2 looming problems are threatening to hammer FedEx — and that's not even counting the recession

2 looming problems are threatening to hammer FedEx — and that's not even counting the recession
FedEx planes at Memphis superhub.John Gress Media Inc/Shutterstock
  • FedEx CEO Raj Subramanian said the company is facing less demand due to an "e-commerce reset."
  • E-commerce is currently around 19% of total retail sales — still higher than pre-pandemic.

FedEx doesn't need to worry about a full-blown recession to see trouble ahead.

Executives from the delivery giant told investors on a Tuesday earnings call that an "e-commerce reset" was responsible for tanking package volumes in the company's US business. Morgan Stanley analysts wrote that "e-commerce normalizing back to trend" could be enough to create a problem for FedEx, even without the broader economy taking a hit.

In the part of its business that handles the most e-commerce, FedEx's average daily package volume was down 9% in the most recent quarter. (It has also been weeding out some packages that don't bring in enough profit, pushing down volume.)

"Volumes were across the board softer than anticipated," wrote Goldman Sachs analysts, adding that the holiday season — the busiest and usually most lucrative time of year — has been muted this year.

"I think the main macro issue in the United States is really the e-commerce reset," FedEx CEO Raj Subramanian said on the call. Before the pandemic, roughly 16% of retail was e-commerce, he said. At the peak of lockdown-induced online shopping, it touched 22%. Right now, Subramanian estimated that figure is around 18% or 19% — and falling.


Market share worries

The question e-commerce-related businesses have been asking all year is how much of the pandemic growth will stick. Companies from Shopify to Paypal have taken the conservative view: that e-commerce growth will revert to where it was headed in 2019.

But Rick Watson, the CEO of RMW Commerce Consulting, sees another trend in the mix when it comes to FedEx. He told Insider that UPS is growing faster with small and medium businesses, and is more profitable than FedEx. Meanwhile, Amazon continues to deliver an increasingly large percentage of all the packages on the road.

"What you are seeing, more than a reset, is just a shift in share," Watson told Insider. "The reality is, even with the economic challenges of the last year, e-commerce is still growing dramatically, as evidenced by Shopify and Amazon growth rates in the mid-teens in their last earnings."

"This ugly performance is driving lower volume and a corresponding decline in market share," said Dean Maciuba, a managing partner at Crossroads Parcel Consulting who spent three decades at FedEx.

A FedEx spokesperson told Insider the company has maintained share.


UPS's pain could be FedEx's gain

There is some potentially good news for FedEx: A quirk of the calendar coming to help.

Multiple consultants told Insider that any share loss at the end of 2022 will likely come back in 2023 since FedEx stands to benefit from UPS's upcoming negotiations with the Teamsters Union that represents its drivers — and that has already threatened a strike.

"After peak, FedEx will likely see an increase in share as shippers start to worry about the likelihood of a potential work stoppage at UPS," Joe Bobko, principal consultant at BCG Services and a UPS alum, told Insider.

Bobko added that while many in the industry can make informed guesses about market share, it's essentially a black box.

"The multi-billion dollar savings plans, if successful, can easily offset losses (whether planned or not) in share," Bobko said.