As demand for FedEx's shipping services continues to freefall, a revamp of the company's operations and networks is underway to reduce billions of dollars in costs over the long term.

The delivery boom of the COVID-19 pandemic has faded for FedEx and other parcel carriers, and volumes continue to soften as shippers prepare for an economic downturn. The logistics giant is hunkering down in this uncertain environment with a barrage of near-term cost-cutting measures, including service reductions, layoffs and fewer flights.

All the while, FedEx is set to institute major long-term changes at its Express, Ground and Freight operating units through its "Network 2.0" initiative and a program called DRIVE, which the company is slated to provide more details on later this year.

The way President and CEO Raj Subramaniam sees it, FedEx is in the midst of transforming into the most flexible, efficient and intelligent supply chain for its customers.

"This process is critical to ensure we remain competitive in a rapidly changing environment, and it requires some difficult decisions," Subramaniam said in a Feb. 1 message to employees announcing layoffs.

As the vision of a transformed FedEx comes to life over the next several years, the daily flow of millions of packages will look quite different from today's operations. But it won't be easy for FedEx's pursuit of efficiencies through DRIVE and Network 2.0 to be realized without a hitch, considering the size of the overhaul.

"Reorganizations and network optimizations of this scale are rare, for sure," said Anthony DeRuijter, an analyst at Third Bridge.

DRIVE targets operational changes across units

Faced with an uncertain future for the global economy, FedEx is focused on what it can control: Reducing structural costs and driving profitable growth, Subramaniam said on a December earnings call.

The company seeks to execute that through a wide-ranging program called DRIVE, which centers around trimming expenses by improving efficiency throughout its operations. FedEx expects the program to reduce its costs by more than $4 billion by fiscal year 2025 and lay the foundation for Network 2.0, in which the company will consolidate stations and delivery routes.

FedEx has identified three different areas of the company — Express, Ground and shared and allocated expenses — that DRIVE will target. Changes within these areas span from digitizing customer support functions to using new processes to increase packages per Ground linehaul trailer.

A large chunk of the program will focus on restructuring Express' network by reducing routes and more efficiently deploying crews, aircraft and commercial linehaul, CFO Mike Lenz said in a September earnings call. Express saw its operating income fall by 64% YoY in its most recent quarter, and the company is already parking planes and cutting flight hours to reduce expenses.

Over the long term, DRIVE will help the Express air network become more agile when demand changes and make it better suited to handle increased interest in deferred, or less time-sensitive, shipping services. Companies have been more willing to sacrifice shipping speed for lower-cost deferred services amid inflationary pressures.

"How do we change our networks firstly to improve our loaded density and then how do we use partner network especially to move deferred traffic?" Subramaniam said DRIVE’s Express priorities.

FedEx plans to host a call providing deeper insights into the DRIVE program in the first half of 2023, Subramaniam added.

An ideal time for change, if FedEx can deliver

The ability for companies to optimize their business operations have improved with advances in data analytics, allowing companies like FedEx to more effectively tackle larger-scale problems than they could in years past, said Amelia Regan, director of the University of Washington's Supply Chain Transportation and Logistics Graduate Degree Program. And now, with delivery demand falling off, FedEx can take a more thoughtful look at how to adjust its network for an uncertain future.

"It's the best possible time for companies to regroup and improve the efficiencies of their operations," said Regan, who previously worked for UPS' Operations Research Group.

Even in an opportune time for reorganizing, FedEx faces hurdles in both execution and demand trends as it kicks off DRIVE and Network 2.0, analysts say.

FedEx runs the risk of losing long-term business relationships if it doesn't have adequate capacity to serve certain routes, DeRuijter said. He added that FedEx leaning more on Ground to deliver Express packages could place an additional burden on delivery contractors, many of whom have grappled with rising costs and softer volume levels over the past year.

"There's just a lot of actual operating hurdles that will be challenges based on what our experts see and say," DeRuijter said.

Customers could notice the effects of FedEx's pursuit of efficiencies in instances it "opts for slower but cheaper freight transportation through its own network while relying less on faster but more expensive" third-party services, said CFRA Research Vice President Colin Scarola in an email. However, the largest cost-savings move is likely to be Express downsizing its flight operations as demand continues to fall, he added.

"Because most of the DRIVE cost cutting will be tied to shrinking Express volume, and not be matched with organic growth, the long-term profit trend for FedEx is not likely to be great even with a successful DRIVE initiative, in our view," Scarola said.

In a statement regarding potential service impacts of DRIVE and Network 2.0, FedEx said it will maintain a customer-centric philosophy and that its transformation plan will make the company "stronger, more streamlined, and more adaptable to customer expectations and market demands.”

Postmaster General Louis DeJoy is working to not only bring the U.S. Postal Service to financial stability, but also transform the agency to be competitive with major private carriers including FedEx and UPS. 

DeJoy, in an interview with Supply Chain Dive in September, said he isn't trying to "conquer" the highly competitive package delivery market. But he does want the beleaguered agency to become a leader in the sector, instead of just reacting to market trends.

