Yves here. We’ve highlighted some of Angry Bear’s past coverage on economically trumped-up, politically motivated attacks on the Postal Service, such as How Prefunding Retiree Health Benefits Impacts the Postal Service’s Bottom Line – and How Brookings Got it Wrong. Sadly, it’s necessary to continue to defend the Postal Service.
By run75441. Originally published at Angry Bear
From time to time, Angry Bear has featured Steve Hutkins, (Save The Post Office Blog) and Mark Jamison’s (retired NC Postmaster) commentary on the efforts of various political and commercial interests to close down the United States Postal Service and give it over to the likes of UPS, FedX, and other commercial enterprises. Most recently, President Trump’s inane Twitter comments have again gained undeserving national coverage about Amazon having a hypothetical cost advantage over the USPS by using the USPS to deliver Amazon orders 7 days a week. Steve takes issue with the President Twitter comments and a CitiGroup analysis of the Amazon – USPS relationship. Read on . . .
“Steve Hutkins; Talk about Fake News.How a flawed Citigroup analysis led to Trump’s bogus tweets about Amazon and the Postal Service.” President Trump is continuing his Twitter attack on Amazon over its deal with the Postal Service. Yesterday Trump tweeted,
Only fools, or worse, are saying that our money losing Post Office makes money with Amazon. THEY LOSE A FORTUNE, and this will be changed. Also, our fully tax paying retailers are closing stores all over the country… not a level playing field!
A couple of days ago, his tweetswere more specific:
While we are on the subject, it is reported that the U.S. Post Office will lose $1.50 on average for each package it delivers for Amazon. That amounts to Billions of Dollars…. If the P.O. ‘increased its parcel rates, Amazon’s shipping costs would rise by $2.6 Billion.’ This Post Office scam must stop.
The attacks were in the same vein as his earlier tweets back in December. They are apparently based on an op-ed in the Wall Street Journalby Josh Sandbulte and published last July. Sandbulte claimed each Amazon parcel was getting a $1.46 subsidy;
It’s like a gift card from Uncle Sam.
As Jen Kirby at Vox noted, Sandbulte is a money manager who works for a firm owning FedEx stock, but it may or not be relevant, as anyone invested in mutual funds probably owns some FedEx. In any case, he didn’t invent the subsidy idea. It came from an analysis done by Citigroupin April 2017.
The thesis of the Citigroup report is that taxpayers are essentially paying for the free shipping offered by Amazon. As the Citi analysts write, “In this note, we examine the true profitability of the Post Office and show that by charging below market rates on parcel volume (mainly eCommerce) the Post Office has essentially turned free shipping into a future tax payers’ burden.”
It should be noted, the Citigroup report is intended to give advice to investors in the stock market. It claims, “a day of reckoning” is coming when the Postal Service will have to implement a significant increase in shipping rates, and this will provide a large “revenue opportunity” for the Postal Service’s competitors, FedEx and UPS — something on the order of $15 to $19 billion a year in additional revenue. This, they say, “supports upside for both stocks.”
The Citigroup report is somewhat less bullish on Amazon because it will have to bear the brunt of rate increases by the Postal Service and also FedEx and UPS, who will be in a better position to raise rates themselves. According to the analysts’ “worst case scenario,” Amazon will have to pay $2.6 billion a year in additional shipping costs.
As a closer look at the Citigroup report reveals, the case for a huge Postal Service rate hike on parcels is seriously flawed, and the report provides no evidence for Trump’s tweets that the Post Office is losing a fortune on the Amazon deal.
Before we get to the Citigroup report, it will be helpful to lay out a few basic facts about the types of U.S. mail, the way postal accounting works, and the particular service Amazon is using. If you’re familiar with all this, you can cut to the chase and go to the section (Part 2) on the Citigroup analysis.
A Postal Primer
In 2006, the Postal Accountability and Enhancement Act (PAEA) divided postal products and services into two categories, Market Dominant and Competitive.
Market Dominantproducts and services are those in which the Postal Service “dominates the marketplace” as a result of its two monopolies — the letter monopoly, which gives the Postal Service a monopoly on non-urgent First Class mail, and the mailbox monopoly, which gives the Postal Service exclusive right to put mail in mailboxes. Market Dominant includes First Class, Standard (mostly ad mail), and Periodicals, as well as certain types of international mail. According to the USPS 2017 10-K report, Market Dominant accounts for about 70 percent ($50 billion) of total revenues ($70 billion) and about 95 percent of total volumes (150 billion pieces)
Competitivemail includes shipping services like Priority Mail, parcels, and some other types of international mail. Its name derives from the fact that there are competitors in the private sector for these types of products. Competitive products account for 29 percent ($20 billion) of total USPS revenues and about 5 percent of volumes.
