Presentation_Spring 2016.pdf

Courier Industry in the Age of Technological Revolution

Agenda

Genesis:Where it All

Began

Current State of the Industry

Industry AttractivenessFedEx’s Position

Finish

1. Genesis: Where it All Began

1775 – Benjamin Franklin, first Postmaster

General under Continental

Congres 1973 – Fedex

began operations

1956 – M. McLean Containerized Cargo Shipping

1911- First Experimental Flight

1920 – First transcontinental airmail

1969 – DHL invented the international air express industry

1984 – Fedex going global

1907-1913 Messenger Service

1980 – UPS expand air shipment

1999-2000 Global Evolution

1929- UPS open United Air Express

Sources: History of UPS, Time Line Fedex, DHL,USPS

Where is the industry going...

Delivery Location 130

Private carrier

Common carrier

Fullfillment center

Expedited service path

Hub 120c

Hub 120a

Hub 120b

Designed to cut delivery times Predict what buyers are going to buy before they buy Ship products in their general directions Patent 8,615,473 B2 December 24, 2013

New Way of Thinking New vision of doing business

Source: The Washington Post

Global Geographical Segment

UPS 30%

DHL 16%

FedEx 50%

Americas

UPS 23%

DHL 41%

FedEx 10%

TNT 14%

Others 12%

Europe

UPS 10%

DHL 40%

FedEx 21%

TNT 6%

Others 23%

Asia Pacific

UPS 3%

DHL 49%

FedEx 9%

TNT 10%

Others 29%

MEA

Sources: Financial ST: FedEx, UPS, DHL TNT

Products & Services Segmentation

4.90%

12.40%

12.50%

70.20%

Product & Service segmentation

Messengers and local deliveries

Domestic air transit deliveries

International air transit deliveries

Ground deliveries

Source: ibisworld

The segment of ground deliveries have not fluctuated in the past five years. Industry operators include bus lines, messenger services, car services, food product delivery, bicycle courier companies, specialized bank documents. Consumers move from express services to more affordable ground services.

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

UPS DHL FedEx

United States Revenue International

Product Segment

Source:10TopTenReviews

Customer Service Options

Source: 10TopTenReviews

2. The Current State of the Industry


Began


Growing Industry

Revenue 38.2 Billion Operational results 4,371Number of employees 398,300Number of vehicles 94,946Number of aircraft 523Number of company representatives 220

Tight Competition in CEP

2

$0

$10

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$60

2011 2012 2013 2014 2015 2016

MIL

LIO

N

REVENUE UPS REVENUE FEDEX REVENUE DEUTSCHE POST AG

UPS FDXOperating Margin 11.97 8.86

Net Margin 7.34 5.36EBITDA Margin 15.59 14.42

ROIC 20% 13%ROE 78% 17%

Debt/EBITDA 1.57 0.79Debt (adj. for op. 1.86 2.96Leases)/EBITDA

1.96%

6.01%

3.76%4.55%

8.50%

HUB GROUP UPS FEDEX Industry S&P 500

Net Margin 5 Yr. Avg.

Sources: CSIMarket, STATISTA

Global vs. U.S.

GDP growth in 2016 - expected to expand

2.5% in the U.S. and 3.4% globally

E-commerce growth & Technology Deployments Profits CEP

$-

$50

$100

$150

$200

$250

$300

2011 2012 2013 2014 2015

BILL

IONS

MARKET SIZE

GLOBAL US

0

50

100

150

200

250

300

1 2 3 4 5

THO

USAN

D

TOTAL EMPLOYEES

GLOBAL US

Positive Indicators

Revenue growth 3.2X UPS 4.1X FEDEX 0.1X DHL declineOperating Profit Growth UPS & FEDEX decline, DHL increase

