The Futue of Retail Is Delivery - Sears and K-Mart

Today Sears announced its first quarter outlook.   It's announcement illustrated that retailers that rely on brick-and-mortar sales are in trouble.

The key figures:

• Same store brick-and-mortar sales - down 4.1%
• Internet sold and delivered sales - up 22.4%
• Overall US sales - down 3.6%

The impact of internet sales suggests that Sears gets 98% of its U.S. sales in retail stores.  Sears is nearly a pure brick-and-mortar retailer.  Unless it can improve its competitive position on the web and change its brick-and-mortar strategy to complement in-person sales strengths, it will have a real challenge to return to sales growth.

Sears's problems provides an example why companies that sell exclusively on the web now get 20% of all deliverable retail sales are growing rapidly, and those using the brick-and-mortar strategy have less promising futures.

Sears's first quarter outlook show the increasing increasing importance of parcel delivery services and e-commerce. The future of the United Parcel Service, FedEx and the United States Postal Service will increasingly be linked to how well they serve retailers selling services through broadcast, direct marketing, web-based and social media. Recent reports by the Inspector General of the Postal Service suggests that there may be a digital role within the postal ecosystem that could improve the efficacy of web and and mobile based communications for commerce that could improve the prospects for the parcel delivery industry. It is for this reason that an upcoming conference, Postal Vision 2020 will be bringing together some of the greatest minds in e-commerce, social media, digital and print communications to discuss the future of print and digital communications. The symposium to be held June 15, 2011 and the Marriott Chrystal Gateway Hotel in Arlington, VA. To learn more check out Postal Vision 2020 .

The Return of the "Catalog" Retailer

The February employment numbers showed a growing private sector economy in every sector except retail.   Retail jobs dropped by 8,100.     Retail jobs can grow only to the extent that sales at brick and mortar outlets are growing. 

The decline in retail jobs reflects the shift from brick-and-mortar to online retail sales.  In December 2010, online-and catalog merchant sales recorded by the Bureau of the Census grew by 20% over 2009 while retail sales at brick and mortar focused retailed grew by 3.2% in the same period.   In February, 2011, American Banking and Market News reported that online retail sales grew by 13.2%, over three times the 3.8% the growth rate of retail sales in general.

The shift to on-line sales is most clearly evident at America's nationwide department stores including jcPenney's, Macy's, Sears, Target, and Walmart and large specialty retailers like American Apparel, Gap Stores, Best Buy, and Barnes and Noble.   Both Sears and jcPenney's used to be known for their large catalog divisions that no longer print the "big book" catalogs but now sell products for home delivery on-line. Sears and BestBuy allow customers to buy online for nearly immediate pick-up and both jc Penney's and Walmart help customers cut shipping costs through ship-to-store options.   Sears even runs an on-line marketplace that competes with the marketplaces of Amazon.com and eBay.

The growth of the on-line sales of traditional retailers is now significant enough that both jcPenney's and Macy's announced the growth of on-line sales in February at the same time they announced their monthly sales figures.  For jcPenney's  online sales grew by 11.8% which helped the store generate a total same store sales growth of 6.4%   Macy's generated a 30.9% growth in on-line sales which allowed total same-store sale growth to reach 5.8%.   For both stores, their recent results suggest that their on-line "catalogs" will drive their sales growth with brick-and-mortar outlets lagging behind.

For the economy, the shift to on-line retailing means a shift in jobs and economic activity away from brick and mortar retail outlets and businesses that create and support the consumer retail infrastructure to segments of the economy responsible for selling and delivering goods to consumers at home.   Rather than hiring more retail employees, jcPenney's and Macy's are going to have to hire more warehouse employees to pick and pack the items for on-line purchases.    Those jobs will likely be in distribution hubs like those that exist in central Pennsylvania that allow a company to ship to consumer within a day or two of the order and less will be in the communities where the brick and mortar outlets now are.   There will be a ripple effect in this shift in construction and real estate as the consumer retail infrastructure is rightsized and the on-line retail infrastructure grows. 

On-line sales give stores like Macy's and jc Penney's a broader geographic footprint than their retail outlets.   It allows items advertised on the Macy's Thanksgiving Day Parade to be sold in rural Nebraska where the nearest Macy's may be 100's of miles away and the nearest Walmart or Kmart may be well over 25 miles away.

