FedEx Ground Network and Contractors Conflict Intensifies: A Game of Survival and Model

Whether or not FedEx Ground contractors agree with the views of Patton Logistics and Route Consultant founder Spencer Patton, thousands still gathered in Las Vegas last weekend to hear his argument that the delivery giant must change.

Since sending an open letter to FedEx leadership in July about contractor struggles, the operator of 225 ground routes across 10 states has become the public face of a contractor movement pushing for higher pay to offset runaway inflation. Of the 6,000 contractors in the ground network that provide delivery, pickup and linehaul services, 60% attended Route Consultant's 2022 Contractor Expo. At the event, Patton urged the ground network to eliminate Sunday deliveries and limit last-minute change notices.

"I think there are a lot of contractors right now that are really struggling, and that's why everyone came to the expo and said 'something has to change,'" Patton said in an interview. "It's not just Spencer saying 'my business is struggling,' it's the whole network."

Tensions between the ground network and its delivery providers have been brewing for years. The issues contractors continually raise are seen by analysts as obstacles FedEx must resolve to achieve its profit targets. Without a solution, independent contractors could escalate the dispute from pay levels to a legal battle over how their businesses are classified.

"Long term, there are clearly structural issues here," Stephens analyst Jack Atkins said in a report Monday after attending the Las Vegas event. "We continue to believe the Ground (contractor) model is broken and inefficient and needs a complete overhaul for FedEx Ground to ultimately deliver the results shareholders expect."

Delivery demand surges, contractor workloads climb in tandem

The contractors underpinning FedEx Ground's 10 million daily deliveries are legally independent of the company, hiring their own drivers and investing in equipment. In recent years, as residential delivery demand surged, both FedEx and its independent contractors saw volumes rise in tandem.

Carlos Angulo is one of many contractors who expanded operations to handle the pandemic-driven demand spike. He started in 2018 with 9 full-time employees and 9 vehicles; today he has 100 employees and 96 vehicles handling deliveries in Southern California.

"In 2020 we were ready to deliver 1,500 packages a day, but suddenly we were delivering 4,000 a day," Angulo said.

As workloads rose, the ground network also shifted more service responsibilities to independent contractors. Last-mile package delivery for SmartPost, previously handled by the U.S. Postal Service, now falls to contractors through the Ground Economy channel. Additionally, the ground network expanded delivery to year-round Saturday and Sunday operations.

Yet, according to contractors and industry experts interviewed by Supply Chain Dive, as contractors invested more to handle the busy workload, the delivery compensation they received from the ground network was diminishing.

Deutsche Bank research analyst Amit Mehrotra noted in a July 29 report that contractors earn 40% less for residential deliveries than commercial ones—and residential is the service type that surged during the pandemic.

Adding to the financial strain, residential deliveries cost more than B2B ones—contractors burn more fuel traveling between neighborhoods and drop off fewer packages per stop. Patton said paying less for more costly deliveries is a primary source of the current rift.

"The reality is a contractor makes $300,000 one year and $350,000 the next, but he's working twice as hard," said Tony DiNitto, founder of consulting firm Route Tycoon and a former ground contractor. "He's running twice the trucks, twice the drivers, and probably twice the sick days. That's what makes people want to quit—they see the trend of declining profitability per route."

2022: Contractor discontent reaches a boiling point

The slowdown in delivery demand since the pandemic peak has amplified the impact of FedEx policy changes on contractors.

Although the holiday season is typically the most profitable time of year for ground contractors, four contractors interviewed by Supply Chain Dive said last year FedEx overestimated volume expectations, leaving many with lower-than-expected deliveries. Even Angulo's busiest days last year fell short of the company's forecasts.

As demand shrinkage continued into 2022, FedEx made clear it would prioritize more profitable deliveries and buffer the impact by passing inflationary pressures on to customers. FedEx Executive Vice President and Chief Customer Officer Brie Carere said on a June earnings call that fuel surcharges to customers improved "revenue quality," or per-package profitability.

However, the ground network has not fully passed on the benefits of customer fuel surcharges to contractors, which Patton called "going too far." This issue prompted him to publicly call for change and warn that if FedEx did not modify contract terms to cover rising operating costs, he would cease operations on November 25.

FedEx said in a statement that fuel payments are indexed and adjusted weekly based on local prices to reflect price fluctuations. The company also has "fuel islands" at ground hubs and facilities offering diesel at a discount to contractors, and provides linehaul contractors an app to identify the most economical fueling options along their routes.

Still, diminishing returns from the residential delivery boom, combined with rising operating costs this year, are intensifying the day-to-day financial pressures on contractors as small business owners. According to Atkins data, the number of contractor businesses for sale has increased nearly 65% over the past year, while their asking prices as a percentage of revenue have fallen about 8% since January 2021.

As contractors exit, franchise dispute may follow

Even if other contractors heed Patton's call to stop work, Dean Maciuba, managing partner for the U.S. at Crossroads Parcel Consulting, believes the impact on the ground network would likely be minimal.

Maciuba noted that the timeline of peak-season delivery activity has become "more spread out," with the shopping rush from Black Friday to Christmas no longer as concentrated as in the past. Additionally, since the ground network's money-back guarantees to shippers have not been reinstated since the pandemic began, the company may not be overly concerned about the volume of residential delivery delays, he added.

FedEx said in a statement it is prepared to maintain high service levels during peak season. The company will cover otherwise unserved routes through short-term contingency agreements with other contractors and, "where appropriate, purchasing transportation services."

The company also noted that the ground network and its contractors are adjusting their agreements in response to changing market conditions, and that its contractor attrition rate shows no "significant difference" from historical levels.

"Through multiple forums and engagement with thousands of business owners, FedEx Ground understands the impact of current economic and market dynamics on their businesses and has worked collaboratively to find solutions," FedEx said. "Over the past three months, more than 1,600 agreements have been successfully negotiated or renegotiated based on the unique circumstances of each business."

As contractor pressure mounted, the ground network also made operational adjustments. Most notably, it suspended year-round Sunday residential delivery in some markets, primarily in less populated areas. Contractors told Supply Chain Dive that the extra workday added operational burdens and costs, as delivery volume was insufficient to make it financially viable.

While a move like fully eliminating Sunday delivery would be "a huge win" for the ground network and its contractors, Patton is still pushing for other benefits that would give contractors protections similar to franchisees. If those protections don't materialize, Patton said he would "explore paths" to examine whether contractors meet the legal qualifications of franchisees—which could spark another battle between FedEx and the backbone of its network.

"My thought is, I want FedEx Ground to voluntarily give us the benefits of being franchisees without having to trigger a massive 50-state lawsuit over whether we should be legally classified as franchisees," Patton said.