2011-2016 Compound Growth: 2.38%Forecasted 2016-2021 Compound Growth: 2.83%

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$10

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$60

2011 2012 2013 2014 2015 2016

MIL

LIO

N

PROFIT MARGIN

UPS REVENUE UPS PROFIT FEDEX REVENUEFEDEX PROFIT DEUTSCHE POST AG REVENUE DEUTSCHE POST AG PROFIT

4

Sources: Financials UPS, Fedex, TNT, DHL, Yamato

The BI declined 5.5%, still outperformed the S&P 5002016 GDP forecast to 1.7% from 1.8%

Deutsche Post down 22.3%FedEx also down 12.5%

Decline in Express Stocks Milder than BroaderMarket Weakness

Source: Bloomberg Report

Express Carriers' P/E Drop Mirrors Decline in Broader Market

13% median EPS gain on 4% higher revenue in 2016

UPS trades P/E ratio of 18.5x 6% premium to the S&P 500

FedEx trades at 11.4% discount

Deutsche Post trades at a 10% premium to Germany's DAX Index

6Source: Bloomberg Report

Stock Performance in the CEP Industry

Worst performing StocksYamato Holdings Co -6.09%

Deutsche Post Ag -5.91%

Expeditors International of Washington Inc. -2.93%

Royal Mail PLC -0.99%

Atlas Air Worldwide -0.84%

Best performing stocksATSG 54.56%

TNT Express 15.56%

FedEx Corp. 9.07%

Forward Air Corp 6.51%

UPS 1.68%

7Source: Bloomberg Report

Profitability Decline

ROA decreased 2.83 %, due to deterioration of net income -49.93%

ROE decreased compare to previous year to 7 %

Sources: Fedex; Yahoo Finance

Global Consumer Spending Growth: a Potential Opportunity for the Industry

Data Source: Euromonitor International

¾ Industry revenue is expected to grow due to increasing demand from consumers.

¾ As spending increases, more items will need to be delivered using courier services.- A good portion of consumer spending goes to online shopping.- Businesses that offer services to consumers also need more goods to be shipped

Manufacturing goods, supplies, materials, etc.

$200

$210

$220

$230

$240

$250

$260

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

2010 2011 2012 2013 2014 2015 2016 2017 2018

Billi

om

Trill

ion Industry Revenue - World World Consumer Expenditure - World

Changes in World Trade Volume to Impact Revenue Growth

Data Source: IBIS World

¾ The global economic slowdown caused the total world trade to decline in 2009, as the largest economies in the world went into recession. Consequently, demand for the transportation of packages and parcels diminished, causing industry revenue to plummet in 2009.

¾ As the economy recovered, world trade bounced back to positive numbers and has been growing steadily but at a low rate

05.4 3.7

-12.8

7.1 6.5

-0.30.8 1.1 0.7 0.7

15.72

17.4214

-19.3

19 18.87

1.57 3.24 1.75 2.8 2.89

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

% Revenue Growth % Change in world trade volume

Global E-Commerce Market Growth Boosts Package Volume

Source: Bloomberg

¾ Growth in e-commerce in various other economies such as Europe, India, and China opens up new opportunities for international players such as FedEx and UPS.

¾ Retailers everywhere want to expand their operations to include online shopping- This will result in higher demand for package delivery

Tech Innovation Goes Goth Ways

Challenges Opportunities

No oil needed!

Digital Documents

Image Sources: Google Images

Fastest route

Pocket PC, e-sign

Growing Consumer

Expenditure• Increases demand

Growing Trade

Volumes• Increases demand • Enhances supply-chain

Increase of Internet Usage

• Drives e-commerce growth

• Decreases need for couriered documents

• Improves customer relationship

• Lowers costs

External Trends Matter in Terms of Revenue Growth

Data Source: IBIS World

Reaching a Plateau

Source: IBIS World

-

Mail revenue 2012-2014 Bubble size indicates 2014 revenues in US$

Mail Volume 2012-2014

Revenue by type of services: 2007 to 2014

Ø From 2013 to 2014 mail volumes declined by a mere 1.6% Ø Global compound annual growth rate since 2010 is 2.6% Ø All countries are experiencing a decline in transaction mail; however, there are some regional differences. Ø  In 2007 mail comprised 55% of total revenue while in 2014 it went down to 44%

