FedEx preps to have Express contract with Ground operations for select residential shipments

Driven by the rampant growth rate of e-commerce, coupled with the need to increase efficiency and lower residential delivery costs, Memphis-based freight transportation and logistics service provider FedEx announced late last week that in March, FedEx Express—its global, time-definite delivery service unit—will contract with FedEx Ground—its ground transportation package delivery services unit—for the transport and delivery of select day-definite, residential Express shipments.

Company officials said that FedEx Express packages will be selected for delivery via FedEx Ground if they are residential deliveries in which FedEx Ground can meet the service commitment. And they added that this initiative will kick off in Greensboro, N.C., with other markets to be added throughout 2020.  

“This move makes residential deliveries more efficient by putting the right package in the right network at the right cost to serve our customers,” said Raj Subramaniam, president and chief operating officer, FedEx Corp., in a statement. “We continue to flex our network to stay ahead of e-commerce growth, and that includes adjustments to better handle the demand for residential deliveries while lowering our cost to serve. This allows FedEx Express to continue to do what it does best—delivering business-to-business and premium business-to-consumer time-sensitive packages. The FedEx Express integrated air-ground network is precisely the type of innovative business model that our labor laws are designed to protect. This change leverages the strengths and investments in the FedEx Ground network, making it the network of choice for residential packages fueled by e-commerce.”

With this announcement FedEx also highlighted how through the optimization of last-mile deliveries, it will augment safety and sustainability through the reduction of the number delivery vehicles in residential neighborhoods and also improved residential deliveries overall through ongoing investments in last-mile delivery technology and functionality.

A notable difference between this announcement and what FedEx has previously stated is that FedEx announced in May 2019 that it planned to integrate its FedEx Smart Post package volume, which have traditionally gone to the United States Postal Service for daily residential deliveries, into its FedEx Ground standard operations, as well as also increasing large package capabilities. The company said, at the time, this comprises nearly 2 million FedEx SmartPost packages, which will be more frequently integrated into its FedEx Ground operations and will be handled by the same service providers that are already handling its FedEx Ground residential packages.

“This now reads as ‘some,’ which makes far more sense,” said Jerry Hempstead, president of Hempstead Consulting. “Because FedEx operates separate, unique and different networks, cross utilization was difficult. UPS having only one network easily transitioned early on some of the USPS Parcel Select SurePost work to their own drivers based on weight and dimensions. UPS is way ahead and far more fluid in its ability to redirect. And they have a larger numbers of trucks and drivers and with their recent growth greater delivery density.”

But he added that FedEx may have an advantage in that the Ground products are handled by non-union contractors so it may have far less expensive labor costs, as they don’t pay the social security, unemployment, workman’s comp, and retirement, among others, noting, in essence, FedEx is paying the contractor for the route and a per package fee. 

Ravi Shanker, Morgan Stanley transportation analyst, observed in a research note that the separate Ground and Express networks are a key differentiator between FedEx and UPS, leading to the question of FedEx combining them would make sense financially.  

“Mgmt. has always pushed back on this, saying that it wouldn’t work given the different service requirements for Express and Ground, which makes it interesting that they are now dipping their toe in this water,” Shanker wrote. “It will be important to see what percentage of volumes can actually be integrated and what level of costs it can help save at Express. This is the third major strategy reversal at FDX in the past year (following the breakup with AMZN and insourcing of SmartPost). On the one hand, maximizing the number of boxes run through the network makes sense but on the other hand, FDX did not have a UPS-like integrated network and used the USPS as a last mile delivery partner in the past for specific reasons – it is unclear to us if those reasons no longer apply. At this time, we do not believe this is the start of a broader integration of Ground and Express and we do not believe this will have a meaningful impact on numbers.”