In order for online retailing to grow the way that it has, retailers like Macy's and jcPenney's need a sound and reliable infrastructure for both delivering their products to consumers and means to advertise their on-line catalogs and they need one that reaches not only every household in metropolitan New York City, but one that can reach the most rural towns in the Great Plains or in Appalachia.    This is where the courier, express and postal industry comes in.  This industry, while primarily designed for business-to-business shipments, has adapted to the business-to-consumer market and has done it generally profitably. 

Profitability of parcel delivery requires that rates charged reflect differences in costs by shipment and by customer.   Delivering to households cost more for private sector carriers as many of these deliveries require multiple delivery attempts or involve only delivering a single item, so private sector carriers charge more.  Delivering to locations far from terminals to locations that are less densely populated also cost more as the time it takes to get to the delivery point is greater so charges by private sector carriers generally are higher to those points as well.     Private sector carriers have also expanded their use of the Postal Service for home deliveries of light weight items which reflects the primary business of the Postal Service, household delivery.  The joint private sector-Postal Service delivery service can allow private sector carriers to profitably sell the delivery of light weight parcel delivery services by purchasing Postal Service delivery at rates below their own operating costs.   Both jc Penney's and Macy's rely heavily on Postal Service delivery for items that one of the major private sector carriers pick-up from one of their warehouse.

The Postal Service has increasingly become a core part of the on-line retail delivery network as the on-line sales volume of light-weight, relatively low-value items like apparel and domestic goods have grown.  It must continue to remain a core part of that network for jcPenney's, Macy's and hundreds of other retailers to be able to growth their businesses.   For that to happen, the Postal Service's parcel delivery operation has to be profitable so that it will have the capital to invest in the infrastructure that will be needed to handle volumes that could grow at double-digit rates.   Profitability must apply to all parcel shipments regardless of class or customer and must include customers shipping single parcels.

Profitability also requires greater flexibility in pricing than now exists.   Most of the customers of private sector parcel carriers buy their services using contracts that are define discounts off of list rates based on the annual volume of business a customer does with the carrier.  Contracts exist for customers from those shipping just a few shipments per week to those spendiong tens of millions on parcel shipping. The discounts differ not only based on the total annual volume, but also total volume per shipment, and the distance that a particualr shipper is located from the carrier's distribution hubs.  Depending on the volume, carriers even negotiate significant discounts in rural and home delivery surcharges and may wave pick-up charges all together.  

The Postal Service needs to shift its pricing model to reflect private sector practice and allow it to price its parcels to reflect differences among its parcel-delivery customers as to     The sooner that obstacles to such practice could be eliminated the better for the future of the growth of on-line retailing.  

 

FedEx Earnings - Implications for the USPS

FedEx's earnings announcement and conference provided some insights into the parcel market and the increasing integration of the Postal Services delivery network with the marketing and distribution capabilities of FedEx.   The comments relating to FedEx Smart Post seem to indicate that United Parcel Service and other carriers that compete in the market for delivering small parcels to households, whether by their own drivers or by the Postal Service may be losing market share to FedEx.

Here are the relevant excerpts:

 Parcel Volume

Dave Bronczek – President and CEO of FedEx Express from the Q & A

Well, Art, as Fred mentioned in his opening remarks, we expect a very solid peak season. It always gets a little cloudy after that with the key focal point being Chinese New Year. So, we're optimistic about going into the holiday period and I think we'll have strong performance both in our U.S. networks and international networks through the peak season, but it always gets a little cloudy after that with the important period being around Chinese New Year.

We do expect solid industrial production numbers for the calendar year 2010 and going into 2011 in the 4% to 5% range, and we expect a little bit of consumer spending pickup. Our numbers are around 1.5 in calendar year '10 and about 2.6 in calendar year '11. So those are numbers that we’re very comfortable with in terms of supporting our business levels. Obviously, we'll need to wait a little while after peak season to see what the remainder of the year looks like.

The Postal Service can expect an increase in parcels in the 4th quarter and beyond at least as much as large as what FedEx expects.  As will be shown below, the volume of parcels that the Postal Service delivers is tied to how many parcels FedEx and other similar firms feed to its delivery network.

