by Zak Stambor
Higher rates could produce wide-ranging implications, hurting many online retailers’ bottom lines.
189 Top 1000 retailers ship at least some of their online orders via the U.S. Postal Service, according to Internet Retailer’s Top500Guide.com. However, that number could soon decline if the agency follows through on the Task Force on the United States Postal System’s recommendations to raise prices on e-commerce packages.
The Task Force’s 74-page report, released earlier this week, argues that significant price increases are necessary for the agency’s long-term sustainability because the Postal Service’s e-commerce package volumes cannot offset mail revenue declines. “The USPS’s business model … was sustainable in an era where mail revenues and volumes grew alongside population and economic growth. However, as the USPS’s financial condition continues to deteriorate, standalone proposals … will be insufficient. The USPS’s ability to achieve and maintain sustainability over the long-term is dependent upon formative reforms to its business model that will enable it to flexibly and swiftly adapt to the social, technological, and operational changes in the mail and package markets.”
As a result, the report argues that the Postal Service needs to move away from a business model that caps price increases based on consumer price
index for all urban customers (CPI-U), which aims to constrain predatory pricing. In its place, the Postal Service would adopt a business model that enables it to generate a strong return on investment to optimize its long-term revenue. “Purely commercial use of package delivery services should be priced with the intent of optimizing revenue,” the report says.
The report argues that the Postal Service is “distorting overall pricing in the package delivery market.” In effect, it suggests that low prices are artificially deflating the package delivery market and that it needs to raise rates. While it does not map out specific rate increases, its suggestions will translate to higher prices for online retailers, which is in line with President Trump’s reported calls to increase prices on Amazon, No. 1 in the Internet Retailer 2018 Top 500.
The approach is misguided, says Art Sackler, manager of the Coalition for a 21st Century Postal Service, an organization that’s made up of public and private companies, trade associations and other industry groups that rely on the Postal Service. “Many of the report’s recommendations will functionally privatize mail and package delivery by impairing the USPS’ ability to deliver everywhere and every day at an affordable price,” he says. “Driving up prices will accelerate the departure of mail from an already declining base, and, at the very least, damage the USPS’ package business, which has been its lone and very profitable bright spot in recent years. If the Task Force’s price strategies become reality, they will decrease the Postal Service’s revenue and compromise its capacity to serve all of its delivery points.”
Retailers may turn to other carriers
In fact, if the report’s recommendations lead the Postal Service’s prices to be more expensive than FedEx Corp. or UPS Corp., a number of retailers, such as Tipsy Elves, No. 897, will quickly shift to its competitors.
“We use an algorithm to calculate expected costs by shipping destination and weight,” says Nicklaus Morton, co-founder of holiday-themed apparel retailer Tipsy Elves which currently uses the Postal Service for up 40% of its orders. “If USPS rates go up too much it will simply price itself out of our shipping mix.”
Christmas products retailer Christmas Central, No. 998, takes a similar approach. While it uses the Postal Service to ship about 30% of its orders that are less than one pound and up to 10% of its other packages, it doesn’t have any allegiance to it or any other carrier.
“We have used a mix of carriers for many years,” says Nathan Gordon, the retailer’s chief information officer. “When our packages hit the shipping lines, our system will look at how the customer ordered it, how far away they are, how fast the carrier can deliver it and the package’s size and weight.” Then, based on rules it created within its shipping software, it ships the package in the cheapest, quickest way possible. The approach aims to insulate Christmas Central from shipping cost increases, he says.
Challenges could emerge for some merchants
Of course, if the Postal Service raises prices, it could lead FedEx and UPS to increase their prices as well. And that could hurt the bottom line for many smaller retailers. For example, online deal site Unbeatable Sale Inc., No. 298, which ships up to a quarter of its packages via the Postal Service, says it will try to absorb the cost of the higher rates. But doing so, isn’t easy.
“Customers expect free shipping,” says Eli Fisher, Unbeatable Sale’s director of marketing. “But it will be harder to offer that option as shipping costs go up.”
Martin McClanan, president and CEO of Gift Tree, No. 970, agrees that the Postal Service could make life increasingly difficult for online retailers. “We will work with the carrier who provides the best value for the delivery service offered and do our best to avoid having it hurt our customers,” he says. “However, at some point these costs will need to be passed along to the customer.”
Beyond shipping costs, the Postal Service may also impact catalogers and merchants that rely on direct mail. “These communication tools are meaningful to many internet retailers and deserve focus as well,” he says.
Retailers also can’t view a price increase in isolation, says Chad Carleton, who manages operations at kitchenware retailer Everything Kitchens, No. 891. For instance, the trade war with China is driving up the retailer’s wholesale costs.
And, at the same time, Amazon is gaining market share in nearly every category, including kitchenware. “This is another chance for Amazon to absorb the increase while disadvantaging retailers that operate at a fraction of Amazon’s scale.”
by Zak Stambor