USPS Faces New Competition with UPS Stores
Traffic World - April 28, 2004
By Satish Jindel

Just when the Presidential Commission on U.S. Postal Service is getting ready to draft its report on the future options for USPS and its parcel services, United Parcels Service has dropped a 21,000 pound bomb on it's efforts. With the re-branding of Mail Boxes, Etc. as UPS Stores, UPS is marching head-on into U.S. Postal Service territory to capture its dominant share of the retail parcel market.

Not since 1985 when RPS introduced volume discounts for large business-to-business shippers, a strategy also adopted by UPS, has the USPS faced such an assault on its parcel services business. Since then, USPS share of the commercial parcel market has fallen significantly. Now, USPS is facing the prospect of losing revenue from the retail parcel market.

Though USPS was losing customers for the business-to-business and business-to-consumer market to UPS, RPS and parcel consolidators, it still had a considerable advantage in the customer-to-customer and customer-to-business market.  USPS network of 38,000 postal offices and retail centers were too many for parcel carriers to compete against.

Even with the opening of private shipping centers (like Mail Boxes, Etc., Postal Annex, Pak Mail), USPS retained a pricing advantage as these centers had a huge markup (up to 100 percent) on the published rates of parcel carriers. In addition, even the largest of such chain, Mail Boxes, Etc. had only 3000 stores nationwide. This gave USPS almost a 50 percent share of the infrequent-shipper parcel market and almost a 70 percent share of cash and carry segment of the retail parcel market.

This last stronghold of USPS in parcel services is now under attack. The re-branding of Mail Boxes Etc. as the UPS Store is aimed squarely at capturing market share of the retail parcel market from USPS.  Parcel services at the UPS Store will be priced only 10 percent higher than UPS's published rates. With those rates about 15 percent lower than parcel post and about 30 percent lower than Priority Mail rates, the UPS Store will now have a pricing advantage. Since about 83 percent of UPS Ground Service parcels are delivered in 3 days or less, retail customers may consider it a suitable alternative to Postal Priority Mail. In addition, the UPS Store will compete effectively with USPS when it comes to customer convenience, with its presence in retail centers, extended business hours and one-stop shopping, and it will be supported with a $15 million marketing campaign to draw postal customers.

By diverting some of the postal office traffic to the UPS Store, UPS is also taking a shot at another archrival: FedEx Corp. Since FedEx has installed its drop boxes at some 10,000 post offices, UPS is hoping to take away traffic that would have otherwise used those FedEx drop boxes for express documents and packages.

With competition in the B2B parcel market increasing (DHL/Airborne entry will add new pressures) and higher discounts to large shippers reducing the profits from B2B service, UPS is focusing of improving its competitive position in the faster growing and more profitable retail parcel market. Recent developments have made UPS and other private parcel carriers the preferred choice for retail shippers because:

• The UPS Store rates for commercial deliveries will be more attractive than Priority Mail rates.
• UPS rates include $100 in insured value, which costs $1 extra with USPS
• UPS offers delivery confirmation, while USPS has a 35-cent surcharge for that service.
• UPS Ground Service offers greater accountability and predictability with guaranteed delivery commitment
• Customers can measure UPS's on-time performance with detailed tracking and tracing features available from the UPS website.
• In addition to UPS Stores, customers can ship via UPS or other private carriers through thousands of retail centers offsetting a key advantage of USPS with its 38,000 postal offices.

With B2B parcel volume lost to private carriers via discounting and now retail volume being targeted with lower rates and 3,400 UPS Stores locations (which will place pressures on other private retail shipping centers to lower their rates), USPS is now faced with a new challenge to redefine its value proposition as a parcel carrier for the retail market.

USPS may find that its best value proposition is that which also fits its strongest operational competency.  The Postal Service still has the largest number of retail centers nationwide and the largest number of delivery couriers with daily deliveries to 138 million homes. This is almost 10 times more than the total number of domestic parcels handled daily by all private carriers combined.

By focusing on these two areas - acceptance and delivery - USPS can eliminate huge cost associated with supporting all other operational and marketing aspects of its parcel services and thereby further reduce its cost for delivery. The result will be that more private carriers will emerge to compete with UPS and FedEx, bring more packages to USPS for final delivery and provide shippers with more options for parcel services.

Satish Jindel is the Principal at SJ Consulting Group, Inc., a transportation and logistics-consulting firm located in Pittsburgh area.