Last Mile Delivery: Tough Road for USPS, Opportunity for Private Sector
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Last Mile Delivery: Tough Road for USPS, Opportunity for Private Sector

While private sector providers of last mile delivery expand and innovate, the USPS has become constrained by politics, hemorrhages billions annually and is struggling to stay relevant.

Your order has shipped! That’s one email online consumers love receiving. What consumers love even more is receiving their packages soon after placing their order. That is highly dependent on the speed and efficiency of shipment on the last leg of a package’s journey to the consumer, known as “last mile” delivery. With online shopping increasing almost exponentially, last mile delivery has opened up new opportunities for entrepreneurs, startups and retailers. These players are all competing for a lucrative piece of this huge delivery market, developing innovative, faster, lower cost solutions, thereby creating tremendous value for consumers.

While private sector providers of last mile delivery expand and innovate, the USPS has become constrained by politics, hemorrhages billions annually and is struggling to stay relevant. This article explores the nature and development of last mile delivery and the implications for the USPS.  

The E-Commerce Market and Last Mile Delivery

The global e-commerce market surpassed $2 trillion in 2017 and is expected to nearly double by 2021. Historically, business-to-business (B2B) has represented a larger share of e-commerce but that share is expected to decline to about half—$1.1 trillionby 2020 as retail business-to-consumer e-commerce grows (B2C e-commerce sales in North America rose 15.6% in 2016, reaching $423.34 billion). This shift has opened up an expanded market for parcel delivery.

Businesses have identified last mile delivery services—from a facility or distribution center to the end user—as the key differentiator. (While the name might seem to imply a specific distance, “last mile” actually ranges from a few blocks to over 50 miles.) Last mile logistics (LML) focuses on optimization strategies that can include algorithms to optimize routes to real-time relay of weather and road conditions that enable optimal route adjustment.

The USPS once had a dominant role in last mile delivery under their legal monopoly over residential and business mailboxes. However, as the parcel industry grew in the last decade and first-class mail volumes declined, that dominant role is now being challenged by UPS, FedEx, Amazon and other large retailers pursuing self-delivery.

Large retailers such as Amazon, Wal-Mart and Target are beginning to seek new and innovative ways deliver directly to the consumer, while delivery giants like FedEx and UPS aim to compete directly with the USPS for last mile delivery. Some companies are already experimenting with the use of autonomous drones or autonomous ground vehicles to increase speed and efficiency. With last mile services accounting for 50% or more of total parcel delivery cost, it is being targeted as a key step in obtaining a competitive advantage and it is increasingly evident that the USPS is facing some major challenges for last mile delivery.

USPS Loses Money on Last Mile Delivery Despite Multiple Government-Created Privileges

The USPS has a government granted monopoly on residential and business mailboxes (no other company is permitted to deposit mail in these boxes). It also receives substantial subsidies from American taxpayers in the form of tax breaks and below market loans. Altogether, these subsidies are worth at least $18 billion per year, according to a study by economist and former Treasury undersecretary Robert Shapiro. Shapiro also estimates there is $3 billion or more a year in cross-subsidies from the USPS by increasing the cost of its monopoly products and using the revenues to subsidize express mail and package delivery.

In spite of its monopoly privilege and subsidies, the USPS loses money on delivering first-class mail (letters under 13 ounces)—its main source of revenue. Partly this is due to continuing declines in first-class mail volume, which fell by 40% from a high of 104 billion pieces in 2001 to 62 billion pieces in 2015, largely due to the rise of email, social media, and online bill paying.

Challenging Justifications to the Universal Service Obligation and USPS’ Natural Monopoly Label

The conventional justification for the USPS’ monopoly privileges and subsidies is that these are necessary to ensure that it is able to comply with its universal service obligation (USO). Postal officials claim that if it weren’t for such mandates as Saturday mail and delivery of first-class mail at a uniform price regardless of location, the USPS would be closer to breaking even. That might be true but the reality is that private-sector innovations in LML and large retailer self-delivery via LML are still challenging the USPS’ ability to stay relevant and fiscally solvent.

An alternative justification sometimes posited is that the USPS is a “natural monopoly.” However, the evidence suggests that the USPS is a multiproduct firm that offers a multitude of services, many of which are subject to competition. Furthermore, the USPS did not develop with the characteristics of a natural monopoly, resulting from economies of scale. Rather, its structure emerged from the government provided legal protection from competition throughout its existence.

When it had a de facto monopoly on practically all postal delivery, the USPS developed a cross-subsidy design, in which profits generated from lucrative deliveries were sufficient to offset losses from unprofitable (mostly rural) delivery. That may have made sense 100 years ago. But in recent years this cross-subsidy model has broken down, with the USPS losing hundreds of millions of dollars due to declines in first-class and marketing mail, while failing to offset these in spite of strong package growth (as it admits in a recent press release). This puts into question the legitimacy of the USPS’ last mile monopoly.

Some commentators fear that residents and businesses in rural areas would be underserved if the USPS lost its monopoly privileges. But this ignores innumerable changes that have taken place in the past century that now call into question the logic of forcing city dwellers to subsidize rural customers through the USO.

First, mobility has increased dramatically, such that practically all rural customers can easily reach a local grocery store or an automated kiosk from which they could collect their mail. If the USPS were to deliver to such locations in rural areas, rather than direct to mailboxes, it could dramatically cut the costs of rural delivery.

