USPS Slashes Rates, But Can it Handle the Surge?

Spend Matters welcomes another guest post from Jim Haller, program director of transportation services at NPI, a spend management consultancy, focused on eliminating overspending on IT, telecom and shipping.

It’s no secret that the United States Postal Service has been on a mission to grow its parcel business. But the rate cuts that went into effect on Sept. 7 may be one of its most aggressive moves yet. The pricing changes affect two Priority Mail offerings – Commercial Base and Commercial Plus – and spotlight USPS’s increasing focus on attracting large e-commerce customers. For customers shipping at least 50,000 parcels a year, price cuts could be more than 50 percent.

As one would expect, UPS and FedEx are none too happy, especially after they’ve just announced they will charge shippers by dimensional weight for all package sizes come 2015. Documents filed by UPS and FedEx with the Postal Regulatory Commission claim the USPS is using its near monopoly status to gain more commercial business, which is an interesting claim considering many shippers have voiced their own frustration over duopolistic behavior from UPS and FedEx throughout the years.

Over the last five years, the USPS has grown its parcel business by 20 percent, earning status as a viable option. While UPS and FedEx continue to increase margins with price increases and high fuel surcharges, the USPS is playing the game differently. It will continue to price by weight, rather than dimension, and forgo fuel surcharges altogether. While UPS and FedEx do offer a wide range of discounts to volume customers, the carriers’ long lists of accessorial fees and complicated contractual terms have made it more difficult to predict and control costs.

USPS customers can expect to see the highest savings on heavier parcels, which have historically been overpriced compared to UPS and FedEx pricing. Here’s a cost comparison as provided by The Wall Street Journal:

“Currently, a 10-pound package shipped 500 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 percent and 40 percent to some big shippers. As a result, cost savings vary.”

The USPS continues to surprise the industry. Taking market share away from large players is no small feat. Still, a few questions remain: How will these changes impact the long-term partnerships between the USPS and FedEx and UPS for last mile delivery? Is this strategy sustainable for the USPS, which has operated at a loss for the last 21 out of 23 quarters? Finally, how will this impact capacity and service? Is the USPS prepared to handle the volume given a $10 billion need for new trucks and sorting equipment?

One thing is for certain – we’re getting ready to find out.

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  1. Bernie Coley:

    The question is not just whether the USPS can handle the increased amount of packages but can they handle the increased amount of larger packages that will move to them due to the new dimensional pricing that UPS & FedEx are implementing next year

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