Fred Smith came up with the idea of hub based courier service in school and the teachers gave him a “C”. Jokes on them!
Dave Young:
Welcome to the Empire Builders Podcast, teaching business owners the not-so-secret techniques that took famous businesses from mom and pop to major brands. Stephen Semple is a marketing consultant, story collector, and storyteller. I’m Stephen’s sidekick and business partner, Dave Young. Before we get into today’s episode, a word from our sponsor, which is, well, it’s us, but we’re highlighting ads we’ve written and produced for our clients. So here’s one of those.
[Irock Plumbing Ad]
Dave Young:
Welcome to the Empire Builders Podcast. I’m Dave Young alongside Stephen Semple, and we’re talking about empires that were built, industries that were shaken up in the process. What better one to talk about than FedEx? Well, you mentioned FedEx, but if we’re going back to the beginning, we’re going to say Federal Express, right?
Stephen Semple:
True enough, true enough. That’s right on the ball.
Dave Young:
Yeah.
Stephen Semple:
Absolutely.
Dave Young:
We’re both old enough that we remember these things.
Stephen Semple:
I’m trying to be in denial around that.
Dave Young:
As these companies celebrate their 50th year in business, and I’m like, “Oh, yeah. Yeah, I remember them coming on board. Uh-huh, yeah, sure.”
Stephen Semple:
Well, it’s like the one that got me the other day is Sopranos 25th-
Dave Young:
Oh my God.
Stephen Semple:
It was 25 years ago, and I’m like, “No, no, please, God, no.
Dave Young:
Well, and for 20 years I’ve been thinking that the ’80s was 20 years ago. Apparently, that’s no longer the case.
Stephen Semple:
Should we talk about Federal Express?
Dave Young:
Federal Express, absolutely. The most memorable thing about them was, first, how disruptive they were, but their ad campaign was absolutely fabulous, the fast-talking dude.
Stephen Semple:
Yeah, we definitely want to talk about it. But here’s the interesting thing. Fred Smith, who founded Federal Express, he came from a real transportation background. His father founded Greyhound.
Dave Young:
Well, there you go.
Stephen Semple:
So he came from some money. He created this idea of the hub delivery system. The whole idea with Federal Express is what they invented, and everybody does it today, was instead of something going from point A to point B, everything would go to a central hub, be sorted. It may actually travel further but is actually more efficient. Here’s the crazy thing is he came up with this idea as a class project when he was in university, and his teacher gave him a C. Said it was a terrible idea.
Dave Young:
It’s terrible. That’ll never-
Stephen Semple:
Never, never, never going to work. Also at the time, you got to remember, both UPS and the post office did not own their own planes. They relied, if anything was being air freighted, on airlines, and at the time, carrying packages by air was a secondary business for airlines.
Dave Young:
Gotcha.
Stephen Semple:
So literally, if there was no room for a package, it didn’t go, or packages got bumped for people.
Dave Young:
What year are we talking about? What year was it when he was in school and came up with this stupid idea?
Stephen Semple:
I’m not sure what year he was in school. But really, 1970 was a real turning point for UPS.
Dave Young:
Oh, wow.
Stephen Semple:
It would’ve been before that. Going back to Fred Smith, he inherits some money. His dad also had an aviation business, so he decides to sink the money into that aviation business. He’s doing corporate aviation, private jets. What he’s doing is he is buying them, fixing them up, and selling them. So he’s constantly looking for refurbished parts and things along that line.
When he buys the business, he really grows it. He takes it to a $9 million business, which is a 1,500% increase from the size of the business when he took it over from his dad. But there’s these real problems. There’s these real shipping issues grinding the business to a halt because he would have planes waiting for a single part. He’ll have the plane sold, he’ll get the money when he delivers it, and he’d be waiting for a single part to show up to fix the plane. So delivery was completely unreliable. And UPS was not yet national. It took a long time for UPS to get completely national.
Along comes 1970, and the postal workers go on strike, and Nixon declares a national emergency. Fred looks at this and decides, “You know what? We can’t be completely reliant on this. Let’s put this hub and spoke model into practice.” So he digs out his paper, dusts it off. He needs to convince his sisters to let him dip into the family trust because he had to own the planes. The only way this was going to work, had to own the plane. At that time, Pan Am was selling off some of the fleet, and they were small, fuel-efficient little jets. They would be about $1.3 million per plane. So he wanted to go and buy a bunch of planes.
