Monday, July 16, 2018

Amazon Exploits Break From USPS - Very Unfair!

An article published on MarketWatch in the latter part of May stated that President Trump personally pressured Postmaster General Megan Brennan to raise the charges Amazon and other firms pay to ship packages. This is a debate America must have! Brennan resisted Trump’s demand pointing out that the rates are set in contracts and that the Amazon relationship was beneficial for the Postal Service and noted that many other companies also partner with the service for deliveries. How Brennan defines "beneficial" and whether the deliveries are profitable are two different animals. Also, even if they are beneficial to the USPS using Brennan's definition we should consider they are coming at a great cost to both brick and mortar stores as well as to other shippers using the system. 

In mid- April President Donald Trump signed an executive order creating a task force to study the United States Postal Service. Trump said that USPS is on "an unsustainable financial path" and "must be restructured to prevent a taxpayer-funded bailout." The task force will be assigned to study factors including USPS's pricing in the package delivery market and will have 120 days to submit a report with recommendations. Trump's claim the service could be charging more may not be entirely far-fetched. A 2017 analysis by Citigroup supports his claim by concluding that the postal service was charging below-market rates as a whole on parcels. Hopefully, the study will also bring into the light the fact the USPS provides companies shipping from China and many other places with super low rates while outgoing packages from Americans get slammed.

This May Become The Face Of Amazon's Delivery Venture!
Back in February The Wall Street Journal reported Amazon was ready to launch a delivery service for businesses that would compete toe to toe with United Parcel Service Inc. and FedEx Corp. Amazon's plan which they claim will save them money may prove easier said than done. Many companies have tried over the years to break into this difficult market and failed because they underestimated the difficulties of building out and operating a complex delivery network. Customers depending on receiving an important order have little tolerance on damaged or misdelivered packages and the cost of cleaning up these problems far outweigh the benefit of a less expensive delivery.

Without a bit of transparency and hearing the opinions of a few learned souls with nothing to gain I have a difficult time thinking we are getting the whole unvarnished truth. Rather than presenting facts, the MarketWatch story sighted other Marketwatch articles and an article in the Washington Post that is owned by Amazon's CEO Jeff Bezos. The articles appear to circle around giving each other substance and collaborating that there was nothing to see here. One of the articles centered around comments from an analyst that was bullish the stock and had a buy rating on the stock who defended his position by saying that comments made by President Trump concerning the USPS losing money on packages they deliver for Amazon were motivated by hope it would damage Bezos

Package Delivery Is Often Very Challenging
In another one of these pieces, the author validates their position that complaints of shipping rates being too low is a "nothing burger" by treating the opinion of former Postmaster General Patrick Donahoe as a bonified fact. In the past, Donahoe has “unequivocally stated” to UBS analysts that Amazon is profitable for the USPS. Donahoe retired on February 1, 2015, after a 39-year career at the service. Donahoe said that Amazon’s business would fall under the “competitive products” category, which has rules guiding pricing. “By law, competitive products must cover their costs, including both operating costs associated with the service provided (sorting, loading, etc.) and an allocation of 5.5% of the USPS’s institutional/fixed costs (which has a fairly broad definition).

Still, numbers can be manipulated to mislead and even before claiming this has happened it is important to recognize some deliveries are far more expensive to make than others. The contract between Amazon and the USPS is said to expire in October and in light of this President Trump has issued an executive order for an analysis of the U.S. Postal Service’s financial situation which should clarify what Amazon and others should be paying. As it continues to struggle with losses year after year the United States Postal Service is an example that something as basic as delivering a package can be costly and no easy task. This is especially true when you are responsible for taking it the last mile or to the doorstep located down the road, up the hill and through the woods in sparsely populated areas. Amazon started taking most of its packages directly to the Postal Service in 2013, a way of avoiding the expensive last leg of the delivery in high-density metro areas as well as on America's backroads.

The fact the USPS goes to these locations on a regular basis doesn't mean Amazon "deserves" the right to be able to tag along at the same rate they would pay for a package delivered across the street. The true or real cost of putting Amazon packages in the hands of consumers is not easy and forces us to circle back to another big issue and that centers around the cost to society and other American retailers. Any benefit to or claimed by the USPS is quickly negated by the cost of businesses and retailers forced to close all across America from unfair competition created by taxpayers subsidizing cheap deliveries for Amazon packages. It must be noted that the toll on communities is massive when local stores and businesses close and jobs are lost. While online sales have their place in the area of commerce local retailers and distributors of goods should not be put at a disadvantage.

