UPS Inc. has complained for decades that the US Postal Service uses its monopoly on so-called market-dominant products like first-class and marketing mail to subsidize artificially low rates on competitive products like Priority Mail and parcel deliveries. Based on recommendations from the Trump administration’s postal reform task force report, UPS (NYSE:UPS) may have found a friend in a very high place.
According to the 72-page document released nearly two weeks ago, parcel and shipping services need to be priced at market rates and products brought to market free from regulatory hoops and laborious beta-testing requirements. The parcel and shipping segment must contribute more to the overall enterprise than the 5.5 percent of the “institutional cost” it pays to support other postal products and services; the 5.5 percent ratio hasn’t changed in 11 years even though parcel revenue as a percentage of total top-line grew from 11.3 percent to 28 percent during that span. The age-old universal service obligation requiring USPS to serve every U.S. address and which costs $4.4 billion a year to maintain must be narrowed to apply only to what is defined as essential services. The obligation must also be supported by other revenue sources because the mail monopoly is a shell of what it used to be.
To Gordon Glazer, an executive at parcel consultancy Shipware, LLC, and a 31-year veteran of the postal wars, all of this smacks of higher parcel and shipping rates to come, which will cloud USPS’ value proposition and hurt a myriad of users. Who it won’t hurt, Glazer said, is UPS, which will see USPS’ price advantage over private carriers narrow considerably.
By recommending an increase in shipping prices to fund the universal obligation, the White House “took a page from UPS’ playbook,” Glazer wrote the day after the report’s release. UPS, according to Glazer, has been “relentless” in persuading the Postal Regulatory Commission, which oversees postal pricing, to change USPS’ costing methodology so shipping rates would be raised to fund a larger share of the universal mandate by raising shipping rates. UPS’ Washington representatives were unavailable to comment.
The report also recommended that USPS’ 84-year-old monopoly on the mailbox be loosened so third-parties can gain access to it, for a fee. This could be music to the private carriers’ ears as well. For example, because UPS measures driver productivity down to the second, the ability to access cluster boxes or curbside would save drivers significant time at each stop, reckons Rob Martinez, Shipware’s CEO. “Take all drivers and residential deliveries collectively, and it is productivity enhancement into the hundreds of millions,” he said.
USPS will need to put a price on mailbox access in order to monetize it. In that scenario, it would have to forecast the profits it stood to make from opening up the box, Martinez said. That, in turn, would provide UPS an opening to expose how much so-called market-dominant products like first-class and marketing mail are subsidizing package delivery services, he added.
Higher postal rates could be a double-edged sword for companies like UPS and rival FedEx Corp. (NYSE:FDX), among other postal users. Rates on USPS’ popular Parcel Select product, which allows users to inject parcels deep into the postal network for final delivery by letter carriers to residences, are proposed to increase by nearly 10 percent at the end of January. This would hit all users of the service, which include UPS, FedEx and amazon.com, Inc., (NASDAQ:AMZN), which moves 62 percent of its traffic with USPS. However, all three are working on plans to divert final-mile shipments into their own networks, which would minimize the rate hit. Satish Jindel, president of SJ Consulting, said that even with next month’s price increase, Parcel Select—which accounts for about 55 percent of USPS’ parcel volume—will remain the lowest-cost provider for the lightweight parcels that still dominate e-commerce order and residential deliveries.
The report, whose original mid-August release was delayed by 3 months and whose disclosure early this month task force came as a surprise, does not call for privatizing USPS. Nor is there a single mention of Amazon, whose purported getting-away-with-murder rates from USPS led President Trump, already at war with Founder Jeff Bezos over the coverage of his presidency by the Bezos-owned The Washington Post, to form the task force.
The report paints an ironic picture of where the national postal system stands today. First-class mail, USPS’ largest and most profitable product, is in irreversible decline due to digitalization. Yet the same digital trends that have crippled first-class mail have also triggered an explosive growth of e-commerce, and are powering double-digit gains in parcel revenue and volume.
It will be nearly impossible for parcel to ever be as profitable as mail because of the much higher costs of picking up, processing, and delivering packages. Still, the path of a 21st century USPS points to parcels, given the secular growth of e-commerce and USPS’ strong value proposition in the segment, according to the task force.
“Most historical decisions about the postal infrastructure and finances have been driven by mail product considerations,” it said. “Under the new business model, the growing package business will represent the key products that drive the USPS’ decisions and policies, including the structure of the fleet, labor force, processing facilities, cost allocation, pricing, and regulatory requirements.” This profound shift, the authors write, reflects “not only a change to the USPS’s relative product focus, but also a change in management philosophy and culture from a monopoly activity to a more commercial activity.”