"The goal is while we're trying to come out of crisis, eventually we will be cost-effective," DeJoy said. "I think we will be the preferred delivery provider in the nation by being very reliable and very affordable. That's the goal."

DeJoy is already neck deep in leading wide-ranging changes at the agency as he works toward that goal. The Postal Service has moved to consolidate its facility footprint and launch a local delivery service to remain competitive with other carriers.

Growing the Postal Service's share of the delivery market would provide a much-needed financial boost to the agency, which saw $87 billion in losses from fiscal years 2007 to 2020. But experts say it's a tall order even for DeJoy, who hasn’t shied from making big changes. 

Carriers that have traditionally relied on the Postal Service for some deliveries are now increasingly shipping in-house. To keep pace with FedEx and UPS, the agency will have to more effectively sell shippers on its network while keeping service levels above the rough patch it hit in 2020.

Not your grandmother's Postal Service

As part of its growth plan, USPS is adjusting its operations and business approach to account for the spike in package demand — and decline in mail. An enhanced focus on package delivery puts the agency in direct competition with UPS, FedEx and other parcel carriers. 

"I think we're still in the early stages, but clearly they're trying to position themselves as an effective competitor against the private carriers," said Michael Plunkett, president and CEO of the Association for Postal Commerce.

Edmund Carley, national president of the United Postmasters and Managers of America, said the business of the Postal Service has changed dramatically over his 23 years at the agency. The internet has reduced the need for mail communication and the days of the agency making most of its money via "grandma sending you a birthday card" are over.

"We moved that mail first because that was our breadwinner," Carley said. "Now, it's the package business. That's part of [DeJoy's] point. In order for us to be viable into the future, we're going to have to change what we do."

Despite shippers’ growing interest in diversifying their carrier mixes as parcel rates climb, the Postal Service has struggled to compete directly with the two delivery giants, said Nate Skiver, founder of LPF Spend Management. Compared to FedEx and UPS, the list of package shippers with direct contracts with the Postal Service is "relatively short."

"The biggest challenge, I think, will actually be effectively engaging package shippers directly to offer services and contract with those shippers and not rely so much on third parties as they have in the past," Skiver said.

DeJoy understands the need to attract more commercial shippers. He said he's pushing for the Postal Service's sales team to position the agency "as more of a solutions provider," adding that an overhaul to its facilities footprint will allow it to demonstrate the strengths of its regional delivery services.
 

“We do have the dominant regional delivery system,” DeJoy said. “It's more than the last mile. It's probably the last 200 miles.”

Still, it will take a significant cultural change for the agency to more effectively sell its services "and not just assume that retailers will come to them," Skiver said.

Accelerating pace of change ahead of peak season

A logistics executive-turned-Postmaster General, DeJoy has ushered in substantial change at the agency at a pace not normally seen within government. A 10-year plan to transform the Postal Service includes a shift in service standards and consolidation of thousands of its delivery units into large-scale facilities across the country.

"I don't feel like I move fast enough, and this is not an organization or an environment that is comfortable moving fast," said DeJoy, former CEO of New Breed Logistics, which was acquired by XPO Logistics in 2014.

Since 2021, the agency has deployed 249 new package processing machines, converted 100,000 part-time employees to full-time positions and signed multi-year leases on facilities that bolster its peak season processing space, according to a news release.

While the Postal Service had deployed plans to improve operational efficiency before DeJoy, the pace of implementation has been much faster than it was under previous leadership, Carley said.

"He looks at [the job] from a much more business-oriented frame of mind," Carley said of DeJoy. "His line is, 'If you build the Postal Service today from scratch, it wouldn't look anything like the network we have.'"

Not all of DeJoy's changes have been entirely welcomed by stakeholders. A move in 2020 to reduce the number of late and extra truck trips from sorting facilities to delivery stations sparked concern it would limit the ability to vote by mail. 

DeJoy said the purpose was to reduce schedule deviations and to improve decision-making regarding extra trips. A report from a USPS watchdog found the initiative, among other operational changes, hurt the speed and reliability of mail delivery. 

Despite the early issues, the agency hopes the fast-paced changes will help position it to handle a surge in demand during the holiday shipping season after being caught flat-footed in 2020. The Postal Service said ahead of the 2022 peak season that it would have the ability to process 60 million packages a day, up from 53 million in 2021.

Package delivery demand has cooled off in 2022, though the agency said in an August report that volume is expected to remain above pre-pandemic levels. In the quarter ending June 30, the agency reported that revenue and volume in its Shipping and Packages category fell by 1.1% and 5%, respectively, YoY.

FedEx and UPS are encountering the same market dynamics, but they have adjusted to pursue more profitable customer segments and leveraged their pricing power to cushion the blow of reduced volume.

Industry-wide trends could benefit the Postal Service's peak season performance, however, as easing demand gives carriers more processing power to better handle demand surges.

DeJoy said he often feels like he's in an antique shop while leading the Postal Service, with a sign on each part of the agency, reading: "Don't touch. Breakable." But opposition to change and other headwinds haven't stopped him from working to make his vision a reality.

