isn’t exactly delivering. The company is suffering from the fallout of trade tensions, but severing its relationship with
com cold turkey is clearly exacerbating the problem. FedEx sharply cut its profit forecast for the year as it faces higher costs and lower revenue. That, plus an 11% drop in fiscal first-quarter profit, sent its stock plummeting more than 13% by Wednesday afternoon—potentially setting up the stock’s worst single-day decline in more than a decade.
Global trade is the first problem. The company pointed to Chinese industrial production, which Beijing’s official figures show grew at its slowest pace in 17 years in August. The company sees economic headwinds continuing in the U.S., too.
This slowdown makes FedEx more vulnerable to the consequences of its breakup with Amazon. In June, FedEx said that it was going to end the Amazon relationship for the air-delivery portion of its business, FedEx Express. In August, the company decided to essentially sever ties with Amazon completely, not renewing its contract that expired at the end of that month. FedEx has tried to minimize the fallout by claiming Amazon represented a little over 1% of revenue last year. But Amazon still splashes out more than $31 billion a year in shipping costs, which means FedEx has closed itself off to one of the biggest potential customers in the business. Granted, Amazon wasn’t the most lucrative client. FedEx said on its call that it was “taking out significant costs, which were unique to Amazon’s requirement.” In the end, FedEx could be better off without hustling to service Amazon’s demanding delivery schedule.
In the interim, though, its business will suffer. While Amazon represents only a “small portion” of the company’s revenue, it said, the “last bit of volume has significant flow-through to the bottom line”. Partnerships with other retailers such as Walmart could pick up some slack, but it, too, depends on global growth to bolster shipments. FedEx’s former customer also could become a formidable competitor. Amazon has poured billions into ramping up its own delivery force, and in the process has built up a sizable infrastructure. In just the past two years, the number of Amazon delivery facilities in the U.S. alone has gone from 258 to 426, according to consulting firm MWPVL. Most of this infrastructure goes to serving Amazon’s internal needs, but the company has a history of taking its own innovations to the outside, like it did with Amazon Web Services. FedEx Chief Executive Frederick Smith admitted in a conference call Tuesday that Amazon now inhabits the “ecosphere” of the company’s competitors. That is a fearsome prospect. Amazon also plows a large chunk of its operating cash flow every year back into capital investments to expand its business. That number is projected to top $42 billion this year—nearly eight times what FedEx generated in cash from operations in its most recent fiscal year. Amazon’s capital-spending bill has jumped by an average of 37% annually over the past five years. For FedEx, Amazon’s baggage could linger.
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