FedEx Corporation is a deliver service company in the Couriers and Local Delivery Services industry. It was founded in 1971 by Frederick W. Smith, and its headquarters are located in Memphis Tennessee. FedEx is one of the largest delivery companies in the industry with locations all over the world, and they specialize in shipping by ground and air. In May of 2019, their fiscal year ended with a total revenue of over $69 billion (Kalyani, 2019).
External Analysis with Porter’s 5 Forces:
In the industry, fixed costs are one of the biggest expenses these companies face. The fixed costs include paying for the warehouses, different types of packaging, vehicles for ground shipping, airplanes, and fuel for both types of transportation. The fixed asset turnover ratio for FedEx is 2.21 (Dybek, 2019). It is very difficult to achieve economies of scale in this industry because it is dominated by UPS and FedEx. Smaller companies must lower prices in order to compete with the leaders in the industry. It takes a large amount of capital to start up a delivery service company because of all the fixed costs that come with it. Brand loyalty and switching costs are not major factors in the industry. The shipping charge is similar between companies and customers generally don’t mind who delivers the product, just as long as it arrives quickly and intact. Lastly, there are strong government regulations that make it difficult for new companies to enter the market. As a whole, the risk of entry is low.
The industry is dominated by the United Parcel Service (UPS), which holds 53.1% of the market, and by FedEx, which holds 24%. The remaining 22.9% is made up of many smaller shipping companies, such as DHL, which has 3.7% of the market share; therefore, FedEx’s biggest competitor today is UPS. Because there are few companies that make up large percentages of the market share, this makes the industry consolidated. The demand is relatively constant because the industry is at the mature stage of its lifecycle. This concludes that competition is high, and the threat is rivalry is also high (Kalyani, 2019).
The primary suppliers in the industry are retail distributors or warehouses. Because there are a few big players in the market, these suppliers rely heavily on the industry as a large portion of their revenue. If a supplier tries to raise its prices, FedEx could simply find a different supplier because switching costs are low. However, certain expenses such as gasoline can fluctuate, and their fuel supplier can raise the price. Also, the manufacturer for the planes and vehicles can raise prices. This makes the bargaining power of the suppliers moderate.
The primary buyers are the companies who order large quantities of products through the players in the industry. There is a low switching cost for buyers, so they generally give their business to the cheaper company. Because there are few main competitors in the market, they compete with prices for contracts with these buyers. This makes the bargaining power of the buyers high (FedEx corp, 2017).
The threat of substitution is low. There are very few substitutes in the industry that would make a significant reduction in revenue. One example is the use of email or phones to send messages to other people. Another substitute could be if you physically drive yourself to a store to pick something up, instead of having it delivered to your house. Example of compliments could be the fuel that goes in for transportation, mechanics who fix the trucks and planes, shipping boxes and packaging, and storage warehouses.
In 2019, there was a decrease in gas prices, which increased consumer spending on goods and services. This caused a growth of 4.7% in 2019, and the industry expect it to grow at a rate of 4.8% in the next five years. Interest rates have also increased by 1.4% in the last five years. There has also been an increase in e-commerce sales for the industry, growing at a rate of 20.8% annually for the last five years (FDX Stock Price).
FedEx has strengths in the industry that are both valuable and rare. They have a valuable brand name; it is one of the most recognizable brands in the world, and they stress keeping their strong reputation that customers value . They are also strong in their company infrastructure. FedEx has built a variety of different hubs for planes all over the world that can have goods delivered within one day. They also have a large number of warehouses so their ground transportation to one another is more efficient. This is rare because not many companies can do this. In addition to these strengths, FedEx has a few weaknesses. They can’t control the prices of fuel which is a major expense for them, they are not as successful in other areas of the world compared to the United States, and they can not differentiate themselves from UPS, who owns the biggest share in the market (FedEx Annual Report 2018).
FedEx has product innovation with its information systems. These advanced systems can give customers up-to-date tracking information of their ordered product, as well as an estimated time of arrival. They are known for their reliable quality, being in the industry for over 40 years they have developed customer loyalty and a service they can trust. They are also introducing electric delivery vans, which will make transportation more efficient and cut back on fuel costs. As of May 2019, FedEx has an ROIC of 2.29%. Over the last five years, the total invested capital has stayed relatively constant but ROIC has been more up and down. ROIC was at its highest in 2018 at 9.75%, but over the course of a year it dropped over 7% (FedEx ROIC). Although FedEx in behind UPS in total market share, they still have a competitive advantage over the other companies in the industry.