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Oct 232017
 

Has the USPS created a pricing disaster that destroys smaller US retailers while subsidizing Amazon and Chinese competitors?

I ordered a $5.80 radio antenna from Amazon earlier this week.  It arrived two days later, with free second day shipping, courtesy of my Prime membership.  If I’d ordered another $29.20 worth of stuff, it could have been delivered the same day, also completely free.

We should all be delighted at the convenience and the value of Amazon’s service.  I certainly am, and I buy things on Amazon once or twice a week most weeks.

But, as Amazon continues to steadily gobble up market share and get ever larger, at what point do we suddenly realize that our entire retail world is now dominated by one single company?  Already, there are very few categories of goods (and increasingly services too) which can’t be purchased on Amazon, and for ordinary day-to-day household needs, one could live perfectly well never leaving one’s house and ordering everything needed through Amazon.

To date, Amazon has been very consumer-friendly, and deserves its success.  It is growing the best way possible – by providing excellent service and excellent value.  But should we trust that to remain the case into the future?  What happens when Jeff Bezos retires, and new management with new values replaces him?  When there’s no longer any remaining active competition to ‘keep them honest’?  When the mantra of ‘creating shareholder value’ becomes code for ‘price-gouging our customers’?

Back to my $5.80 antenna.  Here’s the Amazon listing.  The same antenna is available elsewhere – for example, on eBay, where it lists for anywhere between a low of $1 and a high of about $12, and also with free shipping.  So, on the face of it, the retail world – at least online – still offers viable alternatives, right?

But there’s a catch with the lower priced eBay listings.  They are shipped from China/Hong Kong, and instead of arriving two days later, they arrive semi-randomly somewhere between two and six weeks later.  That might sometimes be acceptable, but more often, is not.

The $12 antennas offer free shipping from California, and that probably would take three or four days, depending on where in the country you were.  Would you pay twice as much, and accept slower shipping, when Amazon was offering a better price and faster shipping?

So, there you are, the buyer, choosing between $1 and about a month’s wait, $5.80 and for sure delivery in two days time, or $12 and delivery in maybe three, possible four days.  That’s a fairly easy choice, isn’t it.

As buyers, we should be, and we are, delighted.  But what say you are a US seller – how easy is it to compete with Amazon?  Indeed, let’s widen that question to also consider the low-priced Chinese competition, too.

Amazon and China – The Two Impossible Competitors Threatening Regular US Businesses

Let’s work through the example of the antenna I bought, and consider the implications if you had a US business that sells antennas.

We’re going to guess you can buy antennas from somewhere, delivered to your store, at a cost of 50c each (noting the eBay selling prices).  Say you decide to match Amazon on both price and service, and so are selling them also for $5.80, two-day delivery guaranteed.  You could ship UPS or Fedex, but you’re looking at some cost so far in excess of $10 for second day service as not to be worth even researching.  Or you could ship USPS, using their priority mail service, and hope that you are lucky with their two-day delivery expectation.

For a 1.9 ounce package (the weight of the Amazon package), USPS will charge $7.15 to send it across the country in a flat rate box, or $6.65 if it will fit in a flat rate envelope (not sure about thickness restrictions).  The good news is this includes their smallest size box or envelope, but the bad news is that your cost is now 50c for the item, $7.15 for shipping, 3% to accept the credit card payment, and a small amount extra to print a label and invoice and some packaging ‘filler’ so the antenna doesn’t rattle around in the box, plus whatever else you might also spend money on.  You can probably get about a 70c discount going through Stamps.com.    That $5.80 sale will result in you losing perhaps $1.80.  To match Amazon’s service, and make a modest return, you’ll have to sell at about $8.10 – 40% more than Amazon’s price.  Good luck with that.

