FedEx Chief Executive Throws Cold Water On Internet Valuations

Federal Express Corp. Chief Executive Frederick Smith told a crowd of several hundred new economy advocates that the high valuations being given to new economy companies are not sustainable.

In a question-and-answer session here at the iB2B conference, the chief executive of the $14 billion shipping company predicted there will be a market correction of new economy companies. He pointed to the huge market capitalizations of Internet companies with "small total revenue and a high degree of losses."

"I don't think the PEs [price/earning ratios] of new economy companies which today are 100 times or so greater [than traditional old-line companies] is sustainable," said Smith.

That was not the only cold water Smith threw on the red-hot Internet economy. The FedEx chief executive also said he believes the biggest names in business-to-consumer e-commerce retailing do not have a business model that makes economic sense.

Smith said he does not see an Internet start-up such as Kozmo.com, which offers free delivery on everything from books to food to personal care products, as a "major threat" to FedEx's business.

As for Amazon.com, Smith said the company may be successful venturing off into other areas such as licensing its software infrastructure. "That's a different ball game than the initial business," he said.

Smith said he has not seen an e-tailer business model that has "realistic distribution and transportation costs" built into their business model. "I personally have been involved in transportation and distribution all my life," he said. "I've never seen one [Internet e-tailer business model] with a viable [distribution] business model." Smith emphasized that the traditional catalog retail business is very tiny compared with brick-and-mortar retailing.

As for whether the economy has been forever changed by the Internet, Smith said the Internet has the ability to drive by a quantum leap the productivity and economic activity at "old-line companies."

Smith said increasing oil prices have not had a big impact on FedEx, adding that oil is only about 5 percent of FedEx's total costs. A lot of the higher fuel costs have cycled through the economy, he said.

Although oil prices are likely to remain high for some time, Smith predicted new technology will drive prices back down. "It is clearly going to be up for a while," he said. "If you drive an Explorer like I do you may want to think about downsizing."CRN

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