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Will Postal Service Rate Cuts Steal Business From UPS and FedEx?

The battle of the parcel carriers has begun.

Will Postal Service Rate Cuts Steal Business From UPS and FedEx?

While UPS and FedEx are preparing to raise rates on many smaller packages, the U.S. Postal Service is dropping the price of shipping heavier parcels. The move can be seen as part of a concerted effort by the Postal Service to draw business away from the two private carriers, who together handle nearly 80 percent of U.S. ground shipping volumes.

It began with FedEx’s announcement in May that it would begin applying dimensional weight pricing to all ground shipments as of Jan. 1, 2015. FedEx had previously been using weight as the sole criterion for pricing ground packages under three cubic feet in size. (For larger packages, as well as for express and air shipments, the carrier had already been using the dimensional weight formula.) UPS soon matched the move, with the change to take effect on Dec. 20, 2014.

UPS and FedEx were motivated by a desire to increase margins on smaller, lighter packages. Their pricing will now account for the amount of space that boxes take up on a truck. The move is expected to boost ground-shipping costs by 30 to 50 percent.

Now comes the Postal Service with its own announcement of rate changes for Priority Mail, effective Sept. 7. For retail customers, the rates for packages weighing five pounds or less, in zones 1 through 8, will rise by an average of 2.6 percent.

But the real news concerns prices for Postal Service customers using electronic postage services – the Commercial Base and Commercial Plus categories. There, rates for packages of five pounds or less are decreasing by between 0.3 percent and 3.6 percent. And the reductions are even greater for heavier parcels – between 7.8 percent and 14.2 percent for five to 10 pounds, and between 16.1 percent and 17.7 percent for 10 to 15 pounds.

Commercial Base customers will see average savings of 25 percent over FedEx Ground and UPS, for packages of five to 10 pounds in zones 1 through 5. For high-volume shippers eligible for Commercial Plus service, the equivalent savings will be in the range of 42 percent. (The numbers are less dramatic for shipments moving over longer distances.)

For high-volume businesses, the savings can add up quickly. According to Endicia, a provider of online postage and shipping software, a company shipping 20 packages a day in the 5-10 pound range during the holiday season will end up paying $6,612 less for Priority Mail than for UPS or FedEx. When volume rises to 300 packages a day, the savings top $99,000. The numbers are similar for packages weighing between 10 and 15 pounds

Endicia general manager and co-founder Amine Khechfe says the Postal Service is making an aggressive move to expand its commercial business, both in its “soft spot” of 5-10 pounds and beyond. What’s more, by scheduling the rate change for September, instead of June or January, it’s signaling a determination to go after peak holiday volumes.

The Postal Service racked up a net loss of $5bn in its 2013 fiscal year. Much of the shortfall was the result of a steep decline in First-Class Mail, coupled with high operating costs. (It does not draw on tax dollars for day-to-day operations.) The agency is now looking to offset those losses by targeting the parcel sector, especially commercial customers.

Both FedEx and UPS filed objections to the new rates before the U.S. Postal Regulatory Commission, claiming that the reductions wouldn’t allow the Postal Service to cover its operating costs. The PRC rejected their arguments and let the changes stand.

The Postal Service is clearly hoping that its move will attract the business of e-commerce retailers, many of whom offer the incentive of free shipping. Their ability to continue that practice could be challenged by the FedEx and UPS rate hikes. Up to now, many of the most popular e-commerce sites have presented one of those two giants as the default option for shipping. But Khechfe says some e-commerce websites no longer specify the carrier, giving retailers the freedom to choose the cheapest option.

“I’m guessing that for most merchants today, the Postal Service is at least part of their shipping mix,” Khechfe says. “And if it’s not, they’re missing out.”

The Postal Service hopes to gain an even greater competitive edge over FedEx and UPS by declining to follow their lead in adopting dimensional weight pricing. Its rates will continue to be based solely on weight. Already the agency has incorporated that strategy into its marketing materials, with a new ad asking, “How much does a 1-pound box weigh?” and answering: “11 pounds if you use the wrong shipping company.” The reference is to FedEx or UPS packages that will be charged extra for their higher cube.

Also in the competitive mix are a number of regional parcel carriers, including OnTrac, Lone Star Overnight, Eastern Connection, Lasership and Pitt Ohio Express. In some cases, they’ve been able to put together national networks through cooperative arrangements, matching the broader coverage of FedEx, UPS and the Postal Service.

The coming holiday season will tell whether the Postal Service’s latest competitive move is successful. Given the shipment delays that plagued private parcel carriers last Christmas, the agency stands a good chance of carving out a bigger market share. In the meantime, the Postal Service deserves credit for its aggressive action on parcel rates. Says Khechfe: “It’s definitely a wow.”

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