Perhaps you instead decide to sell at the same price as Amazon, but to save on shipping and just use regular first class mail.  The good news is the cost of regular first class package mail is a more moderate $3.00, the bad news is that you’re now looking at three-day delivery, with a higher possibility of delay, and no tracking for either you or the buyer.  You also have to provide your own packaging.  But let’s say the packaging is only 20c, and now your transaction is promising to return you a $1.90 profit, more or less.  Maybe you’ll get another 10c saving on mail costs through stamps.com.  That’s a reasonable return, if you can arrange a very efficient fulfillment operation.

But, switch back to the buyer perspective.  $5.80 from Amazon, guaranteed second day delivery, and tracking information all the way through.  Or buy from you, same price, hopefully three-day delivery, and no tracking information at all.  Which would you choose?  Of course, you’d almost certainly choose Amazon, wouldn’t you.  Only if the other seller was selling for appreciably less would you give up your fast guaranteed delivery.

So, returning to the seller perspective again.  You tried ‘same price, same service’ and that was going to lose you $2.30 per sale.  You tried ‘same service, higher price’ and the extra 40% you have to sell the product for means no-one buys from you.  You try ‘same price, poorer service’ and again, no-one buys from you.

The only thing this leaves is ‘lower price, poorer service’.  You decide you’ll have to sell for $4.80 to compete with Amazon.  This means your net profit now is something under $1.00.  Not very enticing for you, and unlikely to take a lot of business from Amazon either.

Maybe you decide that you’re going to have to concede the ‘quality’ part of the market to Amazon.  Instead you’ll change marketing strategies and, now that you’ve reconciled yourself to low profit margins, you’ll compete against the suppliers shipping from China.  You’ll sell for the same price as them, but with faster shipping.

But – what’s this?  Buyers can purchase the product from China for $1, including shipping, and your shipping cost – not from China to the US, but domestically within the US, is $3.00!  Plus you’ve got another 50c to pay for the antenna itself, and a bit more for the packing, invoicing, credit card processing, etc.  You need to sell at $4 just to break even, but you’re competing against Chinese companies who are selling at $1.  How is this even possible?

Do you notice a commonality of problem, here?

Amazon, using a mix of shipping services, but including USPS for the last part of their package’s journey, can guarantee a tracked two-day shipment anywhere in the US for less that it costs you for the shipping alone, never mind the cost of the antenna.

And Chinese suppliers, also using a mix of shipping services and also using USPS within the US, can send a slower untracked shipment, again including the antenna itself, for less than it costs you for ordinary first class mail shipping alone.

Even if someone gave you a crate of antennas for free, you’d still lose money selling them.  You’d be better advised just to donate them to the local Goodwill store and hope for a tax writeoff.

The Surprising Source of the Problem?

With a 50c antenna that is selling on Amazon for $5.80, the underlying cost of the antenna is not the issue.  Even if Amazon was only paying 25c each for them, that’s only a 25c difference in cost for an item selling for $5.80.

The huge difference in cost is not in product sourcing.  It is in shipping, where, it seems the difference in cost is not 25c but probably $2.50 or maybe even more.

One commonality of problem is the role of the US Postal Service, which not coincidentally lost $5.6 billion in 2016.  This loss is even more than the $5.1 billion it lost in 2015, about the same as the $5.5 billion lost in 2014, and worse than the $5 billion in 2013.  In total, USPS has lost $57 billion in the last ten years (almost all of these losses are attributable to the cost of their pension plan).

Sure, we all know that Amazon has enormous volumes, and so can negotiate favorable deals with shippers all the way through the process, but how much of a discount can the USPS afford to give Amazon when it is losing $5.6 billion?  Yes, we’ll anticipate that the US Postal Service might say ‘we’d have lost even more without Amazon’s business’ and that’s another topic entirely, calling for some forensic accounting and complex value judgments about how one allocates fixed and variable costs.  Suffice it to say, for this article, that even though the business they get from Amazon is growing very rapidly, their losses are also continuing to grow.  So, albeit simplistically, it is hard to see any benefit.

