C&B Notes

(Less) Cash on Delivery

Amazon and other online retailers are enjoying a taxpayer subsidy as the U.S. Post Office loses money on their package deliveries.  Is this subsidy durable, and if not, how big of an impact would it have on the industry?  Delivering goods the last mile to doorsteps is expensive, and it doesn’t exist in many countries.

Like many close observers of the shipping business, I know a secret about the federal government’s relationship with Amazon: The U.S. Postal Service delivers the company’s boxes well below its own costs.  Like an accelerant added to a fire, this subsidy is speeding up the collapse of traditional retailers in the U.S. and providing an unfair advantage for Amazon.  This arrangement is an underappreciated accident of history.  The post office has long had a legal monopoly to deliver first-class mail, or non-urgent letters.  The exclusivity comes with a universal service obligation — to provide for all Americans at uniform price and quality.  This communication service helps knit this vast country together, and it’s the why the Postal Service exists.

In 2007 the Postal Service and its regulator determined that, at a minimum, 5.5% of the agency’s fixed costs must be allocated to packages and similar products.  A decade later, around 25% of its revenue comes from packages, but their share of fixed costs has not kept pace.  First-class mail effectively subsidizes the national network, and the packages get a free ride.  An April analysis from Citigroup estimates that if costs were fairly allocated, on average parcels would cost $1.46 more to deliver.  It is as if every Amazon box comes with a dollar or two stapled to the packing slip — a gift card from Uncle Sam.

Amazon is big enough to take full advantage of “postal injection,” and that has tipped the scales in the internet giant’s favor.  Select high-volume shippers are able to drop off presorted packages at the local Postal Service depot for “last mile” delivery at cut-rate prices.  With high volumes and warehouses near the local depots, Amazon enjoys low rates unavailable to its competitors.  My analysis of available data suggests that around two-thirds of Amazon’s domestic deliveries are made by the Postal Service.  It’s as if Amazon gets a subsidized space on every mail truck.

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