Sources: Accenture, News Reports, Financial Times

Mail Parcels Logistics Financial Services Retail Others

Recalibrating

Source: IBIS World

-

Parcel revenue 2012-2014 Bubble size indicates 2014 revenues in US$

Parcel Volume 2012-2014

Global parcel market volume (millions) and growth rate 2009-2014

Ø From 2013 to 2014: healthy parcel volume growth of 5% Ø Global compound annual growth rate since 2009 is 6% Ø Overall, revenue and volume growth is relatively balanced across companies Ø The growth in parcels delivery is driven by eCommerce


Invest in Parcels Opportunity

Source: IBIS World

Parcel volume growth, revenue growth and yield by performer group: 2012 to 2014

Ø The top 10 performers in the industry have achieved significantly better volume and revenue growth

Ø Clear correlation emerges between volume, revenue growth and high performance


B2C Implications

Source: IBIS World

UK Cyber Monday – 2014 China Singles Day – 2013

39% 86%

166 million 10x

More parcels than previous Monday

More cross-border shipments than previous year

Shipments across China

Greater than average daily shipping volume

Sources: Financial Reports, Metapack, Accenture, News Reports

Ø Although B2C is driving growth; it is also exposing delivery companies to more volatility in demand

Dec 2013: “UPS admits it was unprepared for the late surge in online holiday shopping.”

Competition Basis

Sources: IBIS World, Morgan Stanley, FedEx Annual Report, UPS Annual Report, AllBusiness, PAConsulting

Ø Competition level of CEP industry is HIGH Ø Prompt delivery is crucial Ø Bigger fleet and brand recognition will help gain

market share Ø  Long-term contracts ensure constant stream of

revenue

Price vs. Reliability

Sources: Prestashop, USPS UPS, FedEx

Ø USPS focuses on being the low-cost provider; however, the reliability is it’s Achilles Heel Ø UPS can be slightly more expensive than FedEx Ø Both UPS and FedEx take delivery time very seriously

Head-to-Head Competition

Source: Stamps.com

Packages shipped from three cities to all shipping zones

Total number of scans per package

Average total days to delivery

Average cost to ship a 2 lb. package

Ø  144 packages shipped using the USPS, FedEx and UPS Ø From: Chicago, Los Angeles and Virginia Ø To: all 8 shipping zones Ø Earned discounts and fuel surcharge were added for FedEx and UPS Source: Stamps

3. FedEx’s Position


Began


FedEx’s Position

Superior

financial returns

Meeting customer

requirements

Rewarding relationship with

employees, partners and

suppliers

Safety first

Ethical and professional

standards

’s Road to Success

Source: Investor Relations. FedEx.

PSP (People – Service - Profit) policy

A belief that motivated people provide necessary professional service to ensure profits and continued growth

A belief that value could be added to firm’s

operations if they were to deliver on an overnight

basis

A belief to present an IT as a strategic and sustainable

competitive advantage rather than order taking function or a cost

element

Ranked #8 on the World’s Most Admired Companies

Source: Human Resource Management: Best Practices at FedEx Corpoation. FedEx.

People First Leadership

Speed and Reliability

Information Technology

$39,304.00 $42,680.00 $44,287.00 $45,567.00 $47,453.00

2011 2012 2013 2014 2015

Total Revenues

2011 2012 2013

2014 2015

$2,378.00

$3,186.00

$4,434.00

$3,815.00

$1,867.00

Operating Income

ü Increase in revenues by 4% from 2014 and 7% from 2013

ü Revenues well over industry

average of $32,400

ü Increase in operating expenses: volume-related growth in employees

salaries, benefit plans and transportation expenses

ü Capital expenditures: investing in long term assets and acquisition of TNT and GENCO logistic companies

’s Income Statement

Source: FedEx Annual Report 2015. FedEx.

