One of the perils of working as an independent contractor for a large corporation is that if the corporation sneezes, it’s the contractor who can get sick.
That cause and effect came to light over the past few days after it was reported that about 800 of the 5,500 independent contractors who work with FedEx Corp.’s (NYSE: FDX) Ground unit circulated a “statement of concern” focusing on the unit’s wildly inaccurate forecasts for peak-season traffic, which in turn triggered contractor investments in vehicles and labor to move a level of package volumes that never materialized.
According to an industry source, FedEx Ground had projected volume growth of 30% to 40% above what were already elevated 2020 peak levels. Many contractors scoffed at the projections and didn’t expand their operations. However, there were enough who did to justify the drafting of the letter.
In a LinkedIn video that was believed to have been posted in late January, Spencer Patton, the owner of Route Consultant, a Nashville, Tennessee-based contractor who has worked with FedEx Ground for 10 years, said the unit’s estimates for peak traffic were 20% to 40% higher than what actually came into the system. Patton said the forecasting snafus compounded the already formidable challenge for contractors to ensure they had enough drivers to meet FedEx Ground’s delivery requirements and to do it profitably.
Patton called the 2021 peak season experience “devastating” for many contractors. At the same time, he said FedEx Ground has done a better job of outreach over the past two years. He took pains to frame his remarks as nonconfrontational toward the unit.
The unit acknowledged the forecasting inaccuracies and vowed to do better, according to a report on Bloomberg’s website. In the meantime, many contractors, known in the FedEx ecosystem as independent service providers (ISPs), are stuck with what turned out to be unnecessary capital expenditures that they won’t be reimbursed for.
It is unclear why FedEx Ground was so far off in its forecast. It may have underestimated how much holiday traffic would return to stores with millions of Americans vaccinated against COVID-19. The volume caps imposed on some of its largest customers during the holiday cycle may have cut too deep, causing volume shrinkage of a magnitude the unit may have been ill-prepared for.
The current groundswell of contractor disaffection hardly constitutes a mutiny. “Less than 15% is manageable,” said an executive with close ties to the FedEx ISP community. “If it goes much beyond that, FedEx Ground has a problem on its hands.”
The contractor model has been in place since FedEx acquired Caliber System Inc., the parent of Roadway Package System, in 1997 and rebranded the business as FedEx Ground. It has been instrumental in enabling FedEx to compete with heavily unionized rival UPS Inc. (NYSE: UPS) by being the low-cost provider in many instances. Amazon.com Inc. (NASDAQ: AMZN) copied the FedEx contractor model when it built its logistics operation.
Until the middle of last decade, the contractor model consisted of individual drivers working directly with the company. The shift to the ISP approach was made to insulate the company from legal concerns about how it classified the drivers for employment purposes. FedEx Ground has forked over hundreds of millions of dollars in the past seven years to settle allegations that its drivers were effectively company employees and were misclassified as independent contractors.
ISPs operate across geographic territories, which are bought and sold on the open market. FedEx Ground will fire a contractor that isn’t performing up to contractual standards. At the same time, an ISP may decide to abandon its territory due to profitability concerns. There have also been instances in which FedEx Ground believes a contractor has expanded its territory too aggressively and must be reined in so as not to compromise its delivery reliability.
The forecast gap is just one of the fissures that have developed in the FedEx model. Inbound sortation problems at terminals have caused delays in drivers getting out the door and put the contractors at risk of failing to meet delivery commitments written into their contracts.
For several quarters, significant staffing shortages at FedEx Ground compromised delivery schedules and forced the unit to buy more third-party transportation. That problem seemed to abate during the company’s fiscal 2022 second quarter, which ended Nov. 30. (FedEx releases its fiscal third-quarter results on Thursday.)
FedEx has laden the Ground unit with 2 million daily parcels that entered the network after the company ended its final-mile delivery relationship with the U.S. Postal Service. In addition, it is looking to migrate more nonurgent traffic now moving via ground on FedEx Express to its lower-cost Ground operation, according to the executive. The moves would build compelling economies of scale at FedEx Ground and support its strategy of operating as the lowest-cost ground-delivery provider in the industry.
However, virtually all of that business involves low-margin business-to-consumer deliveries for which rates are low and drivers are often forced to deliver one or two parcels per stop. The business-to-business segment, which was FedEx’s bread and butter before e-commerce changed the delivery game, is more profitable because it typically involves the delivery of multiple parcels per individual stop.