FedEx Takes Sloppy E-Tailers to Task

FedEx Takes Sloppy E-Tailers to Task
Snowstorms Hurt Earnings, but E-Commerce Firms Need to Shape Up, CEO Says
LAURA STEVENS and SERENA NG
Updated March 19, 2014 6:46 p.m. ET
Around 2.4% of FedEx’s five million tracked packages in the first two months of the year were disrupted.Getty Images
FedEx Corp. FDX -1.71% Chief Executive Fred Smith took a tough line with e-commerce companies on Wednesday, saying they need to shape up sloppy shipping practices or risk losing customers.

On Wednesday, FedEx said severe weather shaved $125 million off of its fiscal third-quarter profit, pushing earnings well below even scaled-back analyst estimates. But snow and ice weren’t the only things Mr. Smith blamed. A significant part of the industry’s Christmas-delivery mess, he said, stemmed from problems on the part of retailers.
Retailers, he said, claimed that packages had been tendered to FedEx and rival United Parcel Service Inc. UPS -0.22% for delivery to their customers before they actually were. In addition, labels were often affixed incorrectly or items weren’t properly packaged and subject to damage, the executive added, sounding like the Marine Corps veteran that he is, while speaking on an earnings conference call with analysts.
“No one wants to order something over the Internet, get it three days before Christmas and it is smashed or the label comes off it and the package goes into the ether,” Mr. Smith said.
Retailers’ shortcomings on their side of the delivery equation “is a big part of the e-commerce business that really didn’t get enough publicity last year because they were an integral part of the problem even more than the weather and the carrier performance,” the FedEx chief said.
FedEx didn’t name names on the e-commerce naughty list, but Mr. Smith said his company is working with its retailing customers on these issues.
The Journal reached out to some prominent e-commerce companies to get their reaction. Amazon.com Inc., the country’s largest e-commerce company, didn’t immediately have a comment, and discount retailerOverstock.com Inc. OSTK +0.47% said the relevant executives were traveling and unable to comment.
Wal-Mart Stores Inc., WMT -0.03% which has pledged to invest aggressively in e-commerce, declined to comment on Mr. Smith’s statements.
Some retailers have acknowledged they were in part to blame for the holiday-season shipping snafus, but also have pointed to the limited capacity of FedEx and UPS to handle large spikes in volume.
Last month, executives at Kohl’s Corp. said the department-store chain faced “operational challenges” in its own fulfillment centers during the peak holiday season, which resulted in some customers not getting their gifts on time even though their orders were submitted before a specified shipping cutoff date.
“We all have to be…more realistic as to what we can get delivered those last few days before Christmas,” Kohl’s chief financial officer Wesley McDonald told analysts on the company’s earnings call in late February.
Due to the surge in online shopping, package-delivery companies set records for deliveries during the 2013 holiday season.
UPS delivered a record 31 million packages on Dec. 23, up 13% from its peak day in 2012, while FedEx said it had at least three record delivery days in December of more than 22 million packages.
Adding to that, online orders on Dec. 23 were up 63% from a year earlier, according to Mercent Corp., which works with more than 550 retailers.
On Dec. 24, FedEx’s on-time rate was about 90%, compared with 98% the previous year, according to numbers from SJ Consulting Group Inc., which provides consulting services to the transportation and logistics industries. UPS’s on-time rate fell to about 83%, compared with 97% on Christmas Eve in 2012.
Industry experts have attributed this difference to UPS’s bigger market share of e-commerce and a lack of caps on its contracts with retailers.
Mr. Smith attributed the company’s peak-season success to FedEx’s separate ground and air networks. He also cited contracts with customers that “don’t overpromise or say we do things that we end up not being able to do.”
His comment was a reference to UPS, which said in January that its network was overwhelmed leading up to the Christmas holiday as e-commerce shippers dropped off unexpected packages by the trailer load.
UPS declined to comment.
Online customer-service tracker StellaService had mystery shoppers order about 1,000 packages in the last two months of 2013, and found that about 10% arrived with damaged packaging.
In late December, retailers including Wal-Mart, Amazon and Kohl’s issued customers gift cards and refunds for shipping costs and items that didn’t arrive before Christmas.
FedEx’s third quarter, which runs from December through February, included the company’s holiday peak season.
Mr. Smith and other executives said the company performed well, despite weather and other problems, adding that FedEx even delivered packages on Christmas Day.
FedEx reported third-quarter profits of $378 million, or $1.23 a share, on par with last year’s adjusted earnings per share but below the Thomson Reuters analyst consensus of $1.45 per share. Revenue increased 3.2% to $11.3 billion.
Revenue at the FedEx Ground division rose 10% to $3.03 billion as daily volume grew and the company received more money for each package.
The Express division’s revenue slipped slightly, but operating profit grew 14% to $135 million, helped by cost cuts and U.S. business performance.
The company lowered its outlook for the full year, citing weather in the third and fourth quarters, as well as fuel prices and only moderate global economic growth.
FedEx now expects earnings per share of between $6.55 and $6.80. The company previously gave a growth range of between 8% and 14%, or between about $6.73 and $7.10.
Analysts polled by Thomson Reuters expected $6.89 per share.