Distribution Patterns

Alan Graf  - CFO from the Q and A

 Let me just add, particularly in the high-tech sector, our customers don't have any inventory. And what's happening, the market is coming to us as there's a disintermediation of intermediate distribution. Items are going directly from where they are manufactured to point of consumption, which is called International Priority Express, and that's what’s so exciting about the next few years around here is, that's going to continue, and with the reliability that we put up, there's no need to have an intermediate warehouse and there's no need to have a backlog of things that can go obsolete on the shelves and that's part of the excitement that we see around here.

In response to a question about inventory, Alan Graf highlights one of the challenges competing in the domestic home-delivery parcel market.   Inventory of items manufactured overseas, and in particular items that weigh less than ten pounds are no longer shipped to a domestic warehouse for shipping to the household customers.   As the retailer does not know where in the United States the sales will come from or for that matter, what color, size, and in the case of computers, the processor, specific amount of memory, size of hard drive, and other components that the customer plans to order, keeping inventory in the United States becomes quite expensive.  Given the difference in labor costs, it becomes cheaper to pay international air freight than to ship a basic model to the United States, and then modify it for individual orders.  

FedEx continues to deliver these items within its Express network and United Parcel Service delivers them within their standard network.   The Postal Service could enter the market for the delivery of foreign sourced retail sales for home delivery only if it offered a price competitive delivery service in conjunction with DHL or TNT or a foreign post that offered the same security as what FedEx and UPS offer (signature requirements and tracking service) at a competitive price for the total end to end transportation charge.  It could more easily offer a price competitive service that allowed for pick-up at a Post Office or automated kiosk in conjunction with any carrier for a price well below the cost of home delivery.


Parcel Prices:

Mike Glen - President and CEO of FedEx Services from the Q & A



We were pleased with the Domestic Express volume performance. It is also being driven by the high-tech high value added sector. But the particular point that I want to make here is about the strong yield management activities that are in place and we will continue going forward. That is our primary objective. While we want to continue to grow volume and expect that we will do that, our primary focus is on improving yields, at the domestic Express business as well as in Ground and certainly LTL. So, our primary focus is not on market share so much as opposed to continuing to improve yields.


Dave Bronczek – President and CEO of FedEx Express from the Q & A

This is Dave. I’ll just add to what Mike said, and I've mentioned this a couple of times before and we'll talk about it in a couple of weeks here. Yes, the volume is up 3% and yes, my yields are up 7% for an overall revenue increase of 10%, but again, the global network that FedEx Express is, the more international packages that end up in the United States in the inbound, or outbound part of my cycle drives more and more profits automatically. So, the more international packages that end up in my U.S. domestic trucks coupled with the yield improvement program that Mike just talked about is a significant profit driver for FedEx Express.

FeEx's increases in yield (average revenue per piece) reflect a concerted effort to raise the average rate that its customers pay.  While some of the increase in reflects an increase in weight and a higher proportion of international shipments for FedEx Express, it is clear that even in an economy with slow growth, FedEx is able to raise its prices for parcel delivery services.


Service Quality:

Fred Smith from opening statement

FedEx Ground continues to accelerate its network providing a clear speed advantage over the competition. Quite simply, FedEx Ground is faster to more U.S. locations than any other ground carrier.

Just since this last January, FedEx Ground has increased the speed of nearly 3,700 lanes. Since June 2003, FedEx Ground has accelerated its delivery times by one day or more in about 82,000 lanes. FedEx Ground now delivers more than half its volume of packages in two business days or less, and more than 80% in three days or less. FedEx Ground service levels are at all-time highs.

For the Postal Service, FedEx Ground's improved service standards pose a competitive threat to Priority Mail as for many origin destination pairs FedEx Ground rates are less than Priority Mail.   To the extent that United Parcel Service is also expanding the geographic area that has delivery in less than two or three days, they create a competitive advantage over Priority Mail.

Integration with the Postal Service Delivery Network:

 Mike Glenn - President and CEO of FedEx Services

I want to comment on one thing and caution you about looking at the Ground numbers in a vacuum. One of the strategic advantages that we have is SmartPost. SmartPost allows us to attack the residential lightweight business in a very efficient and profitable way. So rather than trying to steer that traffic into the Ground network and the Home network in particular, we steer that traffic into the SmartPost network.

