Why Higher Rates from USPS are Actually Good for Retailers

By Jim Haller, NPI



The words “raising rates” are enough to elicit a face-in-palms reaction from any online retailer – especially when it comes to small parcel shipping. Yet, a different reaction may be in order as the United States Postal Service announces its intent to raise rates later this year.



Here are the facts. Last month, the USPS filed a request with the Postal Regulatory Commission to raise rates for a portion of its small parcel delivery services. While Priority Mail rates will go unchanged, the USPS wants to raise rates for Parcel Select by an average of 8%. Two other services will see modest hikes under the proposal, including Priority Mail International (6.8%) and Priority Mail Express International (6.7%).



But for most retailers, the real news is the Parcel Select increase. This service is better known as a popular last-mile delivery option offered by UPS, FedEx and DHL ecommerce. For years, retailers have used hybrid delivery options like UPS SurePost and FedEx SmartPost to meet customers’ demands for fast delivery at a lower price point. Parcel Select is the service that’s made it happen.



So, why is a rate increase good news for anyone – especially retailers who don’t have margin to spare? Consider this: If the PRC approves the new rate schedule, the USPS could see an additional $310 million in revenue in 2015. This revenue is sorely needed as USPS has finally gained momentum with commercial customers and has zeroed in on the e-commerce sector.



Chief marketing and sales officer, Nagisa Namabe, has publicly discussed how the USPS has turned to old school tactics like cold calling to reengage commercial customers who had written off the Postal Service as a viable alternative to UPS and FedEx. Fast forward five years and these efforts have paid off. USPS small parcel volumes are on the upswing, and they’ve formed lucrative partnerships with large retailers like Amazon.com for Sunday delivery. Other partnerships with Staples and Costco have expanded the availability of USPS services.



Perhaps most interesting is the fact that USPS has made these strides without employing the same pricing tactics as UPS and FedEx. The “big two” carriers rely on regular annual rate increases, a long list of surcharges and accessorial fees, and dimensional weight pricing to meet shareholder expectations. The USPS does not, and that translates into significant savings for many retailers who move volume to the Postal Service. And, at a macro-level, this is healthy for a small parcel marketplace that’s hungry for competition and innovation.



But, there’s a problem. By design, the USPS network delivers to every address in the United States. Unfortunately, their infrastructure isn’t designed so superbly – at least not well enough to support an e-commerce sector that’s expected to grow by 11.2 to 14.6% annually between 2015 and 2018, according to eMarketer. It’s estimated that the USPS will need to spend more than $10 billion over the next four years just to upgrade its fleet and aging infrastructure.



A modest and rare rate hike goes a long way towards solving this problem, especially when you combine a thriving e-commerce sector that’s grown tired of escalating rates from competing carriers. This increase would strengthen USPS’s ability to be competitive and meet customer demands. Even UPS and FedEx customers would benefit, especially during peak season when there’s higher utilization of hybrid delivery services.



It will be April before the PRC rules on the new rate schedule. Until then, online retailers may want to welcome the prospect of a slightly higher cost on some services. It’s a right step towards a more competitive, service-friendly small parcel landscape – one that will benefit us all in the long term.



Jim Haller is program director of transportation services for NPI www.npifinancial.com, (a transportation spend management consultancy). He can be reached at [email protected].