Call it the Amazon Effect — of a different sort.
News has come that the Trump administration wants to boost the United States Postal Service’s (USPS') revenue, and has taken aim, in part, at a certain eCommerce giant. Might the economics of the last mile change, too?
That serves as food for thought in the midst of the holiday season, where packages by the billions make the trek through rain, hail, sleet and snow.
The latest salvo, of course, is the proposal from the administration that the USPS could sell access to mailboxes. The idea held a bit of a spotlight in a government report that bowed last week, and, as the Department of the Treasury noted, “the legal mailbox monopoly remains highly valuable. As a means of generating more income, the mailbox monopoly could be monetized. … As [mail providers] and package delivery companies continue to expand offerings to multiple parts of the value chain, it is reasonable to expect a willingness to pay for access to USPS mailboxes. By franchising the mailbox, the USPS could expand its revenue and income opportunities without necessitating any change to its current mail products."
The Mailbox As Franchise
Monetization remains critical to the postal agency, which has seen 12 straight years of red ink. Mail volume is off (we’ll get to the financials) and, at the same time, the service must pay billions of dollars in healthcare and retirement benefits annually.
To be sure, there are other proposals alongside this one, which include boosting prices for commercial mail that is, for example, comprised of advertising flyers. Beyond that, though, the potential is there to charge third-party delivery services like UPS or FedEx for access to each and every consumer mailbox. The monopoly is absolute and seemingly resolute, as it remains illegal for anyone, including those delivery services, to deliver packages or letters — or just about anything else — via mailbox.
By paying for the authorization to deliver to the mailbox, the thinking is that the postal service top line will get a boost and the ink at the operating line will get blacker.
Then again, the last-mile dynamics may change in an unfavorable way for the USPS — as businesses, retailers, merchants and enterprises of just about any vertical opt toward UPS or FedEx. Might that presage some price competition of sorts?
FedEx, for example, said in March it would not levy surcharges for residential deliveries into the current holiday season, and has been able to hike rates in the mid-single digits at its Express and Ground operations (UPS has just announced increases, too). At the same time, the company has operating margins in the high-single digits, which show that FedEx can deploy at least some strategic levers here.
Thus, the choice for the USPS may be a sticky one. The fees it charges for mailbox access would have to be worth more than any customer attrition, and that outcome is far from certain.
The Last Mile, But Not The Last Word
Another proposal seems to have Amazon in its sights, in an age when Trump has said the USPS loses as much as $1.50 on each package it delivers for the eCommerce company (it seems no one really knows the true economics that are at play in the USPS/Amazon relationship). The Treasury report stated that “the USPS’ long-term sustainability is in question,” even in an age when eCommerce has boosted shipping volumes.
Speaking of eCommerce, Amazon, of course, uses the USPS to ship millions of its packages, yet it could indeed go elsewhere for its shipping needs. That might make a poor strategy of the idea that the postal service should develop a new pricing model that would abolish price caps and raise delivery prices. In this case, Amazon would likely incur higher costs to do what it does — and those costs might be passed along to consumers.
That Elf on the Shelf may be even more of a tough pill to swallow, at least in terms of price tag (and also ‘cause they are kinda creepy).
We’ll nod to politics for a moment, then retreat. Reports came from The Washington Post this year (The Post is owned by Jeff Bezos) that President Trump had “personally” urged U.S. Postmaster General Megan Brennan to double rates charged on Amazon and other companies to ship packages. Then came the order (via Trump) to review the way the USPS operates, which eventually led to last week’s Treasury report.
The USPS’ operating loss in the year that ended Sept. 30, 2018 was $3.7 billion, according to a review of its latest 10-K. The fact remains, though, that revenues from package deliveries — the line item known as shipping and packages — was up more than 10 percent in the fiscal year to $21.5 billion, with volume up 7 percent, indicating at least some pricing power (then again, as noted above, pricing power only goes so far).
The biggest line item is the revenue from first-class mail (cards, letters and flats, but not packages), with 35 percent of operating revenues at $70 billion as a sticking point, as it’s on the wane. Electronic communications and “transaction alternatives” — which we assume to mean payments done other than checks — are the culprit here. It’s a systemic shift along part of the last mile, it seems, as paper mail declines. That’s where the service has a monopoly and where price increases stick, possibly to help fund the competitive side of the equation.
As for the competition, USPS said in its filing, “The primary competitors of our shipping and packages services are FedEx Corporation and United Parcel Service, Inc., as well as other national, regional and local delivery companies, and crowdsourced carriers. We see additional competition coming from existing customers who are testing and, in some cases, implementing "last-mile" services. These companies include Amazon.com, Inc., Walmart, Inc. and Target Corporation … the growth in our competitive service revenues over the past five years is largely attributable to three major customers.”
Though that trio remains unnamed, we’ll safely assume one of them is Amazon. The deals are struck and, once struck, are crucial.
Even as the USPS operating model gets renewed scrutiny, shipping price increases geared toward 2019 could, according to some reports, hit Amazon’s retail operating margins by as much as 5 percent, as estimated by Barclays. Shipping costs are slated to go up by 10 percent on small boxes, and 5 percent on medium boxes. We may see the same trends at work in the USPS' next fiscal-year report.
It’s too soon to tell how it all may play out, but it bears watching, of course. Speaking of watching, if only we could get that Elf on the Shelf to stop staring.