FedEx executives in the US have said that retailers should be paying more for package delivery to help fund the cost of expanding delivery networks.
FedEx Corporation — one of the world’s largest delivery services companies — says that retailers should be paying more for shipments to help offset the cost of expanding delivery networks. As demand for e-commerce has grown, delivery networks have had to expand to cater for the increase in parcel shipping. This expansion is eating into delivery providers’ bottom line, and according to FedEx executives, it’s time retailers start paying their share.
FedEx has increased its capital expenditure forecast for this financial year to US$4.8 billion, with the largest increases being directed towards its ground division, which handles most of its e-commerce business. The company intends to continue increasing capital expenditure over the next few years to help cope with the increased demand from e-commerce.
However, in its most recent earnings statement, FedEx noted that “Operating results were negatively impacted by higher costs, driven significantly by network expansion.”
FedEx Chief Financial Officer Alan Graf told the Wall Street Journal that the price of shipping a package needs to reflect the effort it takes to deliver it. “We can’t build these networks and spend this kind of capital and not get a return on it,” Graf said.
E-Commerce growth has significantly impacted FedEx’s quarterly results. Revenue for the company’s ground division jumped 30 percent to US$4.41 billion. However, both operating income and margin declined due to costs associated with network expansion and peak season demand that exceeded both volume and package size expectations.
FedEx is currently looking at ways to boost e-commerce revenue, including increasing service fees for large and bulky deliveries and other packages that don’t fit into its ground network.
According to FedEx CEO Fred Smith, the US Postal Service is partially to blame for lower customers cost expectations around package delivery.
“The postal service’s rates, which are the primary driver of e-commerce…they’re going to have to go up as mail service goes down,” Mr. Smith said.
The push for same-day delivery services is also weighing heavily on delivery providers, as established delivery giants are being forced to compete with disruptive same-day delivery start-ups, many of which are operating with unsustainable business models, or floating with investment funds, which may be shielding true costs from consumers.
According to Smith, “The key driver of any delivery system is route density and revenue per delivery stop.” This means that the Australian delivery market presents a very different set of challenges to the US market. In Australia, same-day delivery is not yet the driving competitive factor that it is in the states. The Australian market is also much smaller and more geographically dispersed.
According to Carl Hartmann, co-founder and CEO of Temando, “The biggest challenges facing Australia’s delivery networks are rising consumer expectations and the cost to keep up with these. Geographically, Australia is a similar size to the US, but has only 24 million people, and no central hub in the middle of the country. In the US, you’ve got 10 times the population and centrally located distribution hubs. This means the US carriers have the order densities to provide a wider range of services, which is far more expensive to replicate in Australia due to infrastructure costs. However, carrier networks in the US and around the world are facing the same challenges: How to augment their existing infrastructure to not only handle the increased volume but to provide the service levels expected by today’s consumers.”
While increased investment in Australian delivery networks is necessary to meet customer expectations, the extent that costs will be passed on to the consumer will be up to the delivery providers and retailers.
“Any Australian delivery providers contemplating alternative services to meet increasing demand for hyper-local, three-hour shipping, guaranteed timeslot and weekend delivery will naturally face higher capex costs, but the investment is necessary to support the future of retail in Australia,” Hartmann said.
“If Australian delivery providers choose to pass on additional costs to retailers then any increase will be relevant to services provided. Ultimately, it will be up to the retailer to decide if costs are passed onto consumers but our recent research highlights that Australian consumers are willing to pay for the right service that suits their needs.”