Packaging Up Rate Hikes
Jan 4, 2010 2:43PM GMT
The Journal of Commerce Magazine - News Story
With volume momentum growing, FedEx says it’s time to add pricing momentum to the shipping mix
Weak economy and all, FedEx celebrated a record day in its express division on Dec. 14, 2009, handling 14.1 million packages, and the company has a clear idea of how it wants to mark the occasion.
Pointing to improving demand across its entire range of services, FedEx officials say they are determined going into 2010 to raise prices that have been hurt by diminished demand and beaten down the company’s earnings over the past year.
“As the economy continues to improve, we believe that we’ve got a terrific opportunity to review our pricing strategy,” T. Michael Glenn, executive vice president of the delivery giant, said in a conference call with Wall Street analysts last month, “to make sure it reflects the value of the services that we provide, with the specific objective being to improve our yields for both our parcel and our freight services.”
The company has already announced it will raise list prices 4.9 percent for its express and parcel services, just as FedEx and rival UPS announced a year ago heading into 2009. But that hardly reflected reality in the domestic market: FedEx Express yield for U.S. business fell 21 percent in the six months ending Nov. 30 compared to the same period the year before, and the company’s overall revenue of $16.6 billion in the first half of its 2010 fiscal year was 15 percent behind the year before.
Yet FedEx also ended its fiscal second quarter seeing what it called “positive momentum in the global economy,” and because the reporting period included a key part of the peak season for the expedited business, the company expects that momentum to keep up in coming months.
“Forward-looking indicators point to near-term improvement,” FedEx Chairman, President and CEO Frederick W. Smith told investment analysts. “Manufacturers of capital goods say many of their customers are buying again, as opposed to drawing down inventories, signaling an uptick in capital spending. We believe the process of inventory clearance has bottomed and subsequent restocking is driving growth.”
As the world’s largest express carrier, FedEx has a big window on the late stocking decisions of the world’s retailers and manufacturers, and the company’s numbers showed more goods were moving through distribution pipelines late in 2009, even if the revenue for the carrier didn’t always keep up.
Domestic package volume grew 4 percent in the fiscal second quarter, but FedEx was especially happy about the 6 percent gain in average daily volume for International Priority service.
But even that came with a 14 percent reduction in yield, a sign of why FedEx is intent on taking a new pricing strategy to the market.
“There are several things that we can do and plan to do to make a positive impact on those yields,” Glenn said. “One would be to ensure we get acceptable rate increases as contract renewals roll around, and we have a lot of contract renewals that will be in the hopper here in the months ahead. Two, we are reviewing our pricing guidelines for new business, given the strength of the volume trends. And we are ensuring and analyzing specific customers to make sure that they are meeting volume commitments to retain their current pricing.”
A tough line on rates may prompt stronger competition from UPS for the parcel and express business, but UPS has announced similar increases. Glenn said, however, FedEx is willing to walk away from business to match pricing momentum to volume growth.
“Market share is an interesting statistic but it is not what drives FedEx Corp. . . . When you have the solid growth trends we have at express and ground, you can be more selective, including being more willing to walk away from a piece of business as the economy is improving, than you might be in a difficult economy,” Glenn said.
Still, the company’s operating figures for 2009 suggest it won’t necessarily dismiss customers over transportation costs.
With its cheaper parcel services, the FedEx Ground division defied economic trends last year, and volume at the business grew 4 percent in the second quarter while the operating profit expanded 12 percent to $238 million. The results suggest FedEx retained shippers as they traded down to cheaper services, a strategy the company will keep using in an improving economy.
“The beauty of our organization is that we have a broad portfolio that allows customers to pick and choose the value proposition they would like,” said David Rebholz, president of FedEx Express.