Metric sales

FedEx investors need this metric. They don’t have it.

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Investors are eager to figure out what’s going on in the ground unit of FedEx Corp., which has been the crown jewel in terms of increasing sales and profits for a few decades. That’s why nearly a dozen Wall Street analysts and two top FedEx investors traveled to Las Vegas this weekend to hear from the entrepreneurs who make last-mile package deliveries for Ground. .

From the earnings trend, investors can see that something is wrong. While revenue more than tripled to $33.2 billion since 2012, operating profit rose only 50% to $2.6 billion as margins fell 10 percentage points to 8%. Since 2012, parcel volume has more than doubled and the average revenue per parcel has increased from $6.67 to $10.65.

These results raise questions about why margins are shrinking and why many of Ground’s 6,000 contractors are so unhappy.

Is it a temporary setback due to the combination of Covid-19, the Great Resignation and inflation? Is it more of a structural change with the rapid growth of e-commerce and the changes made by FedEx to accommodate this trend? Are Ground inefficiencies the responsibility of contractors or FedEx? Do entrepreneurs make too much money? After all, FedEx’s entrepreneur model has spawned many absentee owners.

These are all valid questions. Unfortunately, the answers differ depending on whether you’re asking FedEx, an upset contractor, or a satisfied contractor. And yes, there are many. A sure way to gauge the health of FedEx Ground is the trend of payments the unit makes to cover defaulting contractors. For now, this information is closely monitored but should be made available to investors.

Keep in mind that FedEx operates two separate parcel networks. Unlike Express, which owns the planes and trucks to transport the packages and hires all the workers, including the drivers, to manage them, Ground owns no vehicles and has no drivers on its payroll. Instead, the unit pays contractors to transport packages from a FedEx facility to the end customer and vice versa for package pickup. At the contractors’ meeting in Las Vegas, Spencer Patton, who organized it, made no inflammatory speeches to annoy these small-business owners in action. Instead, he said he liked FedEx Ground. If FedEx Ground is successful, contractors are successful and vice versa, he said. Most entrepreneurs think like this and don’t want to blow up the business, but they want to win like it’s 2012, not 2022.

Patton pointed to three key factors as to why entrepreneurs are in a rebellious mood. With a small nod and nod to antitrust laws, he said it would be up to other entrepreneurs to follow his lead. Judging by the applause during his speech and the standing ovation at the end, there are probably hundreds of people ready to follow him.

First, he repeated a statement that without a change to make contracts more lucrative for his businesses — he operates about 225 trucks in 10 states — he couldn’t continue operating after Nov. 25. It’s a serious threat because the date falls just before Black Friday kicks off the heaviest parcel delivery season.

The second point was that he would carefully assess the so-called Appendix K amendment to every contract that comes every year. This document defines the parameters of how much contractors must earn during peak season and how many additional trucks are needed to meet holiday demand. Last year’s Schedule K was a disaster as December volume was well below forecast, leaving many contractors with too many vehicles and without the so-called surge payments that fund truck rental costs and additional drivers. Many entrepreneurs lost money during the 2021 peak season, which can provide a third of annual profits.

This year’s Schedule K, which FedEx Ground is expected to deliver this week, must be a generous offer or Patton won’t sign it, he implied. On the other hand, a good bid on Schedule K would be goodwill evidence that Ground wants to take care of its contractors, he said. If a large number of contractors refuse to sign their Schedule K, it is a sign that the problems at FedEx Ground run deep.

The third point is perhaps the most crucial. Patton said he will not be doing any more emergency work for FedEx Ground for the next three and a half months. A rush job occurs when a contractor fails to respond to the delivery service and FedEx Ground pays a successful contractor to send a team of drivers to fix the problem. The amount of emergency work is a thermometer to check the health of the network. The problem is that FedEx does not share this information. From what contractors are saying, breakdowns and emergency work are at an all-time high.

With contingency as an option to cover service, FedEx Ground began to do even tougher business on its contract offerings. Several major contractors have already sworn to do emergency work. That’s why Patton’s announcement that he’s quitting emergency labor is so significant.

Investors should pressure FedEx to provide a five-year history of these emergency payments, because whatever the cause, it’s a sign that something is wrong and needs to be fixed. especially as the busiest and most important part of the parcel delivery year is just around the corner.

More other writers at Bloomberg Opinion:

• Want to reduce your tax bill? Buying a container ship: Chris Bryant

• Hiring is a bright spot in industrial earnings: Brooke Sutherland

• FedEx finds out that if you pay them, they’ll come: Brooke Sutherland

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Thomas Black is a Bloomberg Opinion columnist covering logistics and manufacturing. Previously, it covered US industrial and transportation companies as well as Mexican industry, economy and government.

More stories like this are available at bloomberg.com/opinion