"I don't agree with [DeJoy] on everything. But, for better or worse, he has a plan," Carley said. "He can see a path forward for the Postal Service, and by God, he's going to implement it, and we're going to help him do that."

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Rising shipping costs are a major challenge for shippers. Small businesses may find it easier to weather the storm, but if your business ships a large number of parcels, you need a robust shipping strategy to reduce your shipping costs.

But shipping is about more than just lowering costs. This guide will point to all the resources you need to develop a shipping strategy that meets your needs and makes your customers happy.

Cost Reduction

1. 7 Solutions You Can Implement to Reduce Shipping Costs: Shipping costs are a major cause of shopping cart abandonment. Fast, affordable shipping options can help you avert lost revenue.
   • One way to control shipping costs is eliminating unnecessary services, such as signature requirements if they aren’t needed.
2. How to Lower Delivery Area Surcharges: Carriers apply delivery area surcharges on shipments outside standard delivery areas, such as remote and rural areas. These charges help them cover the costs of additional fuel and labor hours to deliver to distant locations.
   • Shippers can lower their delivery area surcharges by hiring a regional parcel carrier or offering customers self-pickup options.

Packaging Options

Packing materials are important for safely delivering your products, but can easily be a source of overspending if not done right.

1. Shipping and Package Dimensions: DIMmed If You Do, DIMmed If You Don’t: Major carriers use the dimensional pricing (dimensional weight) technique for large-sized, lightweight packages. This means shipping fees are calculated based on the space they occupy on the delivery truck.
   • Optimizing package sizing can reduce both DIM Weight charges and material costs.

Carrier Options

Since the pandemic, more shippers are turning toward regional carriers and implementing a multi-carrier strategy.

1. When to Use a Regional Carrier: Consider a regional carrier if you want more flexible delivery options, such as direct routes or overnight shipping options. They’re also a great option for faster transit times if you have clusters of customers near your distribution center.
   • Regional carriers often have lower minimum charges compared to national carriers for moving goods within a shorter distance. Additionally, they apply fewer surcharges during the peak season.

Carrier Considerations

It’s becoming increasingly difficult for shippers to control costs, thanks to the annual General Rate Increase (GRI) and peak season surcharges. 

1. 2023 UPS & FedEx General Rate Increase (GRI) Analysis: UPS and FedEx announced 6.9% average increases in their 2023 rates, along with higher accessorial charges, including packaging requiring special handling and residential and remote area deliveries.
   • The impact of the shipping rate changes on shippers varies based on their carrier agreement terms and shipment characteristics. For example, shipments going to higher shipping zones will be impacted more due to additional fuel and remote surcharges.
   • Read more about how zone skipping can transform your parcel shipping strategy.
2. 7 Parcel Shipping Companies: What’s Best for Your Business?: Choosing the right carrier can be a tricky decision with long-term consequences. It’s essential to carefully evaluate your shipping options based on their cost, quality, shipping methods, reliability and capacity.

Third-party Logistics Providers (3PLs)

Most small and medium-sized eCommerce businesses understand the importance of outsourcing their warehousing and delivery operations to an order fulfillment service.

1. What Are 3PLs and How Do They Help Reduce Supply Chain Management Costs? A third-party logistics (3PL) company is a logistics provider that enables businesses to outsource their warehousing, packaging, transportation and distribution services.
2. Everything You Need to Know About 4PLs: 4PLs (fourth-party logistics) providers are companies that provide 3PL services along with additional services such as supply chain management and consultancy services. They manage the entire supply chain for their customers and serve as the main point of contact between a company and its logistics partners, including suppliers, distributors and carriers.

Reverse Logistics

Reverse logistics is the process of returning goods from the customer back to the manufacturer or point of origin. This process helps recapture value from the returned items by recycling, reclaiming raw materials or reselling them.

1. 15 Things You Need to Know About Reverse Logistics: Some 3PLs offer returns management services, including collecting returned items from customers, restocking them in the warehouse or delivering them to the point of purchase.
   • Read more about forward and reverse logistics.
2. How to Get Your Reverse Logistics Costs Under Control: You can reduce your reverse logistics costs by carefully analyzing and improving your product design and manufacturing processes, improving customer service and hiring a 3PL partner to better manage and repurpose your returns.

Editor’s note: This story is part of an ongoing series diving into the opportunities and challenges supply chains face in 2023. Read the rest of the series here.

A labor union representing 350,000 UPS workers could strike this summer if a new contract agreement isn't reached on time, threatening the delivery of millions of parcels.

Teamsters leadership has made it clear they are taking a hard-line stance on pay, scheduling and other issues ahead of negotiations for a new labor contract with UPS. The current contract is set to expire July 31.

“Our union is resolved to win the best contract for UPS members and to reset the standards for wages and benefits in this industry by August 1, 2023," Teamsters General President Sean O’Brien said in a statement last year. "We won’t extend negotiations by a single day."

