In March, I reported that Amazon, which is the Postal Service's biggest customer, was planning to reduce the number of packages it sends through USPS by at least two-thirds after failing to reach agreement on business terms. USPS delivered more than a billion packages for Amazon last year, which accounted for around 15% of Amazon's total package delivery and up to 40% of its delivery to rural areas.
Amazon said it negotiated in good faith with USPS for over a year and believed a deal was near when USPS “abruptly walked away at the 11th hour and introduced the auction concept” — which is where the Postal Service, for the first time, opened its last-mile delivery contracts to competitive bidding rather than negotiating with large shippers individually. The new Postmaster General David Steiner believes that the market should set the rates, which is why the auction system was introduced.
I wrote at the time:
“Amazon said that the deal they were working towards with USPS ‘would bring them billions in revenue' — but that's obviously not the full picture. That revenue has a cost, and Amazon historically hasn't been a big fan of paying premium rates to its partners. At some point, if profit margins are too thin, that same revenue becomes a liability, as the obligation associated with it can hinder growth in other areas. The ‘billions in revenue' may have proven to be a bigger strain on the postal service's resources than it was a profit center. Plus, those ‘billions in revenue' may very well be worth ‘multi-billions in revenue' on the free market, which USPS aims to find out with its auction system.”
Flash forward to last week…
Amazon reached a new agreement with USPS in which it will retain about 80% of its existing deliveries, though neither party disclosed specific financial terms of the agreement.
Many news outlets were quick to point out that USPS generated $6B in revenue from Amazon last year, so a 20% reduction represents a meaningful hit. However, what we don't know is what Amazon will be paying for the remaining 80% of packages it ships through the postal service.
I'd like to think that USPS was able to negotiate new rates to offset that loss. Through the revised deal, it's very possible that USPS reduced their Amazon volume by 20%, but walked away with the same revenue (or close to it), which would be a win for the postal service in my book.
The new deal is a win for Amazon as well. Without a deal, the company would've had to scramble on short notice to find ways to take on the added capacity in-house or divert it to other carrier partners, which likely wouldn't have been as cheap as USPS.
It's ultimately a solid outcome for both parties.