April 23, 2015

USPS testing e-fulfillment services for small, mid-size e-commerce businesses

Chicago-based warehouse proving ground for initiative; OIG sees major opportunities for agency in domestic, international e-fulfillment; new services would take USPS beyond its historical mandate.

By Mark B. Solomon

The U.S. Postal Service is testing a program to provide fulfillment services to small to mid-size e-commerce businesses, a move that could expand USPS' offerings beyond the handling and delivery of mail and allow it to join the ranks of global posts that have long since expanded into nontraditional segments.

USPS has repurposed space in a facility outside of Chicago where it is "conducting an operational test to determine the feasibility of providing prestaged warehousing delivery services for third-party companies," according to Sarah A. Ninivaggi, a USPS spokeswoman. In a statement to DC Velocity, Ninivaggi said the initiative allows USPS to "explore a new way of providing value and convenience for consumers by taking advantage of our existing processing and delivery network" and to "respond to the changing needs of consumers while enhancing the overall delivery experience." The pilot program began several months ago, she said.

Details of the program are unknown. However, USPS may be following a template laid out by the quasigovernmental agency's Office of Inspector General (OIG), which, among other duties, serves as a de facto marketing advisor. In two reports, one in February 2014 and the other this January, the OIG suggested several ways the USPS could expand its value proposition and capture more of the business-to-consumer traffic being driven by e-commerce's phenomenal growth.

The OIG proposed that USPS consider pursuing the market for "continuity shipping," where online orders automatically get replenished and shipped as parcels to the same customers on a repeat basis. Products such as mail-order pharmaceuticals, cosmetics, pet supplies, and beer and wine would be ideal candidates for this form of shipping, and USPS, as a parcel carrier, would be well positioned to advise e-merchants on fulfillment and delivery solutions, the OIG said. It pegged the continuity shipping market at about $7.6 billion in calendar year 2014, or 2.5 percent of total U.S. online sales. The market could grow 30 to 40 percent annually over the next 5 to 10 years as repeat online customers transition to new subscription services, the OIG said.

"Continuity shipping is an established and growing segment of the retail industry, and an integral part of the e-commerce fulfillment world," the OIG said.

The Postal Service could start by offering "competitively-priced, basic fulfillment services, while developing expertise in other e-commerce supply chain areas such as logistics, warehousing, inventory management, product shipping, and traceability," according to the OIG. USPS' 248 million square feet of excess facility space, which has ballooned as the agency reduced a large portion of its physical footprint in a bid to reduce costs, could be converted into warehousing and fulfillment space, the OIG said.

Based on low-end demand assumptions, USPS could generate about $164 million in revenue from the service in about two years, and post a net profit of about $5.7 million by that time, according to OIG estimates.

Another segment that USPS should more fully explore is international mail forwarding (IMF), which allows foreign customers to remotely manage their U.S. mail. IMF companies assign foreign customers a U.S. mailing address and offer various services for mail shipped to that location. When a customer's mail arrives at the assigned U.S. address, the IMF company captures a digital image of the pieces and loads it into the customer's account. The vendor sends an electronic message notifying the customer of incoming mail. The customer can then direct the vendor to discard the mail, hold it, open it and digitally scan its contents, or consolidate it with other mail to be shipped to the customer's international location.

Currently a $1-billion-a-year market, IMF's demand is expected to grow exponentially as e-tailers such as Amazon.com and eBay increase their international presence and foreign buyers become increasingly interested in U.S. goods and services, the OIG said. Based on U.S. online purchase sites, there are more than 2 million potential IMF customers, OIG estimated.

Overall, the international shipping industry is growing about 8 percent annually, from $2 billion in 1990 to $12 billion in 2013, according to OIG estimates. USPS has been losing ground in international shipping, a situation that broader exposure into the IMF segment could help reverse, OIG said.

BRANCHING OUT

The OIG proposals underscore the growing need for the USPS to explore ways to leverage its formidable resources beyond the handling, processing, and movement of mail. Over the years, Congress has freed up USPS to compete for private-sector business. However, the law confines the scope of its operations to what are known as "postal products," Meanwhile, many foreign postal systems have been partially or wholly deregulated and have jumped full-bore into businesses beyond their original mandates.

The most visible is Deutsche Post AG, the centuries-old German postal system that was privatized in phases during the 1980s and 1990s and has since made dozens of acquisitions, including the express carrier DHL and multinational freight forwarders Danzas and Air Express International, to diversify its revenue stream. In its 2014 fiscal year, mail accounted for less than 30 percent of the company's total revenue.

Although traditional mail remains an important line of business for postal organizations, the rapid growth of digital communication alternatives means that, for many posts, it is no longer the largest revenue source. Between 2011 and 2012, nonmail revenue outweighed mail revenue for postal organizations around the world, according to the OIG.

In response, posts are transforming into hybrid organizations that now offer broad product portfolios. For example, Norway Post offers simplified customs clearance for parcel deliveries, while Finland Post offers cold-storage logistics for groceries, the report said. Through recent acquisitions, Singapore Post Ltd. provides ocean freight, warehousing, and fulfillment services in six countries, the OIG said. Australia Post provides a payment solution called PostPay, which builds on the post's brand to offer a confirmed delivery and payment solution, according to the OIG.

USPS faces the same profound market shifts as its global counterparts. First-class mail, the agency's most profitable service line, has seen multiyear declines in revenue and volume, a trend that USPS officials acknowledge is unlikely to be reversed. In its 2014 fiscal year, which ended September 30, first-class mail volume declined by 2.2 billion pieces year over year. By contrast, package and shipping services volume grew by 8.1 percent year over year. However, package services account for a fraction of USPS' total sales of nearly $68 billion.

It would take legislation to alter USPS' mandate in such dramatic fashion. Steve DeHaan, president and CEO of the International Warehouse Logistics Association (IWLA), which represents the public warehousing industry, said that lawmakers he and his staff have conferred with about the USPS project were either unaware of it, surprised by it, or a combination of the two.

"We are actively watching this," DeHaan said in a recent phone interview. He acknowledged that IWLA members have to balance their concern over an enormous competitor potentially entering their midst with the awareness that many are USPS customers.

DeHaan questioned the legality of the program given that it was undertaken without legislative action. Ninivaggi, the USPS spokeswoman, said the program does not currently require legal approval because it is just an operational test.

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.

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