FedEx Ground Contractor’s Update: Inflation, Opportunity & Lawsuit Resolution

On Aug. 20, 2022, with a digital backdrop of #PurpleFriday, Spencer Patton took the stage at Paris Las Vegas with a message for FedEx. He asked FedEx Ground CEO John Smith to come to the table now to address the concerns of FedEx Ground’s independent contractors around rising costs, a slowdown in e-commerce volumes, and to renegotiate specific contract terms in this new environment. 

Without a good faith effort from FedEx, he said his company Patton Logistics would be idling its trucks on Black Friday. The 3,500 contractors in the room — along with the 2,500 who didn’t make it to Vegas — could join him in this planned walkout if they chose. At the same time, he announced the formation of TALP, a trade association for logistics professionals.  

The crowd was wired. Whenever there are unscripted outbursts from the audience at a business-to-business trade event, you know you’re onto something — it was coalescing, though no one was sure what it all meant. 

Five days later, Smith was on CNBC announcing the termination of Patton Logistics’ routes as well as a lawsuit against Route Consultant, Patton’s contractor consultancy, for damaging FedEx Ground’s brand and reputation.  

Flash forward to July 29, 2023. Patton took the same stage at his Route Consultant Expo + Party, but this year he was more subdued. The public battle with FedEx Ground had taken a toll on him and the company.  

Neither #PurpleFriday nor TALP had come to fruition. Although Patton believes Ground contractors have a legal right to a trade association, a protracted court battle with potentially damaging outcomes was not one he was willing to take on, he said.  

In that vein, Patton believes Ground contractors could be classified as franchises in some states and would enjoy the benefits of established protections in longstanding franchise law. But that classification quest is another multi-year battle with unclear results.  

The crowd was smaller this year, owing to the fact that FedEx corporate had scheduled its own contractor event in Orlando the day after Patton’s show concluded. 

Patton Won the Lawsuit 

But the reason for the event has not changed: Patton is still the guru of FedEx Ground contractors, and their health — and the health of FedEx corporate — is good for everyone, including Route Consultant, which brokers sales of routes from one contractor to another. 

The contractors are facing evolving challenges around inflation, cost containment, and business diversification. The seminar discussions over the weekend looked to solve those challenges.  

And the good news, Patton won the lawsuit hands down. In March, all nine counts against Route Consultant were dismissed in a ruling that examined First Amendment free speech and “commercial speech” and was favorable to Patton’s public statements about the issues with FedEx Ground.  

Patton also announced another win for contractors: FedEx Ground has reduced Sunday service by 50%. This issue, which he called “a failed and unprofitable model” was one of last year’s #PurpleFriday demands.  

Inflation, Macro Trends Affecting FedEx Contractors 

The other big news at this year’s show was not, luckily, generated internally.  

The industry is keeping an eye on the tentative agreement reached between UPS and the Teamsters Union that guarantees $49 an hour for full-time drivers for five years. Meanwhile, FedEx Ground P&D (pickup and delivery) drivers get paid about $20 an hour.  

Though UPS drivers are under a corporate umbrella — and there are no serious unionization plans of FedEx workers — the agreement brings the pay disparity under a glaring spotlight in ways that FedEx corporate will be forced to address. “That pressure cooker is being turned up” on FedEx corporate, Patton said. 

Right now, $20 an hour is causing close to 100% turnover in some contractors’ operations. It’s a never-ending HR turnstile and liability worry.  

During a session on the economy, Leland Mize, Route Consultant’s CFO, fielded a question on whether FedEx’s publicly announced quest for massive cost cutting would hurt or hinder Ground contractors.  

Mize said the cost cutting is happening on the corporate side. Overall, the contractor model works well for FedEx, he said. This plays into the other big news, the integration of FedEx’s business units in 2024. Patton sees it as an opportunity for FedEx to expand its contracted business.  

Mize did raise other economic warnings, though. He warned that more small bank failures are coming in 2023 (though not to crisis levels) and sees indicators that fuel prices will rise again.  

However, he said low unemployment is driving the transfer of goods and generation of services, which is good for e-commerce, FedEx’s business, and its ISPs, though it would create slight upward pressure on inflation.  

Inflation is one of the biggest, if not the biggest, pain points post-pandemic. Though moderating, FedEx Ground contractors experienced 25% inflation in their operations over the last two years, and contractual negotiations over per-mile pay for linehaul operators and pay per stop for P&D (pickup & delivery) haven’t kept up.  

One stark barometer of the pricing environment is the cost of a step van. According to data introduced in a leasing seminar, a standard P1000 complete step van listed at $53,620 in 2019. That same van is averaging $79,550 in 2023, a 45% increase in cap costs in four years. Exacerbating those costs are interest rate hikes of 3% to 9% over that timeframe.  

In terms of supply, however, step vans are built and on dealer lots right now, a factor of overbuilding during the pandemic’s e-commerce craze. Supply of new cargo vans is more constricted.  

To address these cost imbalances, Patton Logistics has pivoted from running FedEx Ground routes into other areas, including truck leasing. Patton Logistics’ CEO Grace Bay, who oversees Hello Truck Lease, showed how the fixed expense in a lease can even out cash flow and ease the cost burden of catastrophic truck breakdowns.  

There were new business opportunities presented as well. Bread is often delivered by owner-operators from bakery to store in a single truck. One seminar examined how FedEx Ground contractors could get into this business in a diversification strategy, and scale to multiple routes with new efficiencies in an antiquated model. 

Electrification Pause 

These pressures are superseding the quest to electrify for right now, and there were fewer EV vendors in the exhibit hall.  

For EVs to make sense for contractors, FedEx needs to install infrastructure at its depots. In California, FedEx is in the process of electrifying seven terminals this year, out of about 200 in the state.  

BrightDrop’s Zevo 600 vans have been rolling in Southern California for months, as part of a larger agreement to incorporate 2,500 BrightDrop vans across FedEx operations over the next few years. This is out of more than 100,000 vehicles in the FedEx Ground fleet today. Yet the rollout might be stretched with the wait for infrastructure to catch up.  

Patton said electrification is the industry’s future, but he sees the timetable being pushed out five years before meaningful numbers.  

Kevin O’Leary’s Bullish Future 

Shark Tank’s Kevin O’Leary was this year’s featured speaker. “Mr. Wonderful” seemed to match this year’s mood, compared to last year’s Jabbawokeez dance troupe, which pumped up the glam.  

O’Leary was on stage for almost an hour, with most of his talk analyzing the why and how of today’s economy. Coming from someone who has funded hundreds of startups, his message resonated. He said the FedEx Ground contractor model has two strong factors in its favor: guaranteed cash flow and no customer acquisition costs (CAC). Those are the two biggest reasons that 70% of startups fail in the first five years, he said.  

He’s bullish on e-commerce. After the pandemic, a staggering 40% of businesses didn’t return to their offices in urban metros, he said, explaining how buildings in New York City are turning into private controlled storage for e-commerce platforms such as Shopify.  

He also said Nike was able to grow its direct-to-consumer sales from 20% pre-pandemic to 50% today. It’s more efficient than using big-box middlemen like Walmart and you get better data. Social media is driving brand awareness.  

We’re not going back to brick-and-mortar stores, he said, which benefits everyone in the room.  

Originally posted on Automotive Fleet