FedEx launched its Home Delivery service in March in major metro markets including New York, Chicago, Los Angeles and Dallas after realizing that e-shoppers were choosing lower-cost delivery options after ordering goods online.
"The growth of e-commerce has influenced our thinking and made it imperative for us to offer this service," said Rodger Marticke, FedEx Ground's executive vice president.
The new service allows customers to set up deliveries by appointments, evening drop-offs or specific dates.
Delivery companies such as United Parcel Services (UPS), FedEx and even the United States Postal Service have increasingly hitched their fortunes to the e-commerce explosion. The need to bring a product purchased on the Web into the buyer's home has given their revenues a tremendous boost.
Their success has also created a whole new generation of delivery services, such as Kozmo.com and DNet, which promise to deliver products within one hour after a consumer makes a purchase.
Even companies that began as Web grocers quickly realized that their strength lay in their network of delivery vans. Companies like Webvan have expanded from being grocers to delivering books and consumer electronics.
But FedEx, which made its name with speedy service in the business world, found itself in the awkward position of moving a bit too fast for the Internet. Shipping a five-pound package overnight from New York to San Francisco costs about $35; second-day service costs about $16.
The new home-delivery service for the same package is about $6.50--add another $30 for appointment services, $10 for evening drop-off, and $5 for a specific-day delivery.
In the three months since FedEx began offering the service, Marticke said the company has picked up more than 1,000 clients, including drugstore PlanetRx and Omaha Steaks, an online meat retailer.
"That is ahead of our expectations," Marticke said, adding that the company is adding new businesses daily.
As FedEx expands the availability of the service beyond major markets, the company said it plans a major advertising campaign for the largely unknown service.
With the launch of the service, online shoppers have a wider range of delivery options--from instant gratification with one-hour delivery, to seven-day service from UPS, to deliveries by appointment.
"This is what customers have been asking for all along, even from their utility companies and furniture-delivery people who tell them, 'We'll be there between 1 and 5,'" said Chris Newton, an analyst at AMR Research. "That just doesn't cut it with people's schedules these days."
But FedEx faces the same problems that other companies confront when making stops in residential areas: How do you avoid sending one truck to one home in a single town?
"The challenge is to maintain enough density in their delivery areas at these time-specific deliveries to make it a profitable operation," Newton said. Unlike repeat deliveries at businesses, residential drop-offs are few and far between.
"That challenge has historically confronted home-delivery services," said Marticke, adding that the service will use FedEx's delivery-routing technology and infrastructure, which has been repeatedly streamlined since the company's birth.
"We are committed to operating all of our businesses, including home delivery, at an acceptable profit margin," Marticke said. "We are not looking at it in any way as a loss leader or a defensive strategy where we're willing to absorb the costs."
The wider spectrum of delivery options is critical to sustain the growth of e-commerce, analysts said.
"The ability to customize shipping options allows a site to compete more effectively not only with other commerce sites but increasingly with their offline competitors," said Michael May, an analyst at Jupiter Communications.
For instance, a consumer who may have been reluctant to buy an $800 watch online may find it more reassuring to make such a large purchase if he or she can schedule an exact time to accept the delivery.
"All of a sudden, buying large-ticket items on the Internet becomes a more attractive option," May said.