregation of 8 countries.

East Asia and Pacific, some indicators of the region: average GDP growth compared to the

world: 3.37%. Services are 65% of GDP, Industry is 32% of GDP. Inflation is somewhat high at

5.23%. Import & Export activity as percentage of GDP is somewhat high at 29.58% for imports

and 32.17% for exports. Low population growth at 0.65% yet 91% of the population is below 65

years. Urbanization rate is average at 53%, internet users somewhat high at 38.55%. Second

highest ranking in air freight transport and third in railway goods transported. Looking at these

numbers, this area has entered into its maturity stage but given that it is an aggregation of 24

countries, great potential lies in the least developed ones.

South Asia, some indicators of the region: somewhat high GDP growth compared to the world:

6.42%. Services are 56% of GDP, Industry is 26% of GDP, Agriculture is 18% of GDP. Inflation

is highest at 10.82%. Import & Export activity as percentage of GDP are significant yet lower

than the rest at 28.48% for imports and 22.79% for exports. Fourth highest population growth at

1.44% and 95% of the population is below 65 years. Urbanization rate is low at 31%, internet

users is the lowest at 9.43%. Second lowest ranking in air freight transport but high in railway

goods transported. This region has great potential in the future as urbanization increases and

physical infrastructure improves.

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Europe and Central Asia, some indicators of the region: low GDP growth compared to the world:

1.95% due to the credit crunch. Services are 72% of GDP, Industry is 26% of GDP. Inflation is

controlled at 3.9%. Import & Export activity as percentage of GDP are the second highest at 40%

for imports and 41% for exports. Low population growth at 0.41% and 85% of the population is

below 65 years. Urbanization rate is high at 70%, internet users is high at 60%. Third highest

ranking in air freight transport, second highest in railway goods transported and second in roads

transported goods. This region has a well-developed infrastructure yet there is potential in

consolidating these markets.

High-income economies, some indicators of the region: lowest GDP growth at: 1.54% due to the

credit crunch. Services are 74% of GDP, Industry is 24% of GDP. Inflation is lowest at 3.33%.

Import & Export activity as percentage of GDP are somewhat lower than the rest at 28.03% for

imports and 27.88% for exports. Low population growth at 0.63% and 84% of the population is

below 65 years. Urbanization rate is highest at 80%, internet users is highest at 76%. Highest

ranking in air freight transport, highest in railway goods transported and highest in roads

transported goods. This region is very well-developed in terms of communication, the potential

lies in consolidating these markets and differentiating from competitors.

Latin America and the Caribbean, some indicators of the region: somewhat high GDP growth at:

4.63%. Services are 63% of GDP, Industry is 30% of GDP. Inflation is somewhat high at 5.13%.

Import & Export activity as percentage of GDP are somewhat lower than the rest at 23% for

imports and 22.6% for exports. Population growth is average at 1.11% and 93% of the

population is below 65 years. Urbanization rate is high at 79%, internet users is low compared to

the urbanization level, 39%. Lower air freight transport given its lower import/export activity, no

data available on transport of goods by railway or roads. This region has a big potential as the

communication infrastructure develops and it is the third highest industrialized with a young

population.

Middle East and North Africa, some indicators of the region: somewhat high GDP growth at:

5.19%. Services are 42% of GDP, Industry is 50% of GDP. Inflation is average at 4.39%. Import

& Export activity as percentage of GDP are highest at 39% for imports and 45.5% for exports.

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Population growth is average at 1.85% and 95% of the population is below 65 years.

Urbanization rate is somewhat high at 62.5%, internet users is average compared to the

urbanization level, 31%. Low air freight transport and railway goods transport given its high

import/export activity, no data available on transport of goods by roads. This region has a very

big potential as the communication infrastructure develops and it has the highest industrialized

economy with a very young population.

Sub-Saharan Africa, some indicators of the region: average GDP growth at: 4.15%. Services are

58% of GDP, Industry is 31% of GDP. Inflation is average to high at 5.67%. Import & Export

activity as percentage of GDP are average at 35% for imports and 33% for exports. Highest

growth and youngest population at 2.53% and 97% respectively. Urbanization rate is low at

36%, internet users is also very low at 12%. Low air freight transport and railway goods

transport given its high import/export activity, no data available on transport of goods by roads.

This region has a huge potential in the future as the communication infrastructure develops.

