Staples Delivers First Blow for Postal Privatization

A pilot program is feared as a first step toward turning over mail service to the private sector.

Apr 28, 2014 at 1:47PM

A company that routinely loses billions of dollars annually -- and even hundreds of millions of dollars in its strongest quarter -- can't be expected to survive too long. While the Postal Service doesn't quite operate like a private corporation the nation's postal service is finding itself in an increasingly difficult position. The postal service lost $5 billion in its last fiscal year and $354 million in the first fiscal quarter, which covers the Christmas holiday, when package shipments surge. This loss does take into account pre-funding of retiree health benefits as required by Congress, meaning that the Post Office is operationally profitable, but these losses will need to be addressed in the long term. That being said, all hope is not lost for the USPS.

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Source: United States Postal Service.

Indeed, it was a 10% increase in package volume and a 14% jump in package and shipping revenue that allowed the U.S. Postal Service to slash last quarter's losses from more than $1 billion the year before. But hundreds of millions in losses is still unacceptable, which is why the agreement it signed with Staples (NASDAQ:SPLS) last year to offer postal services at some 80 stores has some fearing it could be the first step toward privatizing the mails.

Last November, the government began as part of its Retail Partner Expansion Program a pilot plan to install mini-post offices in Staples beyond the usual stamp sales such partners are typically afforded. Instead, Staples will also include first-class domestic and international mail and package services, Priority Mail, Priority Mail Express, Global Express Guaranteed, and Standard Post services. A key detail was that a Staples employee, not a postal worker, would receive your package or envelope.

Last week, the American Postal Workers Union staged picket lines outside dozens of Staples stores across the country to protest the creeping privatization of the service. They don't necessarily mind putting postal outposts in retail stores -- what they object to is the use of Staples employees to handle the mail. The union wants a postal worker standing behind the counter, which is why the partnership the post office launched with Amazon.com to deliver packages on Sundays didn't rankle: It was an expansion of business for postal workers.

Staples is not interested in being as revolutionary as all that. All it's looking for is to bring more people into its stores. It had also entered into a partnership with Amazon to install lockers in its stores as a way to derive incremental income from people picking up packages, but it was a failure because it did nothing more than make it more convenient for its rival's customers to shop the e-commerce site. It ended the program after less than a year. 

Sales at Staples fell to $24.8 billion last year, a decline of more than 1%, primarily from Europe's continued economic malaise, but also anemic growth here at home. Comparable sales were down 4% in 2013 as traffic fell even as it closed almost 80 stores. It can't afford to put those revenues at risk by angering a large portion of the populace that has operations in virtually every city, town, and hamlet. It's what has made post office closings so difficult, because they affect every congressional district, creating a powerful bloc of protest.

The task the postal service sets out to accomplish is a truly vast and mind boggling enterprise. It involves the sorting and delivery of 158 billion pieces of mail. It also happens to employ 626,000 people, making it the third-largest employer in the country, and it would rank 45th in the 2013 Fortune 500 if it were a private company. That gives it a lot of clout in stymieing efforts that even remotely seem to suggest the system may be privatized or altered. 

Although the USPS doesn't directly receive tax dollars anymore to operate, it does get about $100 million annually to fund special delivery programs such as those for the blind, and those multibillion-dollar annual shortfalls are financed by borrowing money from the government. 

Partnerships like those with Staples can help narrow the gap between income and expenses, and as snail-mail use continues to drop, package delivery will assume a greater portion of its revenues. This represents a radical shift from the current structure of the United States Postal Service - a structure that has been resistant to change. The existence of a "post office" at Staples precludes the need for even having many of the high-cost brick-and-mortar buildings owned by the government.

I'm not sure this partnership will be any more successful for Staples at boosting traffic than its venture with Amazon was, and angering the very people it's supposedly working side by side with could cause it to become an even bigger disaster.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Amazon.com and Staples. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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