August 13, 2019
The main bright spot in U.S. Postal Service operations has been the last-mile delivery of packages called Parcel Select. The USPS has had a major competitive advantage in the last mile as its letter carriers already were going to every address six days a week. (An exception has been the addition of Sunday delivery of Amazon packages.) But postal management started warning in early 2017 that its main customers for Parcel Select, FedEx, UPS, and Amazon, were working on taking back a lot of that volume at a lower cost. Now that prediction has become reality.
In the USPS fiscal third quarter ending June 30, it experienced its first volume drop in Competitive Mail, largely packages, for the first time in nine years. This volume dropped by 3.1 percent or 42.7 million pieces. The leading cause was a 7.5 percent decline in Parcel Select volume from 706 million pieces last year to 653 million this third quarter, down 53 million.
FreightWaves describes how this trend will continue:
“The fiscal third-quarter declines could be the tip of the iceberg. FedEx, UPS and Amazon are picking up the pace of their infrastructure expansion, and they are going after the last-mile traffic they have traditionally outsourced to USPS. In June, FedEx said it would in-source its two million daily parcels it tenders to USPS by 2020; FedEx has already diverted 20 percent of the traffic that it formally outsourced. UPS, which has brought 35 percent of its former USPS business in-house, hasn’t announced any further plans. It would seem likely, though, that more of the outsourced business will be redirected to UPS within the next one to two years.
To support their moves, FedEx and UPS will launch seven day a week ground deliveries at the start of 2020. In addition, they have made enormous investments in hub operations and have expanded their networks of third-party locations, such as retail outlets, where their own drivers can pick up and deliver parcels.”
What does this mean for nonprofit mailers? It accelerates the need for a true reckoning of the future of our national postal system. The USPS enjoyed the freedoms of the competitive package business for the last decade by using its network advantages and the ability to price without a cap. But now it is experiencing the other side of the competitive coin. Private sector competitors are now able to do the work at lower cost. The FreightWaves account quotes parcel consultant Jerry Hempstead: “There is no replacing what’s gone and what’s going,” he said. “Congress needs to let USPS right-size the business.”
We agree that the solution needs to be right-sizing rather than the price gouging some have urged for the monopoly side of the postal agency’s operations. Raising prices faster than inflation will only make the problem much worse. In fact, recent USPS data indicate that price reductions are what a successful business would implement.
The same third quarter saw a 2.7 percent drop in First-Class Mail volume, led by huge decline of 5.1 percent in Single-Piece Letters that were subject to an ill-advised 10 percent rate increase this year. (Its revenue was down 0.2 percent.) Marketing Mail volume sunk 4.7 percent, or 878 million pieces, in the third quarter, with Letters down 301 million and Carrier Route off 281 million. Drop-shipped Marketing Mail Letters have experienced above-inflation rate increases for the last three years, with more promised.
It seems clear that both competitive packages and monopoly mail have reached tipping points driven largely by more cost-effective, lower-priced alternatives available in the marketplace. Yet both sides still have massive volume and many loyal customers who continue to see value from USPS services. Piecemeal attempts to juice up Postal Service volume with surcharges and above-inflation rate increases would be the opposite of the right-sizing, productivity growth, and value-addition that the marketplace so clearly calls for. As your competitors are.