Amazon or Scam-azon?

Retirement, Income, Tax & Estate Planning.

Amazon or Scam-azon?

April 5, 2018 Newsletter 0

On Easter Sunday we again saw the President go after Much has been written about Amazon lately, especially as more and more retailers close brick & mortar locations. The President’s tweets, however, were in response to the supposed “bad deal” the e-retailer had struck with the Post Office (USPS) and how it was a “scam” that was costing the beleaguered agency “billions of dollars”.

On the surface, it does look like Amazon is strong-arming special favors out of a USPS that is desperate for cash. We know the postal service is struggling to make money. We know costs have gone up as the struggle continues—in 1968, it cost $.06 to mail a letter, by 1988 it was up to $.25, and this year it’s $.50. And despite talks of cutting Saturday delivery to homes because they just can’t afford it, we see postal trucks out on Sundays delivering Amazon packages, even though the Post Office has never delivered mail to us regular folks on Sundays. And since Amazon doesn’t charge much for shipping in the first place, what kind of deal do they and the post office have?!
If we put the outrage—and the need for Saturday grocery flyers—aside, we’ll see there’s more to the story.
First off, as you may or may not be aware, the USPS is not a full-fledged government agency like the FBI or the IRS, nor is it a government-owned corporation like Amtrak. It is not completely fueled and funded by your and my tax dollars. It is an independent agency of the federal government, controlled by the Executive branch. So it operates semi-independently, and is funded through a mix of its own revenue and government funding.

Now, its money troubles stem from three things. First, the decline in the number of first class mailings (which peaked in 2006) coupled with the increased costs of ensuring their delivery took away revenue. Second, the removal of direct subsidies from the government that started in the 1980s took away funding. And finally, the 2006 requirement by Congress mandating the agency fully fund its pension system for 75 years, which is estimated to cost the USPS $5.5 billion per year, increased its operating costs significantly.
So is Amazon taking advantage of a troubled USPS? According to an article from Vox (read here), parcel delivery—like what the USPS does for Amazon—is one area where they remain profitable. So, probably not! As Vox explains, it’s best to think of the USPS conducting business as two organizations. It has a “monopoly” side—its postal mail delivery, which no other organization can do—and it has a “market” side—parcel delivery, where the USPS competes with companies like UPS and FedEx. The monopoly side is completely funded by postage revenue. On its market side, the USPS bids against UPS, DHL, etc. with companies looking for parcel-shipping partners and enters into contracts called NSAs (negotiated service agreements). USPS NSAs and its parcel shipping services produced a profit of $7 Billion for the agency last year, up $2.1 Billion from the year before.

So while parcel delivery is profitable for the USPS, there remains a caveat with the Amazon question. The specific NSA between Amazon and the USPS has not been disclosed, so just how profitable that particular relationship is for the post office is unknown. But while it’s likely the USPS did not bid themselves into a losing contract (we hope), they may have cut margins slim to get the bid.
So while Amazon may catch the blame for killing middle class retailers like Macy’s and Toys R Us (over, say, those retailers all racing to the bottom to try and beat Walmart, abandoning service & uniqueness in the process), they probably can’t be blamed for killing the USPS. Email and a funding-cutting Congress probably share the blame for that.