FedEx missteps fuel contractor's crusade as pandemic delivery boom fades
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[August 26, 2022] By
Lisa Baertlein
LAS VEGAS (Reuters) - Package carrier FedEx
Corp is facing a threat from an unusual source - one of its biggest
delivery contractors.
Tennessee businessman Spencer Patton has ratcheted up pressure on FedEx
to boost compensation for contractors after company actions made it even
harder for them to wring out profit in a downshifting, inflationary
economy.
Patton is one of the largest contractors for FedEx Ground, the company's
fastest-growing business, which relies on 6,000 "independent service
providers" to get millions of packages to homes and businesses each day.
The 36-year-old has morphed from one of FedEx's biggest boosters to one
of its biggest adversaries.
"I am not here to be a bomb thrower and to trash FedEx Ground and the
CEO," Patton told Reuters at the contractor conference he hosted in Las
Vegas last weekend. He proposes that FedEx and contractors collaborate
to find solutions.
![](http://archives.lincolndailynews.com/2022/Aug/26/images/ads/current/burtonview_daily_sda_FAIR_2022.png)
Patton is also forming a trade group to advocate for all delivery
partners, including those working with Amazon.com Inc. Memphis-based
FedEx has traditionally been anti-union, but if Patton's efforts gain
traction, they could squeeze the company's profit and disrupt business
ahead of the crucial holiday shipping season.
Patton's crusade comes as new FedEx CEO Raj Subramaniam faces calls to
boost Ground's returns. A Reuters analysis of that unit's financials
showed that drops in package transport and delivery spending have
coincided with improved operating margins.
FedEx hit Patton - who has made a fortune with FedEx Ground running 275
semi-trucks and delivery vehicles, selling routes to other
entrepreneurs, and offering consulting services - with a "cease and
desist" letter earlier this summer.
"As the pendulum swings back" from pandemic growth, "FedEx Ground
remains committed to working with each of you to find solutions," unit
leader John Smith said in an internal message to contractors viewed by
Reuters.
NO MARGIN FOR ERROR
FedEx Ground uses contractors to reduce fixed costs, stymie unionization
and maintain leverage in negotiations, analysts said. Those contractors
bear the brunt of economic downturns because they shoulder labor and
vehicle costs.
Patton said up to 35% of FedEx Ground's independent service providers
(ISPs) are at risk of financial collapse. His own business, which runs
225 routes in 10 states, operates at a -5% to -10% margin. He has called
on FedEx to stop money-losing Sunday deliveries and increase
contractors' share of fuel and holiday surcharges on packages.
Thirteen contractors at Patton's conference told Reuters they are losing
money on operations, or that a major setback like a blown engine would
push them into the red.
Most traced the current financial crunch to Christmas 2021. Contractors
got stuck with big bills due to an inaccurate holiday season volume
forecast by FedEx.
Then, they missed bonus targets that were based on the company's overly
optimistic forecast. That left them without a cushion against spiking
fuel costs and losses from the Sunday deliveries FedEx marketed to
Walmart Inc and other retailers that compete with e-commerce leader
Amazon.com. "There is no margin for error now," John Pontefract, an
Oregon contractor, said.
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![](../images/082622PIX/busine39.jpg)
A person walks by a FedEx van in
Manhattan, New York City, U.S., May 9, 2022. REUTERS/Andrew
Kelly/File Photo
![](http://archives.lincolndailynews.com/2022/Aug/26/images/ads/current/farmers_bank_sda_FAIR_2022.png)
BLEEDING PURPLE AND RED Struggling contractors' worry turned to anger in June,
when FedEx executives told investors they used proceeds from fuel surcharges to
increase Ground's operating margin.
The company has not yielded on the fuel surcharge split, Brie Carere, FedEx's
chief customer officer, told Reuters. It did reduce Sunday requirements for 25%
of contractors, but remains committed to the service, she said.
Last Saturday, Patton told some 3,000 attendees at his Las Vegas conference he
still bleeds FedEx Purple, even as his business hemorrhages money. But he then
threatened to stop "bailing out" FedEx Ground by helping complete work for other
struggling contractors.
FedEx's Carere told Reuters that the changing market reduced the need for that
work and that the company could manage the holiday season without additional
help from Patton.
FedEx "pays handsomely" for that work and others will be hungry to do it, said
Dean Maciuba, a consultant and former FedEx executive.
'$9.99 STEAK'
Patton said he would shutter his business on Black Friday, which marks the start
of the holiday peak shipping season, if contractors do not win more relief.
Carere said FedEx stress-tested this year's peak forecast and is confident it is
better prepared. It will release holiday compensation details by the end of
business on Friday, she said.
To be sure, Patton has his critics, including California FedEx Ground contractor
Satgur "Singh" Athwal. Contractors made "so much money in 2020," he said. "Did
any of us step forward and say, 'You're paying us too much'?"
It is too early to tell if Patton is a changemaker or a squeaky wheel, but he
has successfully broadcast contractors' fear that they and FedEx will be harmed
by a flurry of ISP failures.
![](http://archives.lincolndailynews.com/2022/Aug/26/images/ads/current/elkhart_grain_sda_FAIR_2022.png)
Before the pandemic, analysts predicted contractor-based FedEx Ground and Amazon
would unseat unionized rival United Parcel Service Inc as the industry leader.
If the standoff between the two sides continues, UPS will benefit, said Satish
Jindel, who helped build the company that became FedEx Ground.
Jindel, now a consultant, does not support subsidizing inefficient operators,
but said delivery providers' current stress is largely due to FedEx rushing
through changes like year-round Sunday delivery without contractor input.
A real-world comparison would be McDonald's telling the franchisees that run its
restaurants to sell a $15.99 steak for $9.99, he said.
"That is what has happened, and that needs to change," Jindel said.
(Reporting by Lisa Baertlein in Las Vegas, Editing by Ben Klayman and Matthew
Lewis)
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