The rates for Market Dominant mail are constrained by “price cap” regulation, which limits rate increases in a class of mail to the Consumer Price Index. The rates on Competitive products are essentially constrained by the marketplace, but the Postal Service is free to set prices as it sees fit, subject to approval by the Postal Regulatory Commission, so long as the products cover their costs, aren’t cross-subsidized by Market Dominant products, and make an appropriate contribution to institutional costs. In other words, the rates can’t be too low.
The phrases “covering their costs” and “contribution to institutional costs” refer to the way the Postal Service analyzes the costs of each product and service. As in every business, for every product there are two types of costs, variable and fixed.
The variablecosts are those associated directly and indirectly with a specific product or service, and they change relative to volume. The Postal Service calls these attributable costs.
The fixedcosts include wages, rent on leased post offices, and all the other overhead expenses that stay the same regardless of how much volume the Postal Service is handling. The Postal Service calls these institutional costs.
For each product and service, the Postal Service figures out the variable costs that can be attributed to that product; whatever revenue is brought in beyond that is considered contributionto the institutional costs.
The cost coveragefor a product or service is determined by dividing the unit’s revenue by the attributable cost. A cost coverage of 100 percent means that the product has covered of all its attributable costs but contributed nothing to institutional costs. Ideally, a product will therefore have a cost coverage greater than 100 percent, so it can contribute something to the Postal Service’s fixed overhead costs.
Finally, there are the Negotiated Service Agreements, i.e., contracts between the Postal Service and individual mailers that provide customized pricing and other arrangements. For business reasons, the details of these deals are withheld from the public, but each NSA must be approved by the PRC before it goes into effect, and then again annually as part of a review to ensure that the deal is still in compliance with the law.
There are several hundred NSAs in effect right now, including 846 Competitive domestic agreements, ranging widely in size and scope. At least one, perhaps several of them, cover the deals between Amazon and the Postal Service.
The PRC’s Annual Compliance Review
The PRC conducts an Annual Compliance Determination Review (ACDR) to ensure sure all the products and services provided by the Postal Service are in compliance with the laws governing postal matters. Generally speaking, the review determines if the costs incurred by each product and service are covered by the revenue generated by that product or service.
The compliance review thus looks at how each type of mail — including each NSA — is doing with respect to cost coverage, i.e., the extent to which it is covering attributable costs and how much it is contributing (or failing to contribute) to institutional costs.
The Commission also examines how much Competitive mail as a whole is contributing to institutional costs to ensure that the Postal Service isn’t using the products which it has a monopoly to unfairly subsidize products for which there’s competition from the private sector.
As it happens, last week the PRC issued the 2017 Annual Compliance Determination Report. The law requires “each Competitive domestic NSA product to cover its attributable cost. The Commission noted “all but four Competitive domestic NSAs covered their attributable costs and complied with this statutory requirement” (p. 84). Three of these NSAs expired or were terminated, and the fourth (a Priority Mail Contract that is almost definitely not the Amazon NSA) is being monitored pending reevaluation.
The PRC’s compliance report means that the PRC has reviewed the Amazon contract or contracts and determined that they are indeed covering their attributable costs. They are not losing money for the Postal Service.
The Amazon NSAs and Parcel Select
While we know very little about the details of Amazon’s contract or contracts with the Postal Service, we do know that most of the parcels delivered by the Postal Service for Amazon fall under the category called Parcel Select.
Back in 2013, when the Postal Service announced that it was doing Sunday delivery for Amazon Prime, we were able to locate the NSA in PRC docket CP2014-1and confirm that it was a Parcel Select product. You can see the agreement here, but it’s almost entirely redacted.
According to the USPS description, “Parcel Select ser¬vice provides very competitive pricing. It is often used by other private parcel companies to complete delivery of the ‘last mile’ for their shipments — particularly for deliveries in non-metropolitan or rural areas because the Postal Service is the only carrier that offers delivery to every door 6 days a week.”
The biggest users of Parcel Select are Amazon, FedEx, and UPS. They’ve determined that using the Postal Service for the “last mile” (from the post office to the home or business) is much more cost-effective than trying to deliver to millions of addresses themselves.
In fiscal year 2016, according to an article in DC Velocity, about 2.5 billion packages moved under Parcel Select. Amazon was responsible for about 1 billion packages; FedEx (through its “SmartPost” product) used USPS for 600 million pieces, and UPS (through “SurePost”) had USPS deliver about 275 million pieces of Parcel Select. The balance came from several parcel consolidators that aggregate packages from multiple smaller shippers.
