For nearly 20 years, the U.S. Postal Service and Stamps.com (NASDAQ:STMP) had a fruitful marriage of convenience. As a USPS-approved reseller, Stamps.com promoted the value of USPS’ service in order to prevent business from defecting to rivals FedEx Corp. (NYSE:FDX) and UPS Inc. (NYSE:UPS). One of Stamps.com’s units, Endicia, provided USPS with software, codenamed “Dazzle,” that allowed users to print postage from their computers without enduring the traditional and cumbersome USPS manifest-approval process. In return, Stamps.com received commissions of between 0.5 and 1.5 percent for label-processing services.
About six years ago, a postage “reseller” program was put in place to drive revenue to USPS. Many customers began to receive relatively small discounts. But Stamps.com, which became a major reseller, reaped the fruits of a spread between its discounted price for postage and the sale price to users, according to people familiar with the matter. The spread, which varied depending on traffic lanes but could hit double-digit levels, became known in the trade as “postal arbitrage.”
On February 21, the marriage ended after El Segundo, California-based Stamps.com said it had terminated its “exclusivity agreement” with USPS covering two of its units – the Stamps.com operation and Endicia, a labeling company. On an analyst call that day, Stamps.com CEO Kenneth T. McBride said the decision was made after USPS refused to waive the exclusive nature of the relationship and allow Stamps.com to incorporate other parcel carriers. Stamps.com said its demands were non-negotiable, so it ended the agreement once USPS didn’t budge. USPS declined comment for this article. A Stamps.com spokesman did not respond to a request for comment.
Gordon Glazer, a consultant to parcel consultancy Shipware, LLC and an expert on USPS shipping, doesn’t buy the Stamps.com line that it forced USPS’ hand over exclusivity. Glazer said the quasi-governmental agency seemed ready to either end, or at the very least, demand substantive reforms to the reseller program, which was originally structured to protect and strengthen USPS’ parcel share but had “morphed out of control.” Seeing the writing on the wall and unwilling to agree to changes in the status quo, Stamps.com walked, Glazer said.
The reseller program, which was part of what are formally known as a “Negotiated Service Agreement,” had expanded to the point that resellers were selling stamps and labeling to vendors that didn’t meet the USPS’ volume requirements to qualify for lower prices, according to a 2017 report from Capitol Forum, an investigative agency. A separate report that year by the USPS Inspector General’s office estimated the annual loss to USPS from alleged abuse of the programs at more than $1 billion.
USPS may have valid reasons for ending or restructuring the reseller program. However, the absence of Stamps.com, which was a key factor in USPS’ parcel growth, will hurt, Glazer said. “Now you have a spurned partner that is going to actively promote competitive carrier solutions across all of its platforms,” he said.
Stamps.com, Glazer added, has “tremendous traction in the marketplace, and it will take some time for the middleware providers and end-users to write code to integrate to alternative postage providers.”
Whoever is right, what is clear is that Stamps.com’s disclosure had immediate consequences. The price of Stamps.com’ shares, which had peaked in mid-June 2018 at about $281 a share but had been falling steadily since then, cratered on Friday, February 22. Shares fell nearly $115, or about 60 percent, to about $83 a share. The share price has since recovered by about $10 a share.
McBride acknowledged that the company’s decision would result in a multi-year revenue hit as the USPS business disappears. He added that the company will continue to work with USPS when it makes sense to do so. However, McBride said it was in the best long-term interests of Stamps.com and its customers to make its platforms available to other carriers that, in a hyper-competitive parcel shipping environment, are likely to be the best performers. USPS is too weighed down by a stakeholder-saturated bureaucracy to ever be as nimble as companies like Amazon.com, regional parcel carriers, startups like UberFreight, and FedEx, UPS and DHL Express, all of which are developing innovative business-to-consumer delivery solutions with customer guarantees that USPS cannot match, McBride said.
In a comment likely to stick in the craws of USPS executives – given the organization’s consistent double-digit annual growth in parcel traffic – McBride said that “it is unclear to us if the future direction of the USPS will include a strong strategic focus on growing packages at all.” (According to the transcript of the analyst call provided by Seeking Alpha, McBride made the comment after citing a recommendation in last December’s White House postal reform report that USPS should focus on essential services that are not provided by the business community. FreightWaves’ article at the time said that the report’s authors “advised Congress to clearly state what postal delivery services are essential and should thus enjoy monopoly status, and what services are subject to competitive forces and should not have any pricing caps or restrictions.”)
Much is at stake as the postal business devolves. Stamps.com processes 5.5 billion packages annually for USPS. Based on Stamps.com data, it processes 35 percent of U.S. “Priority Mail” packages, half of all packages moving in domestic first-class service, and approximately 30 percent of all USPS international packages. Shipping activity has grown to current levels from about 300 million packages 10 years ago, a growth rate that no other USPS partner has been able to approach, Stamps.com said. A large part of the growth is tied to the explosive surge in e-commerce demand that began about seven years ago and shows no signs of abating.One of the changes will affect the cost of the Endicia’ software, which had been paid for by USPS. McBride said on the call that it has begun notifying customers of a 3 percent surcharge on their shipping volumes to help defray the cost of the technology.