An old salesman joke: A salesman says, "We sell below cost." A customer asks how he can do that. "Simple," he says. "We buy below cost."
For a day or so last week, Jeff Bezos passed Bill Gates as the richest man in the world. And that's pretty much how he did it.
Bezos runs Amazon, which is primarily a shipping business. It relies on the U.S. Postal Service to deliver two-thirds of its packages. In many places now, it locates a depot near a post office, presorts the packages, and delivers them to the post office. The Postal Service, which has a monopoly on last-mile delivery, does the rest.
The Postal Service is happy because it can report healthy increases in sales in the package delivery department. Postal employees are happy because it means work seven days a week — the Postal Service operates on Sundays almost solely to deliver for Amazon.
And Amazon is happy because it has a deal that takes advantage of a loophole in the law that gives it a taxpayer-subsidized deal none of its competitors could get or match.
That's how it is that, according to a recent piece in the Wall Street Journal, "The U.S. Postal Service delivers the company's boxes well below its own costs."
Bezos can sell shipping below cost because he buys it below cost. He buys below cost because of what the Journal piece termed "an unappreciated accident of history."
The Postal Service has a legal monopoly to deliver first-class mail and non-urgent letters. It is the only entity that can put something into a mailbox or through a mail slot. It is legally obliged to provide the service at the same level and price nationwide. That means, even with mail volume down 40 percent since 2006, the Postal Service still must visit 155 million mailboxes every day.
Since 2007, the Postal Service has been required to allocate 5.5 percent of its fixed costs to package delivery and to incorporate that into its pricing. That figure made sense then, but today, 25 percent of the Postal Service's business is package delivery. And thanks to features of the Amazon deal – such as Sunday delivery, grocery delivery, even delivery from fish markets to local restaurants – the expenses have climbed.
In fact, they've climbed so much, according to a recent analysis by Citigroup, that the Postal Service should be charging Amazon $1.46 more per package than the $2 or so it does now. "Amazon now enjoys low rates unavailable to its competitors," the Journal story said. "It's as if Amazon gets a subsidized space on every mail truck."
It's not just the free ride in the truck. It's the $200 million three years ago to furnish carriers with 270,000 Internet-connected handheld scanners needed for real-time package tracking. It's the $5 billion or more to replace the Postal Service's 190,000 delivery vehicles with new ones better equipped to handle packages.
The Postal Service has followed this formula to $60 billion in losses since 2007. It expects to lose about $6 billion more this year. But first-class mail volume is down, junk mail is about the same, packages continue to grow 8 percent or so per year, and Postmaster General Megan Brennan's position is that "we're obviously looking to get additional customers who are interested in that type of customized delivery."
There is no question the Postal Service must change to survive. What we need from it has changed. We now pay bills online. We email rather than write letters. We evite rather than send invitations. At the same time, we buy online and need the Postal Service to deliver.
But its finances are not in order. The Postal Service has had one profitable quarter in the last five years. Even with monopoly protection on its most valued service, it has fallen more than $120 billion behind in pension and retiree health expenses and has chewed through a $15 billion line of credit from the Treasury.
The Postal Service has made significant gains in automation and other cost-cutting moves. But the deals it is operating under are unsustainable. It's about selling something over and over and over again to your biggest customer — who also is one of your biggest competitors in spaces such as same-day delivery — for $2 when you should be charging 75 percent more.
If you're in a deal where you lose money and your partner profits wildly, maybe deal-making is not for you. When tax dollars are at stake — and they are, regardless of Postal Service protestations — we have an interest in assuring the deals the Postal Service makes serve it and not the richest, or second-richest, man in the world.
Brian McNicoll is a freelance writer based in Alexandria, Va.
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