So, I read the following article today and it got me thinking. Now, I am not saying either are doomed just that technology may just sap much of the growth from them going forward.
Entrepreneur Frederick W. Smith identified a pressing business need: important documents had to reach their destinations within one or two days. He incorporated a company called Federal Express in June 1971 and began operations in 1973 from Memphis International Airport. On its first night, in April, FedEx shipped 186 packages to 25 U.S. cities.
But all was not well on the international front, and within months, several Arab states had embargoed oil exports to the United States. While this news could have been disastrous for a company that relied on petroleum-fueled transportation, Federal Express stayed alive and became profitable in July 1975, when oil prices finally leveled off.
Status today: 2008 seemed at first to be a deja-vu replay of the company’s nascent years, as soaring fuel prices hurt operating costs. But when prices retreated, FedEx faced a new whammy: The weakening economy has reduced demand for prompt shipping. Average package volume for daily ground shipping dropped 2% year-over-year for the quarter ended Nov. 30. Warning that FedEx faces “some of the worst economic conditions in the company’s 35-year operating history,” CEO Frederick Smith took a 20% pay cut for 2009 as part of a sweeping cost-cutting plan.
So, what am I talking about? Do you know what is one of the fastest growing segment of the shipping giant Amazon.com? Right now it is the Kindle, the digital book. Title are delivered digitally, no shipping. Those titles are coming at the expense of books. How many books? Consider Amazon (AMZN), Barnes & Noble (BKS) and Borders (BGP) sold nearly $6 billion of books online in 2007. Now, admittedly not all are shipped via the two carriers but most are.
To see the digital effect on “hard items” see DVD’s & iTunes. It won’t be long before the majority of overnight shipping for books and dvd’s from all of the above is replaced with “download now”.
Documents. Know a ton of lawyers. Many do Social Security Disability. The social security administration is now accepting digital delivery of the documentation for cases. Insurance companies are also accepting it for personal injury and workers compensation cases. These were previously shipped via FedEx (FDX) & UPS (UPS). Again, only my corner of the world but expand this by tens of millions of claims nationally each year and you get the picture.
There are other examples but I hope the point is getting made.
FedEx and UPS will always lead in the shipment of “things” (toys, good etc) but the shipment of information is rapidly being eliminated from their portfolio. It is a large part of it and with an economy dipping into a prolonged recession, the last thing either need is customers finding a cheaper and faster way to get large amounts of the items they now ship.
Again, this will not destroy either but it does become a bit of a permanent headwind for both.
Disclosure (“none” means no position):Long BGP, none
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