Porter’s 5 Forces Model

Existing Rivals

HIGH

FedEx, UPS, DHL…

Buyer’s Power

HIGH

High Demand Elasticity, Low Switching Costs

Supplier’s Power

LOW to MODERATE

FedEx’s size

Substitute Products

MODERATE

ICloud, 3D Printers, Retail Stores

Potential Competitors

MODERATE

Amazon, Google, In-House delivery

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Existing Rivals: The competition among existing firms is intense given the nature of the

industry where firms incur high fixed costs due to their capital intensity; consumers are price

sensitive and there’s low to no differentiation among the firms which add up to low switching

costs. FedEx’s main competitor domestically is UPS even though “USPS offers lower prices due

to government subsidies…both firms spend heavily on advertising and often match each other

when it comes to fuel surcharges, increases/decreases in pricing, and even acquisitions (UPS

purchased Mailboxes Etc.; FedEx followed suit with its purchase of Kinko’s)” (Amsler, Cullen,

and Erdmenger, 2010). FedEx’s main international competitor is DHL especially after DHL

exited the US market (Amsler et al., 2010).

Supplier’s Power: FedEx’s suppliers typically exercise low power over it given the sheer

volume FedEx trades in; i.e: FedEx orders supplies in big volumes where it packaging materials,

vehicles, or planes. In addition, FedEx’s employees exercise low bargaining power since the

business is highly automated and the drivers are contract workers; however, the pilots are the

only unionized employees, which gives them some bargaining power. The Federal Aviation

Administration (FAA) does exercise bargaining power over FedEx since it’s got the right to

grant or restrict access to airspace and landing rights (Amsler et al., 2010).

Buyer’s Power: the transportation industry exhibits high demand elasticity given the price

sensitivity of consumers and the lack of differentiation among competing firms. As a result of the

2008 financial crisis that drove the world into a recession consumers need to cut costs thus they

have switched to slower shipping services which triggered the restructuring of the FedEx

Express division (Adler, 2012).

Threat of New Entrants: although the nature of the industry requiring shipping companies

to be capital intense (airplane fleet, vehicles, ships) is a barrier to entry, companies that have

purchasing power are potential competitors such as Amazon and Google6; even in-house delivery

is a threat, i.e: companies such as WalMart can develop their own delivery system. However, the

knowledge and expertise acquired over time is the biggest barrier to entry. FedEx has 40 years of

experience optimizing its delivery services, studying its customers’ needs, and responding to

domestic and global trends.

Substitute Products: trade is a natural activity of or an innate function to humanity. Thus

there is no substitute for transportation of goods. However, the advancement of technologies

                                                            6 Google acquired BufferBox Canada in 2012 (Roberson, 2012)

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such as the internet with e-mails and fax machines can cut into FedEx’s revenues especially in

delivering documents. Other emerging technologies such as the ICloud and the 3D Printers with

“personalized manufacturing”7 can also cut into FedEx’s revenue stream but it is not enough to

affect or disrupt the transportation industry.

Value Chain

Primary function:

FedEx intertwines its physical assets of 663 aircrafts, 90,000 vehicles, and thousands of dropoff

locations with its drivers, pilots, and other staff supported by cutting edge IT infrastructure to

guarantee delivery of goods and services to its customers. Those resources are molded into a

hub-and-spoke model that allows transportation through efficient routes. In addition, FedEx’s

operations rely heavily on IT and automation to ensure reliable delivery (products reach their

destination) and support through their online shipment tracking system: “The information about

the package is just as important as the package itself”- Fred Smith (Company Website). FedEx

relies on secondary functions as well to complete its value chain: the firm infrastructure, HR

management, technology development/Innovation. Marketing is an important secondary function

as well since the intense competitive nature of the business coupled with low switching costs

entails heavy marketing and advertising to capture or orient the consumer awareness to the

FedEx brand.

                                                            7 MakerBot replicator: www.makerbot.com   

Input/Resources:

Physical Assets Human Resources

IT

Operation:

Logistics of Delivery (JIT) IT backbone

Services

Output: Service Completion (products reach destination)

Output: Support (shipment tracking)

Output: Data (information intelligence)

Output: High Volume-Low Profit Average daily volume of 9 million shipments- profit margin less than 5% in 2012

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SWOT analysis

Strengths: Brand Equity Domestic leader in the express delivery

market Technology infrastructure: IT Physical Assets: impressive fleet of

aircrafts and vehicles Drivers are not unionized (saves costs)

Weaknesses: International leader is DHL and domestic

ground leader is UPS Capital intensity: high fixed costs Major Clients: the USPS contract No differentiation from competitors Geographical Concentration: USA

Opportunities: International expansion: South Asia,

Sub-Saharan Africa Growing global trade Growing e-commerce/online retailing Acquisitions and business diversification

Threats: General state of the economy Disruption to the technology and/or

transportation infrastructure Changing laws and regulations including

labor unionization, additional safety measurements, environmental, etc…

New entrants

Part 4: Strategic Analysis

FedEx has an interest in the United States’ nationwide economic activity (Company website) as

well as wanting “to connect the world responsibly and resourcefully” (Annual Global Citizenship

Report 2011). With the government deregulating the airline industry (1977-1980) allowing

FedEx to make use of the hub-and-spoke model by construction “networks based on logic” and

with FedEx pioneering a new printing methodology of bar-code-readable numbers for their

tracking system, FedEx was able to fundamentally change the way businesses managed their

supply chain, moving to Just-In-Time inventories and actually reducing logistics costs from

“16.5% of GDP to 9.5%” within 25 years (Bloomberg, 2004).