UPS, meanwhile, has stressed the need to reach an agreement, saying it aims to negotiate a contract that benefits all sides. The carrier has been touting its employee benefits and long-standing relationship with the Teamsters.

"Our focus is on reaching an agreement that provides a win-win-win, for our employees and the union, for UPS, and for our customers," the company said in a statement.

Here's what shippers need to know about the state of contract talks, the likelihood of a strike and how to prepare for any supply chain fallout.

Where do negotiations stand?

National contract negotiations don't kick off until April, Teamsters spokesperson Kara Deniz said, but the Teamsters' UPS National Screening Committee has been reviewing various proposals for what should be included in the Master Agreement.

Committee members sorted and compiled more than 11,000 proposals submitted by locals from across the country during a Jan. 9 meeting in Washington, D.C., according to a Teamsters news release. Five screening subcommittees also met to review proposals on areas such as safety and health.

"The screening of proposals will determine what will ultimately be put forth to the company when National Master Agreement negotiations begin," the release said.

What are the top issues UPS and the Teamsters need to address?

The Teamsters union is largely looking to address scheduling issues that have cropped up since the COVID-19 pandemic fueled a surge in package volumes, Deniz said in an interview. Some drivers say that they continue to be forced into working a sixth day or taking "excessive overtime."

A driver works about 9 hours a day on average, but schedules can vary according to customer needs, according to the UPS statement. Still, the carrier recognized the need to find the right balance between serving customers and meeting drivers' desired work hours.

"Last year, UPS met individually with drivers to better understand their unique preferences, and we are making adjustments where possible," the company said.

Deniz said the Teamsters are also looking to eliminate discrepancies in pay and other areas between full-time drivers and 22.4 combination drivers. The latter category, with the number referring to an article in the current contract, covers employees typically making deliveries on a Tuesday-through-Saturday schedule.

"It's the same job for less pay and a slightly different schedule in terms of days on the job," Deniz said of the combination driver positions.

In addition to eliminating pay gaps, the union is also looking to negotiate a member pay increase for both full and part-time employees, but declined to provide a specific amount. Full-time package delivery drivers at UPS have a $95,000 annual average wage, while the average part-time employee earns $20 an hour, according to the company.

How likely is a strike?

Both sides aim to reach an agreement by the July 31 contract expiration. If that effort is unsuccessful, the Teamsters say they are ready to strike.

"We’ll either have a signed agreement that day or be hitting the pavement," O’Brien said last year.

A UPS strike wouldn't be unprecedented ground for the union. In 1997, 185,000 UPS Teamsters halted deliveries for more than two weeks before a new contract agreement was reached.

Alan Amling, distinguished fellow at the University of Tennessee's Global Supply Chain Institute and former VP of corporate strategy for UPS, said in an interview that he believes the two sides will ultimately come to an agreement, though it won't be easy.

“But I also think the risk of a strike is the highest it's been since 1997, and it's a completely different environment,” Amling added.

This round of bargaining is also likely to be far different from 2018, when the Teamsters ratified a contract despite the majority of participating members voting against it. O'Brien, who will be the face of union negotiations this spring, had won his election for Teamsters general president in 2021 as a vocal critic of how the previous contract agreement went down.

"[The Teamsters] should've went back to the table or struck the employer," O'Brien said of the agreement in a candidate debate prior to his victory. "Unfortunately, that didn't happen and our members got stuck with a contract that they voted down.”

How disruptive would a strike be for shippers?

Out of UPS' roughly 534,000 employees worldwide, 350,000 are represented by the Teamsters, per a recent company report. A strike would create large-scale disruptions in the company's network.

It would also likely create headaches for FedEx and other last mile carriers as shippers attempt to divert their deliveries to alternatives.

"Even though I think UPS will try to maintain limited service in the event of a strike, the capacity being taken out of the market will drive up pricing with other carriers," Amling said.

UPS' U.S. ground delivery network handled more than 17 million packages daily on average in 2021. With that level of activity, the company held a strong position in the parcel delivery sector overall at 24% of market share by volume in 2021, according to the Pitney Bowes Parcel Shipping Index.

Despite concerns over the negotiations, in a July earnings call, CEO Carol Tomé said the company continues to win business with customers who are aware of the upcoming negotiations.

"We are building contingency plans, and we will take care of our customers," Tomé said.

What can shippers do to protect their supply chains?

Amling recommended for business-to-business shippers to have buffer stock on hand in the event of UPS disruptions, while business-to-consumer shippers should be ready to call on alternative carriers.

However, existing contract arrangements can make it difficult for many shippers to divert a large share of their volumes to other delivery providers, said Transportation Insight Chief Strategy Officer John Haber. Volume-based discounts incentivize businesses to rely on one carrier for much of their shipping activity, and minimum volume commitments penalize shippers that don't meet certain thresholds.

"For a lot of shippers, their hands are kind of tied if they move volume, which is dangerous if UPS goes on strike," Haber said.

Ultimately, Haber advised shippers to begin contingency planning as soon as possible, since capacity at other carriers will run out fast.