Parcel Select generally takes two to nine days, but the big mailers, consolidators, and private shippers prepare and presort the parcels and deliver them to the Destination Delivery Unit (DDU) — usually your local post office — or a regional processing facility, thus saving a lot of time and expense.
If the shippers get the parcels to the DDU by a certain time — Early Bird DDU — the Postal Service can often provide same-day delivery. Regular DDU — dropping off the parcels after the carriers have left the facility — usually means next working day delivery.
The Postal Service’s ability to deliver packages in two days or less has been an important factor in growing its parcel business, and it points to the synergy between the Postal Service and its larger customers who help shuffle packages to the right place in the network, labeled and sorted in the right way.
Because the users of Parcel Select do some of the work themselves, they’re entitled to “workshare” discounts based on the costs the Postal Service is avoiding. These discounts are arranged through the nonpublic NSAs, so we don’t know how much Amazon is paying, but the public pricing for Parcel Select is shown here. As you can see, the prices start at $2.85 for a parcel weighing a pound or less, dropped off at a DDU. Prices go up from there, depending on the weight and how close to the destination it’s dropped off.
Due to its volume discount, Amazon is paying much less than that, however. According to a Bloomberg article, David Vernon, an analyst at Bernstein Research who tracks the shipping industry, estimates that Amazon is probably paying, on average, about $2 per parcel. That estimate can also be derived from this USPS financial report. It shows that in 2017 Parcel Select brought in $5.66 billion on 2.8 billion pieces, an average of $2 per piece. Amazon’s deal is probably comparable to the agreement the Postal Service has with UPS and FedEx to deliver the last mile for them.
As the chart for Parcel Select prices shows, there’s a big range in pricing, and the pricing on Amazon packages probably varies significantly, depending on geography, time of year (holidays), and who’s doing the delivery (e.g., union workers or lesser-paid non-union workers like City Carrier Assistants).
If Amazon is now sending about a billion parcels through the Postal Service, and if the average is about $2 per piece, the relationship is bringing the Postal Service about $2 billion a year. That strictly a ballpark guess — the Citigroup report puts the estimate at $3 billion a year — but it shows that Amazon has become a big part of the Postal Service’s business.
By the way, to put the numbers in context, Amazon reportedly shipped about 5 billion parcels via Prime worldwidein 2017, and it spends about $20 billion a yearon shipping.
Talk about Fake News: How a flawed Citigroup analysis led to Trump’s bogus tweets about Amazon and the Postal Service, Save The Post Offic blog, Steve Hutkins, April 7, 2018
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Thank you for highlighting this–I was wondering about the details on the Amazon-USPS relationship in light of President Trump’s tweets and also because (and I wish I were kidding) I saw a USPS mail truck delivering in my neighborhood on Easter Sunday, which presumably was Amazon deliveries as I don’t think anyone else receives Sunday delivery service.
Business Insider says Citigroup’s math is all wrong.
http://www.businessinsider.com/trump-amazon-twitter-attacks-usps-post-office-citi-note-2018-4
It’s so easy to do the right thing in this case. Buy stamps and use the mail, plus inform yourself and your friends.
One doesn’t have to build new institutions, reform old ones or fight pitched battles. Just buy a roll of Forever stamps and send letters. If we could just get teenagers make a game out of sending secret hand written notes, pressed flowers and little trinkets to each other through the mail, instead of handing their privacy to Farcebook, the institution would be much healthier.
Here’s a primer on who is profiting from dismantling this fine old institution started by Ben Franklin:
“…CBRE, the world’s largest commercial real estate firm. In June 2013, Postal Service Inspector General David C. Williams published a scathing audit of CBRE’s exclusive contract to manage all the sales and leasing of postal real estate. Williams noted that outsourcing these activities to a single firm is “a fundamental change from how the Postal Service previously managed its real estate portfolio [and] Facilities officials should improve oversight to mitigate inherent risks associated with the CBRE contract …. Specifically, there are conflict of interest concerns.”
Williams warned of the potential for contract fraud, but he stopped short of referring the matter to a prosecutor, and advised the postal executives in charge of the CBRE contract to clean up their act.
