FedEx is winning the ground game

April 10, 2014, 2:59 PM UTC
Photo: Mike Blake/Reuters

World’s Most Admired Companies rank: 8

Headquarters: Memphis
Employees: 290,000
The business: Provides customers worldwide with shipping, e-commerce, and business services

FedEx CEO Fred Smith would be the first to tell you it has not been an easy time for delivery companies. In late March he told investors that the 42-year-old company had experienced its “toughest winter” ever. The $44-billion-a-year giant has also been facing rising fuel costs and shrinking demand for express shipping. Yet FedEx stock, which has outperformed the market handily over the past one, three, five, and 10 years, is clearly weathering the rough patch. In the face of heavy pressure from online retailers like Amazon, FedEx is investing in its ground business to get packages to domestic customers faster. Meanwhile, it’s collaborating with traditional retailers, such as department store chains, to streamline the delivery process for their increasing number of online orders. In 1973, FedEx invented express shipping by taking to the air. Now the company plans to stay ahead of competitors by innovating on the ground.

Speedier sorting

FedEx has roughly 30% of the U.S. market for ground package distribution — a share the company has increased for 57 consecutive quarters. To keep the streak going, FedEx says it’s planning to invest nearly $1 billion in fiscal 2014 on new hubs and delivery stations as well as in automation technology, like a high-speed sorting system that can process 1.8 million packages an hour. The infrastructure improvements, say analysts, should be a boon during peak holiday periods, when FedEx handles some 22 million packages a day, more than double its typical load.

Retail collaboration

FedEx is now working more closely with retailers to speed delivery — picking up some packages from individual stores rather than at the retailers’ distribution centers. The company is also experimenting with same-day delivery at select locations of department stores like Saks Fifth Avenue. Likewise, FedEx is partnering with several chains to revamp the dreaded store-return process, says Wells Fargo Securities logistics analyst Anthony Gallo. The bottom line for consumers? It may soon be much easier to return items bought online to brick-and-mortar stores.

Express reshuffle

Boeing’s 1970 introduction of the 747 plane didn’t just give passengers more legroom; it also gave FedEx (and other global shippers) a cost-effective way to send packages by air. But today cost-conscious customers are willing to wait a bit longer for international shipments, so FedEx now ships some air cargo through third-party vendors. (The company is also replacing its less-fuel-efficient planes.) Such cost cutting is a “significant shift” from FedEx’s express-shipping roots, but one that should help it gain share in the quickly growing market for international economy shipping, says Art Hatfield, a transportation analyst at Raymond James.

This story is from the April 28, 2014 issue of Fortune.