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Management in Practice

How Will E-Commerce Transform the Shipping Industry?

The past four decades of globalization have been a “golden era of global trade,” according to Rajesh Subramaniam, head of marketing and communications at FedEx, and have seen enormous growth for shipping companies. But the growth of online commerce poses new and complex questions for the industry.

The history of commerce reflects the history of technology. Steam-powered engines helped reliably move goods between and across continents. Refrigeration revolutionized the transport of perishables. Reliable air travel placed any destination less than a day away. Then, in 1973, 29-year-old Frederick Smith YC ‘66 launched Federal Express, building a private plane fleet on the premise that passenger airline routes made little economic sense for urgent commercial shipments. (Federal Express adopted the name FedEx in 1994.)

Most recently, the Internet gave birth to e-commerce, which is now growing four times as quickly as conventional retail. For FedEx, this trend is increasingly integral to their business—the sales just from “Cyber Week” account for about 25 percent of the company’s holiday sales. But e-commerce is also transforming the way shipping companies think about their market. Businesses are the longtime “bread and butter” of delivery services, said Subramaniam in an interview with Yale Insights. But, he added, “In the age of e-commerce, now we are increasingly talking to our customer’s customer”—in other words, individuals.

This transition presents obvious opportunities. More online shopping means more shipping, as well as more returns, which both benefit the company. Significant challenges are also becoming apparent, though, as e-commerce captures a growing percentage of total retail sales. Web giant Amazon, for instance recently started to expand its network of warehouses. By positioning inventory closer to customers and developing its own shipping fleet, Amazon intends to provide same day delivery while circumventing the cost of external shipping companies. Even traditional brick-and-mortar stores, like Wal-Mart and Best Buy, are working to optimize the distance between people who shop online and the products that they purchase. Such efficiency reduces the demand for long-distance shipping from major inventory centers—an important revenue stream for companies like FedEx.

In emerging economies, many of the same challenges exist. China’s largest e-commerce platform, Alibaba, is aggressively partnering with retailers and couriers around the country to establish an extensive transport infrastructure. (Regulatory restrictions in China that only grant FedEx access to select cities don’t help their competitiveness.)

Roadie, which describes itself as the “Uber of package delivery,” hopes to challenge the shipping industry in the same way Uber has challenged taxis: by exploiting a latent supply of drivers. The app, launched in January of 2015, offers money to travelers who deliver packages to stops along their route. (To offer a safe and convenient meeting place for Roadie users, the company partnered this year with Waffle House, a chain of 24-hour diners that will open its doors to Roadie users and offer them a free waffle and drink.)

FedEx is anticipating these trends, making key e-commerce acquisitions and paying close attention to how global trade agreements, like the Trans-Pacific Partnership, might affect the fluidity of trade as e-commerce opens access to emerging markets. These legal frameworks, said Subramaniam, “have tremendous potential to unleash even more trade and, ultimately, even more possibility.” FedEx is also investing in innovative forms of package tracking and delivery that cater more to the individual. “That’s a new audience we’re now talking to,” Subramaniam reiterated. Wherever and to whomever a package is going, he says, “We think we can bring a lot of value to the ultimate recipient.”