FedEx Rises Most Since November on E-Commerce Efficiency Plan

(Bloomberg) -- FedEx Corp. rose the most in three months after saying it plans to hand off some deliveries from its overnight division to its separately-run ground business, attempting to wring more profit from surging e-commerce.

The arrangement is part of Chief Executive Officer Fred Smith’s strategy to tackle the flood of residential packages from online shopping, which can be more expensive to handle than commercial goods because fewer items are left at each stop. By having Express hand off less time-sensitive parcels to its Ground unit for final delivery, the company will reduce cases in which a driver from both units visit the same customer.

“We are duplicating efforts and diluting our delivery density, including the number of packages delivered at each stop,” Chief Operating Officer Raj Subramaniam said in a letter to employees. “This move is an effort to make costly last-mile deliveries more efficient.”

In the last year, FedEx has rolled out several changes, including seven-day deliveries, later pickup deadlines and more capacity to handle large packages, to capture more e-commerce business and stem a drop in profit margins. FedEx predicts that 90% of growth in the parcel industry from 2018 through 2026 will come from e-commerce.

The shares rose 5.1% to $156.22 at 3:09 p.m. in New York trading after climbing as much as 5.3%, the biggest intraday gain since Nov. 4. The advance put FedEx up 3.1% for this year, having traded down 1.7% through Thursday.

Separate Networks

Unlike competitors United Parcel Service Inc. and Amazon.com Inc., FedEx operates two separate networks for overnight and ground deliveries. Its Ground unit uses contractors who hire their own employees to operate delivery vehicles. The more packages delivered to the same place by one driver, the lower the per-parcel delivery cost will be.

“Investors have long wanted FDX to find ways to extract synergies from its two overlapping networks,” Jack Atkins, an analyst at Stephens Inc., said in a note to clients Friday. The shift will allow Express to focus on commercial deliveries while driving higher profit at the Ground operation, he said.

FedEx will start the initiative in March in Greensboro, North Carolina, with Express products that have less strict delivery deadlines, such as standard overnight and second-day service. The plan is to roll it out to other U.S. cities in phases, FedEx said in a statement.

“We continue to flex our network to stay ahead of e-commerce growth, and that includes adjustments to better handle the demand for residential deliveries while lowering our cost to serve,” Subramaniam said in the statement.

To contact the reporter on this story: Thomas Black in Dallas at tblack@bloomberg.net

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Tony Robinson, Susan Warren

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