FedEx Power Play Sends the Wrong Message to Contractors
The widespread dissatisfaction among entrepreneurs didn’t start with Patton and it won’t end now. The situation can be confusing as entrepreneurs are by no means a monolithic group, and some may be relieved that the loudest voice of the recent uprising has been silenced for the time being. Even so, the ease with which FedEx Ground eliminated Patton’s delivery business and the net worth of these routes raise questions about how the contractor model has changed and whether it can be reshaped to benefit consumers. two parts.
Several entrepreneurs discussed being stuck in the system because they injected their savings and mortgaged their homes to keep their businesses afloat. It’s clear now that FedEx has all the power to do whatever it wants with these delivery companies, and that includes shutting them down, as Patton’s predicament has shown. In its lawsuit, FedEx Ground said Patton “exaggerated and misrepresented alleged financial hardship.” FedEx may wonder if it’s within its rights to destroy Patton’s business, but what’s undeniable is that the company wields that power over all of its contractors.
The entrepreneurial model – which FedEx founder Fred Smith inherited with the acquisition of Caliber Systems in 1998 and became the company’s growth engine – has suffered from growing pains. It all started with one person with a van delivering packages for FedEx Ground. As the business grew, FedEx required each contractor to operate multiple routes, pushing drivers to become contractors. The model worked and both parties made a lot of money.
The rise of e-commerce has changed the equation for Ground, which is based in a suburb of Pittsburgh, and its contractors. Since residential deliveries are more expensive and harder to predict, profit margins have started to decline at FedEx Ground. In 2019, the company imposed operational and financial changes on its delivery partners, such as extending service to seven days a week and adjusting payments to favor one rate for each stop rather than for each package. Among some other changes and complaints about inefficiencies in the FedEx network, these made the model far less lucrative for contractors, leading to tensions with the company.
Under the contract, FedEx determines the amount it will pay and has the authority to take any action to ensure delivery of packages.
A telling example of the lopsided power dynamic is that FedEx Ground decided a few years ago that it would examine the financial health of its contractors. The company simply ordered the contractors, under threat of not renewing their contracts, to hand over all of their financial information to a third-party vendor called RapidRatings, which in turn provided FedEx with a financial health score. (FedEx says it doesn’t have access to detailed financial information.) Financial distress followed shortly after FedEx forced contractors to hand over their financial information, according to the contractors.
Despite its overwhelming position of power over its contractors, FedEx Ground is still struggling with its profit margins, which fell to 8% in 2022 from 18% in 2012. That compares to 13% in 2021 for rival United Parcel Service Inc., where union drivers earn twice as much as those at FedEx Ground and receive the best benefits package in the parcel industry. These numbers indicate that UPS is a much better carrier, and analysts often point to UPS’s unified network improving efficiency. During the peak season in December last year, FedEx’s on-time delivery performance dropped to 89% while UPS’s percentage was in the 90s, according to ShipMatrix, which compiles data on the parcel industry.
Of course, FedEx Ground offers benefits to contractors. FedEx is a ubiquitous brand and parcel growth has been rapid and steady over the past two decades, with FedEx Ground delivering approximately 10 million parcels a day. Entrepreneurs don’t have to hustle after sales or spend on advertising. FedEx provides them with packages. Ground pays contractors promptly every week, a huge plus for a small business. FedEx also provides extensive insurance support, especially for catastrophic accidents. Additionally, since July 1, the company has accepted about 40% of contractors’ renegotiation requests and more than 90% of those talks have led to higher contract payments, according to its lawsuit against Patton.
Yet 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 on both sides, not just dangle the threat of turning small businesses to dust whenever it wants.
More writers at Bloomberg Opinion:
• FedEx investors need this data. They Don’t Have It: Thomas Black
• FedEx can do more to quell contractor revolt: Thomas Black
• FedEx finds out that if you pay them, they’ll come: Brooke Sutherland
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Thomas Black is a Bloomberg Opinion columnist covering logistics and manufacturing. Previously, it covered US industrial and transportation companies as well as Mexican industry, economy and government.
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