FedEx’s sustainable growth stems from its ability to provide its customers timely information

about their shipments: “we have continued to offer information up to our customers as a strategic

advantage and use that same information inside of our company to ensure our quality and

productivity as we grow”- Robert Carter, Executive Vice President and Chief Information

Officer at FedEx Corporation (Knudson, 2007). For FedEx to be able to offer up timely

information, their business model is built around speed and flexibility (Annual Report 2012).

These attributes are the result of the hub-and-spoke model, the IT infrastructure, and the

knowledge and expertise accumulated over 40 years.

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FedEx has segmented its business into four distinct entities operating independently to serve

their core markets, but compete collectively as one brand, and are managed collaboratively under

FedEx Corporation: FedEx Express generated 62% of total revenues in 2012, FedEx Ground

generated 22%, FedEx Freight generated 12%, and FedEx Services generated 4% (Appendix 2).

However there’s a concern over such a model where there’s a chance of delivery overlap with

the Express and Ground segments (Amsler et al., 2010) that may result in inefficiencies and

additional costs: a business may require both express and ground services from FedEx thus a

different driver from each segments picks up the packages (Vincent, 2011); proper controls or

systems’ integration should recognize these transactions and eliminate delivery overlaps.

FedEx understands that operational effectiveness can only take you so far. It has been

successfully growing since inception by first developing domestically, maturing in the 80s, and

recognizing the potential in international expansion. FedEx first offered international shipping in

the mid-80s. Thus FedEx’s growth throughout its existence has been driven by acquisitions

(Amsler et al., 2010). Appendix 1 highlights the most important ones. In its pursuit of strategic

growth through international expansion FedEx is balancing its geographical concentration. In

addition, acquisitions allowed FedEx to diversify its portfolio extending in services with

businesses relevant to its core activity: in 2004 FedEx acquired Kinko’s for $2.4 billion (Annual

Report 2006) thus providing office services such as printing, copying, and binding to its

customers as well as expanding its retail outreach to the 1,200 Kinko's stores (Appendix 1). It is

noteworthy to mention that FedEx’s purchase of Kinko’s was an attempt to match UPS’s retail

presence with MailBoxes Etc.8 but the acquisition is yet to prove profitable with FedEx writing

off $1.6 billion in impairment charges (Amsler et al., 2010) when it has originally recorded $1.8

billion in goodwill in relation to the acquisition (Annual Report 2006); the biggest impairment

charge was in 2009 for $810 million (Annual Report 2009).

FedEx relies on alliances with business as main drivers of sales. It has successfully stricken deals

with major retailers as well as governments to integrate FedEx in their value chain as logistics

and/or transportation solution providers: FedEx is one of the biggest defense contractors (Turse,

2011), Apple (Hardawar, 2012) and HP (Close-Up Media, 2012) rely on FedEx, Ebay teamed up

with FedEx “to offer shipping discounts and label printing” at home (Kucera, 2012), and

                                                            8 www.mbe.com

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WalMart added FedEx office locations to its site-to-store pick up points9. Amazon does not

exclusively rely on FedEx and it is biggest threat especially that it had invested $775 million

purchasing Kiva Systems in 2012 that constitutes part of its back-end systems in an effort to cut

operational costs (Kanellos, 2012); however Amazon relies on FedEx to allow its cloud

customers to “bypass the Internet by shipping storage devices via airmail” (Brodkin, 2010).

FedEx keeps a low debt structure (debt ratio is 33% in 2012) since it is faced with high fixed

costs in a high-volume/low margin industry (average profit margin from 2000-2012 is 3.7%10):

net fixed assets are 58% of total assets and wages and salaries for its 300,000 employees make

up 41% of operating expenses or 38% of revenues. This contributes to the company’s volatility

with respect to fuel price fluctuations and regulation changes. However, FedEx hedges against

fuel price fluctuations and passes on additional costs to its customers through fuel surcharges

(Ackerman, 2008). As for wages and salaries, pension and benefits costs are minimized since

FedEx is governed by the Railway Labor Act (RLA) that does not allow its drivers to form “local

unions” (Garofalo, 2010). FedEx has been aggressively lobbying to maintain its preferential and

advantageous legal status under this act thus protecting its thin profit margins. For the period

2008-2010, FedEx is said to spend $50.81 million on lobbying “compared with paying federal

tax bills of $37 million” (McGuire, 2012). Other changes such as tighter environmental

regulations to decrease the company’s carbon footprint (aircrafts’ CO2 emissions is currently at

1.3lbs/ATM11) can be costly; yet FedEx is aware of the change in the energy and transportation

markets and has replaced several aircrafts with ones that are more fuel efficient. In addition,

FedEx is taking a leap into the future and contributing to social innovation and environmental

change by operating 130 electric cars from Nissan (Haindl, 2012) and becoming an “early

adopter of the electric drive in the parcel delivery market” (Electrification Coalition, 2012).