Over the past year, my investigation has explored the kinds of conflicts of interest that concerned Williams by diving deep into the public record. CBRE’s contract, its postal facility sales data, as well as expense reports for Postal Service executives were obtained under the Freedom of Information Act (FOIA). The deeds of sale and assessment data for most of the postal properties sold by CBRE were found at the county level.”
from “Going Postal” by Peter Byrne
https://www.nakedcapitalism.com/2013/09/senator-diane-feinsteins-husband-selling-post-offices-to-cronies-on-the-cheap.html
I read some while ago that although USPS is unionized, the non-standard deliveries (eg Sunday) use additional non-union workers. Implications for that…
I worked for the Post Office for several years as a Rural. Not all the old line Post Office workers were unionized. I can attest to that as far back as the early nineties. There were ‘T’ class employees. Short term lower wage employees. No real benefits offered. Then the Rural Carrier Associates. Essentially a form of serfdom. At will scheduling with no benefits. Then various and sundry ‘fill in’ workers with lower wages and benefits than regular workers. Basically, one had to become a ‘regular’ full time employee, such as get a route to run, to move on up to the unionized ranks.
Remember, this all started way back when Nixon, remember him?, split the parcel deliveries off from the regular Post Office. An early ‘privatization’ effort. s/ That worked out well for the average worker. /s
Excellent point! Here’s an article from someone who says they are an actual Sunday delivery person –
https://www.alternet.org/labor/horrific-new-marriage-between-your-post-office-and-amazon-sunday
That’s sound like a pretty hefty subsidy to Amazon to me.
And then there’s also the fact that we are creating a society where nobody gets a day off.
Arbeit macht frei!
“That’s sound [sic] like a pretty hefty subsidy to Amazon to me.”
Indeed … in my area USPS makes heavy use of private services like OnTrac which employ non-union members of the precariat to help with parcel delivery, and not just on Sundays.
So this article makes a bold “fake news!” claim, then admits that “we don’t know all the details” of Amazon’s deal, and in the final sections lays out what sounds like a pretty hefty subsidy, and one in no small part supported by private wage-underclass employees. I might expect to see such stuff on Mish’s blog, but on NC?
The variablecosts are those associated directly and indirectly with a specific product or service, and they change relative to volume. The Postal Service calls these attributable costs.
The fixedcosts include wages, rent on leased post offices, and all the other overhead expenses that stay the same regardless of how much volume the Postal Service is handling. The Postal Service calls these institutional costs.
Hmmm. What costs do Amazon, FedEx or UPS pay?
. . . The law requires “each Competitive domestic NSA product to cover its attributable cost . . .
Institutional costs are for the peasants.
According to Figure 6 on page 20 of this USPS document, 55% of Postal Costs are Attributable and 45% are Institutional. I think competitive product customers are required to pay at least 5.5% of Institutional Costs. On average this could mean the minimum price the USPS can charge for package deliveries is approximately 57.475% of their costs ( 55% Attributable delivery cost + 5.5% of ( the 45% ) Institutional cost ). I’m guessing this is what Amazon, UPS, and FedEx pay. Probably no other merchandise retailer gets this deal.
As someone who works in the postal industry, and a fan of USPS despite its flaws (glass houses and all), I think this analysis is a little glib. The allocation of fixed and variable costs is a nightmare that has no good solution, and endless pitfalls.
My understanding is that USPS is relying on an allocation model for various reasons that has not been updated in a long time (I believe I read 2005 somewhere). The variation in product mix, not only between mail and parcels but even the flux in size and weight of parcels over the last decade has been extreme, which renders these sorts of allocation models very inaccurate for anything but the period they’re based on. Personal experience is that generally you can get a reasonable idea of what you spent on specific activities last year, and a good understanding a year before that.
We don’t have a time machine so trying to extrapolate from past performance to a general model for a range of scenarios of product mix in future periods is basically buggered due to lack of counterfactual data. You do what you can, and you update your assumptions often. It’s not always bullshit when corporate schmucks talk about the need for agility in today’s market.
The overly-simplified version is – mail used to cover a lot of fixed costs, so parcels could piggy back with a low marginal cost. As mail drops out of the network, parcels cost allocations increase rapidly.
You’re seeing ten letters replaced with one parcel, and even though the parcel might have the revenue of five letters which means your average revenue per unit is going up, the total gain is not covering the lost revenue in the mail network, and as a result of this stacking up over the years you’ve either recently dropped below your fixed cost line for network maintenance from mail or you’re going to in the next couple of years (varies by country).
The legislated need to only cover a certain amount of fixed costs in competitive products that is mentioned by Jim Tan is another skew that will be adding to the potential subsidy Amazon, UPS, Fedex, and other users of these cut price services are getting. That sort of guidance almost always gets turned into a rule for minimum pricing.
So, in summary, I’d buy that the citigroup analysis was biased and not a complete picture, but I won’t buy that Amazon is a great profit centre for USPS based on what we know at this point. Subsidy at reasonable scale seems likely.
