USPS Delivers Groceries: Jack of All Trades, Master of None

The United States Postal Service (USPS) seems to be on a frenzied crusade to delve into new areas of business, even as it is posting billions in quarterly losses and mismanaging its core line of business, delivering first-class mail.  Its latest entry into a new market, grocery delivery, ignores the fact that the USPS is not permitted to leverage its government-conferred monopoly business, first-class mail delivery, to cross-subsidize other lines of business, nor is it supposed to leverage its monopoly to unfairly compete against private sector businesses. 

According to the USPS, the agency “ended the June 30, 2014, quarter with a net loss of $2.0 billion, compared to a net loss of $740 million for the same period last year.”  That was the twenty-first loss in the last 23 quarters. 
Earlier this year, Sen. Elizabeth Warren (D-Mass.) and USPS Inspector General David Williams encouraged the USPS to think about adding financial services to its portfolio.  Since the agency currently sells money orders, the addled rationale goes, expanding into banking and financial services would make sense. 

While that proposal has fortunately not been implemented, USPS’ regulators at the Postal Regulatory Commission (PRC) have agreed to allow the agency to get into the thriving and competitive grocery delivery business.

In November, 2013, Amazon announced a deal with the USPS to deliver packages on Sundays and holidays in Los Angeles and New York.  In May, 2014, these services were extended to an additional 15 cities.  According to The Wall Street Journal, which got its hand on a copy of the contract language, it appears that the arrangement could last up to five years, with a 30-day escape clause if things don’t work out.  In August, the USPS added a grocery delivery component via its Amazon partnership and has stated that it wants to make that a regular part of its operations. 

Although outsiders are barred from seeing the details of the USPS’ finances and accounting methods because the PRC deems them “proprietary,” the basic data is publicly available.  First-class mail volume was down by 1.4 percent in the third quarter of fiscal year (FY) 2014.  The losses associated with that decline were mitigated by another increase in the price of stamps in January, 2014, but even the USPS recognizes that higher stamp prices only push first-class mailers to find other alternatives, thus compounding the volume decreases.  Total mail volume has dropped by more than 55 billion pieces (25 percent) from its apex in 2006. 

USPS operating expenses for the third quarter of 2014 were $18.4 billion, up by $1.5 billion from the same period last year.  Compensation for postal workers also increased by $15 million.  The agency missed its September 30, 2014 deadline to ante up its $5.7 billion retiree health benefit prefunding payment to the U.S. Treasury.  And in the midst of these negative fiscal indicators, Postmaster General Patrick Donahoe has gone on record saying that he wants to spend $10 billion to purchase new vehicles and upgrade postal sorting facilities. 

At the other end of spectrum, USPS officials claim that its package delivery business is booming and its future lies in such deliveries, which keeps it in direct competition with existing companies such as FedEx and UPS.  Those companies, whose pricing calculations are finely tuned to the stringent economic realities of the private sector, were recently forced to increase delivery prices, yet the USPS was permitted to slash its parcel delivery prices by up to 58 percent to a select group of e-commerce mailers shipping at least 50,000 parcels a year.

On the one hand, as USPS officials have stated that there is not sufficient mail volume to merit a six-day delivery system, they simultaneously claim on the other hand that it is profitable to deliver packages to a smaller number of customers on Saturdays and Sundays, degrading service for the first-class mail customers it is mandated first and foremost to serve.  Furthermore, the agency claims that it somehow delivers packages more cheaply than their private-sector competitors.  Something just doesn’t add up. 

Now that the USPS has entered into the grocery delivery business, it is once again diving into a private-sector business that is currently well served by grocery home delivery pioneers such as Peapod, Safeway, and Wal-Mart, all of which have invested multiple millions of dollars and many years of experimentation in order to provide good service. 

As the Lexington Institute’s Daniel Goure observed “…the price of a stamp increased by 6 percent this past January while that for packages only went up by 2.4 percent. This means that the average American who mails a letter is getting taxed so that the USPS can lower the cost of its package delivery activities, thereby competing more effectively against the private delivery companies….the USPS is undercharging for package delivery so as to increase its volume and market share and overcharging letter writers to cover institutional costs.”

There is every reason to suspect that something is very much askew with USPS accounting and that the beleaguered agency is using its government-granted monopoly to cross-subsidize its other line of businesses while it unfairly competes with the private sector.  Postal regulators and Congress have been asleep at the wheel, they need to wake up and pay attention.