The United States Postal Service (USPS) has not traditionally priced its package delivery service based on the cost of delivering packages. A government task force believes this should change and that prices need to go up in areas where the USPS loses money. As a result, retailers might make changes to how they promote free shipping to customers and whether they offer incentives to get consumers to pick up in stores. This could create a ripple effect that causes Amazon.com (NASDAQ:AMZN), FedEx (NYSE:FDX), and UPS (NYSE:UPS) to reassess some things.
A full transcript follows the video.
This video was recorded on Dec. 13, 2018.
Nick Sciple: Let's talk about another wild card that's getting thrown in. Again, from the executive branch, there's currently a Treasury-led task force that is proposing the U.S. Postal Service should charge more for their package deliveries. The task force has reported that the Postal Service does not price its package deliveries in a way that focuses on profits, and therefore, the Postal Service should look at increasing their rates to more of a market-based rate. What's your instant reaction to this, Dan?
Dan Kline: Doesn't that tell you everything that's wrong with government-run agencies? Like, can you imagine if I said, "Hey, Nick, I'm starting a business. It's a butcher shop. I'm not going to price the meat based on the cost of the meat. On Tuesday, veal chops are free." [laughs] It just makes no sense! I know there are laws, it's not easy for the Post Office to increase prices. But, very clearly, any sensible person would say that whether it's Amazon or whoever it is, should be paying at least the cost of the service.
Now, obviously, there are some deals. The Amazon delivery on Sunday through the USPS is profitable. They have negotiated a deal where, because they are serving one customer in a very specific way, it makes money. They need to figure out how to price the rest of their services. And that's going to change some things. If you raise the cost of shipping, it might be beneficial to go to a store. You'll see more of what Walmart does, where they will say, "We will sell this to you and ship it to you for this price. But if you come get it, it's that price." That's not something Amazon can do easily. But, Amazon has the volume to negotiate things like their Sunday deal, or to say, "Alright, you're going to raise prices? We're going to build our own shipping network."
Sciple: Right. To give a little context on Amazon, according to Morgan Stanley, Amazon relies on the Postal Service to deliver about 45% of its packages. That's a meaningful segment of their business. I know part of this Postal Service price discussion has been in relation to President Trump's attitudes toward Amazon. It's going to affect them.
Another part of the industry that we might think is going to be affected is FedEx and UPS, in that it might actually be a little bit of a negative for them. Oftentimes, FedEx and UPS can use the Postal Service for their last-mile delivery. As those prices increase, that's of course going to hurt them, because it's going to increase the cost of their shipping.
Kline: Also, though, higher USPS prices allows UPS and FedEx to charge more.
Sciple: Oh, yeah. The analogy that I would have is, think about the Federal funds rate. We've talked about interest rates being increased over time. That rate for banks is the baseline for interest rates. Their rates are always set relative to that number. Well, what happens in logistics as well is, UPS and FedEx and the other shippers' rates are set relative to the Postal Service. If you look at the Postal Service increasing their rates, it's just like the Fed increasing rates. All these shippers down the line get to increase their rates, as well, because relative to this baseline Postal Service rate, the spread remains the same.
Kline: Right. There's no magic to it. It's not like FedEx has a special better way to deliver packages. I mean, obviously, there's a heavy level of training at FedEx and UPS, and they're very efficient. But they haven't figured out teleportation or drone delivery or any of the things that would be a game changer. So, it's a fixed cost.
Sciple: Right. Going forward on these prices, it's unclear what form these price increases for the Postal Service are going to take. We do know at this time that there is going to be an increase on the USPS' Parcel Select service in the range between 9.3% and 12.3%, beginning at the beginning of 2019. For context for listeners, this service allows large shippers -- think your Walmarts and Targets of the world -- to sort their packages themselves and then deposit them directly to the USPS for their final delivery. We know for sure that large package shippers will see a 9%-12% increase in their rates for this service. What is your reaction to that?
