FedEx Corp.’s ground delivery unit, FedEx Ground, spent several years shifting last-mile delivery traffic from a long-standing partnership with the U.S. Postal Service to its own network. The idea was to increase parcel density at FedEx Ground’s business-to-consumer infrastructure and to set the stage for what would become a seven-day-a-week delivery service.

Things have not gone according to plan. FedEx Ground, which completed the project in March 2021, underestimated the expense of bringing what at its peak was well over 3 million parcels per day in-house. To offset the higher costs, the unit raised rates to levels that turned off shippers accustomed to inexpensive pricing under the old program, known within FedEx as SmartPost. 

FedEx Ground also began restricting capacity for the service, which was eventually rebranded as Ground Economy. The move had the effect of pushing shippers to a higher-cost service known as FedEx (NYSE: FDX) Home Delivery. In addition, the unit has struggled to achieve service consistency with Ground Economy, according to Nate Skiver, founder and president of LPF Consulting LLC.

In response, many shippers fled FedEx Ground altogether. In some cases, FedEx Ground didn’t try to keep the business. Parcels scattered to multiple alternatives. UPS Inc. (NYSE: UPS), the U.S. Postal Service, and parcel consolidators like DHL e-Commerce and Pitney Bowes Inc. (NYSE: PBI), companies that aggregate huge parcel volumes that are inducted deep into the postal infrastructure for residential deliveries, got their share.

The erosion at FedEx Ground has been significant. In fiscal year 2020, which ended May 31 of that year, average daily volumes, calculated on a seven-day-a-week basis, were more than 2.16 million, according to data from ShipMatrix, a consultancy. In fiscal 2021, that number fell to just under 1.6 million per day. By the end of FY 2022 this past May, volumes had fallen to a little more than 1.1 million per day.

FedEx Ground has in recent months lowered prices in an effort to win back business. Some customers have returned or will return. However, the unit will never recapture anywhere near what it had before, said Satish Jindel, ShipMatrix’s founder and president.

“FedEx has found its way and it is now competing again on price,” said Dean Maciuba, managing partner, U.S. at Crossroads Parcel Consulting and a longtime FedEx executive. “But it’s too late. The damage has been done.”

Fedex Ground executives were not immedaiately available for comment.

The Ground Economy service, which offers a contract-only, two- to seven-day delivery window to merchants willing to sacrifice speed for price, has more than its share of competition. UPS has a service similar to the old SmartPost, which at UPS is known as SurePost. The Postal Service’s Retail Ground service, which is comparable to Ground Economy, earlier this year narrowed its delivery window to two to five days. However, the technology supporting the Retail Ground service is not as seamless as what supports the FedEx operation, according to Jindel.

The direction that shippers take will be dictated by specific needs, according to Skiver. Shippers with parcels that weigh 1 pound or less could opt for a UPS service known as Mail Innovations. Parcels weighing 2 to 20 pounds, for example, could choose SurePost. However, UPS is more zealous at protecting SurePost margins, according to Skiver. As a result, UPS would be reluctant to price SurePost as a loss leader.

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