FedEx is in the news, from the financial times to industry and route analysts to business insiders, and it’s all about one thing; the Future of FedEx. This is because FedEx is merging all its branches besides LTL into one organization under the Drive initiative. As of June 2024, FedEx Ground and Express will be united in a single air/ground unit to increase efficiency and save the company billions of dollars annually.
While freight services will still operate independently, air, ground, and services divisions will move under a single umbrella. FedEx Corp. CEO Raj Subramaniam will run the new enterprise as president and CEO, the company said. Effective April 16, John Smith, current FedEx Ground CEO, will become president and CEO of all FedEx Express and FedEx Ground operations in the U.S. and Canada. Smith will also run surface operations across FedEx Express, FedEx Freight, and FedEx Ground units.
Richard Smith, the current head of FedEx Express, will serve as president and CEO of air operations and the international division of the Express unit.
But what does this mean to FedEx Contractors and route owners? While there was much initial speculation, it appears that the news is good. Here are the facts as we know them so far.
The Fred Smith Era is Over
FedEx is now over 50 years old and has operated the same way since its inception. Operations were siloed, and each division of the company operated on its own. This worked well – for a while. But as technology advanced and profit margins narrowed, the need for new efficiency measures came into play.
“If you have ever seen a FedEx Ground truck and a FedEx Express truck in your neighborhood on the same day, or even pass each other on the street, you’ll understand what we are trying to change,” John Smith said. This is a part of the company’s “one truck, one neighborhood” initiative.
In part, this is thanks to new thinking when it comes to routing drivers and new technology that helps reduce duplicate trips and stops. Ground packages and air packages will be on the same truck, creating efficiencies that were previously not possible.
Of course, this will mean changes in the way routes are run, the size of routes, and more.
Taking a Page from Amazon
This change comes in part from watching the efficiencies created by Amazon and its Delivery Services Partner program. There are several things Amazon does that FedEx will likely imitate, but others they will not.
The new CONDOR system of routing adopted by Amazon creates incredible driver efficiency by solving the huge mathematical problem plaguing delivery and sales route companies for decades. FedEx is working on a similar proprietary system designed to support the “one truck, one neighborhood” initiative in a way that Amazon has already made progress in.
In addition, Amazon assigns route areas differently. Rather than geographic areas, routes shift based on where there are the most deliveries. While FedEx is unlikely to take this approach, it is likely that route areas will undergo a shift. With nearly double the packages, along with the potential time schedules of priority deliveries, route boundaries will be tighter, and as a result, more routes will be created.
This is due in part to the fact that in contrast to Amazon, which offers the two-day and overnight Prime options, FedEx has stricter service times, and often priority packages must be delivered by a certain time to a wide variety of locations.
But there will likely be some parallels: Amazon has built a logistics division that is extremely efficient in a short period of time, and FedEx has taken notice and taken notes. To increase profit margins and satisfy shareholders, some things must change.
A part of that is the contractor model, something both FedEx and Amazon excel at.
More Contractors Rather than Fewer
Unlike rival UPS, FedEx Ground and Amazon rely heavily on independent contractors for their delivery workforce. Going forward, it seems that FedEx will double down on that model, reducing the employee drivers in the FedEx Express division and expanding the contractor model currently in use with FedEx Ground.
The future of FedEx is one where there may be few to no drivers on the payroll. New CEO Raj Subramaniam calls it “a more holistic approach to how we deliver packages.” Contractors have long been an effective tool in the last-mile delivery business. Incentivized by profits, contractors learn to work efficiently and often implement creative solutions to minimize mileage covered and the time their drivers need to be on the road.
As a company, FedEx realized this and wants to capitalize on it. They want to take more control of the end-to-end contract details and contractor and driver training. “FedEx Ground [is seeking to] improve contractor training processes, increase transparency, improve upon their volume forecasts, and incorporate 360-degree feedback at the station level, which will hold station management and even package handling to much higher standards.”
This will empower contractors even further and offer an even greater incentive for owners to have multiple routes and drivers. “The contractor opportunities are bigger and more profitable than ever,” said John Sanders, a FedEx Contractor. “Expansion and growth are a no-brainer, and the new model will make it even better.”
The result will be more contractors, more routes, and more business potential. Current and future contractors will be positioned to create profitable, long-term businesses.
Does that mean higher profit margins?
The Future of FedEx is Higher Profit Margins
The simple answer is yes. In the long run, FedEx itself will experience higher profit margins. But there are some questions. A restructuring takes both time and money, and some experts wonder how the company can maintain profit margins during the transition. But it appears the company has a plan, and that includes layoffs of administrative and other staff, something that is already happening.
This includes 280 employees at its Tarrant, Texas, shipment center outside Dallas, job cuts in Indianapolis, Memphis, Richland, Mississippi, and other locations nationwide. These layoffs are simply signs of the restructuring process and are necessary to streamline company operations.
“The FedEx workforce has several redundancies,” one company spokesman said, choosing to remain anonymous. “This is something that has needed fixing for a long time, and under the new company model, there will be some initial job cuts to make way for new and improved systems.”
However, the result, at least according to projections, is a cost savings of around 4 billion dollars by the end of 2025, with even more savings projected going forward. What that means for the company and shareholders is higher profit margins, and the company has committed to keeping them in double digits even in the short term. “This has long been a business of single-digit profits and razor-thin margins allowing little room for error or missteps even in tough times,” that same employee told us. “The Drive and One FedEx initiatives intend to turn that around.”
This translates to larger investments in infrastructure while reducing redundancy and inefficiency and technology improvements that will directly benefit contractors. And there are other changes on the horizon as well.
Reward Based Opportunities
For a long time, FedEx had a contractor points system. Points were a bad thing, and customer complaints, late deliveries, poor service, and other factors had their own point values. Enough points and a contractor could lose their contract. That seldom happened: usually, contractors would want to improve and keep their businesses, but it created a potentially negative culture that often depended on station managers.
But FedEx realized this, and in a bid to increase contractor satisfaction while still maintaining service standards, the future of FedEx includes a new, rewards-based grading system. The system rates contractors as Gold, Silver, and Bronze. Gold members get the most benefits, including being offered premium routes and other potentially lucrative opportunities. Silver-rated contractors will get some of these opportunities, and bronze members will receive the least of them. The company still has a system in place to take corrective action as needed, but the new rating system tends to focus on positive accomplishments and rewards rather than a more punitive system.
It’s all a part of changing company culture and showing contractors how much they are valued and how much they contribute to the company’s vision overall.
The Future of FedEx is a Winning Formula
This is a big shift for FedEx. The merging of its major divisions for the first time in company history and the biggest restructuring it has ever gone through mean big changes are ahead. But overall, this appears to be a winning formula, one popular with shareholders, contractors, and customers alike.
While much business will come from the growing e-commerce market, the business-to-business market is improving as well, despite inflation and other macroeconomic factors. There’s never been a better time to be a part of the contractor system at FedEx.
Are you ready to purchase a FedEx route, or are you interested in expanding your business to include additional routes? Here at Route Advisors, we stay in touch with what is happening with FedEx and the entire delivery industry. We can help you find the right FedEx Ground route for you in the right place and at the right price. Contact us today.
The future of FedEx looks bright, and you can be a part of this amazing opportunity.