In line with its innovative culture and keeping pace with the socio-economic trends, “The FedEx

Institute of Technology at the University of Memphis houses ten research centers that focus on

an array of global studies and issues: to apply how emerging technologies can help shape the

global information economy” (Knudson, 2007). This innovative spirit and the ability of FedEx to

identify trends lead it to be at the forefront of the social commerce: a market where social media

is used to buy and sell goods. This market is forecast to reach $30 billion by 2015; thus FedEx

                                                            9 http://www.walmart.com/cp/Site-to-Store-Shipping-with-FedEx/1069504 10 Calculated by obtaining historical financial data through Compustat database 11 Annual Global Citizenship Report 2011

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has developed the Ship to Friends facebook application “that allows people who use Facebook to

prepare and pay for a U.S. domestic shipment without ever leaving Facebook” (BusinessWire

(2012).

The most beneficial domestic and global trend that affects FedEx is online shopping. The

increase of online shopping increases sales in value and in volume. Thus, FedEx collaborated

with American Express to support small businesses in the form of “giving away 40,000 $25 gift

cards” (a total of $1 million) to be spent at local businesses (DividendChannel, 2012) and with

average revenue per package of $12.99, FedEx would have theoretically encouraged online

spending with effectively less than half the $1 million spent12.

FedEx continuously pursues operational effectiveness in cutting costs and increasing quality as

the industry’s demand is highly elastic. FedEx has recently identified a permanent shift of

customers from express services to ground, freight, and ocean shipping in light of the global

recession; thus FedEx is restructuring its FedEx Express division (Adler, 2012) by cutting jobs,

retiring planes earlier which will allow it to increase profits by $1.7 billion within the next 3

years (Schlangenstein, 2012).

Part 5: Recommendations

Opportunities lie in growing market such as South Asia and the Middle East, and in the future

FedEx needs to keep an eye on Sub-Saharan Africa as they develop their communication

infrastructure and their social-economic trends evolve towards e-commerce. International

expansion reduces FedEx’s geographic concentration on the United States. In fact FedEx is right

on track with international expansion by acquisitions: in 2012 FedEx acquired 3 companies in

Brazil, France, and Poland; in 2011 FedEx acquired 2 companies in Mexico and India; in 2007

FedEx acquired 3 companies in India, China, and Hungary (Appendix 1).

FedEx benefits from an increase in the volume of e-commerce. As FedEx collaborated with

American Express to support small businesses in the U.S. they can induce online shopping in

international markets thus pushing and/or supporting the communication infrastructure. For

example, Latin America and the Caribbean have the second highest urbanization level among the

6 regions of the world as segmented by the World Bank yet internet usage is relatively low at

40%. Similarly, in the MENA region urbanizations is at 63% while internet usage is at 31%.

                                                            12 40,000 gift card x $12.99 = $519,600

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FedEx can induce online shopping through socially conscious and developmental programs thus

building brand awareness in that region. Such programs help FedEx achieve its corporate

citizenship goals by “sustainably connecting people and places and improving the quality of life

around the world” (Company website) and build a loyal customer base in an industry governed

by low switching costs.

FedEx is successfully replacing old planes with new greener and more efficient ones thus it is

proactively mitigation any environmental or safety regulations that could be imposed in the

future. In addition, FedEx actively lobbies to keep its drivers from unionizing thus minimizing its

employees’ remunerations especially pension costs. FedEx should avoid reclassification from a

company specialized in aerial shipping governed by the Railway Labor Act (RLA) to a company

specialized in ground shipping governed by the National Labor Relations Act (NLRA) like UPS;

this is the reason FedEx’s pilots are unionized while its drivers are not. If FedEx’s status changes

it can face an increase in wages up to 14.2% of sales in comparison to UPS: UPS spent $27.6

billion in their last fiscal year (2011) or 52% of sales to compensate their 398,300 employees

whereas FedEx spent $16.1 billion in their last fiscal year (2012) or 38% of sales to compensate

their 300,000 employees. Thus, UPS’s cost per employee was $69,232 whereas FedEx’s cost per

employee was $53,663. This $15,569 spread per employee is attributable to the unionization

effect where unionized employees command higher bargaining power when it comes to

compensation and benefits.

