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Why the Post Office Gives Amazon Special Delivery

14 July 2017

From The Wall Street Journal:

In my neighborhood, I frequently walk past “shop local” signs in the windows of struggling stores. Yet I don’t feel guilty ordering most of my family’s household goods on Amazon. In a world of fair competition, there will be winners and losers.

But when a mail truck pulls up filled to the top with Amazon boxes for my neighbors and me, I do feel some guilt. Like many close observers of the shipping business, I know a secret about the federal government’s relationship with Amazon: The U.S. Postal Service delivers the company’s boxes well below its own costs. Like an accelerant added to a fire, this subsidy is speeding up the collapse of traditional retailers in the U.S. and providing an unfair advantage for Amazon.

This arrangement is an underappreciated accident of history. The post office has long had a legal monopoly to deliver first-class mail, or nonurgent letters. The exclusivity comes with a universal-service obligation—to provide for all Americans at uniform price and quality. This communication service helps knit this vast country together, and it’s the why the Postal Service exists.

In 2001 the quantity of first-class mail in the U.S. began to decline thanks to the internet. Today it is down 40% from its peak levels, according to Postal Service data. But though there are fewer letters to put into each mailbox, the Postal Service still visits 150 million residences and businesses daily. With less traditional mail to deliver, the service has filled its spare capacity by delivering more boxes.

. . . .

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.

Link to the rest at The Wall Street Journal (Link may expire) and thanks to Morgan for the tip.

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32 Comments to “Why the Post Office Gives Amazon Special Delivery”

  1. I worked briefly as a City Carrier Assistant. Part of the mantra was, “Those Amazon packages have saved the Postal Service.” The USPS delivers a HUGE number of Amazon packages seven days a week, yes, including Sundays in many cities. So if it’s true that each Amazon package gets a subsidy, you have to take into account that’s actually subsidizing a huge number of jobs for your fellow Americans, who might otherwise be unemployed and unable to support their families.

  2. Al the Great and Powerful

    So:

    1) the post office hasn’t updated its rates to spread costs to packages as the percentage of mail that is package shipping has increased. Hmmm. Not Amazon’s fault…

    2) the post office wants that sweet delivery money that DHL, Fedex, UPS and others are getting, so they made a deal that (if there are enough packages to make it worthwhile TO THE POST OFFICE SYSTEM) certain customers can ship packages from a depot to the customer at a discount. Hmmm. Not Amazon’s fault.

    3) “It is as if every Amazon box comes with a dollar or two stapled to the packing slip—a gift card from Uncle Sam.” “It’s as if Amazon gets a subsidized space on every mail truck.”
    And three for three, NOT AMAZON’S FAULT…

    Blame Congress for not doing proper oversight, blame USPS for sure, but I fail to see how anyone but an ADS-afflicted knucklehead sees this as Amazon taking unfair advantage.

  3. Last year I attended a party where I had a conversation with a USPS financial analyst. I commented on how the post office is able to deliver Amazon packages with previously unseen speed and accuracy. She commented that it was a multi billion dollar contract with Amazon and if not for this specific contract the USPS would have had to seek other financial remedies or significant restructuring, which would come out of taxpayer monies. So, while Amazon is getting a significant benefit, so is the USPS, and all of us as taxpayers.

  4. Patricia Sierra

    I can’t even remember the last time I had an Amazon order delivered by UPS. It’s always the USPS now — but when tracking a package recently, I notice that it was taken from the warehouse to a postal sorting facility via UPS. From there it was handled by USPS. Also, all my returns travel via UPS.

    • I get Amazon packages from USPS, UPS, Amazon’s own delivery people. I notice it’s spread out, but I’ve seen an uptick in deliveries from folks with Amazon-logo shirts.

      Returns for me are mostly USPS, but I still can sometimes get a UPS drop-off or Amazon locker drop-off option. HOwever, the 6 or 7 times I checked the Amazon Locker that’s 5 minutes away, it’s always full. FULL.Wow.

      • I’ve never seen an Amazon logo on anyone coming to my house. Didn’t even know they had their own delivery people. Do they drive marked vehicles?

  5. This is a classic case of financial accounting vs cost accounting. The author wants the USPS to charge based on full allocations under financial accounting. This is a mistake many make when they either don’t understand accounting, or they are trying to mislead others because they do understand accounting.

    I’m not going to explain the whole thing, but the guideline is very simple. If the marginal revenue from doing something is greater than the marginal cost, then do it.

    For the USPS, this means looking at the incremental costs of delivering for Amazon, and compare that to the incremental revenue from Amazon. If revenue > costs, then do it, and forget about allocating fixed costs.

    If incremental revenue is $10, and incremental costs are $8, do it. Don’t include any existing fixed costs in the analysis.

    (Incremental or marginal costs mean new spending because of the venture. New dollars out the door.)

    • Thank you! I thought it had to be something like that, and you explained it with beautiful clarity.

