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

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

Since sending an open letter to FedEx leadership in July about contractor struggles, Patton — who operates 225 ground routes across 10 states — has become the public face of a movement pushing for higher pay to hedge against rampant inflation. Sixty percent of Ground's 6,000 contractors attended Route Consultant's 2022 Contractor Expo, where Patton urged Ground to eliminate Sunday deliveries and limit temporary changes.

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

Tensions between Ground and its delivery providers have been brewing for years, with contractors consistently pointing out issues that analysts say FedEx needs to address to meet its profit goals. If unresolved, independent contractors could escalate the dispute from compensation issues to legal action over how their businesses are classified.

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

Delivery demand surges, and workloads climb

The contractors who support FedEx Ground's 10 million daily deliveries operate independently of the company, hiring their own drivers and investing in their own equipment. In recent years, as home delivery demand surged, workloads for both FedEx and independent contractors have risen significantly.

Carlos Angulo is one of many contractors who expanded their businesses to handle the pandemic-driven demand spike. He started his ground contracting business in 2018 with 9 full-time employees and 9 vehicles. Today, he has 100 employees and 96 vehicles in Southern California handling deliveries.

"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 increased, Ground also shifted more service responsibilities to independent contractors. Last-mile package delivery for SmartPost is now handled by contractors through Ground Economy, whereas this previously fell under the Postal Service's purview. Additionally, Ground has expanded Saturday and Sunday delivery to year-round operations.

Yet, as contractors became busier and invested more money to handle the load, the returns they received from Ground deliveries diminished, according to contractors and industry experts who spoke with Supply Chain Dive.

Deutsche Bank research analyst Amit Mehrotra noted in a July 29 report that contractors earn 40% less for residential deliveries — the service type that surged during the pandemic — than for business-to-business (B2B) deliveries.

Worse, residential deliveries cost more to complete than B2B deliveries because contractors burn more fuel driving through neighborhoods while carrying fewer packages per stop. Patton said paying less for higher-cost deliveries is a major source of the current divide.

"Right now, you have a business that made $300,000 this year and $350,000 next year, but the contractor's workload has doubled," said Tony DiNitto, founder of consulting firm Route Tycoon and a former ground contractor. "He's managing twice the trucks, twice the drivers, and maybe someone calls in sick — that's why people want out, because 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 compounded the impact of FedEx changes on contractors.

Although the holiday season is typically the most profitable time of year for ground contractors, many contractors saw lower-than-expected delivery volumes last year because FedEx overestimated its volume forecasts, according to four contractors interviewed by Supply Chain Dive. Even Angulo's busiest day last quarter fell short of the company's projections.

As demand shrinkage continued into 2022, FedEx has made clear it will prioritize more profitable deliveries and pass inflationary pressures onto customers to cushion the blow. FedEx Executive Vice President and Chief Customer Officer Brie Carere said on a June earnings call that fuel surcharges imposed on customers have improved "revenue quality," or profitability per package.

However, Ground has not passed the full benefit of customer fuel surcharges to contractors, which Patton called "over the top." This issue prompted his public call for change, including a warning that he would cease operations on November 25 if FedEx did not amend contract terms to account for rising operating costs.

FedEx said in a statement that fuel payments are based on an indexed mechanism adjusted weekly according to local prices to respond to price fluctuations. The company also has "fuel islands" at ground hubs and stations offering discounted diesel prices to contractors, and provides line-haul contractors with an app to identify the cheapest fuel options on their routes.

Nevertheless, diminishing returns from the home delivery boom, coupled with higher operating costs this year, have intensified the daily financial pressures on contractors as small business owners. According to Atkins, the number of contractor businesses for sale has increased by nearly 65% over the past year, while their asking prices as a percentage of revenue have fallen about 8% since January 2021.

Contractors exit, and a franchise fight could be the next battleground

Even if other contractors heed Patton's call to halt deliveries, the impact on the ground network could be minimal, said Dean Maciuba, managing partner for the U.S. at Crossroads Parcel Consulting.

Maciuba noted that the timeline of delivery activity during peak season has become "more dispersed," meaning the delivery surge from Black Friday to Christmas is now less pronounced than in the past. Additionally, since Ground's money-back guarantees to shippers have not been reinstated since the pandemic began, the company may be less concerned about the volume of delayed residential deliveries, he added.

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

The company also noted that Ground and its contractors are adjusting their operating agreements to adapt to changing market conditions, and that its contractor attrition rate is "not significantly different" from historical levels.

"Through multiple forums and engagement with thousands of business owners, FedEx Ground understands the impact of current economic 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 has grown, Ground has also made some operational adjustments. Most notably, it has suspended year-round Sunday home delivery in certain markets, primarily less populated areas. Contractors told Supply Chain Dive that the extra Sunday workdays brought more operational strain and expenses, as delivery volume was insufficient to make them financially viable.

Although measures like eliminating all Sunday deliveries would be "a huge win" for Ground and 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 qualify as franchisees — which could spark another battle between Ground and the backbone of its network.

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