By early June, the U.S. Postal Service (USPS) will have moved one of its core parcel products from regulatory protected status and opened it to the unpredictable winds of the free market. Only time will tell if the decision ends up being the right one for the financially struggling organization.
On April 6, the Postal Regulatory Commission, the body that approves changes to postal rates and services, blessed USPS's decision to shift its first-class mail parcel product from "market dominant" status to what's known as a "competitive product" classification. The change, which affects bulk shipments of parcels and not single pieces tendered at postal counters, is expected to take effect after a required three-week public notification process, according to David Lewin, a USPS spokesman.
The commission's action ends the USPS's historic monopoly on parcels weighing 13 ounces or less, a category that accounted for 44 percent of the post office's total parcel business in its 2010 fiscal year, which ended last Sept. 30. USPS officials say the change frees it to modify rates beyond annual adjustments pegged to the Consumer Price Index. It also enables the agency to offer bulk-shipping discounts to large users, though there are no immediate plans to change the product's pricing schemes, according to Lewin.
"This product serves a highly competitive marketplace, with many participants offering similar products," Gary Reblin, USPS's vice president, domestic products, said in a late February press release announcing the move. "By moving to a competitive product classification, we have greater flexibility to make this offering more attractive to commercial shippers."
However, the change would also give private carriers like FedEx Corp. and UPS Inc. an opportunity to compete for business previously not available to them.
Like other first-class mail, the USPS first-class parcel business is protected by the Private Express Statutes, a law passed in 1792 barring private companies from setting competitive rates with USPS on certain products. As a result, UPS and FedEx don't offer service for parcels weighing less than one pound. First-class mail parcels are mostly used by fulfillment houses and other businesses that ship lightweight merchandise.
Jerry Hempstead, a former top parcel executive and a close observer of USPS as president of his own consulting firm, said the post office may move too aggressively to hike prices on the parcel product in an effort to raise revenue any way it can to stem mounting losses. If it does, USPS risks losing significant share to private rivals, Hempstead said.
"The USPS, in their effort to right the ship, may do something stupid and take a big increase—because they can—and put some of these pieces into a [price] range that makes them attractive to UPS and FedEx," Hempstead said.
Kevin Smith, a former supply chain executive at CVS Caremark who now runs a supply chain sustainability firm, said USPS may box itself in by raising rates on first-class parcels while at the same time consummating its proposal to eliminate Saturday deliveries, which many online retailers have long relied on to reach their customers.
"In their effort to increase revenue and decrease costs, they could just about put themselves out of the parcel business," Smith said.
Hempstead echoed those remarks, saying a substantial price increase could turn the private carriers from users to competitors. In such a scenario, "one has to question if the USPS should be in the parcel business at all, since it's successfully and competitively handled by the private sector," he said.
UPS spokesman Norman Black said the company would evaluate the post office's move to see if it presents any opportunities for the Atlanta-based shipping giant. "But it's really too soon to say at this point," Black added. FedEx did not respond to a request for comment.
Lewin, the USPS spokesman, said the organization is aware of the competitive risks. "Any plans for future price increases have to be weighed against the potential for loss of business in the segment," he said. "It is a primary factor in our due diligence process with our pricing models."
The untethering of the parcel segment comes as USPS announces a fiscal second-quarter net loss of $2.2 billion, which was $600 million larger than its net loss for the same period a year ago. It also warned that barring legislative measures to relieve it of such burdens as pre-funding $5.5 billion in future retiree health benefits in the current fiscal year, it will be forced to default on payments to the federal government by the end of its fiscal year.
Revenue from USPS's "mailing services" segment, which includes first-class and standard mail, fell 14 percent year over year. USPS's first class-mail business in particular continues to suffer market share erosion from the growing use of electronic mail formats.
Revenue and volume from "shipping services," which include Express and Priority Mail, rose 5 percent in the quarter to $2.2 billion, while volume increased 3.2 percent to 352 million pieces. To put the numbers in perspective, USPS handled 38.7 billion pieces of first-class and standard mail in the quarter with combined revenue of $12.2 billion.
As its fiscal situation deteriorates, the post office has stepped up its efforts to raise revenue and slash expenses. Its most visible cost-cutting proposal is to suspend Saturday deliveries for most products, a move the organization said would save about $3 billion a year. USPS would be free to drop Saturday deliveries unless Congress intervenes to disallow it.
Post offices would remain open on Saturdays for pickups and drop-offs, and next-day Express Mail deliveries would continue. Reblin said USPS is weighing the possibility of maintaining Saturday deliveries for its less-urgent Priority Mail product if demand warrants.
In recent months, USPS has rolled out two shipping products designed to attract high-volume shippers moving goods within relatively short distances, a fast-growing segment of domestic transportation but one where the Post Office has been a minor player.
The first, unveiled in January, is patterned after the Priority Mail product, where a flat rate is charged regardless of how much is stuffed in a package. That service is geared toward businesses shipping packages weighing between five and 15 pounds and moving within 700 miles for delivery within two to three days.
The second, introduced in mid-April, offers a regional ground service for high-volume business-to-consumer users.