The United States Postal Service announced yesterday that it is slimming down its delivery schedule, potentially opening up new market share for UPS (NYSE:UPS) and FedEx (NYSE:FDX) to put their stamps on. Here's what you need to know:
In a press release issued yesterday, the USPS announced that, starting in August, it will no longer offer Saturday mail delivery. The move comes as part of a larger movement to cut costs at USPS, which has been in dire financial straits since 2006.
Weekday-only deliveries are not a new idea, but what's more surprising about the announcement is what it doesn't include: packages. According to the USPS, package delivery demand is soaring even as mail deliveries crumble.
In light of these trends, the Postal Service has decided to continue Saturday package deliveries – at least for now.
Taken at its most rudimentary level, this announcement might be seen as one store closing its doors on a day when people are shopping and other stores are selling. But the Postal Service's newest cost-cutting initiative might not be the game changer it's made out to be.
The USPS expects to save $2 billion annually, but that chunk of change isn't easy money for corporations like UPS and FedEx to snatch up. Sure, if you need a letter delivered on Saturday you now have one less competitor to choose from, but the Postal Service exited this offering because it was bleeding money.
In 2012, FedEx pulled in $1.75 billion in sales from overnight envelopes, accounting for just 6.6% of the company's total revenue. If we assume that Saturday deliveries represent one-sixth of this revenue, weekend mail makes up 1.1% of overall sales. Unfortunately, UPS doesn't parse out mail deliveries quite so cleanly, but it's fairly safe to assume that the UPS mail business would be similar to FedEx's.
In addition, both companies enjoy package delivery partnerships with USPS that would've suffered significantly if Saturday deliveries turned out to be a no go. The SurePost partnership with UPS is an important part of the company's e-commerce business and grew significantly in 2012.
Although FedEx's SmartPost partnership pulled in just $782 million in 2012, the division grew 18% in the last year and is a good example of carefully harnessed competitive advantage.
Don't go breaking your investing theses just because USPS dumped an unprofitable delivery schedule. More than anything else, this most recent move represents a government organization reorienting its public service mandate, rather than a cash cow opportunity for private organizations to swoop in on.
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