reckoning” for USPS, when its parcel rates would be forced
to reflect the actual cost of service and shipping would
have to pull more of the profit load to offset the secular
decline in first-class mail, the traditional cash cow.
“ENORMOUS” MARKET IMPACT
Should USPS’s parcel rates rise to the levels cited by
Wetherbee, the impact on the shipping marketplace, and
on an economy increasingly influenced by e-commerce
activity, could be enormous. Millions of online retailers
and merchants offer their end customers “free shipping”
for purchases as a means of retaining and keeping their
business. The shipping is not free, and
USPS has been raising parcel rates by mid-to high-single-digit amounts for several
years. Still, the rates remain so competitive
that big-ticket users have been willing to
effectively eat the costs. That approach
may no longer be viable should rates rise
substantially from current levels.
In his analysis, Wetherbee wrote that
“many consumers have been conditioned
to expect shipping solutions [that] are
not supported by economic reality.” A
meaningful parcel rate hike from USPS,
especially if it is pushed by Congress rather than just by the PRC, could shock the
ecosystem into making profound changes in parcel delivery
strategy, he said.
Large users could increase their in-house investments
in parcel distribution, much the same way Amazon has
been doing in building out its own network. However,
Amazon’s volume is extremely large, and it is growing
at a 20-percent-a-quarter clip. Thus, there is no way it
could accommodate all of its shipping business in house.
About three-quarters of Amazon’s shipping costs would be
impacted in some manner by a meaningful USPS rate hike,
according to Wetherbee’s projections.
For UPS Inc. and FedEx Corp., companies that compete
with USPS and also rely on its “Parcel Select” service to
deliver packages to out-of-the-way addresses too costly
for the companies to serve themselves, an escalation in
postal rates could be a revenue bonanza. Wetherbee estimated a $15 billion to $19 billion combined annual revenue
“opportunity” for the two carriers should the overall rate
floor rise and enable them to price ground services more
aggressively.
ALLOCABLE COSTS
One of the elephants in the postal room is the issue of
allocable costs. Under a 2006 law that further changed how
USPS does business, the agency is required to price its prod-
uct offerings in such a way that they recoup both its variable
costs and the appropriate share of the organization’s overall
costs. Back then, so-called competitive products—the cate-
gory under which parcel and shipping fall—were assigned a
5.5-percent allocable share. That percentage has remained
the same, even though parcel and shipping today account
for about one-quarter of total revenue, the highest ratio in
USPS’s history.
In 2015, USPS told the PRC that competitive products
should account for 24. 6 percent of the agency’s overall
costs. The post office has declined to respond to various
requests from DC VELOCITY asking what it
considers an appropriate percentage. The
implication is that, should parcel costs and
revenue be more closely aligned than they
are today, costs would rise substantially
and, by extension, so would parcel rates, to
offset those escalations.
The debate over the proper allocable
cost formula is critical in the context of
postal operations. Parcel processing brings
with it higher labor and equipment costs.
By contrast, first-class mail processing is
highly automated. Furthermore, a truck
that cubes out with letters generates more
revenue than a truck full of parcels.
The irony is that significant parcel rate hikes could end up
taking business from USPS. The three largest users of Parcel
Select—UPS, FedEx, and Amazon—are developing their
own infrastructures and rate matrixes to challenge USPS in
the local last-mile e-commerce delivery category. USPS has
publicly acknowledged that those efforts could undermine
its ability to grow the business in the years ahead.
What is even more ironic is that a meaningful postal rate
hike could create a scenario where, over the long haul, the
one company that ends up benefiting the most is Amazon.
Its large-scale logistics investments in recent years have
afforded it deeper fulfillment density than ever before,
which, in turn, allows it to diversify its delivery options to
include local carriers. This would insulate it from any USPS
rate hikes, especially if they are imposed over a period of
time, according to Wetherbee.
Because Amazon would be better able than its retailer
rivals to digest higher shipping costs, a USPS rate hike
would further strengthen its cost advantage to consumers, and the e-tailer would gain even more market share,
Wetherbee predicted. While Amazon might be hurt in the
short term by postal rate hikes, “increased purchase frequency and customer density should benefit [its] margins
over time,” he wrote.
