Fedex power play sends the wrong message
Silencing critics won’t end widespread discontent
FEDEX Corp has moved quickly to address the concerns of many of the 6,000 contractors who make last-mile deliveries for its ground unit. The problem is that it’s the wrong move.
The company last Friday sought to cut off the head of the contractor rebellion by accusing the consulting business of Spencer Patton, the de facto leader of the revolt, of defamation and revoking the contracts for Patton’s business, which operated about 225 delivery routes across 10 states in the United States.
This took place less than a week after Patton gave a keynote speech in Las Vegas to a few thousand contractors, Wall Street analysts, and even a couple of Fedex investors.
In the speech, which received a standing ovation, he said contractors are in severe financial distress and pushed Fedex to pay them more, while emphasising he wanted to work with the company.
The widespread discontent among contractors didn’t start with Patton, and it won’t stop now.
The situation can be confusing because contractors are by no means a monolithic group and there are those that may be relieved that the loudest voice of the recent revolt has been silenced for now.
Even so, the ease with which Fedex Ground abolished Patton’s delivery business and the equity value in those routes does raise questions about how the contractor model has changed and whether it can be reshaped to benefit both sides.
Several contractors have discussed being stuck in the system because they have injected their life savings and mortgaged their houses to keep their businesses afloat.
It’s clear now that Fedex has complete power to do whatever it wants with these delivery companies, and that includes shutting them down, as was made apparent by Patton’s predicament.
In its lawsuit, Fedex Ground said Patton “exaggerated and misrepresented the purported financial hardships.”
Fedex can argue whether it’s in the right to destroy Patton’s business, but what’s undeniable is that the company wields this power over all its contractors.
The contractor model, which Fedex founder Fred Smith inherited with the acquisition of Caliber Systems in 1998 and became the company’s growth engine, has suffered through growing pains.
It started out as one person with a van who delivered packages for Fedex Ground. As the business grew, Fedex required that each contractor operate multiple routes, pushing drivers to become entrepreneurs. The model worked, and both sides made good money.
The rise of ecommerce changed the equation for Fedex Ground, which is based in a Pittsburgh suburb, and its contractors.
Because residential deliveries are more costly and harder to predict, profit margins started to decline at Fedex Ground.
In 2019, the company forced operational and financial changes on its delivery partners, such as extending service to seven days a week and tweaking payments to favour a rate for each stop instead of for each package.
Among some other changes and complaints about inefficiencies in the Fedex network, these have made the model much less lucrative for the contractors, leading to the tension with the company.
Under the contract, Fedex determines how much it will pay and has the authority to take any action to ensure the delivery of packages.
One telling example of the lopsided power dynamic is that Fedex Ground decided a couple of years ago that it would examine the financial health of its contractors.
The company simply ordered contractors, under threat of not renewing their contracts, to turn over all their financial information to a third-party provider called Rapidratings, which in turn provided Fedex Grounf with a financial health grade. (Fedex says it doesn’t have access to the detailed financial information.)
The financial distress followed soon after Fedex forced contractors to turn over their financial information, according to contractors.
Despite its overwhelming position of power over its contractors, Fedex Ground is still struggling with its profit margins, which dropped to 8% in 2022 from 18% in 2012.
That compares with 13% in 2021 for rival United Parcel Service Inc (UPS), where union drivers earn twice what those for Fedex Ground make and receive the best benefits package in the parcel industry.
Those numbers indicate that UPS is a much better operato, and analysts often point to the UPS unified network as adding efficiency.
During December’s peak season last year, Fedex’s on-time delivery performance slipped to 89%, while UPS’S percentage was in the high 90s, according to Shipmatrix, which compiles data on the parcel industry.
For sure, Fedex Ground provides benefits for contractors. Fedex is a ubiquitous brand, and package growth has been rapid and steady over the last two decades, with Fedex
Ground delivering about 10 million packages a day.
Contractors don’t have to hustle after sales or spend on advertising. Fedex feeds them packages.
Fedex Ground pays contractors promptly every week, a huge plus for a small business. Fedex also provides significant support for insurance, especially for catastrophic accidents.
Moreover, since July 1, the company has agreed to about 40% of contractor requests for renegotiation and more than 90% of those talks led to higher contractual payments, according to its lawsuit against Patton.
Still, Fedex’s brazen effort to silence one of its most prominent critics is the wrong message to send to its contractors.
The company needs to work with its delivery partners to improve its network and find solutions to improve profitability for both sides, not simply dangle the threat of reducing small businesses to dust whenever it desires.