It is not uncommon to see the USPS embroiled in a political storm.
The organisation’s high debt levels have been an issue in Washington for a number of years, whilst President Trump has previously weighed in to say it was in effect subsidising Amazon. Now, the new Postmaster General, Louis DeJoy, under pressure from House Democrats has just announced he would suspend controversial changes to services that critics believed would have undermined mail-in voting ahead of the November elections. This would have seen mail processing equipment removed, mail boxes re-located, a continued squeeze on overtime and reduced retail hours at post offices, all apparently to cut costs.
The motives for DeJoy’s moves have been questioned, but he would highlight the tremendous financial difficulties the Postal Service faces as reasons for the proposed changes.
The organisation faces stark challenges despite a Q3 which saw Shipping and Package volumes increase by close to 50%. This was caused by a surge in demand for B2C e-commerce shipments during the peak of the crisis. However, mail volumes have declined at a fast rate this quarter (Marketing Mail down 37.2% and First-Class Mail down 8.4%). Furthermore, the additional costs associated with the increased parcel shipments, including labour, transportation and PPE expenditure contributed to a net loss for the quarter of $2.2bn, leaving losses for the nine months of the fiscal year at $7.5bn. The organisation has been loss-making for the last 13 years, but this year that loss could reach an 8-year high. DeJoy has used this to argue significant changes are needed at the Postal Service.
Aside from the short-term shocks from COVID, increases in parcel volumes have slowed in recent years. In FY19, the company’s volumes increased by just 0.3%. This coincides with moves from Amazon’s increasingly ambitious last mile delivery service. In 2017, Rakuten Intelligence estimated USPS accounted for around 60% of Amazon’s last mile volumes, but that has now fallen to 40%, with Amazon Logistics now the number one carrier of its own US parcels.
Amazon and USPS still appear to need one another on the face of it. For Amazon, USPS is a cheap carrier of parcels to rural homes due to its universal service obligations. Amazon has spent fortunes building out its delivery network in recent years, but the rural deliveries USPS makes every day are costly. For USPS, although it carries volumes cheaply, the loss of Amazon would be catastrophic. Its network depends on economies of scale and the reduction in volume from Amazon would not lead to a proportional reduction in costs.
Could USPS increase prices sufficiently? If it did so, it may make sense for Amazon to re-consider its last mile strategy in rural residential settings. It has already shown the ability to swallow up USPS volumes in urban settings. Additionally, there have been complaints of USPS’ service quality, which may make increasing prices by any significant amount difficult. Also, for its smaller merchant customers, price hikes may wipe out margins, forcing them out of the market. This leaves the new Postmaster General in limbo, with an organisation stuck in a seemingly endless loss-making cycle.
Following its Q3 losses, the organisation did announce temporary price hikes for peak season in the 5-10% range across its products. For its Parcel Select service, where the likes of Amazon, FedEx, UPS and DHL drop-ship goods into the Postal network, the price hike equates to 7.5% ($0.24). This increase is perhaps a sign of the times. Parcel carriers have been handed more pricing power over shippers due the pandemic. FedEx and UPS have also announced surcharges on residential volumes ahead of peak season, in the range of $1-$5 per parcel. The surcharges will begin as early as October 5th in some cases.
Usually an increase in postal rates would cause controversy but given the clear issues at the USPS and the prices charged by other carriers, the move appears to be more accepted this time around. Continual price hikes might be needed to cover the additional costs caused by a surge in e-commerce parcels and to service its high debt load, but this may force merchants out of the market, or to other service providers. The situation for USPS looks extremely challenging without major structural changes.
Source: Transport Intelligence, August 20, 2020
Author: Andy Ralls
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