Why The Post Office Might Choose To Continue Delivering Amazon Packages While It Loses Money On The Contract

If you support the United States Postal Service, you must have experienced mixed feelings about last week’s fiscal announcement. On the one hand, package volume increased significantly over last year’s comparative levels. But on the other hand, financial losses worsened significantly.

Huh? How can an organization serve more customers and yet suffer more losses? There are usually two possible reasons why such a mixed outcome is possible. The first is that the entity may be losing money on each customer served, and thus more volume generates worse financial results. And the second is that the entity may be facing a problem that is unrelated to customer volume, and that is suddenly generating losses.

Evidently, President Trump has not taken a position on this question, having simply tweeted that “Only fools, or worse, are saying that our money losing Post Office makes money with Amazon. THEY LOSE A FORTUNE, and this will be changed.

But the President has not considered the possibility that the Post Office might choose to continue its relationship with Amazon while it continues to incur losses on the contract. Why? Imagine, for the sake of argument, that you decide to pay freelance drivers to deliver packages in competition with the Postal Service.

Let’s assume that your only significant operating payments are $100 per day to rent a small office, and $10 per delivery for each service rendered. You charge and collect $15 per delivery, and thus earn a gross profit of $5 per delivery before paying the rent. You would thus need to deliver 20 packages per day to pay the rent and break even.

That arithmetic is not difficult to follow, is it? But now let’s assume that Amazon offers to guarantee you $600 per day to deliver 50 packages. You might estimate that you’re charging your customer $12 per package. On a per-delivery basis, that’s a loss of $3 in comparison to your normal $15 price!

But now look at the situation in total. You’ll earn $600 from Amazon alone. You’ll pay $100 in rent and $500 (i.e. 50 packages @ $10) for deliveries, yielding total payments of $600. You’ll actually enjoy a guarantee of breaking even on the Amazon contract alone! And you’ll start to earn a profit on the very first package that you deliver for any other party.

So when you read that the Postal Service is losing money on its Amazon deliveries, it may indeed be true. And yet, perhaps paradoxically, the government agency might choose to continue serving Amazon while it loses money on the contract.

Why? Because, as we can see from our example, it might be reasonable to do so.

U.S.A. vs. Canada: A Pair Of Postal Opposites

American and Canadian societies often seem to be joined at the hip, don’t they? At first glance, it can be difficult to spot any significant differences between them.

The cosmopolitan city of Toronto, for instance, hosts a theater scene that is reminiscent of Broadway. The Calgary Stampede rodeo rivals any that are held in Dallas. And the Pacific metropolis of Vancouver has been called a “twin city” of Seattle.

If we look more closely at each nation’s economic sectors, though, we can spot some clear differences. Canada’s health care system, for example, is dominated by a single government payer. But during the debates about the Affordable Care Act in the United States, the Canadian model was severely criticized in comparison to the private insurance model.

The two nations even vary in their professional sports models. Most Canadian football and hockey franchises are situated in small cities like Saskatchewan and Winnipeg, whereas baseball, football, and basketball teams in the U.S. are often found in megalopolises like New York, Chicago, and Los Angeles. That may be why the Canadian Football League’s expansion into the U.S. was unsuccessful, as was Major League Baseball’s attempt to maintain a team in Montreal.

What other economic sectors differ? During the past month, the national postal services of Canada and the United States began to adopt very different business strategies in response to an identical challenge. Both services are struggling to adapt to significantly lower mail volumes in an era of internet communications.

The Canadian Postal Service has chosen to down size its operating infrastructure by eliminating costly home delivery activities in urban and suburban areas. Residents of Canadian cities and suburbs will now be required to pick up their mail at designated community mail boxes.

The U.S. Postal Service has proposed reductions in home delivery schedules as well, but the American Congress has refused to approve them. Instead, the U.S. Post Office is now pursuing a very different strategy, one that focuses on revenue growth.

So what is the U.S. Post Office now selling? Harry Potter stamps! American collectors have always purchased commemorative stamps that recognize illustrious American artists and dignitaries, and that celebrate great moments in American history. Although Harry Potter is certainly not an American figure, his popularity in the U.S. compelled the Postal Service to honor the fictional character in the hopes of stimulating collector sales.

Which of these conflicting strategies will prove successful? Although the Canadian service will undoubtedly reap significant cost savings from its abandonment of the home delivery model in densely populated regions, many critics are panning the decision. Likewise, the Harry Potter stamps are generating controversy in the United States.

As is the case in industry sectors from health care to professional sports, the Canadian and American strategies in the postal service sector appear to be widely divergent. At the moment, though, it remains to be seen whether one strategy will prove to be better attuned to consumer needs than the other strategy.