So by definition, some of the growth potential that might otherwise go to Ground is going to SmartPost, and I think you can see the very strong performance we have there. So you have to look at our Ground strategy as an overall residential strategy, including SmartPost. We are very pleased with our ability to continue to have industry-leading growth rates and very strong yield improvement efforts at Ground, and I think that's based upon the combination of a great sales team that is armed with the tremendous value proposition and that's a formula for success.

Fred Smith from the Q & A

So, a good example of that is what Mike Glenn just talked to you about. If you really want to talk about the most cost-sensitive segment of the market, it is lightweight, low value-added retail items going to the home. There is no one that has the density that can compete with United States Postal Service. That's why several years ago, we came up with the strategy of developing a SmartPost service, and why it is growing at huge rates. So, we firmly believe that our strategy which has allowed us to pick-up in the commercial ground sector, what about 12 market share points...

Alan Graf - CFO from the opening statement

FedEx SmartPost average daily volumes grew 9% to $1.1 million as a result of gains in market share and the introduction of new service offerings. Yields at FedEx SmartPost increased 19% primarily due to lower postage costs as a result of increased deliveries to U.S. Postal Service, final destination facilities and higher fuel surcharges.

FedEx clearly sees its SmartPost service as a competitive advantage.   Given that it offers shippers in a highly price sensitive market very low parcel delivery rates a competitive service it increases what the Postal Service delivers.   Pricing this service to FedEx requires a great deal of understanding as to what FedEx is charging customers and what portion of that charge represents the Postal Service's part.   Trying to set this rate within a regulatory context is particularly difficult and raises a question as to whether the rate increases for the Postal Service's portion of the revenue from a parcel delivery shipment should reflect the ability of FedEx and similar carriers to raise prices for end to end service or some other standard.  

To the extent that regulated parcel services are primarily originated by FedEx and similar firms, then the value of the regulation to the shipper of regulated rates may be diminished by the benefits that FedEx and similar firms capture for themselves.

The Exigent Rate Case: Rethinking Price Regulation

Yesterday the Postal Service proposed a major change in its rate structure through an exigent rate case.   The general and postal press have focused on 1) the rate increases themselves with particular attention to the impact on First Class single piece mail; and 2) the exigent process itself, a rate setting process that is being used for the first time. 


Mailers have organized a major effort to stop the changes through a new group the Affordable Mail Alliance.   With only 90 days to press their case mailers have a major challenge in their effort to argue that:

1. the conditions necessary for invoking the exigent process had not been met; 
2. the rate increases proposed are too large;  and
3. the changes in individual rates result in rates that are not fair and reasonable and do not meet the pricing objectives in postal law.

Given the limited amount of time available for the proceeding, the level of discovery, expert testimony, and cross-examination in this proceeding will be limited.   While the procedural schedule is not yet out, the Commission will likely need around 20 to 30 days to review evidence and write its opinion which compresses the first nine months of a traditional rate case into a 60 to70 day period.

What makes the exigent rate increase particularly difficult for mailers and the Commission is that it represents more than just a simple across the board increase in rates.   The proposal represents a fairly bold rethinking of regulatory pricing and the economic thinking that guided postal pricing for nearly thirty years.  These new approach can be summarized in seven statements as follows:

1. Divergence to electronic alternatives for single piece mail is not affected by stamp prices.   "The Postal Service does not believe that the erosion of single-piece mail through electronic diversion can be materially affected by limiting the growth of the stamp price." (Statement of James M Kiefer on Behalf of the United States Postal Service, July, 6, 2010, p. 15)  "As long as these forces [that encourage electronic payment] are in play, efforts to hold down the stamp price to "protect" the single piece customer will be unlikely to spur usage of single piece mail among users, for whom continence trumps the small impact of the postage savings." (Kiefer, p. 16)
   
   From a business standpoint, this means that the Postal Service cannot protect itself from the decline in single piece First Class mail by holding prices down.   Given that single piece mail is now declining at a faster rate than it did before the recession, the Postal Service's single piece rates today will increasingly be required to bear the costs associated with reducing the workforce that currently handles single piece mail at a rate far faster than the rate of normal attrition.  The public should expect that single piece rates will begin rising faster than other postal products to generate cash to cover these costs.
   
