USPS’ holiday surcharges may be lump of coal for merchants

The first rate increase of the Louis DeJoy era as postmaster general could end up hitting millions of merchants right between the eyes during the busiest time of the year. However, the increases could be stocking stuffers for the agency’s largest parcel users. 

With no fanfare, and subsumed by the extraordinary election-year chaos swirling around it, the U.S. Postal Service (USPS) on Friday afternoon announced a series of proposed peak holiday season surcharges on its biggest parcel customers, those who ship massive numbers of packages under commercial contracts with USPS. In absolute terms, the increases are measured in cents on the dollar. However, because of the very low rates already afforded to big users, they amount to substantial increases on a percentage basis.

The proposed temporary hikes, which would take effect Oct. 18 and run until Dec. 27, must still be approved by the Postal Regulatory Commission, the independent agency that oversees USPS’ pricing actions. The increases will not affect retail customers and do not apply to international shipments, USPS said. It will also not be accompanied by any structural changes in the agency’s parcel-processing and delivery operations. 

Under the proposed measure, a 1-pound parcel rate for the agency’s popular Parcel Select DDU drop-shipping service, where consolidators dump bulk parcels deep into the postal network for residential deliveries, would rise by as much as 7.5%, from $3.19 to $3.43 per parcel. The rate for a returned parcel of the same weight would rise 7.9%. The rate of a parcel weighing less than 1 pound would jump by 13.3%. Commercial rates on USPS’ Priority Mail two- to three-day delivery product would rise 5.9% from a low of $7.02 to $7.42 per piece. The surcharges would average out to 6% to 8% increases on USPS’ largest mail users, according to estimates from investment bank UBS.

However, those increases will likely be passed on, and in larger increments, to the small to midsize merchants who pay the large users to consolidate their parcels with millions of others and induct them in bulk deep into the postal system for residential deliveries. According to UBS estimates, the marked-up surcharges by UPS Inc. (NYSE:UPS), which operates as a consolidator of merchant traffic, could be two to four times higher than the increases that UPS will absorb from USPS. 

In a note published Sunday, UBS called the nature of the USPS announcement “unusual,” and said it reflects the tightness of the parcel delivery market as well as the greater-than-normal pricing power currently held by UPS, rival FedEx Corp. (NYSE:FDX) and USPS on business-to-consumer (B2C) traffic.

Some National Service Agreements (NSA), the name for contracts between USPS and its largest shippers, have caps on rate increases. However, NSAs allow for rate pass-throughs as a result of USPS pricing actions beyond the users’ control, according to Jerry Hempstead who runs a parcel consultancy bearing his name. Carriers have levied, or are poised to levy, their own peak surcharges, which are expected to be larger than prior years due to the added volumes associated with the coronavirus pandemic. 

In an email, Hempstead said many shippers will “most likely get a double whammy of the carriers’ peak surcharge and the USPS peak surcharge.”

Consultancy Shipware, LLC used the example of the Parcel Select rate increase to illustrate the potential financial benefit to consolidators like UPS. The $3.19 rate paid by UPS will rise by 24 cents per parcel. However, should UPS pass on that increase proportionately, the $10.17 rate that it charges customers using its SurePost last-mile induction service will rise by 76 cents per parcel, Shipware said. The differential represents a 52 cent, or 5.1%, increase for UPS on every SurePost shipment, Shipware said. 

Shipware CEO Rob Martinez said the gap will create a “huge profit” opportunity for UPS. Conversely, merchants operating on tight margins and already offering consumers low-cost to free shipping in order to compete could find the markups painful, Martinez said.

The Package Coalition, which represents a broad array of USPS stakeholders, said in a statement that the proposed increases are “relatively moderate” compared to the frequent calls by President Donald Trump for USPS to quadruple its parcel rates. Trump’s demands, which many experts believe would severely damage smaller merchants and cause postal customers to flee to rivals, are “devastating to businesses and consumers,” said John McHugh, the coalition’s president. Forcing USPS to “set prices above competitive levels would do nothing but harm the Postal Service and, with it, the American businesses and consumers who rely on its delivery services,” McHugh said.

The USPS increases will apply to all businesses who drop-ship parcels at the agency’s “destination delivery unit,” postal lingo for the local post office. These include companies like UPS, FedEx, DHL and Pitney Bowes Inc. (NYSE:PBI), as well as mega-shippers like Inc., (NASDAQ:AMZN), USPS’ largest shipping customer, that have the large volumes to meet the agency’s thresholds for receiving bulk commercial rates

The proposed surcharges will help offset the costs of handling elevated parcel volumes since the coronavirus pandemic began, and will generate additional revenue at a critical time, the agency said in a statement on Friday.

USPS handled 701 million shipments in July, a 46% year-on-year increase, according to data from consultancy ShipMatrix. Second-quarter volumes rose nearly 50% year-on-year to 2.1 billion parcels, ShipMatrix said.

USPS handles immense residential volume. It delivered 6.2 billion parcels in 2019, more residential volume than FedEx and UPS combined, according to Shipware data. Most of the volume came from the Parcel Select service, Shipware said.

Parcel Select is popular with consolidators and merchants because it offers universal deliveries at very low rates. By law, USPS must serve every address in the U.S. Big users value Parcel Select because it provides them with blanket delivery coverage without the cost of dispatching their trucks and drivers.