"If you wait until June, it will be too late," he said.

Whether or not FedEx Ground contractors agree with Patton Logistics and Route Consultant founder Spencer Patton, thousands listened to his argument on how the delivery giant must change at an August event in Las Vegas.

Since he sent a letter on contractors' struggles to FedEx leadership in July, Patton, an operator of 225 Ground routes in 10 states, has become the public face of a movement pushing for better compensation to offset raging inflation. Sixty percent of Ground's 6,000 contractors, which provide delivery, pickup and linehaul services for the FedEx operating company, attended Route Consultant's 2022 Contractor Expo, where Patton pushed Ground to end Sunday deliveries and limit short-notice changes.

"I think that there's a lot of contractors that are really, really hurting right now, and that's what you saw come out to the expo to say, 'Something's got to change,'" Patton said in an interview. "This is not just Spencer, saying, 'Hey, my business is struggling.' It's the network."

Tensions between Ground and its delivery providers have been brewing for years as contractors flag issues that analysts say FedEx needs to solve to reach its profit goals. Without a fix, it’s possible independent contractors could shift the fight from compensation to a legal battle over how their businesses are classified.

"Long-term, it’s clear that there are structural problems here," Stephens analyst Jack Atkins said in a note after attending the Las Vegas event. "We continue to believe the Ground [contractor] model, which is broken and inefficient, needs an overhaul for FedEx Ground to ultimately achieve the results shareholders expect."

As delivery demand surges, so does workload

The contractors that make FedEx Ground's 10 million daily deliveries are independent from the company, employing their own drivers and investing in their own equipment. As home delivery demand boomed in recent years, both FedEx and the independent contractors saw their workloads rise.

Carlos Angulo is one of many contractors whose business has grown to keep up with pandemic-induced demand spikes. He started his Ground contractor business in 2018 with nine full-time employees and nine vehicles. Today, he has 100 employees and 96 vehicles delivering in Southern California.

"We were ready to deliver in 2020, like 1,500 packages in one day, and suddenly we had to deliver 4,000 in one day," Angulo said.

Higher workloads also came as Ground shifted more services to become the responsibility of its independent contractors. Final-mile package delivery for SmartPost service shipments is now being handled by contractors via Ground Economy, when it had previously been the Postal Service’s responsibility. Additionally, Ground expanded to year-round Saturday and Sunday delivery operations. 

But as contractors got busier and invested more in their businesses to handle the load, they saw diminishing returns on the deliveries they made for Ground, according to contractors and industry experts interviewed by Supply Chain Dive.

Contractors are paid 40% less for residential deliveries — the type of service that surged during the pandemic — compared to business-to-business deliveries, Deutsche Bank research analyst Amit Mehrotra said in a July 29 note. 

Adding to that financial crunch, residential deliveries are more expensive to complete than B2B deliveries as contractors expend more fuel driving through neighborhoods while delivering fewer packages per stop. The issue of reduced payments for costlier deliveries has been a major source of the current rift, Patton said.

"What's happening is that you get this business that's making, let's say, $300,000 in income this year, and it makes $350,000 the next year but the contractor is working twice as hard," said Tony DiNitto, founder of the consultancy Route Tycoon and a former Ground contractor. "He's managing twice as many trucks, he's got twice as many drivers that can call in sick, and that is what is making people want out, because they see this trend on how much profitability they're making on a per-route basis.”

Contractor frustrations reach a boiling point in 2022

Softening delivery demand since the height of the pandemic has exacerbated the impact of FedEx’s changes on contractors.

While the holidays are typically the most profitable time of year for Ground contractors, many made fewer deliveries than expected last year after FedEx overshot its volume projections, according to four contractors interviewed by Supply Chain Dive. Even Angulo’s busiest days last season fell below company projections.

As shrinking demand bled into 2022, FedEx has made clear it is prioritizing more profitable deliveries and pushing inflationary pressures onto customers to cushion the blow. FedEx EVP and Chief Customer Officer Brie Carere said on a June earnings call that fuel surcharges on customers drove increased "revenue quality," or per-shipment profitability. 

But Ground has not fully passed on the benefits of customer fuel surcharges to its contractors, which was "a bridge too far," Patton said. The issue pushed him to publicly campaign for changes to Ground, including a warning that he will stop operations beginning Nov. 25 if FedEx doesn't change the terms of his contract to account for increased operating costs.

FedEx said in a statement that fuel payments are indexed and adjusted weekly based on local prices to account for fluctuations. The company also has "fuel islands" at Ground hubs and stations that offer contractors reduced diesel fuel prices and an app for linehaul contractors that identify the least expensive fuel options on their routes.

Still, the diminishing returns of the home delivery boom, together with this year’s higher operating costs, have added to contractors’ daily financial pressures as small business owners. The number of contractor businesses up for sale has increased nearly 65% over the past year, while their asking prices have declined about 8% as a percentage of revenue since January 2021, according to Atkins.

