The online retail market is evolving at a rapid pace, with no indication of slowing down any time soon. Companies, both brick-and-mortar and Web-based sellers, have been forced to restructure supply chain operations and assess the business models to figure out how they can increase their presence in the e-commerce segment without losing profits. And as omnichannel purchasing takes center stage, it is creating more complications.
To maintain a competitive edge in the market and satisfy consumers' growing demands and expectations, most retailers are aiming to reduce shipping costs and expedite delivery times. This is great for shoppers, but not so much for shippers.
Expanding networks gets expensive
This week, The Wall Street Journal reported that FedEx Corp. believes e-commerce organizations should be contributing more to the shipping costs needed to deliver packages to customers, especially as the network grows. Alan Graf, the freight company's chief financial officer, indicated that, considering the amount of time and resources it takes to transport shipments from online sellers, it isn't worth doing if no profit is being made.
"We can't build these networks and spend this kind of capital and not get a return on it," Graf told The Wall Street Journal.
FedEx raised capital spending to $4.8 billion this year and plans to increase it even more in over the next couple of years. A significant portion of this amount has been allotted to ground transportation, the primary division used for e-commerce shipments, the news source added. Furthermore, the corporation released its third quarter earnings that revealed a 19 percent drop in net income.
Some may assume that FedEx calling on e-retailers to increase shipping costs could be related to a few of the moves recently made by e-commerce giant Amazon.com. Earlier this month, the company announced it has teamed up with Air Transport Services Group Inc. to lease an air cargo fleet of Boeing Co. 767 planes in an effort to reduce shipping costs. In addition, it has tried to enhance logistics operations by improving its own network of ground transporters, developing new warehouse and distribution centers and making deliveries with its own vans.
Delivery giant unaffected by Amazon's logistics plans
However, it seems FedEx is not at all threatened by Amazon moving in another direction for shipments. According to The Wall Street Journal, FedEx Chief Executive Fred Smith indicated that, although the online seller is a valued customer, it is by no means a major competitor.
Retail Dive reported that T. Michael Glenn, another FedEx executive, told analysts earlier this week during a conference call that at least 95 percent of e-commerce deliveries are made by either FedEx, UPS or the United States Postal Service.
"In fact, if we were to isolate our e-commerce business one could argue that FedEx is one of the most profitable e-commerce companies in business today," said Glenn, according to the source.
And it makes sense that the delivery company wouldn't be worried about demanding higher shipping payments from e-retailers or too concerned with the loss of business from the leading merchant. Because, The Wall Street added, the most any of its customers account for in its total sales is 3 percent.
Smith told news source that postal rates will have to increase as mail service declines. In addition, the delivery company plans to improve the expense of returns by charging higher rates on large packages that can't be transported by ground.
FedEx is among many organizations in the industry that are looking for cost-reduction strategies. JOC revealed that one approach carriers are taking is to partner with third-party logistics providers that can help them lower contract rates.