Inflation and other challenges are putting pressure on shipping companies and their contractors. Patton Logistics, one FedEx Ground’s largest contractors – servicing 225 routes in 10 primarily Midwest states – has warned that the company could stop deliveries if FedEx doesn’t amend its contracts to account for increasing costs. And Patton Logistics isn’t the only company feeling the pain.

FedEx has identified contract renegotiation as the appropriate remedy to the challenges its contractors are facing, and says that over the past three months, 1,600 contractor agreements – representing approximately 25% of its service providers – have been negotiated. Additionally, in a response to contractors’ concerns, this month the company cut back on Sunday residential deliveries in some markets.

Negotiations continue, in some cases, however. Spencer Patton, founder and president of Patton Logistics is calling on FedEx to revise its contracts to account for higher fuel, vehicles and labor costs. Speaking earlier this month at the Route Consultant Contractor Expo in Las Vegas, Patton said that his company would stop servicing its delivery routes on November 25 – Black Friday – if FedEx does not offer improved contract terms.

Promo Perspective

Patton Logistics’ challenges highlight concerns that e-commerce/B2C has made the individual service provider/contractor business model that FedEx utilizes less profitable. Regardless how the company’s issues with FedEx play out, it will likely have an impact on businesses in the promotional products market.

“For industry companies in the 10 states serviced by Patton Logistics, if Patton does stop deliveries and FedEx finds alternative contractors, that would cost more,” says Maurice Norris, PPAI public affairs manager.

PPAI members receive savings from FedEx, an Affinity Partner to the Association, on shipping costs - with discounts as high as 78% off freight and 50% off Express service.  The Association will continue to monitor this ongoing issue and report updates on the story as they become available.

An Ultimatum

Earlier this summer, in a letter to FedEx, Patton made two requests to FedEx Ground:

• An increase in stop pay – if a load requires multiple stops between loading and the final destination, a driver could be paid for those in-between stops along the way—for pick-up and delivery contracted service providers (CSPs) of $0.50 per stop and an increase of $0.20 per mile for linehaul CSPs.

• The letter asks FedEx Ground to reevaluate its commitment to Sunday deliveries. Patton says, “By our estimates, Sunday deliveries are costing FedEx Ground upwards of $500 million in earnings drag. That $500 million figure is getting worse, not better. Likewise, Sunday deliveries erased more than one-third of CSP profit margins in less than one year’s time. In parallel fashion, that margin erosion is worsening, not improving.”

• Structural changes made by FedEx to the independent service provider contract.

• Sunday deliveries, which have much lower package density and create operational challenges as well as additional capital requirements and costs.

• An increase in Express deliveries via Ground, for which contractors are paid a lower rate than with traditional Ground delivery.

In Las Vegas, Patton stressed that the problems with the business model have grown so severe, that he needs to see changes from FedEx. He termed his November 25 deadline “Purple Friday.” During his conference speech, he said, “Purple Friday is my way of trying to work with FedEx Ground to say, ‘We have to have a timeline.’ This cannot just extend on an open-ended platform because that’s not working in my business.”

The Industry Challenge

Analysis from Stephens, an independent financial services firm, on the FedEx Ground/contractor relationship, found that after seeing strong profitability in 2020 due to additional payments and much higher volume, the margin structure for a Ground contractor began to come under pressure in 2021. This is attributed to:

Also, projections for the 2021 peak delivery season were overly optimistic and missed the volumes that contractors had prepared for. So even before fuel and other costs climbed, contractors entered 2022 on the back foot.