DEEP DIVE

FedEx and UPS are the two biggest shipping companies in the world. They compete viciously for customers in a never-ending race to ship as many packages to as many customers as possible. 

Their battlefield expands globally, and encompasses air, sea, and ground shipping.

While each of these billion dollar behemoths have a multitude of revenue streams, they both offer business opportunities to the general public that gives entrepreneurs the chance to be a business owner under either of these brands.

For UPS, that means operating a UPS store franchise, while for FedEx, that means operating a FedEx route (a non-franchised business). Let’s break down the story of each brand, and compare the different business opportunities.

FedEx vs UPS: Origin Story

FedEx and UPS  were both founded decades ago, but have very different founding stories. 

FedEx Origin

Fred Smith founded FedEx in 1971 after graduating from Yale University, and serving as a marine pilot in the Vietnam War. 

His original premise was that shipping packages via air would be more efficient if you had dedicated planes to carry them, instead of just shipping them along via commercial airlines with travelers (as was the norm back then).

However starting a shipping business that required airplanes would be no easy venture from a capital perspective. 

Fred already had a $4 million inheritance at his disposal, thanks to his father who started a bus line that was acquired by Greyhound. But $4 million wasn’t nearly enough for this operation, and so he raised an additional ~$90 million to get this venture launched. 

Of course, as we all know FedEx has become a massive success, but the early days are pretty shocking. Here’s some highlights:

• The business lost $30 million in year 1
• The first profitable year wasn’t until 1977 
• Fred once gambled the last $5,000 FedEx had on a blackjack hand, which he (luckily) won and used to pay off a $24,000 fuel bill 

Imagine where FedEx would be if the dealer in Vegas drew a different card?!

UPS Origin

The origin of UPS  dates back to 1907. James Casey was 19 years old and had a “fleet” of six bicycles that allowed him to deliver telegrams.

Boomer translation: telegrams were written messages that transcribed a telegraph (the messages sent along electrical wires in morse code). 

However once the telephone was invented and popularized, telegram delivery demand evaporated. So James shifted the UPS business model to focus on department store deliveries. Basically, if you needed to order something from the department store, UPS guaranteed delivery within 24 hours. 

But by the 1950’s, a little thing called automobiles became commonplace, and so customers didn’t have to wait a full day to get an item, as they could easily drive to a store and get it themselves.

Thus, James pivoted the UPS business plan once again, this time to the model they’re still known for: a package logistics and delivery system for businesses and individuals alike.

Given the origins and focuses each business had when they started, it’s not surprising that UPS is more commonly associated with the big brown delivery trucks, while FedEx is more known for their airplanes. 

Business Opportunities: The UPS Store vs FedEx Routes

It’s not uncommon for franchise searchers to look into buying a FedEx route instead. Just like many quality franchise opportunities, on the surface, a FedEx route offers many of the same benefits, namely: massive brand recognition and a proven system to operate their business.

But operating a FedEx route differs quite a bit from a UPS Store – let’s explore each.

FedEx Routes

Owning a FedEx route means owning a specific area in which you make deliveries via FedEx trucks for any delivery within your geographic defined territory. 

• Fees: Not clear – but there is a contracted fee structure with FedEx
• Franchise Fee: $0 – not franchised
• Initial investment: Varies between $50,000 – $1,00,000

FedEx routes are largely purchased from previous owners, rather than being awarded a new territory by FedEx directly. Thus, your ability to own one largely depends on negotiating with a seller of an existing route. 

Some routes can be acquired for as little as $50K, but others are worth $1 million, hence the wide investment range. 

Unlike UPS Stores, FedEx routes don’t require any brick & mortar storefront. Your primary focus as the owner is hiring drivers and maintaining the trucks. There’s no marketing, accounts receivable, or utilities required.

Return on Investment

This varies like the investment – and depends on how big your territory is, how many drivers you can hire, and how well laid out the route is. If you aren’t efficient with how you deliver each day, you’ll make less deliveries, which means less money in your pocket.