Kline: Do you buy from Amazon pretty regularly?
Sciple: Yeah. As a U.S. citizen, I'm probably in the vast majority here as buying Amazon probably once a week.
Kline: I order from Amazon probably every day. And if Amazon came to me and said, "I'm going to increase the price of Prime by 12%," and everybody else I order from that sometimes I have to pay shipping said, "We're going to pass this on. We're going to raise your prices 15%," I wouldn't bat an eye. Maybe, occasionally, I'd pick up something in a store, just to not have to order it, to save time. But it wouldn't factor in. Unless Amazon said, "Prime's $129. Now, it's $650," I don't think this impacts anyone. This is one of those areas, like gas prices, where consumers just expect it's going to be a little flexible. I don't know, do you know what it costs to FedEx a box? If you have to FedEx something, you go to the FedEx and do it, and it costs what it costs.
Sciple: You're right. What could be the takeaway here is, given that this is a marginal increase, and there is a lot of consumer surplus to the Amazon Prime offering to begin with, this could be something that's just passed on to consumers. But it is something to think about. These businesses are going to have to adapt, whether it's passing those prices on to consumers or making changes to their logistics infrastructure, to handle these costs going forward.
Kline: We talked about this a little bit before, this is going to be a big benefit to brick and mortar retail chains that have very good supply side logistics. You're going to be able to know on every item -- Walmart might be able to say, "I'll ship this to you if you also buy this." Amazon has the add-on items that are free shipping, but only with another order. I think you're going to see a much more sophisticated level. Or, Walmart saying, "I will give you something great. I'll give you a $5 gift card to come pick this up in the store, because it makes no sense to ship it to you because you're a mile away and I have to send it to a Post Office and it's going to be on a plane before it gets to you." So, this might be a little bit of a blow to Amazon, or might force Amazon to make some more brick and mortar partnerships.
Sciple: Yeah. What we know for sure is that demand for e-commerce and goods purchased online is certain to increase over the coming years. And, as a result of that, the ability to move things from one place to another, particularly small, individual shipments, will become even more important each year. The companies that are able to navigate that dynamic and adapt as things change, whether it's with these tariffs or with the USPS, those are the companies that are going to really succeed going forward. Moving things from place to place is more important today than it maybe has ever been. What are your thoughts on that?
Kline: To close, there's one more prong of this that we've talked about before. That is, everybody is building out some sort of same-day shipping capacity. My son texted me when I was with you at a football game yesterday. "How do you order from Chipotle?" My wife was baking, and he wanted Chipotle, so they couldn't go out. And I said, "It's Postmates." And my wife said, "What the hell is that?" She uses Grubhub, we have Instacart. So, I had to send her a picture of the app and be like, "This is how you do it." Then, I looked at my phone, and I have like 15 separate delivery apps, and like three restaurant chains we deliver from that you order through them, but maybe it shows up and it's Uber Eats, or maybe it's Postmates, or maybe it's who the heck knows.
As Target and Walmart figure that out, they will take some stress off their two-day shipping by saying, "No, it makes sense to have toothpaste and toilet paper and cookies be in our same-day delivery basket and to incentivize people there," because that's always going to be a smaller pool of items. There's less choice, they'll push you toward it. There are going to be huge shake outs there. There are not going to be 15 separate delivery services in West Palm Beach in two years. Maybe even Walmart and Target won't both make it. But that's going to change this whole UPS, FedEx. Those are all guys-in-a-car kind of delivery services. You will see this gig economy service take some stress off.
Sciple: Yeah. It's going to be something that's remarkable to follow over the coming years as the face of retail continues to transition and consumer preferences continue to be, "I want to stay at home and you bring the stuff to me, you businesses figure out how to make that happen."
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel B. Kline has no position in any of the stocks mentioned. Nick Sciple has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Chipotle Mexican Grill, and FedEx. The Motley Fool has a disclosure policy.