Other strategic moves may be in maritime shipments since FedEx relies on aircrafts and vehicles

given that 70% of its sales are domestic. So far, FedEx is expanding internationally yet it could still

acquire maritime shipping companies. To do so, FedEx could benefit from its brand equity and

high stock price to raise capital through share offerings since given its capital intensity and high

correlation to overall market volatility it is recommendable to maintain its low leverage level.

In addition, since clients may become competitors with in-house delivery system development

and/or backward/forward integration, FedEx should hedge this risk by diversifying its product

portfolio. So far diversifying its product line did not payoff for FedEx. The acquisition of

Kinko’s did not serve its purpose. In 2009, management chose to impair the goodwill booked in

2004 in relation to the acquisition in an effort to “to phase out the use of the Kinko’s trade name

and reduced profitability at FedEx Office over the forecast period” (Annual Report 2009). The

emerging ICloud technology is a way for FedEx to diversify its portfolio. With over 7,000 IT

Mada Arslan    16  

expert, owning their own satellites, and with 40 years of accumulating market information FedEx

can leverage those advantages into providing customers with computing resources delivered as

services over the internet. In fact, FedEx is actually pursuing cloud computing (Babcock, 2011)

proving that they are reading the market’s needs right.

As for FedEx’s overlap in deliveries due to their business model where their core markets are

segmented and served by 4 different companies; it is advisable that FedEx develops an integrated

platform to avoid such overlaps thus reducing costs and increasing efficiencies.

FedEx needs to also hedge its risks from losing major contracts like the USPS contract (Annual

Report 2012) by building strategic alliances domestically and internationally. As mentioned in Part

4: Strategic Analysis, FedEx deals with the U.S. military, Apple, HP, Ebay, and WalMart.

Part 6: Lessons Learned

Awareness: Frederick Smith (founder of FedEx) took advantage of economical, social, and

political changes to create FedEx: the deregulation of the transportation industry in 1977 allowed

full exploration of the hub-and-spoke model. Even as the company grows or reaches maturity it

can always spot those opportunities to create value to its stakeholders.

Speed and flexibility: a company operating globally, keeps an eye on the global market and takes

advantages of changes in social, economic, and political conditions predicting hot spots, spotting

ripe acquisitions, and weaving alliances. Therefore, to be able to move with speed and beat the

competition to the market, the company needs to be flexible.

Financial health: a key component for such companies to be profitable in such an industry is cost

control given the low profit margin levels.

Be proactive: companies need to be proactive in tipping the scale to their advantage. For

example, induce customers into online shopping by giving out credit increases the volume of e-

commerce; aggressively lobby to avoid unfavorable laws and regulations.

Changing strategy: as the company reaches its organic growth limits, smart diversification is

essential for growth. IBM and Siemens are great examples of companies realizing when their

strategic advantage is no longer enough to sustain growth and create value. Google is no longer

just a search engine, it is developing the driverless car and has recently made a move in the

distribution industry with its BufferBox acquisition.

Mada Arslan    17  

Appendix 1: Acquisition History

Federal Express Corporation is founded in Little Rock, AR in 1971 by Frederick W. Smith

1984: Gelco Express International FedEx dramatically expands its presence outside of the U.S. with the acquisition of Gelco Express, a worldwide courier with service to 84 countries.

1989: Tiger International Inc.

With the integration of the Flying Tiger Line, FedEx becomes the world's largest full-service, all-cargo airline. The acquisition includes routes to 21 countries, a fleet of cargo aircraft including Boeing 747s, facilities throughout the world and Flying Tigers' expertise in international airfreight.

1998: Caliber System Inc.

FedEx creates FDX Corporation (later renamed FedEx Corporation) and grows its portfolio of services with the addition of ground small-package carrier RPS (now FedEx Ground), Western U.S. less-than-truckload carrier Viking Freight (now part of FedEx Freight), Caliber Logistics (now FedEx SupplyChain Services), Caliber Technology (now part of FedEx Services) and Roberts Express (now FedEx Custom Critical)

2000: Tower Group International Inc., WorldTariff Ltd

FedEx Corp. creates FedEx Trade Networks. Today, FedEx Trade Networks is one of the largest-volume customs entry filers in North America and provides FedEx customers with end-to-end transportation and customs clearance solutions around the world.

2001: American Freightways Corp.

FedEx Corp. acquires this less-than-truckload carrier serving the Central and Eastern U.S. to complement Viking Freight. Rebranded as FedEx Freight in 2002, these companies combine to make FedEx Freight a leader in the regional less-than-truckload shipping industry.

2004: Kinko's Inc.

