Navigating USPS Parcel Select Rate Increase: What Sellers Need to Know

Glenn Gooding [00:00:03]:

Come January of 2025, we know that there are going to be increases in other areas, for example, priority mail round advantage. So I think this is the beginning of a variety of massively impactful rate increases into the e commerce transportation market. As the post office pushes these increases, they're going to drive more parcel select volume into their entire network, from pickup to delivery. Postal induction companies will be less financially, financially compelling, less relevant. I think many of them will struggle to stay in business. It's going to be a real challenge for them. And ultimately the consumer now is going to be paying a parcel select rate to the post office at a much higher price.

‍

Glenn Gooding [00:00:50]:

Welcome to Parcel Perspectives, the podcast dedicated to small parcel shippers. I'm Glenn Gooding, and each episode we dive into insights, best practices and strategies to help you navigate this complex, costly market. Join me as we explore ways to strengthen your long term partnerships with your chosen carriers and stay competitively aligned.

‍

Glenn Gooding [00:01:17]:

Hi, Glenn Gooding here, president of iDrive. I've been in the small parcel space now for the better part of 37 years. Started with a very, very deep and broad background, working for one of the major carriers as an operator and industrial engineer, and manage pricing at the very highest levels for the largest, most complex shippers in the world. Since then, I've been a national thought leader and work hard to help drive strategy for clients from Fortune 50 companies all the way down to startup e commerce companies, helping them more competitively align in this very complex and expensive market and start better and more, let's say, beneficial and long term partnerships with the carrier or carriers of their choosing. Recently there's been some stuff happening in the USP's world that I think is going to have an incredibly material effect to the small parcel market in general. In particular the e commerce market. It involves a proposed USP's parcel select rate increase scheduled to take effect July 14 of this year. I think before we dive into the effect it's going to have on the e commerce market, I want to back up for just a moment and give some folks some perspective on what the heck parcel select is and why it's in the space and why it's meaningful to you.

‍

Glenn Gooding [00:02:34]:

So there are postal aggregators out there, DHL, e commerce, UPS, mail innovations, OSM, Pitney, Bose, to name a few. There are others as well, but their business model is to offer a market competitive rate, one that is more competitive or below priority mail, or the legacy first class rates, which are now called ground advantage and offer a like time in transit service at a discount for shippers shippers that ship large amounts of volume can take advantage of this. And the USP's historically has offered what's called a workshare program. That workshare program in essence means the more work that is done for the USP's, the better I the rate the aggregator is going to get. So rather than being picked up by the post office at the origin process through the network, all points to final mile delivery by the post office at DHL. E commerce, for example, will make the pickup. They will aggregate it in one of their operations. They will sort it either via automated means or manually.

‍

Glenn Gooding [00:03:41]:

They will aggregate it into like zip codes, and they will transport it across country or wherever its destination is, as far into the USP's network as possible. Traditionally, the DDU induction point, or the local post office is the gold standard. It's as far as you can go and it gives the postal aggregator the most favorable postal rate. And that has been in place for many years now. It is known as kind of the lowest cost ground residential e commerce product for parcels less than a pound and parcels up to about three or four, maybe five pounds. There are size restrictions and we're not going to talk about those things now. Now what the post office is doing, specifically, Louis Dejoy, the postmaster general, is proposing some incredibly impactful rate increases to parcel select. There's some thought behind this and I'm going to offer opinion on why this is happening.

‍

Glenn Gooding [00:04:39]:

I don't know it definitively, but I'll offer my perspective to you and my expertise here. But contingent on where a parcel aggregator inducts to the post office, the post office is proposing increases that could be from 23% to 24%, upwards of 70% increase at the DDU level. When you think about a postal aggregator's business model, they have to offer a rate that is cost competitive to the post office's ground advantage or priority mail rates. It becomes impossible to do so incurring that type of an increase at the DDU level. So effectively, Louis DeJoy appears to be killing the postal aggregator market. Now, timing on this and the ultimate impact are still kind of yet to be determined. A letter has been sent to Congress and the proposed date is a July 14 increase. However, I can tell you that many of the postal aggregators are working very, very hard behind the scenes to try to get some Runway on this.