Of course, that’s not to say that hiking Amazon’s price from USPS to where its not competitive is the right answer either.
If they go to FedEx or UPS, about a third of it will come back at the same price anyway for last mile delivery, and the other bill and a half is an even bigger bloody hole in the balance sheet that needs to cover the universal network.
Worst case, if the price is hiked too much, Amazon is encouraged to use its various financial chicanery to subsidise its own delivery network and drive the bottom out of the whole market and burn it down.
Seriously we’ve gamed this out with the arrival of Amazon-like operators in our patch, and it basically boils down to what one of my more colourful colleagues would sum up as “bend over and lube up because it’ll hurt less”.
maybe by subsidising it’s own delivery (otherwise known as paying their own way) then amazon would make a less glorious profit for the dear leader, maybe have to raise prices to reflect their actual unsubsidised business cost (gasp!), prove to be less than they claim, and no different from the sears catalog
Yes, in a just world this sort of anti-social market malpractice would be less productive.
But disruption! Innovation!
Meanwhile we try to keep universal service available despite the cherry picking and monopolistic behaviour, because you know, I’m pretty sure universal and affordable availability of crappy slow teleportation is still a social good. Not forever maybe, tech will get there eventually, but for now.
https://www.foxbusiness.com/markets/usps-financial-woes-swell-with-2-1b-net-loss-last-quarter
USPS owed 63 billion thru 2017.
USPS has not funded their pension plan for six years.
They borrow more money each year than the year before.
I think they are subsidizing Amazon.
you’ve got the cart before the horse
https://www.linns.com/news/postal-updates/2017/april/congress-raid-usps-coffers-30-years.html
What about ePackets from so many Chinese merchants on Amazon and Ebay?
https://www.forbes.com/sites/wadeshepard/2017/11/05/how-the-usps-epacket-gives-postal-subsidies-to-chinese-e-commerce-merchants-to-ship-to-the-usa-cheap/2/#3047396f53f5
Does that opinion piece describe the situation accurately?
This article presents no data to back up its claim. I question why Yves takes the article seriously.
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Fact: USPS subsidizes rural delivery.
Fact: almost all rural Amazon packages use USPS for last mile delivery.
Conclusion: USPS loses money on rural last mile delivery for Amazon.
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Now, you can make the argument that there is zero INCREMENTAL cost for having the rural driver deliver the Amazon packages because USPS has committed to sending a driver on that rural route regardless. When there is zero incremental cost, then it looks like last mile delivery is profitable no matter how little it charges.
.
But it is also fair to consider TOTAL cost and OPPORTUNITY cost. When you look at TOTAL cost, then USPS loses money on rural Amazon packages. When you look at OPPORTUNITY cost, then USPS is losing the opportunity to charge Amazon (and UPS and FedEx) more. That is a subsidy to Amazon, as well as a subsidy to rural residents. UPS and FedEx cherry pick the profitable routes while leaving USPS holding the bag for unprofitable routes.
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It does not make a lot of sense to try to apply business accounting practices to a subsidized government service, so there is never going to be an undisputed answer to the Amazon subsidy question.
Fact: almost all rural Amazon packages use USPS for last mile delivery.
I live in rural SE Arizona at least 20 miles from nearest PO.. I buy a lot of merchandise on Amazon and eBay; as many as 5 or 6 weekly. 95% of my amazon orders are delivered UPS, including very small items. Maybe 75% of my eBay orders are delivered UPS/FedEx. I rarely see last mile USPS deliveries (except for China sources). IMO, Amazon Prime is a windfall for me and I am sure that someday the cost of this service will have to go up.
My problem with the Amazon – U.S. Postal Service arrangement is that I live in an apartment. IF the package from Amazon will not fit (with the day’s mail) into the standard postal box assigned to us, which is outdoors near the apartment office and outside in the weather, the carrier does NOT even attempt to deliver the package to my door, which is a ground floor apartment. He leaves the box at the apartment complex’s OFFICE for me to have to pick it up there, put it in my car, and drive it to my building, and then haul it to my apartment from the parking lot. I have to pick the package up from the apartment complex’s office during their regular office hours, which is Monday through Friday 8:30 a.m. to 5:30 p.m. So when I work full-time that might be impossible. And the office is NOT open on weekends at all. So even though I was at home on the day of delivery, my plan to get some of my groceries from Amazon Prime delivered to my door has backfired. This has happened both times I tried to order goods from Amazon and they used USPS. And this is NOT an apartment complex policy, either.