Late last week, Memphis-based global freight transportation and logistics services provider FedEx said it is getting ready to cut down on its Sunday delivery services in remote and rural areas of the United States.
“FedEx Ground is constantly evaluating opportunities to optimize network operations based on market conditions and customer needs,” the company said in a statement provided to LM. “To accommodate the exponential growth of e-commerce during the pandemic, we accelerated the rollout of Sunday residential delivery coverage to nearly 95% of the U.S. population. As economic conditions have shifted, we are making operational adjustments to suspend Sunday delivery operations in certain low-density, rural markets, effective the week of Aug. 15. This will enable FedEx Ground to increase efficiencies while maintaining a competitive advantage in weekend coverage by reaching nearly 80% of the U.S. population on Sundays.”
A Bloomberg report observed that this service reduction serves as proof that the pandemic-driven surge in e-commerce is now abating, pointing out how FedEx Ground volumes rose 33%, for the quarter ending in August 20, when the pandemic was in its early days, compared to a 6.2% dip in volume, for its most recent quarter.
As reported by LM, FedEx initially announced its plans for residential delivery seven days a week, for most of the U.S., in May 2019, which took effect in January 2020, in an effort to “further serve the fast-growing e-commerce market” and match USPS’s 7-day offering that was quickly followed by UPS stating it was considering seven day a week delivery as well.
This did not come as surprising, at the time of the announcement, as FedEx had already delivered seven days a week during the holiday peak season. What’s more, in September 2018, FedEx said that it was upping its FedEx Ground U.S. operations to six days a week from five. Company officials said at the time that this move was made in response to a combination of –increasing e-commerce demand and record influx of volume expected for the 2018 holiday season, and beyond.
Morgan Stanley analyst Ravi Shanker wrote in a research note that FedEx’s move to seven-days a week delivery in January 2020 accelerated after Covid lockdowns, in order to handle an unprecedented rise of deliveries.
“However, the rapid introduction of Sunday delivery also reportedly placed heavy demands on FDX and its contractors,” wrote Shanker. “[Management] attributed shifting economic conditions as the main driver for this decision. The decision also coincides with media reports of displeasure at FDX’s independent delivery contractors, which was partly related to Sunday delivery.
The analyst added that this move by FedEx was surprising for a few different reasons, including: being the first significant reversal of e-commerce service by a major delivery provider after 10-15 years or relentless service expansion; and competitive implications as FedEx had viewed Sunday service as a competitive advantage over UPS, while Amazon Logistics and USPS continue to deliver seven days a week.
Jerry Hempstead, president of Hempstead Consulting, said that, in his opinion, the FedEx decision may be driven by the company to look at where it was delivering on Sundays and where FedEx.
“It could be that if it decided to cut back on zip codes, customers in those areas would not quit FedEx and have any reason to go to UPS,” he said. “In the end it’s really all about pleasing Amazon with this Sunday delivery stuff and, FedEx does not participate in any Amazon deliveries. No love lost between the two. I don’t know any online shipper that makes a big deal about Sunday delivery. Servicing the seventh day is really expensive to do and now with the Covid-related tsunami abating (we saw in in the UPS numbers, the USPS numbers and the prior FedEx release) that trying to do all zips on Sunday to all or most zips on low prices transactions just does not make economic sense. High density residential zips are a different story.”
Adi Karamcheti, a consultant in San Diego-based Shipware’s professional services group, noted that the timing of the announcement by FedEx is interesting in that days after a Bloomberg report cited comments from Spencer Patton, founder and president of Route Consultant/Patton Logistics Inc., mentioned that FedEx had lost as much as $500 million on the Sunday service, subsequently followed by FedEx then choosing to announce reductions to that same Sunday service.
“I think what we are seeing is a real test for FedEx’ new CEO, Raj Subramaniam,” he said. “Margins are down on the FedEx Ground service. He’s under real pressure to improve those margins. At the same time there are stresses and strains showing on the FedEx Ground Contractor model. As per the same Bloomberg article, the contractors are pushing for more compensation as the stresses of delivering more packages in this Covid driven e-commerce explosion have pushed many contractors to the financial breaking point. It’s hard to see how Subramaniam improves margins and better compensates his contractors. In the past, when Fred Smith was the CEO, his reputation was such that he could tell the markets that FedEx was going to focus on long term gains even if it meant short term pain. Subramaniam doesn’t carry anywhere near such clout. In this light, cutting back on the Sunday service was a more obvious if not necessary decision.”