The top-level reality, especially for smaller shippers, is much easier to comprehend.  From their perspective, the Postal Service is selling its service too cheaply to Amazon, and/or too expensively to smaller shippers.  We all know that Amazon only uses the Postal Service because it is the lowest cost option.  How much higher could the Postal Service go with its Amazon pricing without losing Amazon’s business?  A 10% increase in fees would probably still see the Postal Service competitive and the preferred choice for Amazon, while adding $1.6 billion in profit to the Postal Service’s bottom line.

Or, for that matter, how much lower could the Postal Service go with smaller shippers without going deeper into debt?

Ultimately, how much of a pricing differential should USPS allow between smaller customers and larger ones?  We all understand and accept the concept of ‘quantity discounts’, but is it possible the USPS is currently killing off its smaller customers by giving too much of an impossible cost advantage to larger shippers?  An advantage that not only kills off smaller customers, but is not entirely commercially necessary?

And what about those Chinese shippers.  Why is it cheaper to mail a package all the way from China to somewhere in the US than it is to mail the same package domestically?  We guess it is costing 50c to ship from China, compared to $3.00 to ship domestically.  How can it be six times cheaper to ship from China than domestically!?

How can it cost about 50c to ship a 1.5 ounce packet all the way from China, when a regular first class letter, weighing under 1 ounce, costs 49c domestically!?

Yes, we know there are complicated international mail treaties, but if the mail treaty ends up so that the US Postal Service is both losing money and simultaneously enabling foreign companies to kill off our local retailers, isn’t it time to renegotiate that mail treaty, like sort of super-fast?

Has anyone stopped to consider the strange situation where the US government, via its enormously loss-making Postal Service, is in essence subsidizing both Amazon and Chinese merchants, while destroying the rich tapestry of competition and smaller businesses in our country?

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  23 Responses to “Why the $5.80 Item I Just Ordered on Amazon is a National Problem”

  1. David, I’ve asked myself these same questions many times.

    Last Christmas a USPS mail truck cruised our neighborhood and I had occasion to stop the driver to ask him a question. I looked briefly inside the delivery van and it was full of nothing but boxes from Amazon. That was my revelation about Amazon.

    Additionally, most of my grandma friends, me included, now purchase items from Amazon and have them send the purchase to our grandchildren. So much cheaper than paying for our own shipping at USPS. But it is devastating the retail market.

    We were just in China and heard the same thing; that online purchasing is reducing sales at the retail markets and apparently the Chinese love to shop. They have their own online company called Ali Baba and it’s giving Amazon a run for its money.

    I have no answers to any of these questions/problems. Fran.

    • Hi, Fran

      Nice to hear from you, and thank you for your comments.

      Alibaba is indeed an enormous business, and you are very sensible to mention it, because we tend to take a too US-centric view of such things. Its owner, Jack Ma, is estimated to have a current worth of just under $40 billion.

      (Quoting largely from Wikipedia, here) Alibaba itself is the world’s largest and most valuable retailer as of April 2016, surpassing Walmart, with operations in over 200 countries, as well as one of the largest Internet companies. Its online sales and profits surpassed all US retailers (including Walmart, Amazon and eBay) combined since 2015. It has been expanding into media industry, with revenues rising 3-digit percents year on year.

      As of October 2017, Alibaba’s market cap stood at US$463.0 billion. It is one of the top 10 most valuable and biggest companies in the world. In 2017, Alibaba became the first Asian company to break the US$400 billion value mark.

  2. So David, how did the short antenna work out? While on a recent trip to China we visited a ham shop in Hong Kong and was most disappointed with the lack of stock and the prices that were higher than US. As an aside, the shop owner stated their were only about 3K hams in HK. mostly old folks.

    John

    • Hi John

      You are too polite to ask what I’m doing getting a stubby antenna like that…. and it hasn’t arrived yet.

      I’m deliberately trying to reduce the radiated power of some walkie-talkies that I’m looking at using on my tours. In the coach, instead of having me boring everyone over the PA, people who wish to listen can tune in on a walkie-talkie; and of course, when sightseeing outside the coach, it makes it easier for everyone to hear the commentary and not be up close.

