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FEDEX Seven Day Package Delivery Casts Doubt On Postal Service Package Delivery Rate Hikes

August 1, 2019

FedEx’s announcement of seven-day-per-week delivery means higher USPS rates would likely drive business—and revenue—away from USPS.

FedEx has announced it will offer home package deliveries seven days a week in many parts of the country starting in 2020.

This is good news for consumers and another indication of the growing importance of e-commerce. However, it calls into question the probable effectiveness of proposals by the Trump administration and some on Capitol Hill to cover huge U.S. Postal Service (USPS) deficits by having the service charge higher rates for the packages it delivers. If anything, USPS rates might already be too high, which would account for FedEx’s expansion of its delivery services.

Internet Gains, USPS Loses

FedEx’s expansion suggests higher rates for USPS package delivery could backfire, losing more money for the Postal Service and harming e-commerce.

USPS has a legal mandate to deliver to all addresses six days per week, and it has a government-mandated monopoly on delivery of first-class mail such as bills and letters. USPS has lost significant first-class mail business, with its associated revenue, to the internet—paying bills online is becoming the new norm—and to email and social media.

Even with annual revenue of $70.6 billion, in 2018 USPS lost $3.9 billion, part of a decades-long string of losses. The service has downsized its labor force from about 800,000 in 1999 to about 500,000 today, and it uses work-sharing and outsourcing for sorting and transportation to contain costs. But the deficits continue.

E-Commerce Growth

One bright spot for USPS, private delivery companies, and for consumers has been the growth of e-commerce. In 2018, consumers purchased $517 billion in products from American companies online, with 40 percent of those purchases having been made through Amazon. E-commerce now accounts for 14.3 percent of U.S. retail sales, up from 5.1 percent in 2007.

More than half of the retail sales growth in the past year came from e-commerce. E-commerce is especially important for customers who do not live in major urban hubs and for businesses in such areas that now can more easily sell and ship to customers nationwide.

Crucial to e-commerce is USPS package delivery, which is utilized by Amazon and other e-commerce companies. Private companies are allowed to compete with USPS package delivery services. Shipping companies such as FedEx and, more and more, e-commerce retailer Amazon have their own fleets of trucks to carry packages to customers’ doors.

USPS is fairly efficient at carrying mail and packages the “last mile” to the customer’s door, and USPS revenues from package deliveries in fiscal year 2018 hit $21.5 billion—up from $19.5 billion the prior year—thanks to e-commerce.

Higher Prices, Less Business

By law, USPS package delivery charges are required to cover the service’s direct costs, such as the pay for the carrier coming to your door, and overhead, such as the expenses of your local post office and its management. A 2018 task force report, “United States Postal Service: A Sustainable Path Forward,” commissioned by the Trump administration, acknowledged USPS package rates comply with the law but nevertheless urged rates be raised above the legal requirements to cover USPS deficits.

FedEx’s announcement of seven-day-per-week delivery means higher USPS rates would likely drive business—and revenue—away from USPS.

FedEx also announced it is cutting back on its current practice of dropping off most of its FedEx SmartPost packages at local post offices to be carried that last mile to the customer’s door. FedEx will shift about two million packages per day onto FedEx ground delivery trucks instead.

Last-Mile Delivery Boom

FedEx is building out its own last-mile system by tapping into efforts by traditional brick-and-mortar stores to compete with e-commerce by allowing customers to place orders online and pick up merchandise at stores or have them delivered to their door.

Such local, fast delivery services are on the rise. Prominent examples include Uber drivers delivering meals to customers at their homes, and fast-food establishments like McDonalds and Giant Foods delivering groceries to customers through the PeaPod fleet.

FedEx sees delivering products from local stores as a growth market. In essence, brick-and-mortar stores challenged by e-commerce are adding e-commerce options, and FedEx stands to benefit by expanding its last-mile delivery service.

Amazon, in partnership with USPS and using its own expanding truck fleet, offers Sunday deliveries and now is moving from free two-day delivery to free one-day delivery for its Prime customers. Delivery providers such as Amazon are also working on drone and driverless vehicle deliveries.

Undermining Progress

FedEx’s announcement of deliveries seven days a week and other expansions of e-commerce promise to benefit customers and merchants, especially small businesses in the nation’s heartland. E-commerce has also brought more revenue to the Postal Service.

USPS, however, faces deep and serious problems with its current business model. Proposals to raise package delivery rates—rates that consumers would have to pay—are likely to drive away even more customers and impede the growth and diversification of e-commerce.

Edward Hudgins (ehudgins@heartland.org) is research director at The Heartland Institute and editor of The Last Monopoly: Privatizing the Postal Service for the Information Age and Mail @ the Millennium: Will the Postal Service Go Private?

Author
Edward Hudgins is the research director for The Heartland Institute.
ehudgins@heartland.org @DrEdwardHudgins

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