In her final conference call as Postmaster General to discuss the U.S. Postal Service’s (USPS) financial results, Megan J. Brennan was asked several times about how USPS will reverse the dramatic slowing in parcel and shipping volumes now that its three largest customers, Amazon.com, Inc. (NASDAQ:AMZN), UPS Inc. (NYSE:UPS), and FedEx Corp. (NYSE:FDX) were diverting postal business into their own networks.
Brennan had no answers, at least none she was willing to publicly divulge. Asked what was causing the three giants to leave, she replied that it was “density economics.” Asked whether most of the diversion was occurring in populous urban markets, less-populated rural areas, or both, she responded, “where there’s density, there’s more competition.”
Asked how USPS’ will replace such a large bloc of traffic, Brennan, who retires Jan. 31 after five years as PMG and 33 with the $71 billion organization, struck a defiant tone. “We are not conceding any of that business,” she said. USPS’ value proposition will appeal to new and current customers alike, she predicted.
Come Feb. 1, it will be someone else’s problem. But the die has already been cast. By the end of next year, FedEx’s traffic, which is estimated to be two million parcels a day, will be gone. Amazon has, according to one data source, cut its business with USPS in half, and is self-handling most of its urban shipments and consigning USPS to the suburbs or rural areas where the density is lower and the cost-per package is higher. UPS has in-sourced about 35% of its last-mile business and may do more.
If Brennan has no answers, it may be because there aren’t any. Indeed, the problem may not lie with USPS, but with the advancements made by the customers themselves. UPS, FedEx and Amazon have long relied on USPS’ Parcel Select service, where parcels are inducted deep into the postal network for transport to every address at a low cost. The combination of universal coverage at cheap rates proved compelling for users, especially in the new world of commerce where stuff is ordered online and shipped for free to the consumer. USPS has recorded annual double-digit revenue and volume gains for nearly a decade, to the point where parcel and shipping today account for one-third of all revenue.
However, UPS, Fedex and Amazon have dramatically re-engineered their distribution networks to more efficiently handle last-mile deliveries. In their view, it makes little sense to pay for their networks and pay USPS at the same time when they could make last-mile work on their own.
Parcel Select’s low prices have always been a key selling point. However, USPS hiked rates on the service by double-digit amounts earlier this year (its 2020 increases will be around 4%). In addition, it implemented a pricing formula based on a package’s dimensions rather than its actual weight, a change that was tantamount to a back-door rate increase because higher rates were assessed on packages that fell outside of the dimensional parameters. As Parcel Select’s prices have risen, which would be expected given the increased demand, the gap between what USPS charges and what it would cost the three giants to in-source their delivery operations has narrowed.
The numbers disclosed today tell the story. Parcel and shipping traffic rose a scant 0.6% for the 2019 fiscal year, well below recent historical norms. Volumes in the fiscal fourth quarter were down marginally, according to USPS CFO Joseph Corbett, who did not disclose specifics on Thursday’s conference call. According to consultancy ShipMatrix, fiscal fourth quarter Parcel Select volume fell 4.5% to 680 million pieces from 712 million. The volume tendered through Amazon and SmartPost, the latter being the FedEx service, declined by 49 million pieces in the quarter, ShipMatrix said. The balance of the customer group posted slightly higher traffic than in the fiscal 2018 period.
USPS’ fiscal fourth quarter decline marks the second consecutive quarter of year-on-year quarterly drops after nine straight years of gains. Parcel and shipping revenue rose more than 6%, courtesy of rate increases that have become a double-edged sword.
Declines in parcel traffic are no small matter for USPS. Under its cost-allocation formula, parcel revenue is leveraged to support what is known as the “Universal Service Obligation,” or required pick-ups and deliveries at every address. Less traffic and less revenue could put a strain on operating costs. What’s more, USPS plans to spend around $6 billion to upgrade its fleet to more package-friendly vehicles. The update is long overdue given the creaky nature of the familiar UPS box trucks that are so old that it is difficult to find mechanics to work on them. Yet the investment was made to dovetail with USPS’ increasing focus on parcels. Fewer parcels could make it harder for USPS to recoup its investment.
There are no easy answers. One advanced by Satish Jindel, president of ShipMatrix, is to put a strict weight ceiling on parcels that UPS will accept. Parcel handling and processing is time and labor-intensive, and it will never generate the profit margins of first-class mail whose processing is super-efficient. According to Jindel, USPS makes it harder on itself by accepting packages that weigh up to 70 pounds, which are even costlier and more difficult to handle, and account for a small percentage of its parcel mix.