FedEx Activist Investor Seeking Input from Ground ISPs

FedEx logo feature

An activist investor group with control of at least two board seats at FedEx is reaching out to FedEx Ground contractors to see what they think of efforts by a new association of independent service providers to collectively approach management about challenges to their operations.

In a letter from hedge fund D.E. Shaw & Co. sent to about 200 current and former FedEx Ground contractors and shared with Multichannel Merchant, the company asks about the nature of their contracts and how they work. They’re also asking what ISPs think of the fledgling Trade Association for Logistics Professionals (TALP) and its founder, Spencer Patton. The letter was in the context of an investor team there looking into the major carrier.

Patton, who owns a major FedEx Ground contractor business based in Nashville, also runs a consultancy advising ISPs working for both FedEx and Amazon.

“At a high level, how do ISP contracts with FedEx Ground work?” D.E. Shaw asks in the letter. “How has the profitability of being an ISP changed during the pandemic vs. previously? Today, what are the unit economics of the ISP business model? What should FedEx Ground be doing differently to help ISPs?”

Referring to TALP and its efforts, D.E. Shaw asks, “What do you think of Spencer Patton and the public letter he has issued to FedEx Ground management? What leverage do ISPs have in trying to negotiate better terms with FedEx Ground?”

In June, FedEx reached an agreement with D.E. Shaw in which the activist investor was granted the right to name two board members and have a say in a third. In return, D.E. Shaw agreed to accumulate no more than a 7.5% stake in the company. As a result, FedEx announced last week that Nancy A. Norton and Stephen E. Gorman have been nominated as directors, to be voted on at the annual shareholder meeting in September.

This week, FedEx sent out an internal talking points memo to Ground employees reiterating how it works collaboratively with ISPs, including keeping open lines of communication and addressing issues on an individual basis. “We recognize this is a difficult economic environment that will require us to work with service provider businesses to overcome challenges,” the company said in the memo.

While restating its refusal to negotiate with TALP on behalf of contractors, FedEx did say individual ISPs “must determine whether membership in any trade organization is in their organization’s best interests.”

Concerning Patton’s suggestion that ISPs could seek to reclassify as franchisees based on state laws, and improve their position through that avenue, FedEx said it “does not align” with the service provider model.

“We are confident that our existing business model is best suited to enable a productive, flexible and service-oriented relationship between FedEx Ground and the entrepreneurs who choose to do business with us,” the memo stated.

This week, TALP opened up nominations to a 10-member leadership committee, which would be empowered to speak on their behalf to FedEx Ground management. TALP is also recruiting members from ISPs contracted with Amazon. Voting will begin at Patton’s trade event, Contractor + Expo and Party, which will be held Aug. 20-21 in Las Vegas.

Analysts confirmed that about 35% of FedEx Ground contractors are in financial straits that could threaten them as going concerns. That in turn would significantly affect the Ground network and its ability to meet service level obligations, which has been improving in 2022. Patton said FedEx executives have told him privately that the company has been over-budget on contingency pay to third-party carriers hired to pick up the slack when ISPs abandon routes.

Thomas Andersen, a partner and EVP of supply chain services with LJM Group, said FedEx’s performance in 2021 was affected by shifting SmartPost parcels to economy ground, in addition to taking on excess volume as UPS shed unprofitable accounts.

“UPS proactively limited volume and increased rates for many of their larger shippers,” Andersen said. “FedEx Ground appears to be back at a similar performance level as UPS, based on YTD performance.”

Andersen added his firm has heard of UPS reps using FedEx’s 2021 performance figures “to scare their potential clients,” but shippers using FedEx Ground have been happy with the 2022 service levels.

Tim Sailor, owner of Long Beach, CA-based parcel spend consultancy Navigo Consulting Group, said FedEx Ground contractors have valid concerns and are “getting squeezed” between increased service-level agreements and fixed costs.

“I also think that the contractors overpaid for their routes,” Sailor said. “I explored this with a broker several years ago, and I couldn’t make the numbers work. You paid a premium on multiples, and were only guaranteed a 12-month contract with FedEx.”

Regarding Patton’s suggestion that Ground contractors have legal grounds to become franchisees, based on a three-pronged test, Sailor said the carrier would not take that lying down.

“When you look at all the effort that went into preventing independent contractors from becoming employees, I expect a full-court press from FedEx to pull out all the stops to prevent franchisees,” he said.