USPS and Amazon team up for Sunday deliveries in metropolitan Los Angeles and New York

The financially-beleaguered United States Postal Service (USPS) and e-commerce giant Amazon announced yesterday that they have teamed up in a joint effort focusing on Sunday delivery in the Los Angeles and New York metropolitan areas, which kicked off last Sunday.

Under the parameters of the agreement, USPS will deliver packages on Sunday to Amazon Prime members whom receive unlimited, free two-day shipping for $79 per year. This could be a boon for USPS customers as Sunday package deliveries are typically very costly.

Amazon and USPS officials said that metropolitan Los Angeles and New York are a starting point for this service, explaining that that plan to introduce it in Dallas, Houston, New Orleans, and Phoenix next year, among other locales.

USPS Senior Public Relations Representative Sue Brennan told LM that the USPS has been working with Amazon for months on a negotiated service agreement for this service. The USPS defines a negotiated service agreement as a contractual agreement between the USPS and an individual company that provides customized pricing incentives or other terms.

And USPS Postmaster General Patrick Donahoe said in a statement that “[a]s online shopping continues to increase exponentially, the Postal Service is very pleased to be able to offer shipping solutions that allow major retailers and customers alike to appreciate the benefits of using the U.S. mail,” adding that “by offering Sunday delivery, the Postal Service is focused on serving the needs of our valued customers in today’s busy online world. We consider this a win-win for both organizations and are excited to be delivering packages seven days a week in select markets.”

Brennan left open the possibility that the USPS may eventually work with other companies for similar partnerships in the future, saying if other shippers are interested, the USPS would be happy to speak to them.

Jerry Hempstead, president of Orlando, Fla.-based parcel consultancy Hempstead Consulting, said that the USPS-Amazon partnership has potential, while cautioning it will by no means serve as a financial lifeline for the USPS either.

“Let’s not assume the USPS is providing door to door service from an Amazon DC to the consumer,” he said. “Most likely Amazon has to get their packages to a DDU (destination delivery unit) for delivery to the consumer. Who might be best to do that? Amazon does not have a fleet of their own trucks, and I doubt the USPS is planning to run their entire transport network and sortation process so that Amazon can delight their customers with a day earlier delivery.”

Hempstead said if this is to be a successful alliance it is more than likely it will take a partnership of Amazon and a logistics company like FedEx or UPS to get their parcels down to the delivering unit on Saturday or Sunday morning so that Sunday delivery can be accomplished.

What’s more, he explained that this effort is unlikely to add more packages to either entity; instead he viewed it as the “cannibalizing” of deliveries from Monday delivery to Sunday.

“I don’t see this as being the salvation of the USPS by any stretch of the imagination,” he said. “My tummy tells me that because of union rules at the USPS, this may end up costing the USPS more revenue than it actually takes in but we will let history speak to that. And the key is critical mass, which means that this offering is not unique to Amazon (although the price negotiated for the service may be) so the service advantage will only last at Amazon for a short time before the competitors of Amazon also figure out how to take advantage of the USPS feet on the street on Sunday.”

This announcement comes at a time when the USPS continues to be in the red. In Fiscal Year 2012, it had a $15.9 billion net loss and it has lost $3.9 billion to date in Fiscal Year 2013. One of the main reasons for the ongoing losses is the decline of First Class Mail, which has traditionally been its most profitable offering.  USPS has said that the First Class volume is due in large part to an ongoing diversion from paper to electronic communications, including e-mailing business documents and online purchasing orders, as well as other electronic mailing processes.  Another reason is its mandated prefunding health retiree benefits which are part of a Congressionally-mandated 10-year payment schedule at an average of about $5.5 billion per year to create a fund to pay future retiree health benefit premium, among others.  Last summer, the USPS announced it could not make $5.5 billion in mandated prefunding health retiree benefits to the Treasury, which was due August 1, as well as a $5.6 billion payment that was due on September 30.

Even with these financial issues, the USPS is making strides in its Shipping and Packages group. It expects a 5-to-6 percent increase in volume and a 6-to-7 percent increase for revenue in this area, which represents 18 percent of total revenue (based on 2012 figures), with the expectation it will rise to 26.4 percent—or $16.4 billion—by 2017.

USPS is projecting 5-6% increase in volume and 6-7% revenue annually for Shipping & Packages segment.  Currently accounts for 18% of total USPS revenues (2012), and they are anticipating it will grow to 26% ($16.4 billion) by 2017.