Second, delivery services such as FedEx and UPS offer comparable rates to the USPS for larger packages. The only service for which the USPS is universally less expensive is the one that other providers are prohibited from supplying, namely delivering to mailboxes. Were other companies permitted to compete for mailbox delivery, it is not inconceivable that they could do so at a price comparable to or less than that of the USPS, even in many rural areas.

Furthermore, since 1991 the USPS has been allowing inward sorting or “downstream access” to businesses by offering workshare discounts that allow businesses to presort their own mail and choose to drop ship items to a number of USPS facilities from the largest National Distribution Centers to smaller Sectional Center Facilities, for example. The more a company bundles to finer sortation levels and the further down the delivery chain it’s delivered, the cheaper the postage.

The only service left the USPS has a legal monopoly over is delivery of first-class and standard mail to its final destination. Most notably, however, through the USPS’ Contract Delivery Service, an “individual or company” can contract with the USPS to deliver not just first-class and standard mail but “deliver all classes and types of mail,” as well as perform mail collection along the routes. The independent contractors are also permitted to “sell stamps and accept Special Services Mail such as Certified Mail, Registered Mail, and Insured Mail, and sell Postal Money Orders.”

This means even the last mile delivery monopoly can be delivered by anyone from the private sector that has their own vehicle, given that the USPS has a need for delivery services in that area. Regardless, private sector innovation is just another way the USPS’ monopoly is being challenged.

Private Sector Advances Now Challenging USPS’ Remaining Monopoly

Private sector innovation in LML and large retailer self-delivery will continue to circumvent the USPS’ last mile delivery monopoly. Unless it also innovates, this will continue to diminish USPS revenue. With Amazon sales representing about 43.5% of all e-commerce, it is no surprise that the company plans to create its own delivery business, dubbed “Shipping With Amazon.”

New delivery options are also being introduced by vendors and logistics companies. Amazon Lockers are located in apartment buildings, gas stations, grocery stores, and other convenient locations, usurping the USPS monopoly on mailboxes. Trunk delivery—literally, delivery to vehicle trunks using access codes—is also being tested by DHL in Germany. Wal-mart has even considered crowdshipping deliveries—packages to be delivered by customers to online buyers.

Airborne drone delivery would enable packages to be delivered to a field or a rooftop through GPS tracking technology. Successful automated last mile deliveries have already been made in California using autonomous ground vehicles (AVGs).

The USPS is also attempting to roll out innovations similar to the private sector. For example, it has announced its intention to use AGVs to deliver packages, according to a Office of Inspector General: USPS report. However, the report also states the USPS aims “to achieve the cost, safety, and productivity benefits while limiting operational and financial risks.” That seems rich coming from an organization that operates at annual losses in the billions.

Faced with the growing threat of retailer self-delivery the USPS’ only tool is to adjust prices so it “exceeds unit cost and is not only lower than the competitors’ prices but also low enough to discourage the retailer from self-delivery.” That seems like the road to ruin: charging only enough to cover the incremental cost of delivery will leave nothing to cover the cost of investment in innovation and the fixed costs of the network. Additional big losses and diminished quality of service seem like the inevitable consequence. On the bright side, UPS, FedEx, and USPS’ volume share of package delivery in the e-commerce market currently sit at 54%, 30%, and 16%, respectively, so it seems the USPS’ response may simply be futile.

USPS’ Last Chance of Survival: An Initial Public Offering

With the ever-encroaching private sector innovation, the USPS is close to the end of the road on last mile delivery. However, there may be a chance to salvage the remnants of this once-esteemed public organization: privatization. Several postal service companies have been privatized successfully in the past two decades, beginning with Germany’s Deutsche Post. A recent success was the privatization of the UK’s Royal Mail, which was sold in an initial public offering. If the USPS were sold in an IPO, it would:

  • Raise income for the government
  • Allow the successor to the current USPS to access equity markets to finance capital investment
  • Permit employees to own shares of the company (existing employees could even be given some shares during the IPO and/or as part of a system of performance related remuneration), which would likely improve productivity and reduce the likelihood of strikes
  • Lead to improvements in efficiency, as pressure from shareholders would force management to control costs.
  • Permit the company to make commercial decisions to challenge competitors
  • Provide corporate taxes to the government without the money being circulated back in to offset money-losing operations, as currently happens with the USPS.
  • Increase transparency because currently, the USPS offers some products in its legal monopoly and some competitive-market products but gains and losses on each can become problematic to detect on financial statements.
  • Enable them to respond quicker to rapidly evolving, intensely competitive market conditions.

If the USPS, including all of its massive distribution centers, sorting facilities, post offices, vehicle fleet, and general delivery/logistical network, were to be privatized in an IPO, it could be a very lucrative investment for investors, as long as it remains free from the clutches of Congress and government mandates.

If the USPS is not privatized, there is still plenty of opportunity for entrepreneurs and investors to grab a profitable share of last mile delivery in the growing e-commerce market and in the field of last mile logistics, which, all told, would eventually push the USPS into further financial distress that could result in serious consequences for American taxpayers and/or the eventual bankruptcy of the USPS.

Nicholas DeSimone is a research analyst at Reason Foundation.