USPS is at work on making changes to its contracts with package consolidator companies

The United States Postal Service (USPS) said this week it is taking steps to implement what it called a new strategic approach, regarding its contracts with package consolidator companies, which they define as those who consolidate large volumes of packages for entry into various points of the USPS network.

The rationale for this move, explained USPS, is that those contracts no longer reflect “operational and financial realities in today’s market, as well as the USPS network, and its refreshed product offerings. What’s more, it stated that the USPS has entered into new agreements with package consolidator companies that are consistent with the USPS network that are consistent with the organization’s current business strategy—and it said that the USPS will no longer be offering discounted rates through Negotiated Service Agreements (NSAs) for packages that are entered by consolidators at Post Office Delivery Units.

“As we engage in the process of modernizing our network, we are also changing our product and pricing strategies to ensure that they are aligned with our operating model and goals,” said Postmaster General, Louis DeJoy.  “As one part of this new approach, we have decided that it is appropriate to make changes to how we utilize NSAs in the provision of our Parcel Select product.  In that regard, to more effectively utilize our network and realize enhanced economies, we no longer intend to provide discounted rates through NSAs that incent parties to aggregate mail volume from multiple shippers and to bring such volume directly to our delivery units.” 

USPS said Parcel Select is the registered trademark name for the its economical ground delivery service for packages entered in bulk, including those entered at desti­nation facilities and is designed for and generally used by large- and medium-sized parcel shippers.

The top USPS executive added that it is challenging for the USPS to justify entering into NSAs that incentivize its transportation and processing network and leave USPS responsible for managing the final mile, which he said is often the most resource-intensive part of the delivery process.

“To continue this practice is not consistent with our business strategy to create an efficient network and grow our own end-to-end ground package product (USPS Ground Advantage) for shipping customers,” said DeJoy. “Reevaluating these business arrangements is the right thing to do for the Postal Service and the American people.  And of course, we will make agreements with consolidators who are willing to negotiate deals based upon a more rational use of our network in a fashion that is mutually beneficial.  On that front, we have already concluded a number of new contracts with consolidators that are consistent with our current business strategy, that have been approved by our regulator, and that are operating effectively.”

Jerry Hempstead, president of Orlando-based Hempstead Consulting, noted that this move reflects how the USPS has decided it no longer wants packages at the delivery unit level.

“Their belief, I guess, is that they will now be able to enjoy those parcels further upstream in their network at a higher revenue,” he said. “My observation is that the rate levels offered by the other parcel carriers (UPS, FedEx, OnTrac etc.) for shippers of volume will end up being less expensive than the USPS and the volumes will divert to those carriers’ networks. History will prove out whether this was a prudent move on the part of the USPS.”

Gordon Glazer, Senior Consultant, USPS Specialist, for San Diego-based Shipware, said that while the Parcel Select category discount remains in USPS’s pricing, most usage is via NSAs, and the reduced incentive makes using it a waste of resources.

“Consolidators are being forced to induct further upstream,” he said. “This will have the undesirable effect of slower performance at higher costs. Those not directly impacted: FedEx delivers almost all their Ground Economy (formerly SmartPost) in their own network, and UPS SurePost delivers almost half their volume themselves. Regional Carriers completely skip any USPS involvement. It is interesting to note that these competitors dislike competing for ounce-based lightweight shipments where they are less profitable. They will benefit from significant wholesale cost increases on ounce-based shipping: both on the rate itself and higher-cost regional induction. When the USPS regional centers bog down, Regional Carriers, UPS, and FedEx will be able to outperform USPS and will be able to do it more profitably.”

In its fiscal year 2024 second quarter earnings issued last month, USPS reported it again saw some improvements amid another net loss, for the quarter.

Operating revenue, at $18.8 billion, increased 1.0%, or $191 million, annually, and total quarterly volume, at 26.566 million pieces, fell 1.7% annually. USPS also reported a quarterly net loss of $2.5 billion, compared to a $1.7 billion quarterly loss a year ago, matching the fiscal second quarter.

Shipping and Packages revenue, at $7.7 billion, increased 2.4% annually, with volume up 2.7%, to 1.742 billion pieces. Priority Mail Services revenue was down 40%, to $1.726 billion, with volume off 40% to 160 million pieces. Parcel Services revenue, at $2.65 billion, was off 1.1% annually, and volume, at 920 million pieces, was down 1.3%. The USPS Ground Advantage offering, which was rolled out in July 2023, saw revenues of $3.121 billion, with 556 million pieces delivered (this service is comprised of two-to five- day service standards for packages up to 70 pounds, and USPS is incorporating three services—USPS Retail Ground, Parcel Select Ground, and First-Class Package Service—into this Ground Advantage service) And Package Services revenue, at $202 million was up 2%, with volume, at 112 million pieces, flat annually.