    • And you know that your cost accounting is missing a small assumption…which is you do it, so long as your fixed costs were truly fixed, not “fixed” at certain scale levels (i.e. stepped not flat). Because costs are only “fixed” today, long-term, there are no fixed costs except land.

      So if 40% of your business is “extra packages”, you’re golden right up until you have to pay for a new building or a new processing technology…

      Hence why financial accounting isn’t just “do I have the money today to cover costs, then do it”. It’s why most businesses go under in the first six months…their long-term costs aren’t covered by their revenue, and for small businesses, their fixed costs start hitting them pretty fast.
      P.

      • So if 40% of your business is “extra packages”, you’re golden right up until you have to pay for a new building or a new processing technology…

        Agree. That new building would represent incremental costs associated with the new venture. It doesn’t matter what they are. If new dollars go out the door because of the new venture, they are the incremental costs in question.

        When one reaches the point you highlight, the venture has to be evaluated again. Then the decision is to expand, or leave the level at 40%. Moving from 0 to 40% is one venture. Moving beyond 40% is another.

    • Patricia Sierra

      Our nearby mail sorting facility was closed and that function was moved to another facility in an adjacent state. No one could explain why that made sense. Mail that used to arrive overnight now takes three days. I’m thinking maybe the USPS already had Amazon’s contract in the discussion stage when they made this move (closer to warehouse, maybe?). Regular mail still has a delay, but once Amazon packages hit that out-of-state sorting facility, delivery is overnight.

  6. And the poor mail-carrier has to hit every box on their route whether there’s mail or not – much better if there’s a reason to waste the time and gas.

    And if those rules are there for Amazon, the same rules would work for Walmart and the other big players – if they moved enough to make it worth their while.

    Just another ADS whine, Amazon using the same rules that others have put in place and showing how much better it can be done. (No wonder the ADS crowd hates them so! 😉 ) Any bets this whiner has a ‘Prime’ account?

  7. I wish USPS would subsidize my packages. A few days ago I went in to mail a Kindle Fire to a reader who had won it. It cost me $21 to mail that Kindle, and I had to use USPS because she only provided a PO Box (a mistake I will not make again – no more PO boxes going forward!). The shipping was almost as expensive as the Kindle itself (paid $35 for it last Black Friday). And that was the absolute slowest, cheapest way to send it. It was a tiny, light package, and it cost that much.

    I wonder if we’ll see the USPS go completely under at some point.

    • I’m puzzled and I’m honestly not trying to be snarky or anything. I send small package frequently in the way of my business and while I get a small discount on my shipping by USPS from the online postage company I use, it’s less than $1 per package. USPS also offers the ability to print postage on line.

      If under 16 oz send first class. If a pound or over and its in the manufacture’s box and will fit in either a letter sized or legal sized padded priority envelope then flat rate is about $6.50 (up to 70lbs). You get $50 insurance coverage and USPS tracking included in the priority fee. To add signature confirmation it is just $2.90 if you buy it at the post office and $2.45 if you buy it on line. Parcel select usually costs as much as priority

      If you are shipping international all bets are off though. That has become very expensive.

      I just tried my Kindle Fire 10.1″ box in a flat rate padded envelope and it fit handily.

      • Yeah, that almost certainly could have fit in a flat rate envelope with a bit of padding. Flat rate priority mail envelops cost, I think, $6.50 to ship. Although that is only within the U.S., so if doing a giveaway I would limit it to U.S. only for this reason. But assuming you’re sending within the U.S., you’ve got to look at all your options, not just package it up and then complain about shipping when it turns out to be expensive. (Although I’m also puzzled as to how/where Sariah shipped it that it managed to cost that much even without using a flat rate option.)

        And if you do a giveaway and find out a PO Box is a problem, you can always contact the winner and ask for a physical address for shipping cost reasons. I use a PO Box, and I use that as my default for everything, but if needed I can provide a physical address. I’d imagine most people in a case like that would be willing to give you an alternate address. Again, explore your options.

        • I was going on previous knowledge/information. I’ve done this dozens of times before, with boxes this very same size, and had never once been charged more than $10. So I can complain about the cost when it apparently doubled with no other explanation other than “You’re sending it to a PO Box.” And if there were so many other options available to me, you’d think the mail person might have mentioned that when I expressed my surprise at the fee. I clarified and repeatedly asked about it being the absolute cheapest/least expensive way to send it. And was reassured repeatedly that it was.

          I will most definitely ask for a physical address from now on, and if they’re not willing to give one, then they’ll be disqualified. The PO Box also prevents me from using Amazon to ship gifts, which is something I do often. And I couldn’t exactly “explore my options” and get an alternate address when I was standing in the post office (the nearest post office to my home is over half an hour away. It’s not convenient). I didn’t know what I didn’t know – I had no idea it would be so expensive to ship to a PO Box. Now I do. So I obviously won’t make the same mistake again.