      As for electronics in HK, I never touch them. They’re either last year’s models, or seconds, or their warranties don’t work in the US. Besides which, they’re seldom good value!

      I’m a VE, and the last couple of sessions I’ve participated at locally have been predominantly people very much younger than myself getting licenses. So, while things might be marginal in HK, I dare to hope the hobby has some life in it, here in the US.

  3. It may not be a big factor, but the free 2-day shipping you base your analyses on is only for Prime members. (Yes, I am a long-time Prime member and get lots of value out of the shipping as well as music, video and others.)Surely, some of the $99 annual Prime membership fee goes to subsidize the free shipping.

    • Hi, Don

      You are right, it may not be a big factor, but it also may indeed be a factor. I decided to ignore it in an article that was already overlength, but am happy to lightly touch on it here in a comment. Thank you for raising it.

      As you correctly point out, these days the $99 annual Prime membership (also available for, I think, $9.99/month) covers a very great deal more than ‘free’ shipping. Amazon’s streaming video service seems to be pretty much the equal of Netflix – indeed, in some ways I think it better. With Netflix having recently announced their latest fee increase, to I think $12/month, that reasonably equates to the entirety of the Prime value/cost.

      Then, as you also mention, there is Prime music, a service that is probably comparable to other music streaming services costing $5-10/month. And the Prime free Kindle book reading, one a month and other Kindle benefits.

      So how much of one’s Prime fee does Amazon actually allocate to subsidizing its shipping costs these days? Amazon has always viewed Prime as a ‘loss leader’ type loyalty program. But what does that mean?

      Maybe it could be said that my Amazon vs Regular Store shipping cost is slightly exaggerated because Amazon is subsidizing its shipping costs for Prime members. Certainly there is precedent for that. Until the major book publishers prevented Amazon from continuing to do so, Amazon was often subsidizing the cost of Kindle books so as to honor its promise of ‘no best sellers for more than $10’.

      But the comparison between US domestic shipping costs and those from China – the other half of my article – remain exactly the same. And while China might seem like a distant competitor, remember, as offered in an earlier comment above, that Alibaba is already very much larger than Amazon, Walmart and eBay combined!

  4. A couple of items:
    One very nice feature of Amazon is the easy return process. So much easier than most any other on line or brick and mortar store. That and product reviews, great web site, search for orders (current and past), Wedding type gift lists, etc. make it a value. I see brick and mortar stores on the way out for most items.

    Also I think the USPS loses money because of high costs and very inefficient. However, without Amazon type deliveries, it may have bigger losses. UPS and FedEx are not that much more expensive, but do not have the built in (mandatory) routes that pass by most houses 6 days a week. The variable cost is likely less than UPS.

    I never understood why USPS is not more efficient. If they only had a central deposit mail box on every block or so (they do in some communities), they could probably save 20% delivery manpower. In some towns they even walk and deliver to the front door – probably adding 20% delivery costs. Also why do they need to deliver 6 days a week? Split routes and deliver each 3 days a week and save 40% delivery manpower. If someone needs faster service, pay extra for 1 / 2 day delivery. (Most send FEDEX or UPS if they want fast service anyway).

    As to walkie talkies for your tours. Are there not systems (apps) to connect via cell phone (with headphones) or a receiver that a set of earbuds can connect too. Maybe that is what you are thinking of? You are right, much better to have a way to communicate vs. voice alone.

    Sorry for the long reply. Mike C.

    • Hi, Mike

      Long replies are always welcome. 🙂

      Yes, there are lots of reasons to like Amazon, and many of them are ‘fair’ reasons. It is the shipping cost issue that gives me problems.