FedEx Corp. expands its retail access to all of the 1,200 Kinko's stores. With the backing of a FORTUNE 100 corporation, Kinko's gains the resources and expertise needed to continue expansion of its corporate document outsourcing business and international operations.

2004: Parcel Direct

FedEx Corp. broadens its residential delivery portfolio with the acquisition of Parcel Direct, a leading parcel consolidator. Parcel Direct becomes a subsidiary of FedEx Ground and is renamed FedEx SmartPost. The company offers a proven solution to customers in the fast-growing e-tail and catalog industries seeking a cost-effective means of shipping low-weight, less time-sensitive goods to residential customers.

Mada Arslan    18  

2006: ANC Holdings Limited FedEx Corp. acquires ANC Holdings Limited, a United Kingdom domestic express transportation company for £120 million. This transaction will allows FedEx Express to directly serve the entire UK domestic market.

2006: Watkins Motor Lines

FedEx Corp. acquires Watkins Motor Lines, a leading provider of long-haul LTL services, for $780 million.

2007: Flying Cargo Hungary Kft

FedEx Express acquires its Hungarian global service participant, Flying Cargo Hungary Kft, giving FedEx a wholly-owned operation in one of the region's dynamic markets.

2007: Tianjin Datian W. Group Co., Ltd.

FedEx Corp. acquires Tianjin Datian W. Group Co., Ltd.'s ("DTW Group") 50 percent share of the FedEx-DTW International Priority express joint venture and DTW Group's domestic express network in China for approximately US$400 million in cash.

2007: Prakash Air Freight Pvt. Ltd.

FedEx Express acquires its primary Indian service provider, Prakash Air Freight Pvt. Ltd. (PAFEX), for approximately $33 million.

2011: AFL Pvt. Ltd./Unifreight India Pvt. Ltd.

FedEx Express acquires the logistics, distribution and express businesses of AFL Pvt. Ltd. and its affiliate, Unifreight India Pvt. Ltd. This acquisition provides FedEx more robust domestic transportation and added capabilities in India.

2011: Servicios Nacionales Mupa, S.A. de C.V. (MultiPack)

FedEx Express acquires the operations of MultiPack in Mexico. MultiPack's existing operations include its pick-up and delivery network, warehousing and logistics services, 48 distribution centers, 13 warehouses and more than 500 retail outlets, all of which will be consolidated into the FedEx business.

2012: Opek Sp.z o.o.

FedEx Corp. acquires the Polish courier company Opek Sp.z o.o. (Opek) for $54 million. This acquisition gives its FedEx Express business unit access to a nationwide domestic ground network with an estimated $70 million in annual revenue and 12.5 million shipments annually.

2012: TATEX

FedEx Corp. acquires TATEX, a leading French business-to-business express transportation company, for $55 million. This acquisition gives its FedEx Express business unit access to a nationwide domestic ground network which carries 19 million

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2012: Rapidão Cometa FedEx Corp. acquires Rapidão Cometa, one of the largest transportation and logistics companies in Brazil, for $398 million. This acquisition brings more than $500 million of annual revenue, and is the latest step in the company’s strategy for profitable growth in FedEx Express's Latin American and Caribbean (LAC) region.

Source: Company website

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Appendix 2: Financial Highlights (source: annual reports) FedEx UPS

2012 2011 2010 2009 2008 2011 2010 2009 2008 Liquidity ratios Current Ratio 1.69 1.70 1.57 1.57 1.35 1.89 1.96 1.49 1.13 Quick Ratio 1.60 1.61 1.48 1.49 1.27 1.71 1.76 1.38 0.99 Cash Ratio 0.53 0.48 0.42 0.51 0.29 0.47 0.57 0.25 0.06 Asset Management ratios Accounts Receivable Turnover 9.07 8.58 8.34 10.47 8.71 8.50 8.80 8.44 9.28 Average Collection Period 40.23 42.54 43.75 34.87 41.92 42.93 41.45 43.26 39.32 Fixed Asset Turnover 2.47 2.53 2.41 2.65 2.82 3.01 2.85 2.52 2.82 Total Asset Turnover 1.43 1.44 1.39 1.46 1.48 1.53 1.47 1.42 1.62 Equity multiplier 2.03 1.80 1.80 1.78 1.76 4.88 4.18 4.14 4.70 Debt Management ratios Debt Ratio 32.78% 26.59% 25.89% 25.14% 22.39% 79.52% 76.05% 75.86% 78.73%Debt/Equity 66.56% 47.85% 46.67% 44.72% 39.51% 388.20% 317.51% 314.28% 370.19%Times Interest Earned 81.54 30.42 27.68 12.47 38.33 16.72 14.95 6.93 11.52 Profitability ratios Profit Margin 4.76% 3.69% 3.41% 0.28% 2.96% 7.16% 6.74% 4.34% 5.83%Basic Earning Power (BEP) 10.63% 8.55% 7.89% 3.04% 8.08% 16.77% 15.75% 9.67% 15.97%Return on Assets (ROA) 6.80% 5.30% 4.75% 0.40% 4.39% 10.96% 9.94% 6.17% 9.42%Return on Equity (ROE 13.80% 9.54% 8.57% 0.72% 7.74% 53.52% 41.48% 25.57% 44.29%Market Value ratios Price-to-Earnings Ratio 13.84 20.31 22.09 178.81 25.20 18.86 21.60 29.12 18.64 Price-to-Cash Flow Ratio 6.82 8.67 8.34 8.34 9.29 12.64 14.05 15.38 11.43 Basic EPS 6.44 4.61 3.78 0.31 3.64 3.88 3.36 1.97 2.96 Diluted EPS 6.41 4.57 3.76 0.31 3.60 3.84 3.33 1.90 2.94

