September 3, 2019 at 5:00 am ET
The U.S. Postal Service’s quarterly financial report released last month revealed more than just a net loss of $2.3 billion for the three-month period; it also showed an unexpected drop in the Postal Service’s package volumes for the fewest deliveries in nearly a decade.
While USPS shied away from naming names about whose business they were losing in their August financials announcement, logistics industry analysts cited Amazon and FedEx as major corporate partners who were drawing back significantly on their usage of USPS.
While the mere existence of business arrangements between private companies and government agencies is nothing new, nor inherently problematic, there is a need to understand what taxpayer-backed institutions are conceding in the midst of these highly consequential negotiations. As they say in politics and policy: “The devil is in the details.”
From the perspective of Postal Service management, keeping such details under wraps has been a key part of their strategy as its negotiated service agreements (NSAs) remain largely unavailable to the public.
However, in the midst of assessing the package market vital signs, equity analysts of Morningstar have contributed a key piece of the USPS puzzle in discussing Amazon’s impressive ability to bend down its cost curves and reach a new competitive price. As Morningstar notes, Amazon’s price-per-package of approximately $3.50 is “just slightly above what Amazon pays the Post Office to move its packages.”
Make no mistake, USPS’ rate of approximately $3.50 to deliver each package is clear evidence of the U.S. Postal Service simply giving away its own store. Similar concerns about ultra-low shipping rates from USPS also arose in July 2017. Back then, Citigroup analysts shed light on pervasive market distortions based on estimates that each package was underpriced by a whopping $1.46 on average.
Independent of the trail of analysis, the Postal Service’s willingness to charge approximately $3.50 in some scenarios is shamelessly inequitable with respect to others who rely on the USPS. For example, other retailers, businesses nationwide, as well as entrepreneurs and everyday postal customers are burdened by USPS’ publicly stated rate structure for flat rate boxes in the small ($7.50 apiece), medium ($12.80 apiece) and large ($17.60 apiece) priority mail segments.
Ultimately when it comes to the Postal Service’s package subsidy, it is a tale of the “haves” and “have nots.”
Other USPS deals that were once abundantly lucrative in their respective markets involved Stamps.com. Similar to the high-volume parcel deals, the postage broker could ensure widespread usage of USPS, even if it meant eating away significantly at the Postal Service’s profits. Shortly after the partnership ended, it’s no surprise how Stamps.com’s valuation plummeted nearly 50 percent.
Despite its troubles in business dealings, the USPS is not without its successes. Each year, the behemoth institution brings in approximately $70 billion in revenue. With this in mind, postal leaders, lawmakers, and regulators need to ask simple questions such as: Where can costs be reduced? How can we ensure that each product covers its commensurate costs to the overall system?
While the requirements surrounding competitive product costs were only altered slightly by the USPS’ regulator in January, the oversight decision and willingness to further evaluate the framework reflected a monumental change in perspective.
Leaders in the nation’s capital are tired of the Postal Service’s shell game and are preparing to address the organization’s dysfunctional accounting. In order for the long-awaited business plan — combined with Congressional action — to be successful, the Postal Service must prove that each of its products is independently justifiable for its bottom line, starting with package pricing.
Steve Pociask is president and CEO of the American Consumer Institute, a nonprofit educational and research organization.
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