$0.11 $0.08

$0.16

$0.31

$0.48

2011 2012 2013 2014 2015

Debt / Equity ratio

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

FedEx UPS

0.48

4.54

Debt / Equity ratio

’s Balance Sheet

ü Even though D/E ratio is growing, FedEx operates with less risk for future earnings

ü High D/E ratio indicates that the firm has been borrowing aggressively

to finance its growth and as a result may experience a burden of additional interest expense

Source: Long Term Debt. CSIMarket.

$90.96

$87.13

$94.75

$142.51

$172.09

2011 2012 2013 2014 2015

Stock performance

0

10

20

30

40

50

60

UPS

FedEx

19.71

56.21

P / E Ratio

and its Market

Source: FedEx Competitors. Yahoo Finance.

ü Investors believe in FedEx positive future performance

ü Investors willing to pay more for the company’s shares

Continually seeking new ways to market to its core audience of business executives who tend to be

huge sports fans

’s Strategic Partnerships

Source: For Building Ties to a Sport a Platform Worth Every Penny. The New York Times.

ü Golfers from around the world

ü FedEx field – expensive marketing

initiative that was paid off in the eyes of marketing executives

ü Events that broadcast worldwide

Alternative Methods of Delivery

Retail giant removed the

middle firm in the supply chain and started offering

their own same day delivery

Offers same day delivery services by

contracting personal drivers,

bikers and even taxi

Traditional firms will have to develop

strategies to compete against companies that

deliver quickly and after business hours

Source: Walmart Tests same day delivery. USA Today.

ü Anticipation of roller coaster in transportation costs

ü Uncertainty of oil prices and its

influence on transportation costs in the next ten years

ü Contracted couriers add flexibility to customers

ü Contracted couriers save on overhead of keeping drivers and delivery professionals on staff

Operating and Labor Costs

Source: This Time, Cheaper Oil Does Little for the US Economy. The New York Times.

4. Further Adaptation of Technology


Began


Industry Attractiveness

FedEx’s Position

Digital & Electronic

DocumentsFew Choices

to deliver non-

document Parcels

Threat of New Entrants

Well-known Reputation

Loyal Customers

Differentiation

High Initial Investment

Regulations

Industry Rivalry

Pricing

Innovation

Supplier Power

Oil Prices

Labor Cost

Buyer Power

Price Sensitivity

Knowledgeable Power

Selective Market

Lower Switching

Cost

Substitute Competition

Mature Industry Requires Differentiation

Sources: IBIS, CSIMarket, MarketResearch

Low threat of New Entrants and Substitutes makes Industry “Relatively Attractive”

Change in the Society

Source: IBIS World

other

B2B vs. B2C vs. revenue breakdown

Ø Realignment of volume mix from B2B to B2C by year 2020 Ø B2C contribute significantly less to the bottom line Ø The majority of revenue is generated by B2B parcels Ø High performers deliver better B2C profits and stimulate B2B growth

Source: Accenture Analysis

other

B2B vs. B2C vs. volume breakdown

2013 2020

2013 2020

2013 2020

2013 2020

2013 2020

North America Western Europe Asia Pacific

2013 2020

Rise of the Digital Consumer

Source: Accenture Analysis

As More Shopping is Done Online, Faster Delivery is Required

¾ Combined “buy online” paths amount to 60% of chosen paths to shop

5%

7%

9%

11%

13%

15%

40%

Buy online, pick up in store

Search online and in store,buy in store

Search online and in store,buy online

Search in store, buy online

Search online, buy in store

Search in store, buy instore

Search online, buy online

Share of respondents

Most Used paths to shop

¾ Shoppers in the US are sensitive to the time it takes for the item to be delivered

