Postal Service enters same-day fray with rollout of limited delivery program

The increasingly noisy market for same-day delivery services is about to get noisier.

Perhaps as early as Monday, the U.S. Postal Service (USPS) will roll out a pilot version of a same-day delivery service, called "Metropost," that covers a 49 square-mile radius in and around San Francisco. USPS has not confirmed a specific launch date. However, if it begins Monday, it will coincide with the Post Office's busiest mailing and shipping day of the year.

The market test runs until next December, though USPS Spokesperson John G. Friess said the quasi-governmental agency will know before then if the project should move beyond the pilot phase or be consigned to the junk heap. If the fish bite, USPS can apply to the Postal Regulatory Commission—the federal agency that oversees postal operations—for approval to expand it nationwide.

Due to laws governing a USPS service rollout, annual revenue during the test phase cannot exceed $50 million. USPS' total annual revenue is approximately $66 billion.

The service has other limitations beyond the revenue ceiling. It can only be tested in one market. No more than 10 online e-commerce companies can participate. Each participant must have at least 10 physical locations of some type nationwide, with one or more in the San Francisco area. And at least through the end of the year, only 200 packages a day can be tendered.

The package restrictions can be lifted if USPS decides to increase its capacity supporting the service, Friess said. The agency has developed a separate delivery network dedicated to the implementation.

San Francisco was chosen as the test market because it is "densely populated and has a customer base with an appetite for this type of service," Friess said. He said USPS will announce the initial participant when it rolls out the service.

Potential users are also under some restrictions. Users must live within the area designated for delivery. Cutoff times for orders are between 2 and 3 pm, with packages to be picked up after 3 pm and delivered between 4 pm and 8 pm. Friess said the cutoff times are later than for most same-day transactions, which generally require orders to be placed before noon to be delivered that day.

Users can request same-day deliveries by utilizing an eligible e-commerce platform to buy merchandise, by purchasing items at retail locations that are partnering with test participants, or by visiting a test participant's own website.

Friess said the limitations of the market test do not reflect USPS' "language," but are instead designed to comply with laws governing a USPS service rollout. USPS has said the pilot period will give it time to determine the service's viability and to adjust its pricing as market conditions warrant.

Friess would not comment on specific USPS pricing for the service, though he said the agency has created one pricing scheme for packages under 25 pounds and another for packages weighing more than that. It will then be up to the participant to determine how it would pass on its shipping costs to the end customer. The maximum weight that can be shipped under the service is 150 pounds.

Demand for same-day service will be largely influenced by customers' willingness to pay the market price for the convenience of instant deliveries, or to pay anything at all. Businesses and consumers have been conditioned to receive free shipping for their online orders, and research has shown that many e-commerce transactions are not consummated if there is a cost to ship.

BIG POTENTIAL
The USPS rollout comes amid a flurry of activity in a delivery segment that is long on potential but has a number of question marks attached to it. Because market demand for same-day service has not been fully vetted, no one knows if there is enough long-term interest to motivate providers to build or refine supply chain infrastructures, and then charge the premium prices that would accompany those efforts.

The segment's popularity will be determined by the rapid growth of online transactions. But it's hard to conceive how small, lightweight items that comprise most online commerce would, even in aggregate, achieve the necessary shipment density for a same-day service to succeed on a nationwide scale.

No one is even sure about the size of the same-day market. In 2007, when same-day was more of an adjunct to other delivery services, the market was pegged at $4 billion a year. In 2011, the Messenger Courier Association of America, which has a keen interest in same-day service since many members operate in highly-congested urban areas with small geographic footprints, estimated it at $8.5 billion a year.

JUMPING INTO THE POOL
Despite the caveats, the field is getting crowded as retailers, e-tailers, and providers test the waters. Wal-Mart Stores Inc., the world's largest retailer, is piloting with UPS Supply Chain Solutions, UPS Inc.'s supply chain unit, on a program charging customers in northern Virginia, Philadelphia, Minneapolis, and San Jose/San Francisco a flat fee for same-day deliveries of holiday items. Susan Rosenberg, a UPS spokesperson, said the company coordinates the dispatch of local couriers in each market to deliver goods from Wal-Mart's stores to customer destinations.

For its part, Atlanta-based UPS is evaluating a "number of different models" for same-day deliveries to gauge what the market will bear for what is becoming known as "instant service," Rosenberg said.

FedEx Corp., UPS' chief rival, launched a nationwide same-day service in 1995 that utilized a "next-flight-out" air service. In 2008, it began offering same-day deliveries on an intra-city basis in 10 markets and expanded it to 20 in 2009. Five of those markets—Chicago, Dallas, Denver, Los Angeles, and Washington, D.C.—have since been integrated into the local delivery networks of FedEx Office, a FedEx unit that oversees the intra-city service. The remaining 15 markets will be added over the next two years, according to Carla Boyd, a FedEx spokeswoman.

Boyd said that by leveraging the FedEx Office van networks in each market, FedEx can offer users a two-hour delivery guarantee from the time the package is picked up at origin.

The growing interest in same-day deliveries is pushing e-tailers and traditional retailers in unusual directions. Cathy Roberson, a U.S.-based analyst for U.K. research firm Transport Intelligence, said traditional retailers are starting to use their stores as de facto distribution centers to fulfill orders and consign them to a local courier for delivery, sometimes within a couple of hours.

Through this approach, a traditional retailer "may be able to extend same-day delivery hour options" beyond what a pure e-tailer like Amazon.com can now offer, especially in less densely populated markets, she said.

One example cited by Roberson is online auctioneer's eBay Inc.'s integration of Milo.com, a local shopping engine acquired by eBay in 2010 for $75 million. Through Milo, eBay takes so-called "brick-and-mortar" inventory from local stores and pushes it on to the mobile devices of eBay shoppers who've provided e-mail addresses. There, consumers can order merchandise and have it delivered by local couriers in sometimes under an hour, she said.