Amazon and online shopping are creating a huge problem for FedEx
Underneath those headline results, the company's release and subsequent earnings call revealed a growing challenge for the company: too many packages.
In a possible case of "too much, too soon" it appears that the growth of online shopping through Amazon and others has burdened FedEx with a sudden influx of direct to consumer packages. In fact, on the earnings call, Mike Glenn, executive vice president for corporate communications, said, "We are closing out what has been another busy peak season for FedEx, largely driven by the continued rapid growth of e-commerce."
"As e-commerce grows, so does the challenge of peak, with multiple days of volume levels approaching or surpassing double our average daily volume."
Glenn noted that ground shipping volume has increased by 5% year-over-year for the second quarter.
This shift to online shopping, and the flood of packages to sort and ship, has forced FedEx to rapidly increase the size of their handling operation.
"This year, we completed 185 facility projects, including four major distribution hubs, 19 fully automated stations and 69 relocations," said CFO Alan Graf on Tuesday's call. "This equates to more than 10 million square feet of additional sortation space in the network. And all that comes at a cost above and beyond CapEx investment, including rent, building insurance and property tax."
Or as Fred Smith, FedEx CEO, put it, the company added "250 acres plus" of warehousing for sorting and shipping purposes.
This expansion, said Graf, dragged on the profitability of the Ground segment as it had to digest the increased costs from the expanded facilities.
This issue has even spread to the labor side, with FedEx Ground CEO Henry Maier noting that the company is struggling to staff enough package handlers in some key markets. Here's Maier from the call (emphasis added):
"I would add here that we are increasingly challenged in seven to nine markets to find package handlers. Those markets tend to be markets where many of our customers are operating fulfillment centers and we tend to try to source those handler jobs from the same pool of labor. And as a result of that, we are seeing, particularly this time a year, the need to increase hourly pay rates, offer surge pay and peak bonus pay in an effort to source an adequate number of people to staff these facilities."
Now this is not only a comment on how badly FedEx needs to staff its facilities, but it also appears that the tight labor market - with the lowest unemployment rate since 2007 and fastest wage growth since the recession - is compounding the issue.
The FedEx executives argued that the investments will allow them to better handle the increased load of online shoppers, but for now it appears e-commerce is forcing the shipping company through some growing pains.