As contractors close shop, a fight for franchise rights may be next

Even if other contractors joined Patton’s call to suspend deliveries, it’s likely to have minimal impact on Ground's network, said Dean Maciuba, managing partner, United States, for Crossroads Parcel Consulting.

The timeline during peak season has become "more spread out" in terms of delivery activity, Maciuba said, meaning today’s Black Friday-to-Christmas rush isn't quite as pronounced as it used to be. Plus, with Ground's money-back guarantee for shippers still not reinstated since the start of the pandemic, the company may not be as concerned about the amount of residential deliveries that are late, he added.

FedEx said in a statement that it is prepared to keep service levels high during peak season. The company would use short-term contingency agreements with other contractors, along with "purchased transportation where appropriate," to cover routes that would otherwise be unserviced.

The company also noted Ground and its contractors are adjusting their working agreements to changing market conditions, and that its contractor exit rate is not “notably different” from prior levels. 

"Through multiple forums and other engagement with thousands of business owners, FedEx Ground understands the impact of current economic and market dynamics on their businesses and has collaborated on solutions," FedEx said. "Over the past three months, more than 1,600 agreements have been successfully negotiated or renegotiated based on unique characteristics involving each business."

Ground has also made operational changes as pressure from contractors grows. Chief among them is the suspension of year-round Sunday home delivery coverage in certain markets, primarily areas with lower populations. The extra working day has added more operational strain and expense to contractors, as there wasn’t enough delivery activity to make it financially viable, contractors told Supply Chain Dive.

While moves like ending all Sunday deliveries "would be an enormous win" for both Ground and its contractors, Patton is pushing for other benefits that would offer contractors protections similar to franchisees. If those protections aren't offered, then Patton said he'll "explore the pathway" on whether contractors qualify as franchisees — sparking another fight between Ground and the businesses that power its network.

"The thought is, I want FedEx Ground to give us those benefits of being a franchisee without having to have a huge 50-state fight over whether we shouldn't be legally classified as franchisees or not," Patton said.

Editor’s note: This story is part of an ongoing series diving into the opportunities and challenges supply chains face in 2023. Read the rest of the series here.

Even as space frees up within FedEx and UPS' networks, shippers are poised to continue diversifying their parcel carrier mix in 2023, industry experts say.

Adding new last mile carriers emerged as a popular strategy during the pandemic after volume surges limited capacity at the two delivery giants. In recent months, FedEx and UPS have seen service levels rebound and demand normalize, but many shippers continue to keep other delivery options on tap.

If anything, shippers are adding alternative carriers at an even faster rate. The average number of last mile carriers per company account in December was 5.73, up from 4.86 the year before, according to project44 data.

A mix of factors is buoying this ongoing trend, including higher rates and concerns over UPS and the Teamsters' contract negotiations — their current agreement expires July 31. Increased capacity and more robust services from smaller competitors are also driving interest in alternatives.

The result is that last mile carrier mixes are starting to look more like shippers' varied LTL portfolios, said Caleb Nelson, chief growth officer and co-founder at logistics software provider Sifted. Looking forward, diversification isn't expected to slow down, leaving some industry experts wondering if Amazon will capitalize by launching a competing service.

"I think it's going to pick up pace this year, and it's mostly because shippers are a little bit behind and the regional carriers that have stepped in to offer competitive solutions to FedEx and UPS are far more advanced this year than they've ever been before," he said.

Rate hikes, surcharges leave opening for competitors

While a slowing economy is driving down ocean and trucking rates, last mile rates have remained persistently elevated, putting a strain on shippers' finances. The fact that rates in the sector have remained so high for so long is unusual, said Alan Amling, distinguished fellow at the University of Tennessee's Global Supply Chain Institute and former VP of corporate strategy for UPS.

"In my entire career with UPS, there were only a few years over the 27 years I was there where it was a seller's market — that's not the typical state of things," Amling said. "The typical state of things is a buyer's market and you're creating [market] share and the carriers are really aggressive in how they're courting business."

Despite volumes declining in recent quarters, 2023 is set to be another expensive year for FedEx and UPS shippers due to higher annual rate increases and surcharges. The Cowen/AFS ground parcel index, which measures shipping costs, is expected to reach a record high in Q1.

Both companies have defended their rate increases and surcharges, saying they are needed to keep service levels high and combat inflationary pressures.

"Honestly, we have had very productive customer conversations," FedEx Chief Customer Officer Brie Carere told Supply Chain Dive in October in regards to rising shipping costs. "I think our customers really are very well-informed and they understand the seriousness from an inflation perspective."

While smaller competitors have also raised prices, some have undercut FedEx and UPS's recent 6.9% general rate increase with lower hikes.

"With this added capacity and new competitors, we are going to go back to a buyer's market where there are more alternatives and better opportunities to get lower prices in the market and still maintain service levels," Amling said.

As alternatives expand, is Amazon next?

Since the onset of the COVID-19 pandemic, FedEx and UPS have pursued volume growth in more profitable segments like healthcare and small business while demonstrating a willingness to let go of lower-yielding e-commerce packages from large shippers. UPS, for example, reached an agreement with top customer Amazon that will result in fewer packages from the e-commerce giant inundating its network.