What he also discovered was the Federal Reserve in the United States, when they’re moving checks, it could take five days to clear, and that’s a big money issue for the banks. He was like, “I could move them overnight. I could do this contract with the Federal Reserve and move them overnight,” which is the reason why he decided to call it Federal Express, because he was going to do this stuff for the Federal Reserve.
Dave Young:
That was going to be customer number one.
Stephen Semple:
Customer number one. So he approaches his sisters, and his sisters refuse. He tells his investors, “The Federal Reserve are all in.” He raises $80 million and buys 23 jets.
Dave Young:
Was the Federal Reserve all in?
Stephen Semple:
No. So he moves to Memphis. Calls it Federal Express. The problem is he thought this will be a slam dunk, but the deal did not happen because regulations do not let his planes carry cargo.
Dave Young:
Oh, no.
Stephen Semple:
Only big planes could carry cargo. His planes were too small to legally carry cargo. So Federal Express is losing money like mad. Within a year, they’re $27 million in debt because he’s bought all these planes, and they’re just sitting there. Dave, I do work with a company that charters private jets and sells private jets. It’s a lot of money for a jet to just sit there and look pretty.
Dave Young:
It blows people’s minds when they realize every plane you’ve ever been on has spent the vast majority of its time in the air.
Stephen Semple:
Yes.
Dave Young:
It’s just in the air all the time.
Stephen Semple:
But the part that blows me away is, if they’re not in the air and just sit on the ground, how much they still cost. It’s still like millions of dollars for that sucker just to sit there. So he’s losing money like mad, $27 million in debt, and he needs money from the family trust. So he forges the minutes so a bank loan would be guaranteed.
Dave Young:
Oh, man.
Stephen Semple:
Yep, yep. But this buys him some time. By July 18th, 1972, there’s a change in the rules, and now you can use any aircraft for moving parcels.
Dave Young:
Okay, whew.
Stephen Semple:
So he can now launch the business.
Dave Young:
I have so many questions, Stephen. Are his sisters still mad at him-
Stephen Semple:
Well, this gets interesting.
Dave Young:
… or did they get over it?
Stephen Semple:
Ah, well, this gets interesting.
Dave Young:
Okay.
Stephen Semple:
So on March 12th, 1973, six jets take off and do their first delivery, total package count, six packages in total-
Dave Young:
Oh, man.
Stephen Semple:
… because there’s no name recognition. There’s nothing. At this point, they’re so cash poor, he only has $5,000 in cash left. There’s no way to meet payroll.
Dave Young:
Hey Steve, I want to interrupt us. Can I interrupt ourselves?
Stephen Semple:
Well, look, it’s your podcast, too. You can do what you want to do.
Dave Young:
Here’s the thing. This is where we would normally play that really cool, highly produced ad that our buddy Mick’s voice is in, and Gary has done some of them.
Stephen Semple:
Don’t forget Matthew Burns.
Dave Young:
And Matthew, yeah.
Stephen Semple:
He’ll be hurt. He’d be hurt if we forgot his name.
Dave Young:
No, they’re fabulous. But I thought, well, part of doing a campaign is you change it up every now and then and do it a little bit different. I thought maybe you and I could do the ad.
Stephen Semple:
Okay. Well, let’s do it.
Dave Young:
Basically, this is the reason we’re doing the Empire Builders Podcast is so that we can share stories of business owners, and hopefully, the audience that likes the Empire Builders Podcast is a bunch of business owners. That’s sort of the plan.
Stephen Semple:
That’s the hope.
Dave Young:
We have a special offer for business owners. It doesn’t cost anything. It’s fun for us, and it’s fun for you. We promise it’ll be fun. Just basically contact us and spend 90 minutes with us.
Stephen Semple:
Here’s how it works, just give a little bit of background. Reach out. You can book the session online. Go to the Empire Builders Podcast and go to get started. Right online you can book it, so nice and easy that way. You’ll receive an email with a scorecard and a questionnaire, so you just got to take a little bit of time to fill that out and get it to us. What that allows us to do is instead of it being this typical, “Hey, we’re great. Hey, we’re wonderful. Here’s our ads. You should hire us,” it actually allows us to do some research so we can show up prepared and give you, the business owner who contacts us, some solid advice for free. I don’t like sales. I’d much rather do that than be the sales guy. Here’s my attitude. We give you great advice. If it’s something you think you can apply and helps your business, maybe then you’ll want to go to the next step and hire us. Even if not, go and apply those things and grow your business. The more people do that, just better off we all are.
Dave Young:
This questionnaire that you’re going to give them, again, remember, this 90-minute session is not about us. It’s about you and your business.
Stephen Semple:
Correct.
