FEDEX VS

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Wofford College FIN 420 Cases in Finance The Battle for Value, 2016: FEDEX VS. UPS Day One NOTE : In Ex. 2.3, you need to adjust the FedEx numbers due to a one-time pension expense recorded in 2015. Adjust FedEx’s 2015 data as follows: - Operating Income (EBIT): change to $4,264 instead of $1,867 - Net Income: change to $2,572 instead of $1,050 As needed, you must recalculate any other 2015 ratios and statistics that include EBIT and Net Income. 1. Prepare a list of key facts and a situational analysis: - External Market Environment : What is the size of the U.S. package delivery market in 2015? Discuss key market dynamics that are creating a major shift in the industry.  The U.S. package delivery market is estimated to be $90 billion in 2015.  Market was segmented by weight, mode of transport, and timelines. These are changing with the growth of e-commerce. It has increased the density of home deliveries as opposed to business-to-business deliveries.  Many e-tailers started investing in their own delivery networks. Examples- Wal-Mart, Amazon.  Consumers favored free shipping on their online orders through ground services. - Competitive Environment : Describe the competition between FedEx and UPS? As listed in the case under the section “Competition,” on what dimensions do the two firms compete and how have the two firms responded to this competitive situation?  The firms compete on air-express. For the two companies there was an even split in revenue.  They compete in ground delivery. UPS greatly outpaced FedEx by roughly double the revenue.  Both suffered from the lower density of residential deliveries which are common among ground services. Both UPS and FedEx contracted USPS’s parcel select ground services. This helped businesses move shipments at the back end to of their deliveries.  Dimensions o Customer focus  placed emphasis on listening carefully to customer needs and providing solutions rather than standardized products. o Pricing  Pricing packages by weight took a margin hit so in 2014 FedEx started using dimensional weight to calculate ground prices. A month later UPS followed suit. o Operational reengineering  Cost reduction was achieved by exploiting economies of scale, investment in technology, and business process reengineering. o Information technology  Increased technology use by implementing COSMOS and DIAD added to the security of delivery and the data used to improve operations.

o Service Expansion  2011 UPS launched MyChoice allowing customers to control the time of their deliveries. FedEx followed suit in 2013 launching Delivery Manager. This allowed customers to choose their dates, times, and locations of deliveries from their phones. FedEx also launched a repair shop for devices. o Logistics services  provided total inventory control to customers including purchase orders, receipts of goods, order entry and warehousing, inventory accounting, shipping, and accounts receivables. - Products/Services Offered : The case mentions a variety of products and services offered by these two companies beyond domestic package delivery. List other products and services.  MyChoice allowed customers to control the time of their deliveries.  FedEx followed suit in 2013 launching Delivery Manager. This allowed customers to choose their dates, times, and locations of deliveries from their phones. FedEx also launched a repair shop for devices. - International Expansion : What is occurring in the international package delivery market? How are FedEx and UPS responding to the changes?  The international market for both companies has been expanding over the years. In 1995 FedEx expanded its routes in Latin America and the Caribbean, and later introduced FedEx AsiaOne (next-business-day service between Asian countries and the United States via a hub in Subic Bay, Philippines. UPS entered the European market in 1988 with 10 European courier services. By 2015, UPS planned to double its investments in Europe to nearly $2 billion in 5 years.  To adapt to changes FedEx and UPS are trying to make cross boarder deliveries as smooth as possible. FedEx purchased Bongo in 2014 to help retailers face cross boarder selling issues. 2. Compare the financial performance of UPS versus FedEx. Focus on 2015, but also review trends since 2010. - Exhibit 2.2 (UPS) and Ex. 2.3 (FedEx) : Provide a comprehensive financial analysis of the results of each company, including a comparison of the two companies to determine which company has excelled on which measures. Include the following: a. Calculate a CAGR for revenue, EBIT and Net Income from 2010-2015. (Ignore the CAGR listed in the case). b. Analyze revenue based on the CAGR and annual growth rates. Which company is growing faster? a. Both the CAGR for FedEx and the CAGR for UPS are roughly the same for both companies. UPS sits at a 23.6% growth and FedEx sits roughly at a 27.3% growth. Based on this both companies are growing at relatively the same rate. FedEx is growing 3.7% faster than UPS. b. Both companies’ revenue has been decreasing over the past 5 years. FedEx decreased a total of 9.02%, UPS decreased a total of 7%. Neither are drastic decreases nor are surprising with the rise of e-commerce and the new delivery services provided by smaller companies like Amazon.

c. Analyze the profitability, including margins and return statistics in the “Profitability Ratios/Analysis” sections. Which company has higher margins and returns? a. UPS tends to have higher margins and returns, for example, ROE in 2015 was 17.15% for FedEx, while it was 194% for UPS. This applies when excluding the anormal year in 2012. UPS’s profit margin ranges from 5-8%, while FedEx’s ranges from 3-6%. d. Analyze capital expenditures and capital expenditures % as listed. Which company is spending more on capital investments? a. FedEx has been spending roughly double the revenue percentage on Capital Expenditures than UPS has. e. Review the balance sheet and other ratios to identify any other data relevant to our analysis. a. UPS has way more cash and current assets. Liabilities are similar, but UPS has 10 times the amount of debt that FedEx has. Equity for FedEx is more consistent over time, while UPS’s is more volatile. FedEx’s debt has been increasing significantly in the last three years. The D/E ratio for FedEx is significantly lower than the D/E for UPS, with ratios in 2015 of 0.5 and 5.8 respectively. 3. Exhibit 2.1 : Compare the geographic distribution of revenues between the two companies. What proportion of revenue is domestic versus international? Calculate growth rates to analyze this geographic growth.  For FedEx in 2015, 72% of revenue came from domestic sources, while 28% came from international. This is similar to UPS, where 78% of revenue is domestic and 22% of revenue is international. These proportions have varied only slightly in the preceding five years. FedEx’s CAGR for domestic revenue is 27.54%, and for international it is 26.79%. This shows that FedEx is growing slightly faster than UPS, which has a domestic revenue CAGR of 24.63% and an international CAGR of 20.48%. 4. Both companies exemplify operational excellence as described in the case under the sections entitled “Performance Assessment.” List ways in which these companies demonstrate strong operational execution.  Marketing: UPS ranked 29 th and 27 th for two years in a row showing strong marketing techniques. FedEx ended up ranking 86 th and 92 nd . Not as strong of a marketing performance as UPS. UPS benefited from these marketing techniques in the early 2000s.  Employee satisfaction: ranking the companies based on ability to attract and retain talented people FedEx ended in 12 th and UPS came in 24 th FedEx was also recognized by as the top Great Place to Work Institute. UPS lagged behind FedEx in employee satisfaction.  Holiday performance: FedEx adopted an independent contractor method but was outpaced in the holidays by UPS who adapted the strategy of increasing capacity to handle higher volumes allowed to achieve and on time delivery rate of nearly 98%.  Customer satisfaction: FedEx ranked 1 st until 2009 and the UPS was also ranked 1 st . The two companies remain neck and neck in the ASCI scores. These scores are the only national, cross industry measure of companies’ perceptions among consumers. It measures ease of tracking, package arrival condition, helpfulness of the staff, and other factors. Day Two

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