Meanwhile, many alternative carriers have stepped up to fill the gap by gearing their services around delivering online orders. LaserShip/OnTrac, The Frontdoor Collective and Better Trucks are among the last-mile delivery companies set to expand into new markets in 2023 while siphoning volumes from the top carriers.

“Customers are usually coming to us because they are frustrated with service from some of the big players,” Better Trucks co-founder and CEO Andy Whiting told Supply Chain Dive in November. “There’s been challenges with either service or price or a combination of the two, or they’re looking for alternatives.”

Experts say another company could soon enter the parcel carrier fray, placing increased pressure on FedEx and UPS: Amazon. The e-commerce giant aggressively expanded its logistics network to fulfill and deliver in-house orders when the pandemic supercharged demand, and it has since grappled with excess capacity as sales have slowed.

At the same time, Amazon has rolled out new services that make use of its sizable logistics assets. Last year, the company launched long-term inventory storage services at its distribution services for third-party sellers. Amazon said it planned to expand its "Buy with Prime" service to all U.S. merchants by the end of January, connecting their outside websites to Amazon's fulfillment network and delivery capabilities.

"They were all set to launch a third-party service before the pandemic hit, and then they had to pull it back," the University of Tennessee's Amling said of Amazon. "I would not be surprised if they dust off all those plans and execute those in 2023."

FedEx and UPS have held a tight grip on the U.S. parcel delivery market for ages. But the way Shipware founder and co-CEO Trevor Outman sees it, a combined LaserShip and OnTrac could introduce a new national competitor to the mix.

"The Lasership acquisition of OnTrac represents the beginning of a shifting landscape that will ultimately put pricing pressure back on FedEx and UPS," Outman said in an email.

LaserShip's $1.3-billion deal for OnTrac gives it delivery coverage on both U.S. coasts. In a news release, the companies said the two will form "a leading national network and solution" for shippers. The most obvious path forward, then, is to expand its delivery coverage to fill out the middle of the country, according to industry experts.

The journey to a third parcel delivery company with nationwide coverage is a daunting one, requiring heavy investments in sorting hubs, linehaul infrastructure and labor. But there's no time like the present for an upstart to pursue that goal.

The LaserShip-OnTrac deal comes as interest in carriers outside the FedEx-UPS duopoly has grown. Shippers have encountered surcharges, service issues and capacity constraints with the two companies as an unprecedented surge in package volume flooded their networks.

To adapt, shippers are diversifying their carrier bases instead of sticking exclusively with FedEx or UPS. Shipware estimates 70% of its clients today are interested in using regional carriers, up from 25% two years ago.

"FedEx and UPS have created an environment that have their customers looking for alternatives," Outman said.

Linehaul capabilities crucial for national expansion

Today, LaserShip serves 22 states in the Eastern and Midwestern U.S., plus Washington, D.C., reaching about 150 million customers. OnTrac delivers to every address in California and the major metropolitan areas of seven other Western states. Major Midwest markets like Chicago and Texas could be next, experts say.

But competing with FedEx and UPS requires more than last-mile delivery coverage. The linehaul infrastructure to move volume over long distances is critical, allowing LaserShip's customers to to move East Coast volume to the West Coast. Today, OnTrac relies on large shippers to linehaul volume into their network, and LaserShip would be able to reduce this dependency, said Nate Skiver, founder of consulting firm LPF Spend Management, in a LinkedIn post.

An expansion of linehaul capabilities for the combined network would be a big plus for e-commerce retailers with a national customer base, said Shipium CEO and co-founder Jason Murray in an email. That's a customer base LaserShip and OnTrac have a high interest in — the companies' news release touted the combination as the only pure-play last-mile delivery network for e-commerce retailers.

"If a retailer had inventory in California that needed to be delivered in New York, regionals had little value because of the long-haul middle mile requirement," Murray said. "But with this merger, you can see a future where LaserShip+Ontrac take care of cross-national transport between their regional networks, thus turning them into a true ‘national carrier' option for most of the U.S. customer base population."

Growth of local volume plays into regionals' hands

LaserShip and OnTrac still have a long way to go to reach that true national carrier alternative, as its delivery coverage and infrastructure remain well short of FedEx and UPS. Expanding its network to reach those heights, be it through acquisitions, organic growth or a combination of the two, will take time.

But those shortcomings versus the national carriers may play to the regionals' benefit in a time when speedy delivery is in high demand. LaserShip's focus is on same-day and next-day e-commerce shipping, which calls for products to be close to the end customer to keep service levels high. Amazon's nationwide buildout of delivery stations demonstrates the importance of this approach.

"We are at the beginning of a shift in package delivery, where local and regional volume will continue to grow as a percentage of total (with inventory moving closer to demand)," Skiver said. "This decreases the value of a national, integrated network (another reason Lasership doesn't need immediate national coverage)."