      The question of variable vs fixed costs, and so on, is enormously complex, and all I can offer are the two comments much as I stated in the article – first, looking at the Postal Service annual results, there is precious little evidence that the surging volumes of ‘last mile’ delivery it is doing for companies such as Amazon is boosting its bottom line, and whatever the situation may be, it seems there is such a wide discrepancy between its ultra-high volume rates and its ‘little guy’ non-volume rates as to make it impossible for little guys to survive.

      I accept the concept of quantity discounts, etc, but not to the extreme point where other customers can no longer compete as a result. Think, for example, if you are a travel agent. An airline offers to sell you airline tickets and to pay you a 5% commission. But the airline offers to sell an online mega-agency those same tickets with a 50% commission and allows the mega-agency to discount its fares. How could you survive?

      Plus, the even starker example of the relative shipping cost of sending from China being so many times cheaper than shipping domestically – that is beyond crazy.

      As for the walkie-talkies, you’ll probably see for yourself when you join the Grand Expedition next June. 🙂 If you’ve a specific alternate/better product in mind, please let me know, of course.

      • David, Discussions of government programs are always complex. Again, there are many ways the USPS could cut cost dramatically and then be profitable (which any normal corporation would do), but maybe not politically correct.
        As to the walkie-talkie, your info today enlightened me on the details (or maybe I just misread the earlier article). The new system is exactly what I was thinking of (I guess I would not have called it a “walkie – talkie”. Hopefully your test at Christmas will work out well.

  5. […] article about the $5.80 Amazon item has also attracted some comments.  If you read it online, you’ll see the comments at the bottom, and, of course, you’re welcome to add your own […]

  6. Hi David
    A couple of things. Postage from China is determined by international treaty. It is a sore spot for sellers in the US. It is suppose to go up soon but I am not sure how much. To most sane sellers a $3.00 profit on a item isn’t much, but it will feed a family in China for a day. Amazon 2 day shipping is covered by your prime membership. Amazon does some sleazy things, like blocks FBA sellers from selling certain items during certain times of the year i.e. toys during the Christmas season. They also have all the seller information on its cloud and if they see an item that they can make money off of, they will often make a deal with the manufacturer to sell it, and block other sellers from selling it on Amazon.

    • Hi, Dan

      $3 might well be good money for a Chinese family, although probably much less so these days than was formerly the case, especially for families in the cities rather than in the countryside.

      But I don’t understand your point. The Chinese product is being sold for a delivered price of $1. There’s no $3 profit margin for anyone in that transaction.

      I write about Prime membership and its fuzzy impact on shipping prices in a preceding comment. Not sure if you saw that or not.

      Your point about some of Amazon’s business practices is well taken.

  7. Hi David (and readers) –

    Two quick points:
    Amazon doesn’t ship the total route by USPS. They use their own logistics to get what is ordered “close” to the customer and USPS handles the “last mile”. Depending on how large a post office serves you it can be your local post office but generally is a USPS center. Mine is about 20 miles away but I live is a almost rural area. You can see this if you look at the shipment tracking (assuming the product isn’t in a local warehouse already).

    The Post Office’s problem is it has 535 executive chairman/woman — every time they try to close a small post off the congressman/woman gets involved. Try to people to walk to a cluster mail box and the AARP gets a few hundred of them to complain. Etc., etc. When is the last time anyone got an urgent piece of mail on a Saturday?

    • Hi

      Yes, you’re right. Amazon does much of the shipping itself, but it all costs money. No part of that process is free.

      There is still the disparity where the item from China costs $1 including postage. And, before you make the comment, I’ve also noticed that some shipments from China are also shipped via some other process to somewhere in the US before being passed to USPS, but my point remains – it all costs money.

  8. […] Why the $5.80 item I just ordered on Amazon is a national problem. […]

  9. Two things to keep in mind : A good portion of the USPS “loss” is the way they are required to account for future pension liabilities (which exceeds the requirement for private/public companies); and, USPS could also limit the loss by just raising the price of a stamp by 10¢ (for example).

