FedEx (NYSE:FDX) has a big problem on its hands. Thousands of FedEx Ground contractors are at risk of going under — which could jeopardize its business and your holiday shopping.

FedEx Ground vs. FedEx Express

Shipping via FedEx? They have various business units for that, two being FedEx Ground and FedEx Express. FedEx Ground handles low-cost non-express packages — and is also FedEx’s most lucrative unit. There’s another big difference between the units:

• Unlike FedEx Express or competitor UPS, FedEx Ground hires external contractors (i.e., small businesses) to handle deliveries.
• It’s a strong business model for FedEx, which passes down high vehicle and driver costs to contractors without the risk of unionizing.

But recent years have been challenging for contractors — impacted by high fuel, labor and truck costs and staffing shortages. In 2021, contractors were paid less despite delivering more packages and missed higher delivery targets set by FedEx, which would have paid extra fees.

Contractors demand more from FedEx

Last week, Route Consultant — a broker between FedEx and contractors — warned that thousands of small delivery companies used by FedEx are at risk of going bankrupt. Route Consultant’s Founder Spencer Patton said:

• More contractors are failing since federal pandemic relief funds dried up.
• “The FedEx Ground network is in far more peril than what anyone realizes.”

FedEx contractors are negotiating for higher pay. Various groups petitioned FedEx this year, and Patton is organizing a committee to negotiate with FedEx — rare actions given FedEx’s power against them.

Investors: New CEO, new plan

FDX

has been down 23% in the past year, and in March, Raj Subramaniam replaced its long-time founder as CEO. He instated a three-year plan to increase sales and profit, increased dividends and cut spending last month.

On top of a potential recession, Subramaniam faces several issues:

• Falling profitability: FedEx Ground’s operating margin has fallen, and management warned that it would likely miss end-of-the-year targets.
• Spending shift: In 2022, consumers began spending more on services — leading to FedEx forecasting its e-commerce unit to fall below pre-pandemic levels.

Pressure from contractors is giving Subramaniam a tough decision: satisfy investors and stick with its cost-cutting plans — or side with contractors and risk operating profits deteriorating further.