The spike in e-commerce volume isn't expected to fade any time soon, meaning last-mile delivery companies will have to adjust their networks accordingly, if they haven't already.

Satish Jindel, president of SJ Consulting Group, said FedEx and UPS should be thinking about how to restructure their networks to handle the surge in a profitable way instead of shifting their focus to other kinds of deliveries, because LaserShip and OnTrac are already there.

"The companies that need to pay more attention to this transaction are the two major competitors: FedEx and UPS," Jindel said.

Walmart is a fresh face in the crowded delivery-as-a-service space, but the retail giant is looking to make its mark with a precise white-label delivery focus and by expanding fulfillment options to categories beyond food.

Since being announced in August, Walmart GoLocal has invited comparisons to companies like DoorDash and Instacart thanks to its same-day delivery focus. Yet there is a key difference between GoLocal and other providers: GoLocal doesn't have its own customer-facing platform. Instead, its focus is to deliver orders made on its clients' websites and apps.

"That's a big differentiator, to be respectful of not disintermediating business-to-consumer relationships," Harsit Patel, general manager of Walmart GoLocal, told Supply Chain Dive.

Walmart is rolling out its white-label delivery service at an opportune time. Demand for fast delivery boomed at the onset of the COVID-19 pandemic, as shoppers stayed at home and called for couriers to shop for their essentials instead.

In 2021, the U.S. quick-commerce market will total between $20 billion and $25 billion in retail sales, according to a Coresight Research report published in November. That's a 10% to 13% share of its estimate for online CPG sales in the U.S.

"All indications tell us that what used to be a luxury, same-day delivery, is not just even a convenience anymore," Shipt Chief Business Officer Rina Hurst said. "It's become a must-have service."

Rapid delivery expands beyond food

Same-day delivery has traditionally been a space for groceries, restaurant orders and everyday essentials ordered through customer-facing platforms. But providers are looking to deliver a wider array of products outside of these verticals, bringing more revenue and increased last-mile efficiency with them.

Still in its early days, GoLocal isn't limiting itself to specific verticals. Walmart announced The Home Depot as the service's first retail client in October, and Chico's became its first fashion client in December. GoLocal is also pursuing deals with local firms.

"There's a lot of smaller businesses that have been left out largely outside of the restaurant verticals," Patel said. "We're going to extend these services to any size of local business and then work with them to help them strengthen their relationships with their customers and primarily working as the white-label delivery provider for them."

Retailers using GoLocal notify the service when an order made through its app or website is ready to be delivered, along with the timeframe and any additional parameters. GoLocal offers delivery times as fast as 15 minutes, Patel said. The service also can provide next-day delivery, but it's not a fit for every business. According to Patel, most clients would want to fulfill next-day and two-day deliveries from a warehouse rather than local stores.

Walmart is making its push into white-label delivery as other companies begin ramping up services outside the marketplace format.

DoorDash has Drive, its white-label logistics service. In the grocery sphere, Instacart Connect allows retailers to run their own front-end storefronts while Instacart handles pickup and delivery. Shipt is also diving into delivery-only operations with Shipt Driven, which works off a retailer's own website. Hurst said the last-mile service is an effective way for the company to reach more customers through new verticals.

"This is the fastest growing part of our business," Hurst said of Shipt Driven. "Because this is on a retailer site, we can reach customers through so many different verticals, and our primary play is actually outside of grocery."

Shipt Driven supports brands like Party City, Best Buy and Abercrombie & Fitch, Hurst said. Fellow delivery providers are also expanding into non-food verticals. Instacart has partnered with Big Lots and H&M Canada for deliveries. And Uber Eats is expanding the scope of what it delivers more each day, said Christian Freese, a senior director and GM for new verticals and delivery in the U.S. and Canada, in an email.

"For example, we recently launched a new Kids + Baby vertical with buybuy Baby, Bed, Bath, and Beyond and Walgreens, to help parents and caregivers get what they need for their families—fast," Freese said. "We'll continue looking for new opportunities like this based on consumer feedback and merchant interest."

What's next for GoLocal

For GoLocal to be an effective — and profitable — white-label delivery service, it will need to fulfill more orders on more routes. Patel said GoLocal's goal is to grow volume and delivery route density, but declined to share specific numbers on the amount of deliveries it has made so far or how many it projects to make in 2022.

The service's coverage will proliferate "pretty much around Walmart locations," Patel said. Walmart has more than 5,300 retail units in the U.S., which includes Sam's Club stores. Many of its locations are in rural and suburban markets. John Mercer, head of global research at Coresight Research, said this footprint is a big selling point for GoLocal's service, with plenty of potential customers within 15 to 30 minutes from a Walmart location.

As GoLocal expands, the size and scale of Walmart's logistics capabilities mean the company sees opportunity in offering services further up in companies' supply chains, Patel said — the last mile may just be the start.

"Without going into too much detail, some of the last-mile services that we're offering to our partners you could traverse up in the supply chain," Patel said. "...This is going to be the nucleus that allows us to build on that long-term vision."