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Focus: Transportation Management

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From SCDigest's On-Target E-Magazine

- Sept. 9, 2014 -


Logistics News: Even as they Increasingly Partner for Branded Services, UPS and FedEx Say Recent Major USPS Price Cuts Not Fair


Rates Cut as Much as 58%, as Postal Service Guns for More eCommerce Business

SCDigest Editorial Staff


The struggling United States Post Office continues to look at its parcel delivery business as perhaps the key path to some level of financial viability - and it is using significant price cuts to wrest share away from market leaders UPS and FedEx. Perhaps it can find a way to reduce the amount of red ink on its income statement.

SCDigest Says:

The Postal Service's package business has been fairly strong, up about 20% over the past five years, though that is far less than the rate of ecommerce growth over the same period.
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UPS and FedEx say the pricing moves are unfair, claiming the USPS is using its monopoly mail carrier status as leverage to be able to offer the lower rates, though the move comes even as both parcel carriers continue to increase the amount of business each do with the USPS for certain hybrid package services.

The latest USPS pricing initiative began in August when its government regulators gave it the OK to lower prices by as much as 58% on certain Priority Mail packages for customers shipping at least 50,000 parcels a year.

That would of course represent a very discount to shippers, and be especially attractive to ecommerce outfits struggling with shipping costs and getting their own operations into the black. Significantly lower shipping costs would obviously also make it less painful to offer free or highly discounted shipping to entice buyers to check out with those on-line carts.

The USPS argues that its prices were too high to be competitive before price cuts. But in documents filed with the Postal Regulatory Commission, both UPS and FedEx say the price cuts go far beyond that.

The lower prices "do not reflect a minor cost-related adjustment in the postage that Grandma will have to pay to send a sweater to young Johnny," FedEx said in it with the commission in July just before the lower pricing power was approved. "What USPS is proposing is an aggressive push to gain market share in the fast-growing business of ecommerce."

Meanwhile, UPS claimed that the agency plans "to squeeze as much revenue as the commission will allow out of [mailers], who have little or no alternative to using the Postal Service, while making a grab for competitive market share" in the parcel arena.

The cuts are substantial indeed. Before, for example, a 10-pound package shipped 500 miles by the post office cost $14.66 for its biggest customers. That dropped to just $7.40 on Sept. 7.

Add in the fact that the USPS is not pursuing the dimensional weighting strategies that are being expanded by FedEx and UPS next year (and which effectively will raises price for many shippers) and that it doesn't have a fuel surcharge, nor does it charge extra for home or rural delivery, and the total rate can be compelling.

What would be the rate at UPS or FedEx of the same parcel shipment? A base rate of $9.86, according to the Wall Street Journal, before various fees - and whatever discount a shipper is able to wrangle, which can be substantial.

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Former DHL executive Jerry Hempstead, who now runs his own parcel-focused consulting firm, thinks UPS and FedEx's "unfair" complaints ring hollow.

"It's OK for UPS and FedEx to offer discounts to whomever they want in whatever form and size they want, without review and oversight," Hempstead told SCDigest. "Why can they give a shipper with say a million dollars worth of business better discounts than someone with ten million dollars worth of business? Because that's American free enterprise at work."

He adds that "The USPS for some time has had the ability to do more creative pricing in the competitive parcel space by law and by approval of the Postal Regulatory Commission. Competition is good for America, good for the consumer and good for the USPS." He also noted that "Protesting the USPS lowering prices in the very segment where UPS and FedEx will be raising prices at the end of the year is simply saying that they don't want anyone messing with their ability to pick the pockets of their customers to a greater degree than they have in the past."


The Postal Service is obviously betting that it can win enough new business to make up for the lost revenue from existing shippers taking advantage of the lower rates. And the Postal Service needs the money. Not only does it continue to lose money quarter after quarter as traditional mail volumes tank, it faces huge pension obligations, says it needs another about $10 billion for new trucks and new package sorting equipment.

The reason USPS can't consider dimensional weighting now, for example, is that it simply doesn't have the hardware or systems need to pull it off even if it wanted to.

The tensions come even as both UPS and FedEx continue to increase the business they do with the Postal Service for their own SurePost and SmartPost services, respectively. Under those arrangements, packages are moved most of the distance from origin to destination under the UPS or FedEx networks, but the "last mile" delivery is handled by the USPS for fee.

For FedEx alone, the post office delivers an average of 2.2 million packages a day, or about 30% of the express-mail company's total U.S. ground segments. UPS doesn't provide those numbers, but the percentage number is believed to be about the same.

The Postal Service's package business has been fairly strong, up about 20% over the past five years, though that is far less than the rate of ecommerce growth over the same period.

One big question for shippers should be that if the USPS pricing initiative is successful, could it swamp the Postal Service's capacity, leading to service issues, maybe even during the crucial Christmas season 2014?

Postal execs say their network will hold up just fine even with a big spike in volumes. Of course, that's what UPS thought last Christmas shopping season too.

What do you think of the USPS pricing moves? Is it unfair? Let us know your thoughts at the Feedback button (for email) or section (for web form) below.



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