FedEx’s (FDX) massive investments are cutting into its profits, so the shipper is charging some retailers more.
The shipper, which expects holiday package delivery volume to rise 10% over last year’s record, has opened four enormous distribution hubs and 19 automated sorting stations to help it handle more than 1 million packages a day. But margins for FedEx’s ground business fell last quarter, and overall operating profit margin dropped to 7.8% from 9.1% a year earlier.
FedEx CEO Fred Smith told Wall Street analysts in a call Tuesday that it was important to build up that side of the business in a more profitable manner. “There are a large number of transportation and logistics companies that prove that every quarter,” Smith said, “making no money.”
At the same time, he downplayed the relative importance of the holiday season e-commerce surge to FedEx’s total business: “While we are committed to being a leader in the e-commerce market, it’s important to recognize that non-e-commerce deliveries to residences and business-to-business traffic represents the vast majority of FedEx Corporation’s estimated $60 billion [in fiscal 2017 revenues].”
So the company is pushing some customers to pay higher prices and dropping some who won’t pay up. And FedEx made clear it is ready to sever ties with customers that don’t agree to its higher pricing. “We are not afraid to walk away from a relationship,” Mike Glenn, CEO of FedEx Services, said on Tuesday’s call.
For the quarter ended Nov. 30, FedEx reported a profit of $700 million, or $2.59 a share, up from $691 million, or $2.44 a share, a year ago. Revenue rose 19.2% to $14.9 billion thanks in part to the addition of TNT Express, which FedEx bought this year for $4.8 billion.
As of Dec. 20, U.S. e-commerce holiday season sales were up 10.7% to $79.2 billion, according to Adobe Digital Insights. While that’s a bonanza for FedEx. At the same time, its profit-sapping expansion has caught Wall Street’s eye.
“Clearly preparation for peak was more expensive than expected,” Citi analyst Christian Wetherbee wrote in a research note.