Tess Torelli January 1, 2018

USPS really does make deals with Amazon. It all starts with how the postal system works: According to Kevin Kosar, vice president of policy for the R Street Institute, a free-market think tank, USPS is basically two separate entities: the monopoly side and the market side.

The monopoly side processes regular, first-class mail — wedding invitations, baby announcements, birthday cards, and bills. There isn’t much competition for sending an ordinary letter.

The market services are parcel services, which competitors like UPS and FedEx also provide — and which means more competition.

An independent agency, the Postal Regulatory Commission, oversees and reviews the rates the US Postal Service sets for both the monopoly and competitive sides, basically reviewing and giving the okay for any changes — including a one cent stamp increase.

But USPS, Kosar explains, also cuts individual deals with companies that mail or ship in bulk — what are called “workshare discounts.”

“The prices that the company pays is going to be haggled and based on how much [the companies] prepare whatever is being shipped before handing it over to the Postal Service,” Kosar said.

That preparation includes making sure goods are packaged in the right size boxes, or parcels are outfitted with a bar code that works with the post office — basically anything that makes the USPS’s job easier and cuts down on some logistical and processing costs.

And a massive company like Amazon, with the infrastructure and resources to do what the Postal Service needs, will probably get a more favorable deal. “Obviously bigger companies are better at doing this, that’s how they eke out nice little margins, but driving those costs down,” Kosar said.

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So in some ways, there’s a mutual benefit. Amazon gets a good deal from USPS, which ships millions (but not all) of its packages, and, in return, the postal system gets help streamlining its operations.

Those discounts can be pretty generous. Kosar says that, in hindsight, the Postal Regulatory Commission has sometimes reconsidered its deals as maybe too good, and unions are often critical of these agreements.

So maybe Trump is somewhat right — the USPS is not the best at making deals. Beyond that, some have argued that USPS should be charging more for its packages across the board. A Wall Street Journal op-ed in July 2017 by Josh Sandbulte, a money manager who closely watches the shipping industry, also suggested the Postal Service is probably effectively subsidizing Amazon and other online retailers.

Sandbulte’s claim is based on how the Postal Service sets its prices. USPS is not allowed to set prices so low that it loses money on delivering packages. (If it could, it could undercut competitors like FedEx or UPS.) But the formula for how it sets its prices was created by Congress in 2006, and doesn’t account for the fact that packages are a much bigger share of the USPS’s business than they used to be.

Sandbulte drew his conclusions based on a Citigroup analysis that suggested the average USPS parcel should cost about $1.46 more per package across the board than it does right now. (Sandbulte works for a firm that owns FedEx stock. Sandbulte could not be reached for comment.)

That discount, if it exists, exists for all USPS customers. It’s just that Amazon sends a lot of packages.

And that’s the bottom line here. Amazon is a giant and, as Kosar calls it, “is in a class of its own” when it comes to shipping. Amazon really, really doesn’t need the United States Postal Service to do business. It can and does use a variety of delivery services — and probably can play those services off each other. In other words: Amazon doesn’t need the USPS. The same isn’t necessarily true for the USPS. (The Postal Regulatory Commission and Amazon did not return requests for comment.)

Which means maybe the USPS is a little bit “poorer” than it could be. As for “dumber” — well, in some ways, the USPS is following the playbook that made Amazon, well Amazon.

“Paper mail is a dying business; the margins are not going to increase,” Kosar said. “They need to move into something that’s more high margin.”

Parcels might be the way to recoup some of those losses, especially if the USPS ups those prices a bit over time — essentially taking early hits for long-term gains.

“That would make perfect business sense in their eyes,” Kosar said. “Amazon was willing to take losses year after year … and it worked. It worked.”

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