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Are Amazon, UPS, Others Prepared for USPS' Proposed Price Hike?

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On Oct 11, U.S. Postal Service (USPS) proposed a price increase for its parcel select service. The proposed price hikes will be going into effect in January 2019 if approved by the Postal Regulatory Service. USPS’ parcel select service is used by Amazon.com, Inc. (AMZN - Free Report) and the likes of FedEx Corporation (FDX - Free Report) and United Parcel Service, Inc. (UPS - Free Report) , the last and unarguably the most expensive step in the shipping process.

In fact, President Donald Trump has had earlier criticized the e-commerce giant by saying that the USPS is losing billions of dollars every year by charging Amazon and others too little to deliver their packages.

Moreover, the proposal to hike prices comes at a time when Amazon and other retailers like Walmart, Inc. (WMT - Free Report) and Target Corporation (TGT - Free Report) are sprucing up their delivery service ahead of the holiday season. That said, it is too early to assess if the proposed price hike by USPS is going to hurt companies availing its services.

USPS Proposes Price Hike for Parcel Delivery Service

The USPS has proposed a 12.3% price increase for its lightweight parcel service and a 9.3% increase for non-lightweight service. The services are availed by the likes of Amazon, FedEx and UPS and are likely to cost the company more.

The proposal follows Trump’s criticism of Amazon that the USPS is losing billions of dollars by charging Amazon and others very little. Earlier this year, Trump alleged Amazon of “costing the United States Post Office massive amounts of money for being their Delivery Boy.”

Following that, in April, Trump ordered the formation of a task force to investigate the USPS. The order said that the USPS has lost $65 billion since the Great Recession and required restructuring to “prevent a taxpayer-funded bailout.” Although USPS has said that the proposed price increase was not in response to Trump’s criticism, higher prices are likely to hurt the companies.

In April, following Trump’s twitter spat with Amazon, per Citi Research, a price increase by USPS would cost Amazon $1.3 billion more to ship parcels. This undoubtedly could impact Amazon’s profitability. Not only Amazon, the same could affect the likes of FedEx and UPS, which avail USPS’ parcel select service. UPS has a Zacks Rank #2 (Buy), while FedEx and Amazon each carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

Amazon, Others Strengthen Delivery Service

The proposal to increase prices of parcel select service comes at a time when retailers are making all possible efforts to add muscle to their delivery service ahead of the holiday season. According to the National Retail Federation, retail sales in November and December, excluding gasoline, restaurants and automobiles, is expected to increase 4.3% to 4.8%. Total sales are expected between $717.45 billion to $720.89 billion.

Last month, Amazon said that it has ordered 20,000 delivery vans from Mercedes-Benz, which the company will lease to third-party partners, which will use them for “last-mile” delivery. Understandably, this is in a move to strengthen its own delivery service.  UPS too is gearing up for the upcoming holiday season. The parcel giant recently announced that it expects to hire 100,000 seasonal employees to support the anticipated increase in package volume during the holiday season.

FedEx too recently announced that it is boosting its U.S. delivery by expanding its ground operations to six days per week throughout the year in response to growing e-commerce demand and the anticipated surge in package volume during the holiday season.

Summing up

It is too early to gauge the effect that the proposed price increase will have on the companies using USPS’ parcel select service. However, delivery has become a priority with e-commerce having changed the entire parcel delivery landscape in the last few years.                          

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