This Is Not Right! The USPS Should Not Discriminate'
When you consider that the USPS has had to purchase special equipment such as larger trucks to deliver packages for Amazon it is not difficult to reach the conclusion the USPS is simply in cahoots with Amazon or willing to sell out rest of American businesses for a few dollars in revenue. It should be noted that Sunday deliveries also hurt small businesses especially those which can't afford to expand the hours to seven days a week. Package deliveries should at a minimal be both profitable and not discriminate. This means they should be done for every other company at exactly the same price and terms. While Jeff Bezos would like the USPS to be a subsidiary of Amazon ready to do his bidding and calling it is not. To give a company special breaks that funded by taxpayers is in many ways simply un-American. This is especially true when the company is hellbent on exploiting the brick and mortar stores that add so much to our communities.

USPS Has Worlds Largest Civilian Vehicle Fleet
The USPS has morphed over the years into something far different than originally planned. For example, in 1917 it outlawed the mailing of people, this was several years after a young child was mailed from her parents to her grandparents in Idaho. In 2015 it had 617,254 active employees and today it is the operator of the largest civilian vehicle fleet in the world. It should be pointed out that rather than expanding to delivering to Sunday most USPS watchers have for over a decade advocated dropping Saturday deliveries as its importance declined with the fall of first class mail.  Also, a case can be made that any shift of business away from UPS, FedX or any other delivery company will not add jobs but merely shift them from one company to another. The bottom-line here is that far more goes into deciding the optimum shipping rate than simply whether the USPS makes money.

In January, Postal Service spokesman David Partenheimer wrote an op-ed in The Hill pushing back against calls for it to raise package rates saying,“Some of our competitors in the package delivery space would dearly love for the Postal Service to aggressively raise our rates higher than the marketplace can bear so they could either charge more themselves or siphon away postal customers,”  however, this totally misses the point and confuses the real mission or mandate of the USPS and muddles American values. It is not the job of government subsidized entities to compete with free enterprise. While this highlights the difficulty of determining what is fair it does little to blur the fact some policies simply are not good for America.

The idea Amazon is entering the delivery business world should force any logical investor to question why their stock is trading at a PE 300 time future earnings. It is insane to think any "delivery company" can ever be worth such a high multiple. I almost have to laugh when people say the stock market has not disconnected from the economy and reflects the health of the American economy. Some investors remain oblivious to the fact much of the market gain has been in just a few stocks known as the FAANG stocks. These few stocks have far outpaced the rest of the market when it comes to gains in value. Both UPS and FedEx have over the years honed their delivery systems for maximum efficiency and cut cost to the bone. The packages these companies deliver are often far too valuable to trust to low paid employees that come and go through a revolving door. It is understandable that Amazon wants to mitigate shipping cost but to think they are going to do it on the cheap is a reach.  

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Footnote; The articles below looks at Amazon's plans to enter the delivery business and why President Trump is so concerned about Amazon.


  1. As an online seller, I see and pay the real rates that come directly out of my pocket. Thanks to Amazon, if you don't offer free shipping, then you will fail. Thanks to the USPS, Amazon's shipping costs are almost free unlike the rest of us. I know of a person that ordered a computer power supply from Amazon and the USPS delivered the 12 pound unit. Another guy ordered 5 20 pound medicine balls from Amazon and they too were delivered by the USPS. How can the USPS do this and be profitable?

  2. There needs to be a balancing act, although Amazon is growing fast and creating a lot of job, a lot of businesses are closing down as a result! However one can now start an Amazon Business using Amazon Facilities known as Amazon FBA (or fulfillment by Amazon) and that has created thousands of small businesses popping up. The question is when will the Amazon bubble burst? We just have to wait and see.

    1. I would never recommend that someone "start an Amazon business. The problem is that Amazon exploits its workers and its vendors. It gathers information on vendor sales that can come back and haunt those selling on its platform.

      Utilizing the "power of the web" it slips and sneaks its messages into places uninvited. These all have been a big factor in thousands of retailers being forced to close and in the destruction of small businesses across America. The article below delves into whether there is anyone or anything that Amazon doesn't exploit?