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Appendix 2 (continued)

Income Statement 2011

$ million2010

$ million2009

$ million 2008

$ millionRevenues- FedEx 39,304 34,734 35,497 37,953EBIT- FedEx 2,342 1,965 736 2,070Net Income- FedEx 1,452 1,184 98 1,125Revenues- UPS 53,105 49,545 45,297 51,486EBIT- UPS 5,820 5,293 3,083 5,090Net Income- UPS 3,804 3,338 1,968 3,003Operating margin- FedEx 6.05% 5.75% 2.10% 5.47%Operating margin- UPS 11.45% 11.39% 7.74% 10.45%

Cash Flows 2011

$ million2010

$ million2009

$ million 2008

$ millionCF operating activities- FedEx 4,041 3,138 2,753 3,465CF investing activities- FedEx -3,419 -2,781 -2,383 -2,897CF financing activities- Fed Ex -287 -692 400 -617CF operating activities- UPS 7,073 3,835 5,285 8,426CF investing activities- UPS -2,537 -654 -1,248 -3,179CF financing activities- UPS -4,862 -1,346 -3,045 -6,702

FedEx y-2012

$ millionsy-2011

$ millionsy-2010

$ millions Total revenues 42,680 39,304 34,734

U.S. 29,837 27,461 24,852 % from total sales 69.91% 69.87% 71.55%

International 12,843 11,843 9,882 % from total sales 30.09% 30.13% 28.45%

Mada Arslan    22  

Appendix 2 (continued)

0

10,000

20,000

30,000

40,000

50,000

60,000

2011 2010 2009 2008

Revenue in

 $ m

illion

Revenue: FedEx v/s UPS

Revenues‐ FedEx

Revenues‐ UPS

62%22%

12%

4%

FedEx Segments Revenue

Express Ground Freight Services

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Appendix 3: Stock performance

Source: Company Investor Factsheet 2011

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Appendix 4-A: Macroeconomic Overview of the United States of America

Value- 2011 General Economics (source CIA factbook) GDP (world rank #2) $15.08 trillion GDP Real Growth Rate (world rank #157) 1.80% Per Capita GDP (world rank #11) $48,300 GDP Composition By Sector

Agriculture 1.20% Industry 19.20% Services 76.60%

Consumer Inflation Rate (world rank #65) 3.10% Unemployment (world rank #103) 9% Export (world rank #4) $1.497 trillion

Canada 19% Mexico 23.30%

China 7% Japan 4.50% Other 46.20%

Import (world rank #1) $2.236 trillion China 18.40%

Canada 14.20% Mexico 11.70%

Japan 5.80% Germany 4.40%

Other 45.50% Population & Demographics (source WDI)

Total Population 311,591,917 Population Growth Rate 0.72%

Age Structure:

0-14 20.06%15-64 66.64%

65+ 13.30%Rural population as % from total 17.62%Urban population as % from total 82.38%Government- Laws and Regulation (source: The economist, Heritage, CIA factbook, DoingBusiness) Government Stability 5.3 (110th) Economic Freedom 76.3 Openness to FDI 1

Legal System Constitution-based federal republic;

strong democratic tradition Paying taxes 34% progressive scheduel

Communication: Physical infrastructre & IT (source: CIA factbook, WDI) Roads and Highways (KM) (world rank #1) 6,506,204 Railways (KM) (world rank #1) 224,792

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Airports (world rank #1) 15,079 Heliports 126 Navigable Waterways (world rank #4) 41,009 Ports 22 Fixed Telephone Market (world rank #2) 150 million Wireless Telephone Market (world rank #3) 313.848 million Internet Users (world rank #2) 245 million

Air transport, freight (million ton-km) 50,743

Logistics performance index: Ease of arranging competitively priced shipments (1=low to 5=high) 3.56

