Will Postal Service Parcel Rate Hikes Cause A Shipper Rethink?

The U.S. Postal Service has emerged, bloodied and more than a bit bowed, from the most difficult year in its long history. But beyond the COVID-19 pandemic, the presidential election and the tussles with former President Donald Trump lies an existential crisis for the Postal Service: how to remain viable when most of the macro-trend winds are blowing in its face.

First-class and marketing mail, the traditional cores of the Postal Service, continued their secular declines in 2020, a downward trajectory accelerated by the pandemic. The shipping and package business is currently the lone bright spot, and to capitalize on its growth and offset the costs of processing and delivering parcels, the Postal Service implemented a series of rate increases on shipper-centric products. The increases, which took effect Jan. 24, will reduce, through not eliminate, the Postal Service's low-price proposition that e-merchants depend on to offer low- or no-cost shipping to end customers.

Some of the Postal Service's increases appear to be relatively benign. Many are equal to just cents per piece. Commercial and retail rates for Priority Mail and its more time-sensitive cousin, Priority Mail Express, will rise by low- to near-mid-single-digit rates, hardly off-the-charts increases. Then there are, on average, 20% increases on shipments weighing less than 1 pound and moving via the Postal Service's Parcel Select service, where parcels are delivered to residences after being inducted deep into the postal infrastructure. 

In addition, lightweight parcels that move through Destination Sectional Center Facilities and Destination Network Distribution Centers — which could be considered the Postal Service's "middle mile" — have risen 10.7% and 9.7%, respectively, according to estimates by Spend Management Experts, a consultancy. AFMS LLC, another consultancy, pegs those increases even higher. In general, the new Postal Service rates will fluctuate depending on parcel weight and its length of haul.

The Postal Service has also introduced a $100 fee for oversized parcels that exceed the "maximum mailable" threshold of 130 inches combined length and girth. In a late 2020 analysis of the Postal Service increases, AFMS called the surcharge "very impactful," while John Haber, CEO of Spend Management Experts, labeled it "potentially damaging" for shippers that tender big and bulky online orders. However, Gordon Glazer, who follows the Postal Service for consultancy Shipware LLC, said those who pay the surcharge are likely "unsophisticated" shippers who shouldn't be tendering such oversized shipments for parcel-handling in the first place. Parcels whose dimensions approach the 130-inch threshold should be shipped by a transport mode like less-than-truckload, whose pricing is better aligned with the profile of such oversized shipments, Glazer said.

The Postal Service, which historically shies away from publicly addressing pricing initiatives, declined to comment for this story.

The pricing changes are the initial salvo of Postmaster General Louis DeJoy as he starts his first full year in office, though there have been calls for President Joe Biden to appoint a Democratic-majority Postal Board of Governors that could replace DeJoy. Only the board can fire a postmaster general.

DeJoy, whose background is in logistics and not postal matters, is expected to soon unveil a sweeping operational restructuring that will likely involve cost cuts and service reductions. The Postal Service has been roundly criticized in recent months for subpar service, and though the focus has been on slow mail deliveries, there are concerns that the problems could also impact the parcel side of the house. 

Haber said the Postal Service needs to improve its service performance across the board or risk losing a broad swath of shippers, including the small to midsize customer (SMB) that has long been the bread and butter for products like Priority Mail, which provides one- to three day-deliveries. "We are evaluating a lot of different distribution options for our customers to improve costs and service," he said in an email. 

Haber called the pricing changes a "crusher" for shippers, particularly e-merchants. Parcel shippers in general face a tough road in 2021 as carriers capitalize on rising demand to push through rate increases as well as more and higher add-on accessorial charges.

The Postal Service can ill afford a shipper exodus. Amazon.com Inc. AMZN, the Postal Service's largest shipper, and a very profitable one at that, has migrated high-density traffic into its own network and increasingly has left the Postal Service with less attractive suburban and rural routes. FedEx, meanwhile, has moved all of its final-mile residential deliveries that it once turned over to the Postal Service into its own "Home Delivery" network. FedEx and UPS are both competing aggressively for the SMB customer that typically relies on the Postal Service.

The Postal Service, which expects to deliver 116 billion parcels in 2021, will remain the carrier of choice for many cost-conscious e-commerce merchants. Even though virtually every e-commerce shipper will be affected by its rate adjustments, the Postal Service will "still often beat UPS and FedEx services for most package sizes and destinations," Rob Zaleski, a content marketing manager at parcel software provider Shipping Easy Group Inc., wrote in a mid-November blog around the time the increases were first proposed.

But some experts like Mark S. Schoeman, president and CEO of The Colography Group Inc., said shippers should look beyond the price tag and assess what type of value they get for their parcel spending with the Postal Service. UPS and FedEx, both of which are aggressively pursuing the SMB segment, are continually improving their services, Schoeman noted. UPS, for example, is working toward reducing transit times by one full day on virtually all of its U.S. ground-parcel delivery lanes, an ambitious project that will elevate the carrier's value proposition to all of its customers. 

For shippers who might find FedEx's and UPS' services appealing but have stayed with the Postal Service due to its competitive pricing, the rate increases could lead to a rethink, Schoeman said in a phone interview.

The larger issue is that parcel shippers of all stripes overpay to the tune of about 13%, according to Jason Dies, executive vice president of Pitney Bowes Inc. PBI, the Postal Service's largest workshare partner, and president of Pitney Bowes' Sending Technology Solutions, whose SendPro software helps parcel shippers compare rates, carriers and service options. Postal Service parcel rates can vary widely, and the IT tools finally exist for shippers to identify and exploit any anomalies for their benefit, Dies said in an interview. "There is no longer any excuse" for parcel shippers to throw money away because they lack visibility into pricing details, Dies said.