Amazon, which is the Postal Service's biggest customer, is planning to reduce the number of packages it sends through USPS by at least two-thirds after failing to reach agreement on business terms, according to The Wall Street Journal.
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, but by September, when its contract ends, Amazon plans to reduce that number to just a few hundred million.
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.
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. This is effectively why UPS cut back on delivering Amazon packages last year. The thin margins simply weren't worth the headache and were holding the company back from exploring growth in other higher margin, specialized fulfillment areas.
I'm going to go out on a limb and guess that USPS was finding themselves in a similar situation with Amazon. 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.
Frankly I don't blame the postal service for making moves that benefit themselves. Amazon would certainly do the same.
Last year, when UPS pulled back from Amazon, I wrote:
“Who wants to dedicate business resources towards catering to Amazon when the company is actively competing against your own services? The handwriting has long been on the wall that Amazon wants to completely replace 3rd parties with its own delivery network.
Twenty years ago, nearly every Amazon package was shipped via 3rd parties like USPS, UPS, and FedEx, but now, Amazon delivers more than 70% of its packages using its in‑house network, and that number is expected to climb.”
Amazon certainly has a lot of weight to throw around in terms of business it can provide third-party carriers, but now we'll see what that business is actually worth on the free market. By this time next year, USPS may be delivering 1/3 the Amazon packages it did this year, but at 3x the profit. It's been well documented that Amazon is actively growing its rural delivery presence, and there's no reason for the USPS to have to subsidize the company's rural delivery while they build a competing service.