Amazon and the U.S. Postal Service have forged a deal where packages will be delivered on Sunday starting in Los Angeles and New York and building out to more cities in 2014.
The deal is a classic win-win. Amazon will be able to deliver packages on Sunday to its customers and the U.S. Postal Service gets more shipping volume and a boost to the one business that's growing. You could argue that the Postal Service is becoming an Amazon delivery service, but so what? Amazon isn't disclosing its payments to the Postal Service for Sunday deliveries, but it probably got a better deal than it would have with FedEx or UPS.
Let's face it: The U.S. Postal Service financials are horrible. Saturday mail delivery was about to be nixed. So why would the Postal Service start Sunday package delivery? E-commerce and shipping is the one growth area for the Postal Service.
The impact of technological change has been especially pronounced on our First-Class Mail revenues which continue to decline even as new services, the growth of e-commerce, and successful marketing campaigns have helped us grow our Shipping and Packages revenues. However, because Shipping and Packages presently represent nearly 20% of our total revenues and because the profit contribution on these services is much lower than that of our First-Class Mail services, the increases we are currently experiencing in Shipping and Packages cannot fully offset the declines in First-Class Mail revenue and volume. Revenues from Shipping and Package Services would have to grow at a substantially higher rate in order to replace the contribution of First-Class Mail. We anticipate that the volume of First-Class Mail will never return to former levels experienced in the mid-2000s; in fact, we predict that it will continue to decrease well into the foreseeable future...
Despite trends away from hard copy to electronic media, First-Class Mail and Standard Mail continue to provide the vast majority of our revenues. First-Class Mail represents 43% of our revenues and accounts for 42% of the mail volume while Standard Mail generates 25% of revenues, but 51% of volume. Shipping and Packages generates nearly 20% of our revenues despite representing only 2% of volume.
Now Amazon won't offset snail mail declines, but the volume will be welcome. And it's quite possible that other e-commerce companies will follow Amazon's move. If shipping and packages can become 40 percent of revenue perhaps the Postal Service looks like less of a train wreck due to pensions, debt and government funding.
In August, the Postal Service outlined its financials. In the third quarter, the Postal Service had operating revenue of $16.2 billion, up 3.6 percent from the same quarter a year ago. Operating expenses, however, were $16.9 billion. That tally is due to an efficiency drive at the Postal Services---mail processing centers, work hours and delivery routes were consolidated or eliminated.
Here's the problem: The Postal Service's first class delivery volume has plunged in recent years due to e-bills and simply less need for snail mail. However, shipping and package revenue was up 8.8 percent.
The Postal Service's resurrection plan revolves around more shipping and a lot less mail.
Amazon's deal for Sunday delivery isn't a cure for the Postal Service, but is a welcome addition to any turnaround plan.