September 13, 2013
transportation report | Parcel Express

Mailing in the future

Mailing in the future

The Postal Service's revamp of Priority Mail signals a serious push to dominate e-commerce deliveries and to chart its course for the decades to come.

By Mark B. Solomon

If the U.S. Postal Service (USPS) finds itself not ready for e-commerce prime time, it won't be for lack of effort or imagination.

After many months of planning, USPS in early August took the wraps off the most ambitious remake of its "Priority Mail" delivery service in more than three decades. The initiative is the Postal Service's boldest step yet to frame its future as the primary shipping conduit of online commerce instead of as the share-draining monopoly carrier of the nation's first-class mail.

For the first time, Priority Mail users are able to select a day-definite delivery, whether it be one, two, or three days out. USPS will offer free shipment tracking and free packaging, as well as free insurance coverage of either $50 to $100 a shipment, depending on how the order is placed. Shipping rates, at least for now, will remain the same. USPS's long-time overnight-delivery service, "Express Mail," has been rebranded "Priority Mail Express," ostensibly to get the public and the shipping community accustomed to the name.

By bundling transport, tracking, insurance, and packaging into one rate, USPS is trying to position itself as the value proposition of choice for the growing number of e-merchants that lack the volume clout of a goliath like Amazon.com. It signals USPS's clear intention to skim off short-haul, lightweight traffic—an e-commerce shipment's DNA—from rivals FedEx Corp. and UPS Inc. It also underscores how serious the Postal Service is about increasing its presence in, if not eventually dominating, the e-commerce delivery space. E-commerce shipping in the U.S. business-to-consumer segment grew 32 percent in 2012 over 2011 levels, according to The Colography Group Inc., an Atlanta-based consultancy. The growth rate for 2013 is shaping up to be similar to that of 2012, Colography said.

USPS will no doubt promote the cost benefits that come with not having any fuel surcharges or the array of add-on delivery fees—such as extended delivery surcharges and address-correction charges, to name just two—that often bedevil companies shipping with FedEx and UPS. USPS will continue to offer Saturday deliveries as part of the basic Priority Mail service, something its rivals do not.

TAILORED TO E-COMMERCE
The service will be sold into business-to-business (B2B) channels as well as the core business-to-consumer (B2C) segment, according to Postmaster General Patrick R. Donahoe. Satish Jindel, founder and head of SJ Consulting, a Pittsburgh-based consultancy, said it would appeal to small to mid-sized B2B customers, though bigger B2B players with large-scale volumes are unlikely to be interested.

Analysts say USPS has shrewdly positioned the revamped delivery network to align with the supply chain characteristics of e-commerce. Next-day service will be available within a radius of, say, 100 miles, a distance that may become the norm for e-shipments as consumers and businesses demand deliveries sometimes within hours, and merchants increase their distribution density in response. Shipments moving 150 miles or farther will probably be delivered in two days. The typical e-commerce shipment weighs between one and five pounds, with four pounds being the average, analysts say. USPS traditionally excels at moving lighter-weight shipments over shorter hauls, they contend.

What's more, USPS stands to benefit by not imposing a so-called minimum charge for its shipments. By contrast, FedEx and UPS assess "minimums" on all parcels. The minimum charges apply even on large national accounts that receive sizable discounts based on volumes tendered. In addition, most of the discounts are skewed toward heavier shipments moving over relatively longer distances, not the lightweight stuff moving in shorter hauls, analysts say. Exploiting its rivals' pricing behavior could work to USPS's advantage, they contend.

Yet selling customers on USPS's pricing advantages may not be as easy as it sounds. Mark S. Schoeman, Colography's president, said many FedEx and UPS shippers either don't understand how their discounts are being applied, or, if they are aware, can't sift through their complicated shipping mix effectively enough to get a handle on it. "Shippers have yet to realize the extent to which the minimums are clipping their discounts," he says.

SAVINGS IN THE NUMBERS
Analysts say Priority Mail could save shippers some serious money. Jerry Hempstead, head of Orlando, Fla.-based consultancy Hempstead Consulting, crunched numbers to compare the per-package cost for a Priority Mail "Commercial Plus" customer—which ships at least 100,000 pieces per year—with the cost of UPS's ground-delivery service to a residence. He found that USPS's rates were 20.8 percent lower for a one-pound shipment, 18.54 percent lower for a two-pound shipment, 16.78 percent for a three-pound shipment, and 7.34 percent for a four-pound shipment. Hempstead's calculations assume that UPS maintains its minimum charges and discounts its rates, fuel surcharges, and residential delivery charges each by 50 percent.

"These are big savings and at least worth a look for a shipper," especially those looking to compete against a company like Amazon, Hempstead says. Hempstead, normally not given to hyperbole and hardly a USPS advocate, says the new strategy is "brilliant."

FedEx's and UPS's competitive options are limited, according to Jindel of SJ Consulting. One counter-strategy would be to trumpet their stellar 97 to 98 percent on-time performances and promote the money-back guarantees that accompany their service offerings, he says. However, the companies may not want to highlight the feature because it raises the specter of shipment losses and because "no one pays much attention anyway" to the money-back guarantees, although the language is embedded in the shipper-carrier contracts.

As solid as the strategy appears to play, the devil, as always, is in the implementation details. USPS will need to sync its pickups to accommodate the production schedules of businesses functioning in an increasingly demanding world. Schoeman says that although USPS has the tools and flexibility to make it work, it is not there yet. It remains to be seen if USPS "can execute on a consistent pattern of pickups," he says.

PERCEPTION PROBLEMS
This is the latest service change in Priority Mail since it was launched in 1968. For years, it was marketed as a two-day delivery service. However, in the 1990s, USPS began promoting it as a two- to three-day delivery service after studies showed that an uncomfortably large number of shipments were not delivered in two days.

That move may have created more problems than it solved. By publicly hedging its bets on delivery windows, USPS left the impression that it lacked visibility into its shipping pipeline. "By setting a two- to three-day delivery range, USPS conveyed to people that it didn't really know" about the status of its packages, says Schoeman. That has created uncertainty among users of all stripes. It's a perception that must be addressed and eliminated if USPS is to capture the shipping dollars of e-merchants and customers that need to know precisely when their packages will arrive, analysts say.

Ironically, the analysts who follow the agency said it always had enough data to know when goods would be delivered. "They have great visibility," says Jindel of SJ Consulting. "They just have to share it with the marketplace."

ADDING TO THE TOP LINE
USPS executives estimate the revamped service will add $500 million a year in revenue to an organization that generates about $63 billion annually. It is also likely to accelerate the momentum in USPS's "shipping and packages" segment, of which Priority Mail is a part. In a report filed with the Postal Regulatory Commission on its fiscal third quarter (which ended June 30), USPS said revenue for "shipping and packages" increased 8.8 percent to nearly $3 billion. That accounts for slightly less than 20 percent of all revenue for the quarter. Volumes for the segment grew 7.1 percent from the same period a year ago, USPS said.

However, USPS knows that the gains in shipping services cannot offset the declines in first-class mail revenue and volume caused by the growth of digital mailing options. In its fiscal third-quarter filing, it said that revenues from the shipping and package segment "would have to grow at a substantially higher rate in order to replace the contribution of first-class mail," which is its most profitable segment.

Virtually no one sees that occurring any time soon, if ever.

About the Author

Mark B. Solomon
Executive Editor - News
Mark Solomon joined DC VELOCITY as senior editor in August 2008, and was promoted to his current position on January 1, 2015. He has spent more than 30 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. He graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.

More articles by Mark B. Solomon

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