U.S. Mail Cutting Rates to Win E-Commerce Business FedEx, UPS Howl as USPS Lowers Certain Prices as Much as 58% The Wall Street Journal By Laura Stevens September 4, 2014 2:41 PM 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. (FDX) and United Parcel Service Inc. (UPS). 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 post office 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. The price cuts do not reflect a minor cost-related adjustment in the postage that Grandma will have to pay to send a sweater to young Johnny, wrote FedEx in its filing with the commission in July. What USPS is proposing is an aggressive push to gain market share in the fast-growing business of e-commerce. A number of e-commerce shippers are considering or have decided to use the Postal Service because of the price change, said Rob Martinez, president of Shipware LLC, a shipping strategy consultant and auditor. A lot of shippers are going to take another look at the Postal Service, he added. It is a strategic move by the post office to attract new customers in the $263 billion U.S. online retail industry, analysts say. While the steepest price cuts wont 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 doesnt. As a result, some retailers could save 50% on shipping shorter distances by switching, said Satish Jindel, president of Shipmatrix Inc., a shipment-tracking software developer. This further frays relations between the two express companies and the post office as they increasingly compete for the same customers. Last year, the USPS signed a contract with Amazon Inc. (AMZN), winning over the e-commerce giant with the promise of Sunday deliveries. The Postal Services package business is booming—growing 20% over the last five years. In some instances, the agency partners with UPS and FedEx: Letter carriers deliver the companies cheaper, slower options—Smartpost for FedEx and Surepost for UPS—the last, labor-intensive portion of the trip. But UPS and FedEx wouldnt benefit from the USPS price cut, because it involves the Priority Mail service, which is door to door. The Postal Service argues its prices were so high that it was shipping few packages over 5 pounds. Currently, a 10-pound package shipped 400 miles by the post office costs $14.66 for its biggest customers. That drops to $7.40 on Sept. 7. 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 declined to comment further. It is unclear if they will be able to challenge the regulators decision. In its filing, UPS questioned how the Postal Service could afford such steep price cuts, suggesting that the services financial woes should raise a red flag. The mail service recently raised rates for some mailers, citing its challenging financial position, UPS noted. 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, UPS wrote. 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. There is more leeway when it comes to what it calls competitive services, like Priority Mail shipping, though it is mandated to charge the costs of those, plus at least 5.5%. Both UPS and FedEx question how the USPS calculates those costs. The methods are secret because they are considered proprietary. It raises serious questions that the [shippers] are getting subsidized by someone—what FedEx cannot tell the commission for sure is by whom, FedEx wrote. Ruth Goldway, chairman of the Postal Regulatory Commission, said the agency raised rates on mailers due to unusual costs it faced during the recession, unrelated to its package business. As far as concerns raised by UPS and FedEx, none of them indicated it was not legal. They felt it might not be fair, said Ms. Goldway. The criticism is unwarranted, because the Postal Service calculates its costs correctly and charges enough to make a profit, adds Postmaster General Patrick R. Donahoe. Well make money, and also we expect to get some volume, both of which will be very positive for the bottom line, he said. The Postal Services aging infrastructure was created for letters, not packages, and leaders have said they would like to invest $10 billion over the next four years for things like package sorting equipment and new mail trucks to accommodate the business. Some critics have expressed doubts as to whether the added business could exceed its capacity, slowing down the mail. While the Postal Service admits its 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 doesnt receive an annual taxpayer subsidy, but is reimbursed by Congress for services such as delivering mail to overseas voters and the blind.
Posted on: Fri, 05 Sep 2014 19:56:53 +0000
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