Fedex Ground Services

Even as FedEx struggles with the sharp fall in its air express delivery business, its share price has risen nearly 50 per cent since late September.

Such a dichotomy underlines investors' growing confidence in the company's transformation from a basic overnight deliverer of documents and parcels to an all-service transportation company. Chief among those changes is an expansion into ground services.

FedEx has nabbed nearly 16,000 new clients by entering the home delivery arena, a small but significant amount given its absence from the market only two years ago. United Parcel Service and the US postal system dominate this sector.

"The residential business wasn't really a target market segment for us before," says Rodger Marticke, executive vice-president of FedEx Ground. "But now we're going out there soliciting the business."

In many ways, FedEx Home Delivery is the necessary consequence of a much larger goal – to integrate the company to fit every client's shipping needs.

"FedEx not only wants to handle the shipments that go from say, Hong Kong to the US, but also those same shipments as they go through distribution centres, retail outlets and finally, peoples' homes," says Brian Clancy, principal at MergeGlobal, a logistics consulting firm. "You're increasing the share of a shipper's transportation wallet."

Over the past several years, the company has streamlined operations to give customers a one-stop shop for all FedEx services – air, ground, freight, logistics – much like rival UPS.

"The intent of our integration is to make it easier for customers. The largest global accounts to the smallest can get all their needs handled by FedEx Express and FedEx Ground, and by the same sales staff," says Mr Marticke.

But the company has stopped short of merging its ground and air networks. Mr Marticke explains: "We believe it is necessary to have two separate networks to get the level of service you're paying for."

But UPS claims its competitor is keeping the networks separate to avoid unionisation among its truck drivers.

For a while, it appeared FedEx might run the risk of remaining a distant second to UPS. The Atlanta company, famous for its brown delivery trucks, has been on a spending binge since it went public in 1999 – building a formidable air network and acquiring logistics operations around the globe.

While analysts say UPS has the cash to "make a half-billion-dollar mistake", owing to its profitable, efficient ground system, FedEx has been bogged down by a costly air operation.

"In this business, efficiency and margins are what's important, not size," says Robert Norfleet, analyst at Davenport. On that front, FedEx has been on the losing end: gross margins for the air express business – which still account for nearly three-quarters of total revenues – are around 6 per cent. UPS, meanwhile, enjoys a 12 per cent gross margin for its extensive ground delivery business.

"FedEx is finding a medium ground in terms of how to allocate capital better (and) reduce capital spending . . . they're carrying more volume, signed the agreement with the US postal service and becoming a much more efficient company," says Mr Norfleet.

Expanding ground capabilities has had a two-fold benefit: not only is it attracting new customers from UPS and other shippers, it also helps retain clients. And margins on the ground business are much better, as most customers are small to medium-sized companies that cannot demand the deep discounts given to large shippers.

But there is also little choice – the need for overnight deliveries is likely to decrease. Rather than needing parcels shipped overnight, customers will probably want services that deliver items at a specific time.

In the latest quarter, FedEx Ground was the brightest spot among the group's three operating units, which include the air express services and freight forwarding. Volume for the domestic ground network rose 11 per cent in the three months to November 30, compared with a 10 per cent fall for US express packages. Half the volume growth in the ground network was driven by FedEx Home Delivery. By September, FedEx expects to achieve complete coverage of the residential market by reaching 98 per cent of US homes.

"The transformation FedEx has undergone has put them very much back in the game," says Mr Norfleet. "The decision to go into ground services might be what saved the company from mediocrity."