Logistics performance index: Frequency with which shipments reach consignee within scheduled or expected time (1=low to 5=high) 4.21

Logistics performance index: Quality of trade and transport-related infrastructure (1=low to 5=high) 4.14

Railways, goods transported (million ton-km) 2,468,738

Roads, goods transported (million ton-km) 1,889,923

Transport services (% of commercial service exports) 13.57%

Transport services (% of commercial service imports) 21.63%

Transport services (% of service exports, BoP) 13.08%

Transport services (% of service imports, BoP) 19.90% Internet users (per 100 people) 78.24 Society & Lifestyle

capitalistic and individualistic consumer society

growing internet use for convenience and time-saving

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Appendix 4-B: Macroeconomic Overview of the World

latest numbers available from 2005 to 2011

East Asia and Pacific

Europe and Central Asia

High-income economies

Latin America and the Caribbean

Middle East and North

Africa South Asia Sub-Saharan

Africa General Economics

GDP (constant 2000 US$) year 2011 in billions

11,946

11,516

31,377

3,081

1,502

1,296

574

GDP growth (annual %) 3.37% 1.95% 1.54% 4.63% 5.19% 6.42% 4.15%

GDP per capita (constant 2000 US$)

5,391

12,872

27,645

5,176

3,854

782

655 GDP Composition By Sector

Agriculture 3.39% 1.88% 1.31% 6.25% 7.35% 17.88% 10.82% Industry 31.67% 26.39% 24.36% 30.29% 50.32% 26.41% 30.81% Services 64.94% 71.73% 74.33% 63.46% 42.33% 55.71% 58.37%

Inflation, consumer prices (annual %) 5.23% 3.90% 3.33% 5.13% 4.39% 10.13% 5.67% Unemployment, total (% of total labor force) 4.72% 9.43% 8.45% 8.00% 9.76% 4.49% n/a

Exports of goods and services (% of GDP) 32.17% 40.98% 27.88% 22.61% 45.49% 22.79% 33.11% Imports of goods and services (% of GDP) 29.58% 39.97% 28.03% 22.92% 38.72% 28.48% 34.70%

Population & Demographics

Total Population in millions

2,216

895

1,135

595

390

1,656

876

Population Growth Rate 0.65% 0.41% 0.63% 1.11% 1.85% 1.44% 2.53% Age Structure:

0-14 20.92% 17.37% 17.26% 27.49% 30.21% 31.12% 42.28%

15-64 70.44% 68.10% 66.90% 65.49% 65.21% 64.02% 54.49%

65+ 8.64% 14.53% 15.84% 7.02% 4.58% 4.86% 3.23%

Rural population as % from total 47.33% 29.76% 19.50% 20.90% 37.48% 69.07% 63.53% Urban population as % from total 52.67% 70.24% 80.50% 79.10% 62.52% 30.93% 36.47%

Government- Laws and Regulation

Total tax rate (% of commercial profits) 35.33% 42.31% 37.65% 47.21% 32.26% 40.20% 57.82%

Mada Arslan    27  

Foreign direct investment, net inflows (% of GDP) 2.32% 3.98% 2.63% 2.42% 2.86% 1.36% 2.33%

Communication: Physical infrastructre & IT

Air transport, freight (million ton-km)

61,095

47,516

146,364

5,981

17,094

2,453

2,432 Logistics performance index: Ease of arranging competitively priced shipments (1=low to 5=high)

3.08

3.07

3.37

2.71

2.80

2.59

2.47

Logistics performance index: Frequency with which shipments reach consignee within scheduled or expected time (1=low to 5=high)

3.55

3.54

3.86

3.11

3.24

2.93

2.84

Logistics performance index: Quality of trade and transport-related infrastructure (1=low to 5=high)

3.03

3.16

3.58

2.58

2.68

2.38

2.30

Railways, goods transported (million ton-km)

6,326

7,844

8,285 n/a

1,911

6,187 n/a

Roads, goods transported (million ton-km) n/a

17,757

28,585 n/a n/a n/a n/a Transport services (% of commercial service exports) 26.52% 21.52% 20.51% 12.99% 27.18% 19.42% 31.15% Transport services (% of commercial service imports) 32.20% 24.39% 23.99% 39.57% 35.57% 49.20% 40.55%

Transport services (% of service exports, BoP) 25.68% 19.59% 18.24% 16.69% 22.42% 11.77% 24.18%

Transport services (% of service imports, BoP) 32.21% 21.91% 22.30% 29.57% 26.74% 42.28% 35.20%

Internet users (per 100 people)

38.55

59.65

75.60

39.39

30.72

9.43

12.31

Source: World Bank

Mada Arslan    28  

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