Dave Young:
That’s why we need to know a little bit about you and your business so that we don’t make it about us. We want to make it about you.
Stephen Semple:
Yeah. And it means the first 30 minutes, we’re not asking the basic low-ball questions. You’ve already given us the answers to those things. We can just get right at it. So take us up on it, man.
Dave Young:
Contact information is on our website. You’ll find us. You’ll find us. Let’s get back to the story.
Stephen Semple:
All right, back to the story. So you’ve got this guy, Fred Smith, who’s a Yale grad. He’s a former Marine. He’s the son of a captain of industry, and he’s brilliant. So you know what he does? He goes to Vegas and gambles it.
Dave Young:
Really?
Stephen Semple:
He takes the five grand to Vegas and gambles it.
Dave Young:
Oh my gosh.
Stephen Semple:
Comes back with $27,000, and he can make payroll.
Dave Young:
Holy cow. So he didn’t take a high-risk gamble unless he played all night or something. Man.
Stephen Semple:
Then the sisters, remember the sisters?
Dave Young:
Oh, yeah, yeah.
Stephen Semple:
I know you haven’t forgot the sisters.
Dave Young:
Dude, I have sisters. That’s why I asked.
Stephen Semple:
That’s why you couldn’t let go of it. Striking a little close to home, was it, Dave?
Dave Young:
Oh, yeah.
Stephen Semple:
Did you ever rob their piggy bank? [inaudible 00:11:56].
Dave Young:
No, never. I never robbed their piggy bank, but we had our moments.
Stephen Semple:
Anyway, the sisters file suit saying these documents were forged to get a loan. January 31st, 1975, he gets arrested for financial fraud, like carted off. He fights the charges, and somehow he beats the charges and walks free. I have no idea how he managed to do that. It made big news. It made this national news. Here’s the weird thing. Order started to flood in after the court case. Can we ever think of any other situation where somebody goes to court, gets lots of press, and ends up money flooding in? Anyhow.
Dave Young:
Oh, gosh. This is the classic American success story right here.
Stephen Semple:
Because the scandal actually created a share of a voice for them.
Dave Young:
Yeah, absolutely. There’s no such thing as bad PR.
Stephen Semple:
But on top of that, they also do create this fantastic advertising campaign with the fast-talking voice, which was perfect because when you’re talking about speed, the ad should be fast. But the other part was that whole, “If it simply has to get there overnight.”
Dave Young:
“When it absolutely, positively has to be there overnight.”
Stephen Semple:
Yeah. The thing that’s interesting about that is, when you want to become famous, you have to become famous for a thing. You can’t be famous for a bunch of things. You have to be famous for a thing. So what they realized is they could be famous for overnight delivery, overnight delivery, if you had to send it overnight… There was a time, you and I experienced it, if you’re sending something overnight, you didn’t think about anybody else because you knew, “Wherever I’m sending it, it would go overnight.”
Dave Young:
Before that, you didn’t think of anybody because it couldn’t be done.
Stephen Semple:
Right.
Dave Young:
It could not be done.
Stephen Semple:
But even when others went to get into it, they didn’t have the power of that space because… It’s funny, and I’ve shared with people this idea that, oh, you’ve got to be famous for something, and people would say, “Well, the Kardashians, they’re just famous for being famous.” And I challenge that. Because you know what? The Kardashians are famous for being stylish. Because if you take a look at everything that’s posted, it’s very stylish.
Anyway, it’s 1975. They turn a small profit. 1978, Jimmy Carter signs the Aviation Deregulation Act, which basically really opens up what they can use for planes and where they can fly and how they can operate. The next year after that, they do $3.6 million in profit, and they’re basically in every major city. Today, they have 550,000 employees, and they do like $92 billion in sales.
Dave Young:
In the early days… Remember, I grew up in Western Nebraska, middle of nowhere. Yes, I’m just a hick from the sticks. But it was a big deal for somebody to send you a FedEx, a Federal Express overnight envelope. Really, in places like where I lived, you couldn’t get one. There were times when we would drive maybe 90 miles to send something overnight.
Stephen Semple:
Right, drive overnight to send it overnight.
Dave Young:
You think about it, if I drop it in the mail, it’s still going to take days.
Stephen Semple:
Correct.
Dave Young:
But if I get in the car and I’d drive to, let’s say, Cheyenne, Wyoming, where there’s a Federal Express office and get it there by 5 or 6 o’clock in the evening, they could get it to New York overnight. They could get it to any of the cities that they were already working with. It was game changing.
