USPS turnaround part 2 - amazon drama!
alert: sexy business negotiation unfolding
In January I wrote about the USPS turnaround, a yearslong effort that has spanned four presidential administrations. One big challenge was large corporate partners:
Amazon, FedEx, UPS and the likes account for an increasing share of USPS deliveries. Since USPS is mandated to deliver to every address in America, these partners have the benefit of dumping all the most difficult-to-deliver packages to USPS. Small square box going to 5th Avenue in New York? Oh, FedEx will handle that. Poorly wrapped pair of skis going to a swamp house in the Everglades? Eh, USPS can have that one. This is not a bad thing. The whole point of USPS is to make sure Americans have equal access to mail services. The problem is the USPS ability to negotiate with these partners was tightly regulated to their own detriment.
As explained in that post, USPS congressional mandate follows an outdated pricing architecture that effectively prevents USPS from raising pricing on large corporate customers. As a result, USPS is underearning on these contracts, which has contributed to its financial difficulties. From the post:
“Deliver for America” asked Congress to rethink regulation around USPS pricing and promised taxpayer savings of over $50bil by 2030.
That post ended by highlighting how the new USPS chief was taking a more aggressive approach to large corporate partners:
David Steiner became the new Postmaster General last year. Like his predecessor Steiner is a Trump appointee from the private sector; he previously was CEO of Waste Management and on the board of FedEx. He gave a sort of State of the Union speech at November’s USPS Board of Governors meeting saying a new wrinkle from Steiner was emphasis on more partnership with the private sector especially last mile (last mile = the final leg of the delivery journey). Steiner’s point was that the USPS is the de facto last mile logistics firm of the US. Steiner wants USPS to find a way to double-down on this and deliver more packages for corporate logistics firms at fair and mutually beneficial prices. “We are open to working with customers, big and small, by offering expanded last-mile service to serve their customers, fulfill market demand, and maximize our revenue.”
A new WSJ article has shed light on how Steiner’s efforts with large corporates is going. For the first time USPS opened a bidding process for last mile services. Every large commercial shipper has to submit to USPS a proposed number of packages and price per package. USPS will then discover the “market rate” for their services, and use that price discovery to offer competitive contracts to large corporates. In the past contracts were negotiated individually with different commercial shippers. Why introduce a complicated bidding process? Clearly USPS feels certain customers are getting too much of a sweetheart deal (cough, Amazon). An open bidding process gives USPS a stronger leg in negotiations with large corporates because it forces customers to compete with each other, as opposed to USPS facing off with each heavyweight in 1:1 negotiations behind closed doors. In his last congressional testimony Steiner directly asked Congress to raise prices on commercial shippers:
Raising Prices: Raising the price of a First-Class stamp to $1 or more and other increases in commercial mail prices would also help solve our controllable loss.
Congress hasn’t done that yet, so USPS is still hamstrung in its ability to outright raise prices, but this bidding process is a workaround. Clearly, Amazon thinks prices are being raised and they’re not happy. From an Amazon spokesperson (per WSJ):
“We negotiated with [the Postal Service] in good faith for over a year to try and reach a deal that would bring them billions in revenue and believed we were heading toward an agreement, when the USPS abruptly walked away at the 11th hour and introduced the auction concept. While we’ve submitted a bid and hope to continue our partnership, even at a reduced level, we now have to prepare to meet our customers’ delivery needs regardless of the outcome of the auction,” the spokesman said.
In other words, if USPS increases prices too much on Amazon, Amazon will just deliver those packages themselves. Per the article “Amazon has already begun ratcheting down its postal volume and wants to reduce it by at least two-thirds by this fall, when its current contract with the agency expires, according to people familiar with the matter.”
The article mentions that USPS currently delivers 15% of Amazon packages. Clearly Amazon can deliver all those packages themselves. Will they? Maybe. The reason Amazon doesn’t deliver these packages today is because they are mainly rural last mile packages, and it’s cheaper to let USPS do those. If USPS increases prices enough then it’s possible absorbing delivery becomes the cheapest option for Amazon. However Amazon didn’t just walk out of negotiations. They submitted a bid to USPS and are waiting on a final price. By quickly cutting USPS usage and then running to the media to publicly announce those cuts, Amazon is sending a message to USPS. Now the ball is in USPS court. USPS can probably increase prices, but if they increase prices too much Amazon may go through with their threat and pull out all volumes. As discussed in the original article utilization is the backbone of any logistics business. Even if USPS was just eking out profit on each Amazon parcel, gargantuan Amazon volumes helped cover fixed costs. If USPS gets too aggressive in raising prices it could lose Amazon (and/or other large shippers) as a customer, and if that happens they could be facing an existential crisis as soon as this fall, when Amazon’s current contract expires. That puts a lot of pressure on Steiner and the other architects of this new open bidding process.
What drama! If this works expect Matt Damon to play Steiner in a dramatic USPS biopic in the 2030s (Ben Affleck can play Bezos).