‍

Glenn Gooding [00:05:42]:

And so my thought is that many of these postal aggregators will not take an increase until January of 2025. Regardless, something is coming and it's going to be big and it's going to be impactful. So as we think about and contemplate the effect of this increase, it's important to realize that we know that a postal aggregator can't stay in business and incur a 70% increase at the DDU level. Gonna be active dialogue with the post office on mitigating some of that, how much it's gonna be a case by case basis. And frankly it may force the aggregator to induct at a different point in the post office, let's say further upstream. It requires more handlings by the USP's. What that will in essence do to those parcels. It will affect the performance of those parcels from a delivery experience.

‍

Glenn Gooding [00:06:36]:

If you induct to the destination delivery unit for final mile delivery by the post office, there's not a whole lot of handlings by the post office required. Just goes into the mail truck out for delivery into a mailbox. But if you move it further upstream it requires the post office to handle it, to move it in their equipment. And so the time in transit could potentially be elongated and the customer experience negatively impacted. Important to note effectively though, when we think about this, we have to ask why is the post office potentially doing this? I have a number of theories on this. I'd like to share some of those insights with you right now before we go into the impact of the e commerce market. Louis DeJoy has been placed in charge as postmaster general for several years now. And he has a tenure plan, a plan to bring the post office to fiscal solvency, if you will, versus insolvency.

‍

Glenn Gooding [00:07:30]:

As we all know, they're losing just billions and billions and billions of dollars annually. And he has to stop the bleeding. Earlier he had mentioned he was pulling first class mail out of the air or now branded as ground advantage. That's now he's propped up and built a ground network very similar to a UPS or a FedEx ground network that offers coast to coast service in roughly five business days. It's effectively trying to compete on that level with that network up. There's a lot of available capacity. And so my thought is Louis DeJoy has always mentioned that he was not a fan of the workshare program or the postal aggregator market. And I believe this is a very decisive move on his part to force their hand and begin to force volume into the origin of USP's to take advantage of the available capacity of this ground network that has now been built out by the post office.

‍

Glenn Gooding [00:08:28]:

Now if we play that forward a bit, let's first imagine that this increase takes place July 14. Come January of 2025. We know that there are going to be increases in other areas. For example, priority mail round advantage. So I think this is the beginning of a variety of massively impactful rate increases into the e commerce transportation market. So we go back to the parcel select increase, talked about those increases. It's important to note that they're also looking to eliminate less than pound rates per ounce pricing. And so if you're in the business of shipping nine ounce t shirts in a poly bag, those would now get billed at 16oz.

‍

Glenn Gooding [00:09:09]:

So the increase could be even more impactful to you. So we think about this and we look at the residential market. UPS and FedEx have always looked at the post office and their priority mail rates and the first class rates to establish kind of a waterline, if you will, on where they want to set their residential pricing. Let's say home delivery or UPS ground residential or in today's world also UPS shorepost or FedEx ground economy. As the post office pushes these increases, they're going to drive more parcel select volume into their entire network from pickup to delivery. Postal induction companies will be less financially compelling, less relevant. I think many of them will struggle to stay in business. It's going to be a real challenge for them.

‍

Glenn Gooding [00:09:58]:

And ultimately the consumer now is going to be paying a parcel select rate to the post office at a much higher price. That increase is going to occur either July 14 or sometime in January of 2025. I think the next lever to fall is as this business gets pushed into the post office, let's say via ground advantage. Because they're not taking an increase in July 14, he will. Now Louis DeJoy will drive more ground advantage volume into his network. And he will impose an increase in January to maximize revenues and make good on his ten year promise to bringing the USP's to fiscal solvency. What does this mean for the e commerce shipper? Well, if you're in the business of shipping lightweight products to residential destinations, as most e commerce shippers are, you're looking at massive double digit cost increases in the transportation world. And frankly, there's not going to be a lot of lower cost, slower options out there.

