The Battle of the Vans
Forbes, January 19, 2000
By Penelope Patsuris

NEW YORK. 5:45 PM EST-United Parcel Service (NYSE: UPS) no longer has the e-commerce cash cow all to itself. Today FDX Corp. (NYSE: FDX) released plans for its own business-to-consumer ground delivery service, FedEx Home Delivery. The firm also said that its parent company has been renamed FedEx Corp. and that moniker will be extended to several other subsidiaries.

The service is set to launch March 13 with 67 new, dedicated facilities that are expected to reach half the U.S. population. By 2003, the firm expects to cover 98% of the country.

Despite this threat from the $17 billion express giant, UPS is unlikely to lose much of its estimated 60% share of the e-tail shipping market anytime soon. Indeed FedEx says it only expects to have 5% to 6% of the $6 billion residential shipping market by 2003.

The trouble for UPS is that FedEx's Home Delivery Service will present a major challenge to the level of services UPS currently offers.

"Until now, UPS has had no initiatives to improve its services because it faced no competitive challenge in the business to consumer market," says Satish Jindel, president of shipping consultancy S.J. Consulting.

Thanks to the Internet, UPS has been riding high. After operating privately since it was founded in 1907, UPS floated an IPO on Nov. 10 that priced at $50 primarily on the strength of its new found image as a major e-commerce player.

FedEx is raising the stakes for UPS significantly by becoming the first company to offer a money-back guarantee on residential deliveries. It is also introducing delivery hours extended into weekday evenings and Saturdays, and offering consumers delivery by appointment, letting them choose the date and time. Executives said that FedEx Home shipping rates would be competitive.

"This announcement is in direct response to the e-tailing boom," said FedEx Ground CEO Dan Sullivan. The new delivery options address major problems with shipping online sales, which UPS has thus far failed to acknowledge, much less remedy. As more shoppers than ever are going online, few are home during the day to accept packages, and even the safest neighborhoods have parcels poached from front stoops.

With the FedEx Home launch, the history of the shipping industry is likely to repeat itself. FedEx Home was created out of what was until today the FDX business-to-business shipping subsidiary RPS. When RPS launched a decade ago in the B2B arena it introduced concepts that were unheard of, like volume discounts and tracing and tracking services. This left UPS with no choice but to adopt these policies to stay competitive.

"UPS is going to have to make changes to its residential service the same way it had to make changes when RPS entered the B2B market," said Jindel. "RPS has actually been responsible for more changes at UPS than anything else."

FedEx has been conducting a pilot of the new program for the past six months in Pittsburgh. The company was no doubt lured by the explosive growth in residential shipping spurred by online retail. According to Gartner Group analyst Geri Spieler, the volume spiked 20% alone between the 1998 and 1999 holiday seasons. Still, the $24 billion B2B shipping market towers over its consumer counterpart.

"We see the real growth in the shipping industry coming from the B2B market," said FedEx Chairman Fred Smith on a call with Wall Street analysts. "But customers have told us they want to manage their shipping more strategically and need a broader portfolio of services."

With the advent of Internet sales, the lines between business-to-consumer and B2B shipping have begun to blur. Companies like Dell (NASDAQ: DELL) and Staples (NASDAQ: SPLS), which once shipped mainly to other businesses are now shipping just as often to individuals thanks to the Web, which is why some experts see the FedEx news as a defensive move to protect its B2B market.

No company wants the complications of having to deal with multiple shippers. At the very least, the failure of FedEx to step into this space would be an invitation for a UPS salesperson to call on a FedEx client inquiring about residential service. At worst, that sales call could sway a client to give UPS all its business, residential and B2B.

"FedEx needed to introduce this service to stay a player," says IDC analyst Barry Parr. "E-tailers need a complete logistical solution."