Amazon (NASDAQ:AMZN) announced this week a new partnership with the United States Postal Service that would allow for Sunday package deliveries. The deal gives the Postal Service an advantage over competitors such as United Parcel Service (NYSE:UPS) and FedEx (NYSE:FDX), which don't deliver on Sundays. What does each of the new partners stand to gain from the deal -- and why did Amazon choose the USPS over its competitors?
Sunday deliveries will become available immediately for people in Los Angeles and the New York metropolitan area. But Amazon plans to add more regions next year, including Dallas, New Orleans, and Phoenix.
USPS has offered Sunday package delivery in the past for an additional cost. But the Amazon deal works around that for certain shoppers. The deal's financials weren't disclosed but the arrangement offers clear advantages to both parties and could help plug the USPS revenue hemorrhage.
Amazon will benefit from the competitive advantage of offering delivery on Sundays when most stores don't, which could attract more late-minute holiday shoppers who might otherwise rush out to the brick-and-mortar stores.
But the move will also entice more customers to join the Amazon Prime service. Prime costs $79 per year and offers free two-day shipping. And now that second day can include Sunday.
Amazon doesn't divulge its Prime membership numbers. But a study in March from Consumer Intelligence Research Partners, or CIRP, and Morningstar estimated that there were 10 million Prime members at that time -- more than double the estimated members in 2012.
Why does Amazon want more Prime members? Sure, that $79 membership fee is nice. But the CIRP/Morningstar study also showed that Prime members annually spend about $1,200 -- more than twice the amount of non-member shoppers. More importantly to Amazon, those Prime members do the majority of their online shopping there.
USPS tried -- and failed -- to get Congressional approval for ceasing Saturday deliveries of regular mail. The move would've kept Saturday delivery for packages and cut approximately $2 billion from the service's yearly losses, which amounted to about $16 billion in 2012.
First-class mail had 2012 revenues of $28.9 billion -- down nearly 4% from the prior year. Standard mail had revenues of $16.4 billion, which was also down about 4%. But the shipping and packages revenue of $11.6 billion was a 9% improvement.
The USPS shipment improvement is encouraging but still a far cry from the numbers of shipping specialists UPS and FedEX. UPS domestic package revenues were nearly $33 billion last year. FedEX reported over $21 billion in U.S. package revenue.
Why did Amazon choose the Postal Service?
Why did Amazon choose to team up with the USPS rather than UPS or FedEx for Sunday deliveries? The company obviously didn't spell the reasoning out in the news release. But it likely came down to the fact that USPS offered the best bargain, since the Postal Service is desperate to increase package revenues. UPS and FedEx already have busy holiday schedules and likely lacked the bargaining room of the Postal Service.
Foolish final thoughts
Amazon's desire for more Prime members and USPS' desire for more packages should lead to an eventual nationwide rollout. This year's pre-holiday launch should boost Amazon's revenues in the offered cities and the USPS annual report could show some of the financials of the deal and how they might help recover some of the service's losses.