A fun game anytime POTUS attacks Amazon is to try to guess which Washington Post story that day was the one that pissed him off. The Post is owned by Amazon CEO Jeff Bezos, of course; anytime the reporters at Bezos’s side hustle really get under Trump’s skin, he’s apt to rattle his economic saber at Bezos’s main business. Was it … this one, maybe? Or did “Fox & Friends” run a segment about Amazon’s shipping practices this morning?
Either way, the man has a point.
“Eh, what does he know? He still thinks Amazon doesn’t collect sales tax!” Right, but as a simple fact the USPS *does* charge well below what it might given the success of its package delivery service. The agency is still hemorrhaging money each year but that’s because its main business, letter delivery, is dying right along with the older Americans who grew up with it as their main conduit of written correspondence. Package delivery is where the money’s at now, with USPS package revenue up 44 percent since 2014 as letter delivery declines. You can thank Amazon (and Wal-Mart and a bunch of other mega-retailers) for that.
But there’s a catch. Remember this buzzed-about op-ed that ran in the WSJ this past July?
In 2007 the Postal Service and its regulator determined that, at a minimum, 5.5% of the agency’s fixed costs must be allocated to packages and similar products. A decade later, around 25% of its revenue comes from packages, but their share of fixed costs has not kept pace. First-class mail effectively subsidizes the national network, and the packages get a free ride. An April analysis from Citigroup estimates that if costs were fairly allocated, on average parcels would cost $1.46 more to deliver. It is as if every Amazon box comes with a dollar or two stapled to the packing slip—a gift card from Uncle Sam.
Amazon is big enough to take full advantage of “postal injection,” and that has tipped the scales in the internet giant’s favor. Select high-volume shippers are able to drop off presorted packages at the local Postal Service depot for “last mile” delivery at cut-rate prices. With high volumes and warehouses near the local depots, Amazon enjoys low rates unavailable to its competitors. My analysis of available data suggests that around two-thirds of Amazon’s domestic deliveries are made by the Postal Service. It’s as if Amazon gets a subsidized space on every mail truck.
The op-ed was written by investor Josh Sandbulte, whose firm holds shares in, er, USPS competitor FedEx. And it’s not true that that entire $1.46 is taxpayer-subsidized. The USPS operates on the revenue it takes in, not appropriations by the feds. Plus, noted Fortune Magazine, “USPS’s legal duty to provide universal service means that even at a discount, shipping boxes for Amazon helps it generate revenue from potentially unused capacity. Fixed costs aside, USPS package delivery is profitable, helping subsidize rural service and letter delivery. So there’s room for disagreement about whether the situation is actually unjust.” Amazon, in fact, insists that its contracts with the Postal Service are profitable for the agency. But the fact remains that package delivery has exploded in growth in the last decade and yet the Postal Service’s costs are still being allocated according to a target set in 2007. Sandbulte’s not the only analyst who sees a bonanza for Amazon in the USPS’s rates either:
While full details of the agreement between Amazon and the Postal Service are unknown — the mail service is independently operated and strikes confidential deals with retailers — David Vernon, an analyst at Bernstein Research who tracks the shipping industry, estimated in 2015 that the USPS handled 40 percent of Amazon’s volume the previous year. He estimated at the time that Amazon pays the Postal Service $2 per package, which is about half what it would pay United Parcel Service Inc. or FedEx Corp.
The USPS is stuck. By law it can’t price parcel delivery below cost to try to attract more business, as that would be unfair to private-sector competitors. But if it raises rates it might itself be undercut by FedEx or UPS as they jockey for position in the booming delivery industry. Or, worse, as delivery rates rise, Amazon may invoke the nuclear option — building its own delivery service and cutting the Postal Service out altogether. Could the USPS survive if its package business began to collapse too? Without an even larger annual bailout from Uncle Sam, I mean.
POTUS and the Republican Congress could always solve this problem next year by adjusting the Postal Service’s rates. All they’d need to do is sell the idea to a public that’s increasingly comfortable with e-commerce that “free” shipping at Amazon should be $1.99 or more for each order. How do you think that would fly? Americans love free stuff, whether it’s actually free or not.