Stephen Semple:
It was game changing, and it was absolutely a remarkable thing that they created. They created this system that… Look, common sense would say, if you’re delivering something from Nebraska to New York, it should go from Nebraska to New York, not Nebraska to Memphis to New York, or probably more likely, Nebraska to LA to New York.
Dave Young:
Right, right.
Stephen Semple:
Right? You’d look at that and go, “Well, that absolutely makes no sense.” On the surface, it makes no sense, which is part of what was so brilliant about what he created and how out of the box the thinking was. What’s really unusual is this is one of the first examples that we’ve come across of somebody who’s created this unbelievably innovative business and he actually came from the transportation industry. His dad had a bus line. Then he had an aircraft business. This is actually really unusual. Now, look, the guy’s a maverick. Goes to Vegas, gambles lots of money. He was a crazy man. But, but, you know what? The first of 140 episodes, first one where we’ve done where somebody actually had background in their industry. But even then, when presented it to people, they all went, “Yeah, this is a dumb idea.”
Dave Young:
When he first started out, this idea of not just hub and spoke… Like, airlines have three or four hubs. He had one. Every plane goes to Memphis, every plane. Then in Memphis, a big old sort happens overnight, and then planes go back out to where they came from with the things that are going to their spot.
Stephen Semple:
Literally, if it was two towns over from Memphis, it would go to Memphis and back, those two towns over. Just before we finish, one other thing I want to share is, you’re absolutely right, there was an excitement if you got a FedEx envelope on something, because it signaled it was important because that was sent overnight. That was so powerful that, in the heyday of FedEx, what direct mail guys like myself would do is we would get envelopes printed that would look like a FedEx envelope.
Dave Young:
Oh, sure.
Stephen Semple:
It wasn’t a FedEx envelope.
Dave Young:
Got the color.
Stephen Semple:
Got the color. It’d be fairly close. We would put our letters in it and mail it, put a stamp on it and mail it. But what happened is when it would arrive in somebody’s office, they would just glance at it and go, “Oh, this is important because it’s from FedEx.” That’s how powerful FedEx became.
Dave Young:
Oh, yeah, that blue and orange logo. Do you want just a weird, interesting sidebar to this?
Stephen Semple:
Sure.
Dave Young:
I was talking to a… What do you call a transmitted disease specialist, somebody that looks at the vectors of disease? This was several years ago. We were talking about the Zika virus and the mosquitoes that transmit it. When they trace its path across the United States, it all vectors from Memphis.
Stephen Semple:
Oh, is that right?
Dave Young:
That’s how it got into the US, and that’s where it was spread from-
Stephen Semple:
By a package.
Dave Young:
… from packages.
Stephen Semple:
Interesting, interesting.
Dave Young:
Yeah. Just parts, it could be a part that lays out and gets a mosquito egg on it. Next thing you know, it ends up somewhere else and gets wet and the mosquito hatches and off to the races.
Stephen Semple:
There you go, off to the races. So the last thought I want to leave everybody with, because I want to leave him with something upbeat, not-
Dave Young:
Oh, well, okay. Are you saying-
Stephen Semple:
The lesson to me that we can all take from this is, yes, he had an innovative idea and he did a bunch of crazy things. But when they got down to marketing it, it was this whole idea of being known for a thing. It was the overnight delivery, and they really drove that message home. So I see way too often businesses, “Oh, we do 20 things,” and they want to market all the 20 things. It’s like, “No, you need to be known for a thing.” If it’s 20 things, figure out how to knit it together. If it’s not, you sort of got to lean in and own one. You can’t be famous for 20 things. You can be famous for one.
Dave Young:
He doggedly went after that one thing.
Stephen Semple:
He really did.
Dave Young:
He gambled everything because he believed in the one thing, not, “Oh, well, I guess we could just become like the post office.” Well, you’re not going to beat the post office at their game. You got to play a different game.
Stephen Semple:
Correct, correct. Change the rules.
Dave Young:
So he believed in that, yeah.
Stephen Semple:
Yep, yep.
Dave Young:
Yeah, absolutely. That’s a fun topic. We could chat about FedEx for hours, probably.
Stephen Semple:
Well, let’s not. I think we should wrap it up here.
Dave Young:
Let’s not. What’s the next topic? Stay tuned.
Stephen Semple:
Stay tuned. All right, thanks, David.
Dave Young:
Thank you. Thanks for listening to the podcast. Please share us, subscribe on your favorite podcast app, and leave us a big fat, juicy five-star rating and review. If you have any questions about this or any other podcast episode, email to [email protected].