2. The markets for single-piece and presorted First Class mail are different.   By separating the markets for single-piece and presorted First Class mail, the Postal Service presents a direct challenge to the theory behind workshare discounts as they are currently constructed. "Traditional workshare theory suggests that increasing presort First-Class Mail prices would simply cause customers to re-evaluate their decision to perform worksharing activities.  Essentially, the theory argues that if it costs less for a customer to presort mail than the postal discount, then they will do the sortation. Conversely, if it costs more to presort mail than the postal discount, then the customer will choose to tender unsorted mail to the Postal Service. While this argument may have been valid at the inception of the automation program, it ignores the realities of decisions that customers are making today. Much of today’s presort mail is generated not by physically sorting mail pieces but by using presorted mailing lists to produce the resulting mail in presort order. 
   
   Customers pay prices, not “discounts” and decide whether to mail or not to mail based on the total cost of mailing, including the postage paid (not just the price differential between single-piece and presort mail) and the costs of producing that mail. While at some level the size of the discount affects workshare decisions, the overall postage price affects the decision to mail or not to mail. If this price goes up substantially (because discounts are reduced) the decision to mail at all may be reconsidered."  (Kiefer, p. 18)
   
   The Postal Service carriers maintains the separation between individual and commercial users of First Class mail in its development of First class mail products regardless of shape and is clearly seen in the discussion of both letter and parcel rates.  
   
   The separation of individual and commercial mailers requires the Postal Regulatory Commission to overturn current precedent on First Class rates and worksharing discounts as applied in the Postal Regulatory Commission's 2009 Annual Compliance Determination.   The Postal Regulatory Commission will like spend some time deliberating this change but much of the public work on this issue has been completed as part of another proceeding, Docket No. RM2009-3.
   
3. Pricing is still subject to the Postal Regulatory Commission's worksharing rules even if the Postal Service does not believe it makes sense.   Mr. Kiefer's statement has numerous sections on worksharing to deal with the Commission's approach to measuring traditional worksharing discounts.   The inconsistency between these sections and the Postal Service's thinking on separating single piece and pre-sorted First Class into two separate markets indicates that the Postal Service still must prepare its proposal to meet Commission precedent even if it believes that the precedent does not allow for postal prices to reflect market realities.  While the Postal Service may want to challenge worksharing precedent and law, the Postal Service is holding off that challenge until at least 2011.   
   
4. Weight Categories for First Class Pre-sorted mail require rethinking.   The Postal Service has proposed allowing single piece First Class letters to hold 1.2 ounces and still pay a single ounce rate.   This allows more advertising inserts in letters, items that help make mail that normally is a business expense become a profit generating advertising opportunity.   The question that this change makes is: why 1.2 ounces?  As mailers and the Postal Service experiment with this proposed change, it is possible that the Postal Service may want to allow commercial mailers to send higher weights as long as the mailing meets automation requirements.
   
5. Pricing should not reflect bad operating processes or short term economic challenges.  The prices proposed for Standard Flats and Periodicals both are more modest than traditional price setting rules would require.   The process for handling flats are currently in flux and the costs associated with moving them in one to two years should reflect a different operating process than the Postal Service now uses.  Also if the Postal Service, started an aggressive program to remove excess capacity through a new round of early retirements and a national distribution strategy for flats similar to what it did with the NDC's it may be possible to reduce costs even further.
   
   The Postal Service's rates also reflect a limited recognition that catalogs and magazines are struggling in the marketplace that sees significant reductions in consumer demand.   Magazines in particular have seen significant drops in ad pages that reduce the amount of postage a magazine pays per issue.    The recovering economy has seen some increase in the number of advertising pages sold that will increase the amount of revenue the Postal Service generates per magazine.
   
6. Not all products that look the same compete in the same market.   The Postal Service in its press conference described two Standard Parcel markets.   The first is a product sample market that is a form of advertising and competes with other means of distributing product samples.    The second is fulfillment and includes the distribution of light weight parcels.   Physically, these items look very similar.  However, the value of the item to the sender is very different.   Samples are designed to generate sales so the postage price, combined with all other costs of producing the sample must product a positive return on the advertising expenditure.   Fulfillment parcels rates must allow the seller of the item to earn a profit on the sale including the item's cost as well as all other sales, marketing, and overhead costs associated with the sale.   The differences between the two markets are intuitive, proving this as part of a regulatory proceeding may not be. 
   