• Same day delivery and one/two day delivery are the preferred delivery options users are willing to pay

61%58%

43%38% 37%

15%

7%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

Same daydelivery

One/twodelivery

Specific timeframe fordelivery

pick up froma convenient

location

90-minutedelivery forstore-based

purchase

Locker/boxcollection

Other

Shar

e of

resp

onde

nts

Preferred methods of delivery

Sources: PWC, Statista

A Strategy Fit for the Future

¾ Radical ideas rely on a combination of technology change and business model innovation

¾ Convergence represents an opportunity to define the direction of industry by harnessing the power of both technology change and business model innovation.

Invest in R&D:• simplified orders• Perfect fit packaging with

customized tracking chip that facilitates real time tracking

Utilize Drone technology for faster, lower cost deliveries

From customer oriented service to customized service

Localized, urban delivery models

New

Clo

se to

exi

stin

g

Tech

nolo

gy c

hang

e

Close to existing New

Business model change

Breakthrough ideasGame changers

Radical ideasNew businesses

Incremental ideasProtect/improve existing

Breakthrough ideasGame changers

The Drone Delivery Business Model

Product purchased:• Within 10-20 miles

of a warehouse.

Order goes to warehouse:• Packaged and

place in a special box.

Drone picks up the order:• Comes down a

conveyor belt and is held on by clamps.

Off it Goes:• Using GPS co-

ordinates to locate customers, the drone drops off the box and returns to warehouse.

Challenges:¾ Requires a distribution center within 20 miles of the delivery

location¾ Requires a 20 x 20 feet landing area for safe landing¾ Current FAA regulation limits drone flights within line of sight and

under 400 feet above ground.

Potential Success:¾Medical samples/supplies delivery¾3D printing Industry

FedEx - Acquisitions

1984: First acquisition – Gelco Express Internatiional

2012 Opek Sp.z.o.o. and

TATEX Rapidao Cometa

1973 Federal Express is

formed

2011 AFL Pvt. Ltd MultiPack

2015 GENCO

2014 Bongo International

Supaswift

2006 ANC Holdings Limited Watkins Motor Lines

1998 Caliber System Inc.

2004 Kinko’s Inc. Parcel

Direct

Source: FedEx investors

1989 Tiger International Inc.

2007 Flying Cargo Hungary DTW Group & PAFEX

2001 American

Freightways Corp.

Decrease global community investement by only $1 million Reinvest in 100 new hires Cost per one new hire = 60K (salary) +10K (onboarding) = 70K per year Total 700K for 100 new hires Current employees – 265,000 (FedEx), 435,000 (UPS),

497,745 (DHL)

.

$200 Million

Change from Customer-Oriented Service to Customized Services

Global Community Investment by 2020

Benefits - exclusive contracts – increase in revenue - inside knowledge about customer needs - improvement

Source: FedeEx, SHRM

Security Chip Prevent losses of

packages

Technology Innovation

R & D Decrease Cost of

Insurance

Real Time Tracking System

Live Chat Support

Access 24/7

Reduce Volume of calls during the day

Visibility Creates Transparency

The Best Life-Tracking Apps of 2016

For healthy eating & weight loss

For exercise and fitness

For sleeping

For mood improvement

For time management

For goal – setting

For mindfulness

For budgeting

Life-tracking apps of the future

Source: TechCrunch

Simplify the Process

Return tax become one of the easiest process

Source: Itunes, TurboTax

New Technology

Source: Google, TrackRBravo

Track R Bravo Google smart contact lens

New Packaging Era

Sources: FedEx, Amazon, Ebay, Nike Air, custom package Etsy

Current State of Industry

Strong steady financial growth

Favorably economic

trends

Highly competitive environment

Future Perspective

Focus on customized

services

Simplified user software

Custom fit packaging

What Have We Learned


Began


Industry Attractiveness

FedEx’s PositionFinish

5. Q&A