Today, the world is abuzz over the announcement of an agreement that was made between Amazon.com (NASDAQ:AMZN), the world's largest e-commerce site, and the United States Postal Service. According to the announcement, the USPS will now begin delivering packages for Amazon customers on Sunday. This is on top of the six other days of the week that USPS has historically delivered on and signifies a complete turnaround from their goal earlier this year to end Saturday deliveries. In an effort to inform the Foolish investor of the significance of this deal, I decided to delve into what it means for Amazon, the USPS, FedEx (NYSE:FDX), and United Parcel Service (NYSE:UPS).
What impact this has on Amazon and the USPS
Initially, this deal appears to be a boon for the USPS. For years, it has been struggling to hold its ground against publicly traded entities like FedEx and United Parcel Service, but to no avail. For instance, although the e-commerce industry is a $186-billion-a-year business, the USPS was hit with a loss of $16 billion last year as a combination of government restrictions and increased competition from private competitors hinders its performance.
From a regulatory perspective, one report by the Federal Trade Commission found that, while the organization receives anywhere between $39 million and $117 million a year in subsidies, the regulatory burdens on it cost the organization around $782 million per year. In light of this significant disparity, the FTC has called for the government to end both the subsidies and restrictions. Irrespective of these calls, though, it appears as though the competitive edge that the USPS will be able to gain from this deal may aid it in turning its operations around, especially if it can lock in deals with other big shippers.
For Amazon, this should also provide an even greater competitive edge over other major e-commerce companies. One primary example of this is the impact it might have on Staples. Despite being one of the largest e-commerce companies in terms of retail sales, Staples will likely be negatively affected by this announcement as well as other businesses like eBay due to their current lack of Sunday delivery options. This, in turn, will likely drive additional business to Amazon to aid in its already rapid pace of growth, further establishing itself as a world-dominating power.
Although it may appear to be an exaggeration to say that Amazon is so powerful, when you consider that it comprises roughly one-third of all online sales, it's probably not too far from the truth. Furthermore, this point is illustrated by the company's already phenomenal growth rate. From 2008 through 2012, sales on the site increased by 218.8%, from $19.2 billion to $61.1 billion, while cash flows from operating activities have risen by a lesser, but still impressive, 148.3%, from $1.7 billion to nearly $4.2 billion.
What this means for FedEx and United Parcel Service
In addition to being positive news for both Amazon and the USPS, this announcement has a rather significant impact on FedEx and UPS, as these two entities are left with the question of what to do. Should they also initiate services across the board or would it be a negative move for their operations? Unfortunately, this question is hard to answer, but it's not entirely impossible to guess the outcome.
In the event that FedEx and UPS do not follow suit with a standard plan that aims to target Sunday delivery, it is likely that they will lose some market share to the USPS. However, the difficult question to answer is what will happen in the event that they do initiate regular Sunday delivery. In this case, it is possible that the companies will see revenue increase in the future, but since there are a finite number of packages in the world that will not change much based on delivery options but, rather, change based on consumer purchases made online, it is very possible that the increased competition, combined with lower prices from not having regular fees for Sunday service, could negatively impact revenue.
In addition to potentially impacting revenue, it is likely that an increase from six days per week to seven days would impair margins as the volume of six days of packages will be distributed among seven days now (adjusting for both an increase in e-commerce activity over time, as well as any decrease seen due to competition from the USPS).
Based on the evidence provided above, it appears as though both Amazon and the USPS have struck up an amazing deal. While Amazon will receive an even greater edge over its competitors, the USPS will see an increase in revenue as it too has something that its competitors lack. While it is possible that any change in profits and margins for FedEx and United Parcel Service will be short-lived as they too begin offering similar deals and competitors to Amazon flood in with advocating Sunday deliveries, the first-mover advantage for Amazon and the USPS could mean all the difference.