Trump can't stop ranting about Amazon's US Postal Service deal on Twitter - and there's a $2.6 billion reason why
- President Donald Trump keeps slamming Amazon and the US Postal Service on Twitter.
- Amazon is "costing the United States Post Office massive amounts of money for being their Delivery Boy," Trump tweeted on Tuesday.
- An increase in package delivery due to e-commerce is one of the brightest points in the USPS' troubled financials - and Amazon can be thanked for that.
- However, the USPS may be undercharging people and companies to ship packages, something that Citi estimates could be saving Amazon up to $2.6 billion.
President Donald Trump can't stop slamming Amazon for its use of the US Postal Service.
"Only fools, or worse, are saying that our money losing Post Office makes money with Amazon," Trump tweeted on Monday. "THEY LOSE A FORTUNE, and this will be changed. Also, our fully tax paying retailers are closing stores all over the country...not a level playing field!"
Trump doubled down with a follow-up tweet on Tuesday, stating that Amazon is "costing the United States Post Office massive amounts of money for being their Delivery Boy."
The tweet continued: "Amazon should pay these costs (plus) and not have them bourne by the American Taxpayer. Many billions of dollars. P.O. leaders don't have a clue (or do they?)!"
Trump also doubled down when asked by the press about the issue on Tuesday, saying: "Amazon has the money to pay the fair rate at the post office, which would be much more than they're paying right now."
It is true that stores are closing across the US, in part due to struggles retailers have had in adapting to the rise of e-commerce. And, it is true that in February the USPS posted a net loss of $540 million in the first quarter of the year.
What is more complicated is whether Amazon is to blame.
"Trump is trying to say that Amazon is the reason the Post Office is losing millions of dollars," Edward Jones analyst Logan Purk told Business Insider. "And, in reality, that's not the case."
However, there is plenty of evidence that USPS' business model, in its current form, is unsustainable - and that Amazon is profiting based on this fact.
Amazon is giving the Postal Service a lifeline
The USPS is in rough shape. In 2017, the USPS reported that it lost $2.7 billion on $69.7 billion in total revenue.
The service has enormous pension and healthcare costs, as it is required to pre-fund retirees - a $6.9 billion payment that the USPS failed to make at the end of 2017. People are sending fewer letters with the advent of email and social media and the decline in magazine advertising.
The USPS has a monopoly on the letter-delivery business, which it has long used to subsidize its parcel-delivery business. Now, those roles could be reversed while the amount of parcels being shipped skyrockets and the number of letters plummets.
"Mail delivery has slowly been replaced by email ... That's what's really hurting profitability," Purk said.
In 2017, shipping and packages revenue grew by $2.1 billion, an 11.8% increase over the previous year.
According to the USPS, much of that growth was thanks to e-commerce, making Amazon the USPS' knight in shining armor. Roughly two-thirds of Amazon packages pass through the USPS at some point in their delivery, making the e-commerce giant one of the USPS' biggest customers, Citi analysts said.
However, some - like President Trump - argue that Amazon should be paying the USPS more. Both the USPS and Amazon declined to comment on the record for this article.
Amazon could - and maybe should - be paying the USPS up to $2.6 billion more
The crux of the issue is whether the USPS is undercharging not only Amazon, but everyone who ships packages using the service. And, the answer is complicated.
A 2017 Citi report found that if the USPS were to cover its costs by increasing package-shipping prices, each package would cost an average of $1.46 more to ship.
Trump referenced the report on Tuesday, although he was mistaken in saying it was "recent" and that the $1.46 figure only applied to Amazon (Citi estimated the figure for all packages sent by the USPS).
The Citi report did find that the current pricing model is "unsustainable," as the USPS continues to bleed money that it needs to invest in benefits and other things such as new delivery vehicles.
Amazon would be one of the companies hit hardest if that increase were to take place, with Citi analyst Christian Wetherbee estimating that a USPS price hike would cost Amazon $2.6 billion.
"Their business has been built, almost, on the back of this pricing model," Wetherbee told Business Insider on Monday.
"Whether they're taking advantage of it or not," Wetherbee continued, "or just being astute players in the market and taking advantage of the cost arbitration, they are the ones who have probably leveraged it the most."
The USPS isn't built to maximize profitability. Instead, it is a government service that is required to deliver mail to all Americans - even if it is not profitable to do so. The USPS' only requirement is that it covers the costs it is mandated to pay. However, it is not currently doing that, especially in terms of pre-funding pensions.
As a result, the USPS may need to increase prices. However, it has so far avoided doing so - saving Amazon and other bulk shippers millions of dollars.
Wetherbee said: "The real big-picture argument would be that: Could Amazon have afforded to make this huge push into free home delivery as aggressively as it did if the price was what UPS or FedEx would charge? … Could they have grown this as successfully without this subsidy, if you will?"
Amazon is not the sole company getting an unfairly good deal with the USPS - everyone who ships through the service does. However, the USPS' "unsustainable" pricing model is saving the company millions of dollars, significantly more than any other retailer, simply because of the volume of its e-commerce orders.
Trump versus the 'fools'
So, is Trump right?
On a basic level, the president is wrong. Trump - known for his love of the deal - is treating the USPS like a business when it isn't one. It's a government service with a unique monopoly on letter delivery, which makes it the perfect service for "last-mile" delivery - a notoriously expensive service that neither FedEx or UPS wants to lose money doing themselves.
Additionally, while Amazon probably has a very reasonable contract with the USPS, it doesn't have a special deal to scam the American taxpayer.
The USPS, however, does have an unsustainable pricing model that needs to be addressed - and Amazon is saving big.
Amazon's current deal isn't a bad one for the US Postal Service. However, the USPS could certainly stand to charge more than it does. And, if Trump continues his pressure, it may have to do exactly that.