Washington Post
March 19, 1999
Delivering the Internet Goods
FedEx Profit Surge Shows How Shipping Firms Are BenefitingBy Frank Swoboda
Washington Post Staff Writer
Friday, March 19, 1999; Page E01Propelled by an explosion in electronic and Internet commerce, the nation's package-delivery services are reaping a financial bonanza in the new world of just-in-time shipping, in which companies sell things before they build them, relying on instant communication, rapid shipment and precision timing to make it all happen.
While these techniques have been around for some years in select industries, the expansion of computer-based communication in the past four or five years has allowed them to spread dramatically.
The latest illustration came yesterday when FDX Corp., parent of Federal Express, the nation's leading overnight delivery service, reported a more than fourfold increase in third-quarter earnings, news that sent FDX shares up $5.18 3/4, to $98.50. Earlier this year, United Parcel Service of America Inc. reported an 87 percent increase in earnings for 1998. (This past Dec. 23, the same company set an industry record when it received 1 million parcel-tracking requests in a single day. Three years earlier, the UPS record was 100,000 in a month.)
While Internet purchases by individuals are also rising dramatically, the more serious money is in electronic business-to-business commerce, when one company buys something from another using the Internet or private intranets for execution. Forrester Research Inc., one of the industry's leading analysts, predicts that this sort of trade will rise by $43 billion in 1998, to $1.3 trillion by 2004.
FDX Chairman Frederick Smith said the increase in third-quarter net income from $18 million in 1998 to $78 million this year was largely the result of what he called "the accelerated move to fast-cycle production and distribution methods, the growth in electronic commerce and supply chain engineering."
More simply put, the package-delivery industry is benefiting from the massive shunning of inventory, achieved when companies make only what they know they can sell. Some retailers, such as the online auction house eBay Inc., often never see the goods they sell, serving merely as the broker in an emerging world of electronic bidding.
Ross McCullough, senior director of electronic commerce for UPS, said electronic business has allowed many companies become mere intermediaries, "never taking ownership of the product and making the process more streamlined." He said 80 percent of UPS's 12 million daily packages are handled by Internet commerce. McCullough predicted that 10 years from now a majority of UPS business would be business-to-business electronic commerce.
UPS spokesman Norman Black foresees a day when a customer will place an order for a shirt with a catalogue company on the Internet; the order will go directly to a factory in Asia, which will cut and sew the shirt to the customer's specifications; and the factory will then ship it directly to the buyer without the garment ever having physically passed through any part of the catalogue company's operations.
FedEx and UPS already are working -- with Dell Computer Corp. and Gateway Inc., respectively -- to allow next-day shipment of custom computers that didn't exist the day before.
In the case of Gateway, McCullough said UPS will often pick up a monitor off the boat from Asia, a keyboard from the company plant in Iowa and a central processing unit from another source, "and the three boxes meet on the back of a [UPS] truck on the way to the customer."
FedEx Vice President William Margaritis said 70 percent of his company's transactions are now electronic, conducted at a rate of 60 million a day. He said FedEx now has 1.5 million electronic installations of its own around the world where customers can contact the company.
Margaritis said a year ago electronic transactions accounted for 66 percent of FedEx business, this year it was 70 percent and the company hopes eventually to make it 90 percent.
He too predicted arrangements under which client companies never see or handle the goods they sell, eliminating layers of costs for middlemen. The express companies, in effect, become the middlemen at a much lower cost to the customer.
"We were into e-comm, before e-comm was cool," said FedEx Chairman Smith.
One FedEx customer is Amazon.com Inc., which Smith used during a recent interview as an example of how variable the economics can be in electronic commerce. Smith said he didn't know how long customers would be willing to pay $7.95 to deliver an $18 book purchased over the Internet, but that most customers wouldn't flinch at a $22 shipping charge for a $3,000 computer.
Brian Clark, vice president of the Atlanta-based Collography Group, which conducts research in the transportation industries, said delivery firms such as FedEx, UPS and to some extent the U.S. Postal Service, have made themselves essential to the success of electronic commerce at the consumer level as well. The delivery companies, he said, are replacing the consumer's own transportation. "You're cutting out the consumer jumping into his car and picking up a purchase."