      • I don’t know why it happened. The box was extremely small – I specifically keep boxes of this size for this purpose. I’ve done this dozens of times and never expect to pay more than $10. So the $21 was shocking to me. It wasn’t international. I will try the padded envelope in the future, but I didn’t know beforehand that this was going to happen when it’s never happened in the past. 🙂

    • All USPS PO boxes have an associated street address that will receive most packages and deliveries from private carriers like UPS and FedEx. The format is the street address of the post office building followed by the number of the PO box: 123 Street Name #456. Keep in mind that the post office building itself and the PO boxes may have different zip codes.

  8. I wish USPS would subsidize my packages, too. About a third of my small business’s costs are in shipping. Amazon could undercut me any day, but I have a very niche product.

  9. Uh.. the spin on that article is enough to make me dizzy.

    Let’s take this one,
    > 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

    Anyone can apply for a bulk mail permit and do the same thing. My father worked for the US Post Office for 20 years; for the last 15 of them he was one of the inspectors who kept track of presorted mail, both letters and packages.

    He retired about the time Amazon first went online. Go down to your local Post Office, and you can probably find little display racks of informational flyers telling you how to sign up for the service. It’s hardly a secret.

    As for first class mail subsidizing packages… let’s just say that accountants can make the numbers say anything you want while staying within the GAAP.

    • I hate 3rd class advertising but I know it helps support other classes of mail so I just toss it in recycle.

  10. Let’s add in to that cost. Most carriers now have to go into overtime to deliver all the Amazon packages. Add in that the Post Office also now delivers Amazon Fresh (groceries ) that have to be delivered by 10 A.M. This requires the carrier to deviate from their normal travel routes to deliver these packages. Resulting in overtime once again. You’d have to file FOI to get the information. But it would be very “eye opening” to find out what % the annual incentive raises have been for postal management that they award to … themselves since the Amazon contract. You see the Postal Service loosing money does not concern them. They are lining their pockets thanks to Amazon. The President should demand the resignation of the P.M.G. and all the executives that wrote or approved this contract.

  11. One interesting side-note on how Amazon works to get those prime packages delivered in two days. We lived in the country for many years near a small town with a smallish post office. We order a lot through Amazon and the packages were always delivered by UPS. Last year we moved to a retirement community in a larger town. Our packages are now delivered always by the Post Office. Virtually nothing by UPS. Clearly the larger Post Office is able to meet the two day window while the one in the smaller town was not, but UPS was even though UPS has a large presence in town.

  12. It’s very strange to me that the Post Office is happily providing 7-day-a-week, door-to-door delivery on contracts like this, while at the same time the Trump budget suggests cutting Saturday deliveries and reducing door-to-door service in favor of more centralized drop spots.

    Now, both of those proposals have been kicking around long before the Trump administration, but I figured the new e-commerce delivery activity would have pretty much put an end to calls for those reductions. It’s hard for me to see how the two trends can co-exist.

    • Didn’t know Trump is bringing that up. Seems like that will get Jeff Bezos and his customers protesting.

    • It’s hard for me to see how the two trends can co-exist.

      We have a current practice and a proposal to change it.

    • Felix J. Torres

      Different products.
      First class mail and consumer packages are sorted and *transported* by USPS. Then they are delivered.

      The Amazon contract is solely *last mile* delivery. Moving the packages cross country to the delivery post office is on Amazon, not tbe USPS. Makes a big difference.

      • So does the fact that when they hit that delivery post office, they are pretty much “load and go” – no further processing necessary to get them to the right carrier.

        I occasionally have USPS deliver a letter to the wrong address – but I’ve never had an Amazon package misplaced by them. OTOH, there is one “neighbor” (about a quarter mile away by road) that I’ve become fairly good friends with – FedEx is always dumping his things at my doorstep, and I make a special run over there at least every other month – these are his heart meds. Grr…

  13. These discount prices exist for _all_ classes of mail the USPS sends besides the fixed rate boxes/envelopes. Advertising mailings and large billing operations use it all the time. I even looked at it for the medium sized non profit I worked at. You can have ‘1st class’ well under half the retail price!

    Turns out it’s _easy_ to get the software to print the presort tray labels for your mailing list and even print you mailing list’s labels in the order the end delivery driver drives/walks his route each day!

    Basically you sort your mailing into the smallest delivery area (first 3 digits of the zip code, entire zip code, or individual route) you can meet the minimum number of items for, in trays/pallets labeled the way the USPS wants. Then you drive (or pay UPS and FedEx to drop ship) across the country to the correct USPS Facility for that delivery area (regional sorting facility or local post office). The more of the sorting you do for them, down to the route the end employee walks, the cheaper it is to mail.

    The “catch” is that minimum number of items per grouping. Amazon’s volume is high enough they can meet it down to the lowest rate (delivery route) in Urban areas and probably 2nd lowest (entire post office) rate in nearly any midsized town every day. Your average small shipper just doesn’t have the concentrated volume of deliveries for the lowest rates.

    There is an interesting business niche in cities due to smaller mailers. Companies that pick up your unsorted mail each afternoon, join it up with the mail from all their other customers and do the presort on the aggregated volume to meet minimums. They charge you a bit less than full price postage and make their costs (and profit) up on the presort discount.

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