The big problem for package delivery is the so-called "last mile." Placing a package at a customer's door is the hard part, and large businesses like United Parcel Service (UPS +1.83%), FedEx (FDX +1.38%), and the U.S. Postal Service have built massive distribution networks to accomplish it.
Amazon (AMZN +0.61%) built its own delivery network, too, but it continues to use other delivery services. Only, other businesses aren't as willing to work with Amazon anymore. Here's what you need to think about as you look at the breakdown in contract negotiations between the U.S. Postal Service (USPS) and Amazon.
UPS made the first move
The move by the USPS to walk away from contract talks with Amazon follows the 2025 decision by UPS to reduce the number of packages it carries for Amazon by 50%. The move by UPS was directly related to profitability. The parcel delivery service stated it was looking to reduce its exposure to high-volume customers with business that offered low profit margins.
Image source: Getty Images.
Essentially, Amazon used its size as a business to reduce delivery costs as e-commerce became increasingly important. UPS finally pushed back. That is, likely, what the USPS is doing, as it appears to be forcing Amazon to work through a new "last mile" bidding system. That will force Amazon to compete with other retailers for access to the USPS delivery network.
Are higher delivery costs on the way?
Amazon already delivers many of its own packages, so it could simply continue expanding its delivery service. However, there are limits on what it can do and where at this point, particularly in smaller markets where it doesn't have a material delivery presence. With UPS cutting back its relationship with Amazon, the USPS was likely to be the replacement in hard-to-reach locations.
NYSE: UPS
Key Data Points
Amazon may have no choice but to shoulder higher delivery costs. There are only two choices: quickly building its network or paying higher delivery rates. In theory, paying higher delivery rates would benefit companies like UPS and FedEx. However, it is unlikely either company will want to materially increase their exposure to Amazon, given the historically low profitability of that relationship. And Amazon has already stated it plans to continue expanding its delivery network, so the volume benefit would probably be temporary for UPS and FedEx, anyway.
Amazon is the loser, but nobody really wins
If the USPS pushes back on Amazon, that could theoretically lead to higher parcel-delivery rates, which could help UPS and FedEx. However, the value of working with Amazon is questionable at this point, noting UPS' move away from the online retailer. There is a clear loser here: Amazon has to figure out how to deliver packages to customers' front doors. But it isn't clear that there will be a winner.