But According to FedEx, the average annual revenue for a FedEx route owner is $800,000, with an average profit margin of 5-10%. This implies just $40,000 – $80,000 in profit.

There are bigger success stories that you can find fairly easily – i.e. owners of multi-million dollar routes that have been in the business for decades. But the flipside of these success stories isn’t all sunshine and rainbows. View this comment from reddit via a former employee of FedEx:

“Let me start off saying that my ground drivers typically don’t love their jobs. These guys tend to work from 6 am to 8pm. It’s rough and we can go through drivers like crazy. I have had guys who have had broken down trucks, sprinting to my store from miles away so we can call the owner to send someone else. You will have people quit. You will have to either have back up drivers or go yourself. I’ve had the owner of my stores route take over for a day or weeks sometimes…

…from what I hear, taking care of the trucks is expensive and hard to manage with daily routes. Like everyone else sai, do your research. Make sure the route is well laid out, the trucks are in good shape and the finances are in order.”

Overall, owning a FedEx route is a labor intensive business that varies massively in performance based on the owner you are considering  acquiring a route from.

UPS Stores

The UPS Store is a franchise with brick & mortar stores all over the country. It began in 2001 when UPS invested $191 million to acquire Mailboxes Etc., a 4,300 location chain of packing & shipping centers. 

All those stores were then rebranded to UPS Stores, and they’ve since been franchised. While they offer packing & shipping services, they also offer printing, mailboxing, and more.

Since they’re a franchise, the investment and return on investment is a little clearer:

• Franchise Fee: $29,950 
• Royalty & brand fund: 5% and 2.5%
• Initial investment: $241K – $509K

In addition to the startup costs and associated fees for a UPS Store franchise, the average revenue from the most recent FDD is $677,538. Via past financial statements, this average revenue has been on the rise:

2019 average revenue: $521,316

2020 average revenue: $607,750 

They don’t share any profit statistics, but if we assume a 10-15% profit marin, the earnings per location could be anywhere from $67K – $101k. 

That would be a better margin than a FedEx route, and has been backed up by my past conversations with franchisees of this brand. Revenue is also more diversified relative to a FedEx route, as top performing locations can have less than 40% of their revenue be from shipping.

In Summary

Overall, both FedEx and UPS have hundreds (if not thousands) of operators that are able to leverage the brand to create their own individual business.

While FedEx Routes and UPS Stores do compete, the business opportunities are fundamentally different, as one is a brick and mortar business, while the other is purely service-oriented. 

Like I’d say with any franchise, each business should be evaluated on a case by case basis. But on average, it appears that a UPS Store offers more predictable revenue, and likely more profits. 

If you take 1 thing away from this piece beyond the financial comparisons – remember that FedEx, which currently has a $52.7 Billion market cap, once gambled it’s entire bank account of just $5,000 on a hand of blackjack!!

---

FRANCHISE HEADLINES

Wendy’s Launches “Pacesetter” Program

Wendy’s is launching a new franchisee incentive program, called Pacesetter, intended to bolster franchisee recruitment and store development in the U.S. and Canada. The program waives the $50,000 technical assistance fee franchisees pay per store, as well as royalties and marketing fund contributions for three years. Wendy’s believes these changes will reduce the levered payback time on franchised units by 35%, to two years.

“Our business model is under attack” – McDonald’s CEO

Speaking at the IFA convention in Las Vegas, Chris Kempczinski, CEO of McDonald’s, used much of his time on stage to talk about California’s FAST Act, along with proposed legislation in other states that would impose new regulations on the restaurant and franchise industries. “The reality is, that our business model is under attack. For most of the past decade, the National Labor Relations Board, at the behest of organized labor, has been trying to make major changes to labor market regulations, which would come at the expense of your businesses and my business.”

Balancing fair employee benefits without harming small business owners at large will continue to be a delicate balancing act over the coming years.