(Bloomberg) — FedEx Corp. is facing more pressure to raise pay for the small businesses that deliver a big portion of its packages, adding another hurdle to the logistic giant’s plans to boost profitability.
Spencer Patton, who runs more than 200 routes in 10 states for FedEx Ground, launched the latest challenge on Wednesday by distributing a letter to fellow logistics firms and posting a video online that asks for payments to increase by 50 cents per stop and 20 cents per mile when shuttling packages between hubs.
“The FedEx Ground network is in far more peril than what anyone realizes,” Patton said in a video viewed by Bloomberg. “There is not a day that goes by that I do not hear from my fellow contractors that are seeking a financial path out of certain bankruptcy.”
An increasing number of contractors are failing, especially after federal pandemic relief dried up. The extra payments would help contractors survive a spike in driver wages and prices for gasoline and trucks, according to Patton, who also runs a consultancy for delivery companies and has helped recruit firms into the FedEx network. In his letter, he asks FedEx to negotiate an increase in compensation by Nov. 25, which falls on Black Friday, the start of the US holiday-shopping season.
A separate group of contractors organized two petitions earlier this year, decrying dwindling profits, faulty software for predicting package volume and inefficiencies at FedEx’s package sorting hubs that delay drivers.
The contractors earned average revenue of $2.3 million last year and more than half have provided service for five years or more, helping the Ground unit navigate the rapid growth of e-commerce, FedEx said in an emailed statement. FedEx said it’s more effective dealing directly with each contractor, whose businesses have unique characteristics depending on their service area.
“We recognize the shifting market dynamics and current economic conditions may pose new challenges for service provider businesses, and we remain committed to working with these businesses to create opportunities for continued success,” FedEx said in the statement. “FedEx Ground teams across the network are continuing these productive discussions at a business-to-business level.”
Profit Drive
Meanwhile, Raj Subramaniam, who took over on June 1 from founder Fred Smith as chief executive officer, is trying to win over skeptical investors whose shares have fallen by 23% over the past year. He has announced a big increase in the dividend and a reduction in capital spending. And the company accepted two board members recommended by an activist investor.
The new CEO also wants to squeeze more money from the Ground unit, FedEx’s most-lucrative business. Profit margins at the division have narrowed with the pandemic-fueled boom in e-commerce deliveries, which are less profitable than its shipments to businesses.
FedEx has made a flurry of changes to address the surge of residential packages, including expanding delivery from five days a week to seven days. Subramaniam recently touted the expansion as one of FedEx’s strengths.
Read more: FedEx ground delivery becomes a road to riches for contractors
However, Sunday service is a burden for contractors and should be ended, according to Patton. There’s not enough volume to run routes efficiently and the extra weekend day creates driver scheduling headaches. The option is also unprofitable for FedEx, totaling about $500 million in losses a year, he said in the letter, citing “our estimates.”
Contractors have also complained that FedEx charges its customers a fuel surcharge and only passes along a portion of the extra fee to the firms making the deliveries. On the company’s earnings call last month, FedEx said fuel surcharges were the largest driver of higher revenue per package.
Coordinated Response
Patton hosts an annual conference for contractors, and this year’s event, which is in Las Vegas, will be used to coordinate a response to FedEx. At the meeting, a 10-person committee will be formed to negotiate with FedEx management on behalf of delivery firms. More than half of the 6,000 contractors that work for the Ground unit are expected to attend, Patton said.
This kind of activism is rare within the FedEx universe. Fear of retaliation is prevalent among more than a dozen contractors interviewed by Bloomberg. One reason is that the Ground unit offers contracts that are as short as one year and have triggers that allows FedEx to cancel them.
Patton said in the video he’s “taking an enormous risk” by confronting FedEx. However, he doesn’t want a “war” and said there’s no plan to attempt to unionize contractors. He made a direct appeal to Subramaniam to reduce contractor failures.
“I have brought thousands of people into this space as an investment,” Patton said. “They’re depending upon the cash flow of these businesses and ensuring that this is a viable investment going forward.”
(Updates with FedEx comments in the sixth and seventh paragraphs.)
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