‍

Glenn Gooding [00:11:05]:

It's going to be very, very challenging. So the consumer is either going to take on much higher expense or they're going to potentially look at a much slower and a much poorer customer experience in time and transit. So as a shipper, as you look at this, I think it's very, very important to have some proactive communications with your carriers. In particular if you're utilizing a postal aggregator, a UPSMI, DHL e commerce, an OSM, a Pitney bows, you need to meet, you need to talk with them. You need to understand what their plans are. Frankly, they don't have all the answers right now. They may have an answer for the remainder of 2024, but I promise you, there's a lot of unknowns come January 2025 when I think a lot of this is going to hit. You need to understand those things and you need to work hard now to try to build out some contingencies and mitigate those increases.

‍

Glenn Gooding [00:11:57]:

Some of those mitigation strategies could be realigning commercially with FedEx ground economy back in January of 2020, what was then FedEx smartpost now ground economy handled or dispatched everything to the post office for final mile delivery. They made a change in January of 2020 and they opted to pull it all into their network for final mile delivery. So in today's world, FedEx ground advantage is delivered solely by FedEx drivers. Could be an opportunity to mitigate your risk and get the best commercial terms you can. Now, in an economy where volumes are down and the carriers are hungry to bring new business in, UPS sure post is another viable option. UPS surepost is kind of a hybrid between the two based off of their technology and their agreement with the teamsters. If other parcels are going to consignee on the same day and I moving with a UPS surepost package, then that UPS sure post package is redirected. It's not dropped off at the post office for final mile delivery and it's delivered with those other parcels.

‍

Glenn Gooding [00:13:02]:

Brilliant move by UPS. It improves delivery density for them, it improves revenue per stop and they don't have to pay the post office the parcel select DDU rate because they made the final mile delivery. Now as this increase bubbles through the marketplace, I could see UPS changing their rules on that. It could be very conceivable that UPs could be driving more of that business into a brown or UPS final mile delivery than tendering it off to the USP's again. Get good commercial terms with UPS. Try to focus on getting less than a pound pricing as well. Lock it in for multi year so that you can insulate yourself from the storm that is coming out there. If you're large enough and sophisticated enough and have geographic alignment, there's a variety of regional carriers out there that could do a very, very nice job for you as well.

‍

Glenn Gooding [00:13:56]:

They all have a little bit of different pricing scheme, but the majority of them try to position themselves in the marketplace as a cost advantage to a UPS or FedEx traditional movement. They also, if you give them the volume and the right geography, like to offer things like an enhanced diamond transit footprint, perhaps a broader footprint for one day or two day. Or sometimes you can get the right spot. You can get Bellingham, Washington to San Diego, California all in one day via ground. That can be a very powerful footprint for you. So there's a variety of regional carriers and couriers out there. If you have the volume, if you have the locations near that regional carrier to facilitate an economical pickup. If you have a TMS platform shipping logic to allow you to generate those labels and rate shop and make the right decisions, that could be a real viable opportunity for you as well.

‍

Glenn Gooding [00:14:54]:

At the end of the day, if Louis DeJoy does what I think he's going to do, impose his parcel select rate increase and then after driving more parcel select and converting it into ground advantage into the post office network, then increasing the ground advantageous, you're going to see ups, FedEx and all the other regional carriers adjust their residential pricing accordingly. What does that mean? It means double digit cost increases for the residential market, the e commerce market. Never a dull moment in the supply chain. I encourage you to dive in, take a look at this. If you'd ever like to schedule a call and have a more specific meeting with me, don't hesitate to reach out. I appreciate your time and I promise to bring more relevant and impactful information to you that I hope can offer insights into your work and into your ability to meet your shareholder requirements and be competitive in the marketplace. Thank you very much.

‍

Glenn Gooding [00:15:57]:

Thanks for listening to parcel perspectives. Hosted by me, Glenn Gooding. I've been in the small parcel space for 37 years, starting with a deep and broad background, working for one of the major carriers as an operator and industrial engineer, later managing pricing at the highest level for the largest, most complex shippers in the world. Since then, I've been a national thought leader and worked to help drive strategy for clients from Fortune 50 companies to startup e commerce businesses, helping them more competitively aligned line in this complex and expensive market. If you enjoyed the show, please subscribe and share with friends. Join us next time for more expert advice and strategies to stay ahead of the shipping game.