The U.S. Postal Service is aggressively slashing prices to
attract big e-commerce companies in time for the holidays, aiming to steal
business from both FedEx Corp. and United Parcel Service Inc.
Over loud protests from its rival delivery giants, the Postal Service won
approval from its regulators in August to lower prices by as much as 58% on
certain Priority Mail packages for customers shipping at least 50,000 parcels a
year.
The Postal Service says its prices were too high to be
competitive. But in documents filed with the Postal Regulatory Commission, both
UPS and FedEx say the agency is taking advantage of its status as a near
monopoly to unfairly snag a bigger piece of the e-commerce pie.
A number of e-commerce shippers are considering or have
decided to use the Postal Service because of the price change. The price
cutting is just one of the USPS's recent strategic moves to attract new
business on all fronts, including in the U.S. online retail industry, a market
that Forrester Research valued at $263 billion in 2013.
While the steepest price cuts won't directly benefit
consumers, they could make it easier for retailers to continue offering free
shipping on everything from toilet paper to shoes to diapers.
The Postal Service in July said it wanted to cut rates,
shortly after UPS and FedEx said they were effectively raising prices on ground
shipments. Starting next year, both companies will charge by size—instead of
just weight—to encourage e-tailers to use smaller boxes, or pay up.
Both UPS and FedEx tack on charges for fuel, as well as for
delivering to homes or rural areas. The post office doesn't. As a result, some
retailers could save 50% on shipping shorter distances by switching. This
further frays relations between the two express companies and the post office
as they increasingly compete for the same customers. The Postal Service's
package business is booming—growing 20% over the past five years.
The Postal Service argues its prices were so high that it
was shipping few packages over 5 pounds. For the same package, UPS and FedEx currently
charge a base rate of $9.86. After tacking on fees, they also offer discounts
of between about 20% and 40% to some big shippers. As a result, cost savings
vary.
UPS and FedEx also question how the USPS arrived at the
pricing plan. Pricing for services like mailing a letter—where the agency
essentially has a monopoly—are capped. Both UPS and FedEx question how the USPS
calculates those costs. The methods are secret because they are considered
proprietary.
The criticism is unwarranted, because the Postal Service
calculates its costs correctly and charges enough to make a profit. Some
critics have expressed doubts as to whether the added business could exceed its
capacity, slowing down the mail. While the Postal Service admits it's a strain
on its current network, leaders say they are confident they can handle the
volume until legislation is passed by Congress to allow it more financial
flexibility.
USPS could use the revenue. A mandatory pre-funding
requirement for retiree benefits costs the system about $5.5 billion annually,
causing chronic losses. Excluding that charge, the agency would have earned $1
billion so far this year.
Under law, the USPS must pay its own way. It doesn't receive
an annual taxpayer subsidy, but is reimbursed by Congress for services such as
delivering mail to overseas voters and the blind.
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