FedEx’s Fred Smith puts e-commerce in perspective

by Aaron Karp
Sep 21, 2017

The e-commerce revolution, which is changing the shape of express cargo delivery, is not quite as straightforward as many people may think and should be kept in perspective, according to FedEx chairman and CEO Fred Smith.

Smith invented the concept of express delivery and has been at the forefront of every evolution of the business since founding FedEx in the early 1970s. FedEx and rival UPS have both had to adjust to retail becoming more and more digital, with home shipments of products ordered online making up a growing percentage of the express carriers’ deliveries.

But the notion that there is an inexorable march toward e-commerce dominating retail is not borne out by analysis, Smith told analysts this week. As he pointed out, Amazon—which has been at the leading edge of the e-commerce revolution—is itself increasingly experimenting with “brick-and-mortar” stores, most notably with its recent purchase of grocery chain Whole Foods.

“People like to come and see the produce” at grocery stores, Smith said, later adding, “I think you’re going to see e-tailers become more brick-and-mortar and I think you’re going to see brick-and-mortar become more e-tailers.”

Smith urges perspective regarding e-commerce. “E-commerce is not going to eliminate the [brick-and-mortar] retailing sector,” he said, noting that e-commerce now comprises just 10% of the retail business. “It’s about 10%,” he said. “It’s certainly going to grow as a percentage, but will it be half? I doubt it. Will it be 20% per day? 18% per day? Who knows?”

In other words, even if e-commerce doubles, brick-and-mortar will still make up 80% of retail, which provides a clue to why Amazon is getting into the brick-and-mortar business with Whole Foods and even experimenting with building and owning physical books stores—Amazon, remember, made its initial mark as an online book retailer.

“The vast majority of [US] houses, even with the growth of e-commerce, do not get an e-commerce delivery per day,” Smith said. He also noted that, despite the perception, most e-commerce is not express delivery: “E-commerce has basically been made possible by the postal service’s mail deliverer, by delivery routes and mail personnel putting small e-commerce packages in with the mail and delivering them for very low rates.”

Smith added, “So all of this is not quite as pristine as a lot of people would like to think about it, and I think over the next few years there are a lot of moving parts here and you have to be flexible and nimble to be able to deal with the market as it evolves, because you’re not going to be able to predict exactly how it’s going to evolve, that I promise you.”

Smith additionally said that companies like Amazon—which last year launched its own Prime Air Boeing 767 freighter network and is building a major air hub at Cincinnati/Northern Kentucky International Airport—might be able “to develop greater route densities” in their own networks, but will be hard-pressed to match the far-flung reach of FedEx’s global network.

“This is a very complex business,” Smith said. “We are a transportation company that serves 220 countries around the world. I don’t know how many billion people or how many millions of businesses, but it’s substantial. And through our transportation networks, each of those businesses can be connected one to the other. So that formula is N squared. I mean, there are literally billions and billions of potential combinations.”

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