The supply-chain crisis and the e-commerce boom of the last two years have resulted in record earnings for FedEx, but it has also presented numerous difficulties. Despite adopting a contractor strategy designed to reduce spending, the multinational logistics company has struggled to cut costs.
This spells bad news for the nearly 6,000 small businesses that complete door-to-door deliveries for its largest service, FedEx Ground. Similar trends that are driving up costs are putting their existence at risk.Some contractors claim that high labor costs, FedEx corporate’s operational blunders, climbing truck prices, and increasingly difficult negotiations have put them in financial difficulty, forcing some to sell out as returns plummet.
FedEx contractors are also feeling the squeeze of soaring fuel prices, partly because of Russia’s invasion of Ukraine. Many are now considering shutting down their businesses altogether, as they can’t afford to operate in this current environment.The rising cost of fuel has made it impossible for them to turn a profit, and they are struggling to pay their employees or keep their businesses running.
“We are being squeezed quite a bit,” said Vikram Sekhon, who has worked as a FedEx contractor in California since 2017. “And our contracts are changing. If you look at historically what we are getting paid per stop — that has reduced by 30 to 40%.”
In an interview with Business Insider, three out of four FedEx ground contractors revealed that their colleagues are beginning to leave the company. Those who lack the financial means to pay for increasing costs are first to go. The contractors may be taking the blow right now, but experts believe it will eventually come for FedEx, which is already in a vulnerable position. The company has been trailing behind rival UPS for months. It has struggled to translate record revenue into comparable earnings, with the lowest profit in the ground business.
FedEx, however, remains tight-lipped regarding contractor issues, but here’s what their spokesperson had to say:
“As our industry undergoes new and unprecedented challenges brought on by the explosive growth of e-commerce and rapidly shifting market dynamics, we remain committed to collaborating with service providers to create opportunities for success.” Still, there’s no denying that filling the gaps created by contractors who quit will cost FedEx more money and make its financial problems even worse.
A cry for help
“We need help fast!” demanded 800 contractors in a letter addressed to FedEx Ground. According to drivers, their earnings dropped by 20% during the holiday season from 2020 through 2021, despite a similar amount of package sales. It didn’t help that FedEx’s failure to forecast correctly hindered labor planning, contributed to sloppy operations in the ground network regions that FedEx controls, and led to a lack of coordination, among other factors.
One Midwestern contractor said it’s becoming increasingly difficult to make ends meet, and any criticism about policy changes is met with the promise of termination or contract reduction. “We were not grossly negligent. We didn’t overpay ourselves. We should be doing better than we are,” the contractor said.
FedEx contractors are at their limit as profits shrink and costs pile up
Contractors are hitting rock bottom despite FedEx’s revenue and package volume growing significantly in 2020 as e-commerce expanded. Many invested in new trucks and equipment to keep up with demand, but now they’re struggling to make ends meet.
“The capital investment that we planned on making in the next three or four years, we had to make in three months,” Vikram Sekhon said. It doesn’t help that inflationary pressures are catching up fast. If current circumstances continue, Sekhon estimates his spending will be roughly 26% more expensive than last year, including labor and fuel.
FedEx charges a fuel surcharge to its customers, but some contractors want it to direct a greater proportion of the income toward them. Experts from Reveel, a top shipping data firm based in the US, have put their two cents on the matter:
“They are being opportunistic with the fuel surcharge, and I think we’re going to continue to really see that come to fruition here in the next 90 days,” said Josh Dunham, co-founder of the company. “We haven’t even really seen the impact of the Russia-Ukraine conflict yet.” The problem does not end there. In 2020, the firm introduced a new method for predicting how many packages each contractor would receive to estimate how much staff to schedule daily.
According to Sekhon, the firm’s forecasts were off by 50% for months, forcing contractors to schedule and pay for more labor than necessary. For some contractors, the pandemic’s difficulties and the subsequent crushing of shipments only reinforced FedEx Ground’s historically contentious relationship with contractors. “The ground employees have never been entrepreneurs,” said one contractor. “They’ve never run their own business. Many of them don’t know how to read a P&L. They don’t understand what it’s like to meet a payroll.”
You can read more about this story on Business Insider.
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