    If they charged 59¢ for first class mail that is still pretty reasonable. But, you have to account for bulk (junk) mail lobbyists, magazine lobbyists, and Congress itself. Why for example did the price of a stamp go from 49¢ to 47¢ and then back to 49¢ last year – congressional rules.

    • Hi, Mark

      Thanks for your comments. Two things in reply :

      1. A loss is a loss is a loss. It is impossible to say ‘we lost money because of this or that’ because it is the totality of every element of the business – its income, its expenses, its overheads, and so on, that contribute to the ultimate bottom line. But, in any respect, the profitability of the USPS is only an incidental aspect of the main issue, which is the unfair spread in rates they charge as between major shippers, foreign shippers, and domestic shippers.

      2. Whatever they choose to charge for first class mail or junk mail, while affecting their profit/loss, is irrelevant to this discussion. The only relevant point to this discussion is the disparity between the price they pay for smaller businesses to ship within the US and the vastly lower prices they charge for similar sized businesses to ship from China and the vastly lower prices they charge for large businesses within the US.

      Their current pricing shows no sign of being profitable to USPS itself (see also the preceding comment with a link to a WaPo article a few years ago); harms US businesses, while benefits/boosts foreign competitors.

  10. My postman tipped me off that the USPS has given Amazon a sweetheart deal.

    Unlike UPS and Fedex, the USPS has no lobbyists and can’t make campaign contributions, so Congress throws things at it like having to fully fund the pensions of postal workers who haven’t been born yet.

    They also gave the USPS a formula for their “costs” which is now seriously out of date. Unfortunately, it lets Amazon demand their best possible rate, so technically the USPS is selling shipping to Amazon at cost. In practice it is a massive subsidy.

    The USPS is an amazing outfit, but it gets treated like dirt by Congress, usually at the behest of the big shippers.

    http://fortune.com/2017/07/16/amazon-postal-service-subsidy/

    • Hi Seth

      Being a postal delivery person doesn’t give that person much automatic insight into the regulatory issues of the USPS Pension Plan. I usually think a similar thought when I have a pilot claim to have knowledge of how his airline should be managed. Being able to program an autopilot to fly a plane doesn’t give a pilot any extra knowledge about airline management or marketing issues at all.

      The claim of fully funding the pensions of employees who haven’t even been born yet is specious. Here’s a rebuttal (the first I found when Googling the topic)

      https://www.cnbc.com/id/45018432

      As for the profit or loss the Postal Service makes from its Amazon contract, and as I say above, that is an incredibly difficult matter to accurately establish. You can ‘prove’ any number you wish by making value judgments as to what share of fixed and semi-variable costs should flow through to the Amazon contract. That’s part of the joy of cost accounting – being able to credibly show that any particular transaction is simultaneously wildly profitable and also appallingly unprofitable, merely by changing from one set of valid assumptions to a different set.

      But I do agree that there seems to be an unfortunate set of three levels with too much differential between the three levels – regular shippers, large shippers, and foreign shippers. These large differentials – the foreign shipper rates in particular – are distorting the marketplace and making it impossible for smaller sellers to coexist alongside the major companies.

  11. […] article about the USPS and its unfair shipping rate schedule continues to get some excellent comments, thank you.  I noticed something I’d not realized […]

  12. The USPS does not set its rates. All rates are set by the independent Postal Rate Commission, a body controlled by Congress. Also, the pension issue is very real. Using GAAP accounting would pretty much eliminate the deficit. Also, Congress continually interferes and tells the USPS what it can and cannot do even to the point of forbidding it to institute new services that would generate income. Congress will not allow the USPS to “compete” with private companies..

    • Hi

      It seems to me that the exact nature of the part of the government/USPS continuum that sets rates is a distinction but not a difference. The fact remains that the govt/USPS, between them, is destroying small US shippers and unfairly favoring Chinese shippers at one end of the scale, and Amazon at the other end of the scale.

      The pension issue is real, and also is irrelevant, surely. My focus here is simply on ‘how can I buy something from China, delivered, for less than the cost of the shipping alone, here in the US’.

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