SHIPPING Booming business for FedEx Ground

FedEx Ground is slowly gaining on UPS.
SCRIPPS HOWARD NEWS SERVICE
Frederick W. Smith, chairman, president and chief executive of FedEx Corp., wants to dispel the myth about what's driving the growth of the company's express and ground businesses.
To dispel the notion that one is growing at the expense of the other, Smith, speaking recently to investors and analysts in New York, used the analogy of personal computer makers.
When PCs used to cost $4,000 to $5,000 each and sell briskly, they were shipped express. Now as PC costs have gone below $1,000, a lot of those shipments have migrated over to ground.
The parable: When the economic advantage for shipping express disappears, it doesn't make sense for some shippers to do it. So they quit.
Growing ground service
A few years ago the parable for FedEx customers would have been: Use United Parcel Service.
The Atlanta-based rival had the ground network that FedEx only coveted until it decided to spend $2.7 billion to buy one in 1997.
Fast forward from the 1998 completion of the Caliber Systems acquisition to today. With the development of ground operations, FedEx evolved from a huge niche company that specialized in overnight shipping into a $21 billion full-service global transportation company.
FedEx Express still accounts for about 75 percent of the Memphis-based company's earnings. But there are five other operating units, most notably FedEx Freight and FedEx Ground.
As manufacturing and high-tech sectors have struggled in the slowing economy, so has FedEx's express business.
But FedEx's ground services have been booming and picking up the slack by focusing on the small- to medium-size shippers that the company once overlooked in favor of larger ones.
These ground services include FedEx Freight, formed with the acquisition of American Freightways; FedEx Ground, the small package delivery unit formerly known as RPS; and FedEx Home, the dedicated residential delivery service created to compete with UPS for online shipments delivered to homes.
Investments
Daniel Sullivan, president and chief executive officer of FedEx Ground, has said the company has invested more than $650 million to increase the unit's capacity by 50 percent. But the unit's rapid growth has absorbed much of that, increasing the need for more room, he said.
To that end, FedEx announced Sept. 30 that it would spend $1.8 billion on a plan that will nearly double FedEx Ground's current daily capacity of 2.5 million packages to 4.8 million by May 31, 2009.
For Memphis, it's significant since FedEx Ground plans to spend $27.7 million to expand its hub there. The expansion could add 270 full-time and part-time jobs. Another new hub will be built in Memphis, as well as in Dallas, Cincinnati and Hagerstown, Md., by 2006. Six more hubs yet to be named will be added by 2009.
What is behind all this?
There are a number of things, including the fact that FedEx's sales forces now have two years of experience selling bundled ground and express services, FedEx executives have said. Sales professionals have increased from 600 to 3,000 since 1999.
Competing with UPS
The future looks promising, said Jim Winchester, an analyst with Lazard Freres, who expects FedEx to continue to grow its ground network and take market share away from UPS.
FedEx Ground has about 11 percent of the market for ground shipments, whereas UPS has about 79 percent, said Satish Jindel, principal with SJ Consulting in Pittsburgh and a former RPS executive.
Jindel estimates that FedEx Ground gains 150,000 packages a day in its system for every 1 percent of market share that it takes from UPS. UPS delivers more than 10 million packages a day domestically.
Winchester said the ground marketplace is growing at a faster rate than air shipments. He does not see FedEx's growing at UPS's expense.
However, analysts have raised the question: Will FedEx Ground grow at the expense of FedEx Express?
FedEx Express's total domestic package growth rate has been negative for seven consecutive quarters, plummeting 10.5 percent in the second quarter of fiscal 2002 (read: the Sept. 11 terrorist attacks) but has since improved to a 0.8 percent loss in the recent quarter.
For FedEx Express, analysts say the U.S. market has matured and better growth opportunities lie internationally in Asia. But UPS also has its eye on Asia.