US FedEx dares to keep the status quo

Go behind the scenes at some of Manhattan's top restaurants and the revolutionary impact of FedEx can be found staring straight back at you – in the clear, glistening eyes of truly fresh fish.

Thanks to the company's global delivery network, gourmet chefs are increasingly bypassing the traditional fish market and sourcing their best fish directly from individual fishermen thousands of miles away.

Turning business models upside down in this way is something the express parcel carrier does quietly all the time. When Apple sold one million new iPod nano music players in 17 days last month, the customised models bought online barely saw the inside of a warehouse but were fed directly from factories in China into the FedEx delivery system.

The efficiencies made possible by such low-inventory supply chains even play a key role in the flexibility and resilience of the US economy – most recently lauded by Alan Greenspan, chairman of the Federal Reserve.

But while FedEx continues to change the world of business, a curious stasis is apparent in its own business model. Fred Smith, the former US marine who largely invented the overnight airborne delivery industry by founding Federal Express in 1971, is sitting out the latest revolution sweeping the package delivery industry.

The company's biggest rivals – United Parcel Service, Deutsche Post and TNT – are expanding into an ever-wider range of logistics services but FedEx remains doggedly focused on its core small package and light road-freight businesses.

While Michael Dell now sells printers and Bill Gates chairs a software company that produces games consoles, Mr Smith is a rare example of a successful entrepreneur choosing to stick to his knitting. "We have looked long and hard at whether we want to be a big player in the contract logistics sector," he says. "We have chosen not to do so because it is a low margin business and it is not clear to us that there is the type of synergies there that our competitors hope to find."

Mr Smith has never previously been one to cling to the status quo. So it is tempting to wonder whether, after 34 years at the industry's cutting edge, FedEx is becoming a more conservative company, and Mr Smith, at 61, is losing his eye for the new opportunity.

Deutsche Post, which owns the DHL parcel delivery network, believes that in an era of complex global supply chains, there is an opportunity for it to provide a "one-stop shop" for all the logistics needs of its corporate customers. The group already has the capability, following a series of acquisitions, to deliver anything from the lightest package to the heaviest freight by land, sea or air anywhere in the world.

The German group's offering will be strengthened further if its Pounds 3.7bn agreed takeover of Exel, the British contract logistics group, is completed as planned. In addition to co-ordinating the movement of its customers' goods around the world, Exel does everything from managing warehouses to sub-assembling parts for manufacturers.

UPS, the largest US package delivery group, has been more cautious in its expansion. But its acquisition last year of Menlo Worldwide Forwarding, a global air and sea freight company, suggests it broadly shares Deutsche Post's vision.

TNT, the Dutch post and package group, has also developed a powerful contract logistics and freight forwarding business.

FedEx, in contrast, has limited itself to a small, home-grown supply chain services division and Mr Smith says there are no plans for a large acquisition in the sector. The group's only serious exposure to heavier goods is through its domestic road freight division. But even that is limited to the so-called "less than truckload" segment, transporting relatively light loads over short distances.

Mr Smith believes the small package and light freight markets are fundamentally different from – and more attractive than – the logistics and heavy freight businesses being pursued by Deutsche Post, UPS and TNT.

The former, he says, are high-margin activities fo-cused on delivering small, high-value products, such as iPods or Louis Vuitton handbags, to their point of consumption. The latter, by contrast, is a lower-margin business, typically involving lower-value, larger-scale goods destined for earlier stages in the production process.

While small package customers include many small and medium-sized businesses and consumers with weak pricing power, the heavier freight and contract logistics markets are dominated by large retailers and manufacturers with the leverage to squeeze margins. "We've seen no reason to get into that sector," says Mr Smith.

His scepticism about diversification is at odds, not only with FedEx's rivals, but also with many investors. Jon Langelfeld, analyst at RW Baird, says an acquisition by FedEx in the freight forwarding sector "would be well received by investors".

Mr Smith has never been afraid to go against investor sentiment. But he insists he would not hesitate to change the strategy if the company started losing business because of its lack of logistics services. "If we start to hear people saying 'we want a one-stop shop, we're going to take away your small shipment business', then we'll have another look," he says. "But, so far, we've seen very little leakage."

Mr Smith is equally cautious in his approach to international expansion. FedEx remains, at heart, a cargo airline. As such, it eagerly snaps up every additional take-off and landing slot it can secure in the plum parts of Asia and Europe. But the group is more hesitant about acquiring assets on the ground.

While UPS recently joined DHL in offering a domestic parcel service in China, FedEx has stuck with imports and exports. In Europe, too, the group has shown little interest in competing domestically.

Mr Smith says the reason for the caution is simple: the inter-continental express market, with its high margins and strong growth, remains a more attractive business than either China's nascent domestic market or Europe's fragmented and fiercely competitive road-based markets.

Instead of sinking hundreds of millions of dollars into fleets of branded delivery trucks around the world, FedEx has in many places preferred to forge partnerships with local delivery companies. In the UK, for example, FedEx uses Business Post, a British courier company, to access parts of the country not covered by its own vehicles.

"We would not be afraid to invest Dollars 5bn-Dollars 6bn (Pounds 2.8bn-Pounds 3.4bn) (in an overseas acquisition)," says Mr Smith. "But we are not going to make any investments of that magnitude unless there were wonderful financial returns."

There are clearly risks to FedEx's take-it-or-leave-it approach to geographical and sectoral expansion. If Deutsche Post's one-stop logistics shop turns out to be a winning strategy, FedEx will have a lot of catching up to do. Likewise, opting out of European and Asian domestic markets leaves holes in its global network that DHL and UPS could exploit.

Until then, Mr Smith's simple strategy of using a hub-and-spokes air network to deliver packages with speed and reliability remains as effective today as it was when the first FedEx aircraft left a runway in Memphis 34 years ago.

When you have a model that produces results, says Alan Graf, chief financial officer, it is best not to tinker. "What we haven't done," he says, "is just as important as what we have done."