7. The Postal Service's regulated parcel services, regardless of class, are offered in competitive markets.   The Postal Service with the exigent filing has begun the process of moving its parcel products into the competitive product category. This would allow it to offer all parcel services to commercial customers within contracts just like its competitors do and offer services to individuals based on rates contained in published tariffs.  The Postal Service at its press conference stated that it will propose moving Standard parcels to the competitive category this fall and is evaluating moving other products to this category as well.  
   
   The Postal Service's position in the parcel market is unique in that it both offers services directly to consumers and businesses and offers its delivery network to its competitors for delivering light weight items and items destined to the rural households.   All of the Postal Service's parcel products sold directly to shippers have private sector substitutes, although some are offered at prices that the private sector finds unprofitable and no private sector carrier offers a service that is price competitive. 
   
   The Postal Service's last mile delivery service competes with other firms that can offer last mile delivery as well as the employees and regular contractors of United Parcel Service and FedEx Ground.  The use of the Postal Service's last mile service reflects a classic make or buy decision that United Parcel Service and FedEx Ground that these companies constantly evaluate to ensure that they meet their profitability objectives.   The Postal Service ability to raise its prices for the last-mile delivery of light weight and rural parcels depends on price of its customer's alternatives. 

The seven items listed above should give the mailing community a lot to think about as they deal with the details of the Postal Service's proposal.   They all reflect long-term issues that go beyond the rates themselves.  For many stakeholders, including the Postal Rate Commission, postal unions, and many mailers, the changes reflect challenges to their long standing positions.  In 90 days we will see if the Postal Service has overcome the pull of precedent and traditional viewpoints or if a new era in postal pricing has begun.

Why the Postal Service Matters: FedEx Needs It

The financial data unveiled along with the FedEx earnings report that was announced yesterday revealed how closely tied the fortunes of FedEx and UPS are tied to the Postal Service.  FedEx is one of the Postal Service's largest suppliers.  It provides the postal service with a significant portion of the $2 billion spent on air domestic air transportation annually.   FedEx uses the Postal Service to deliver a significant portion of its light weight ground parcels.

While the size of the air transportation contract with the Postal Service is proprietary, FedEx reports its use of the Postal Service as a delivery supplier.  The following chart shows that FedEx's Ground delivery service has increasingly relied on the Postal Service to deliver parcels.  The shift to Postal Service delivery of ground parcels began in the fall of 2008 (FedEx's FY 2009 2nd quarter).

The shipments delivered by the Postal Service for FedEx Ground generally are 1) lighter weight than those that FedEx Ground delivers itself; and 2) more likely require delivery to a household address. FedEx Ground charged its customers less than $4 per shipment.  Of that the Postal Service received about $2 per shipment and FedEx Ground recorded the rest as its revenue. The most recent quarters for which the Postal Service and FedEx provided data had the Postal Service recording revenue of $1.92 per shipment and FedEx recording revenue of $1.59 per shipment.  Using the Postal Service to delivery lighter weight and home delivery shipments, allows FedEx to:

• Offer customers a delivery product with an attractive price.   With an average price running below $4, FedEx Smart Post offers a service that allows companies selling large quantities of light weight items on the web to offer those products at an attractive delivered price.
• Improve the profitability of its delivery contractors, and in particular home delivery contractors by increasing the average revenue per shipment they deliver.  By shifting low weight shipments to the Postal Service FedEx Ground increases the total revenue associated with all shipments delivered on a delivery route as low revenue items are removed from the contractor delivered network. This is most important for home delivery contractors who can deliver fewer shipments per day as the number of items delivered per stop and the distance between stops are greater than those routes in the same geographic area focused on commercial addresses.  It is hard to imagine any contractor able to cover his costs and earn a profit at $1.92 per shipment.
• Grow its parcel delivery business faster.   Volume growth requires increasing the capacity of the network and in particular delivery routes and delivery drivers.   The use of the Postal Service allows FedEx to better manage this growth and to ensure that its own network grows only as rapidly as heavier weight shipment volume grows.  Also, FedEx Ground would be less likely to invest in the marketing and distribution capacity required to accommodate growth if it had to use some of the $1.59 it now generates per shipment for profitably handling marketing and distribution of the lightweight parcel service to pay for delivery. 
• Grow its parcel delivery more profitably.   Even though FedEx Ground uses a contractor model, it is not immune to the economics associated with delivery networks.  Growing delivery network capacity to handle the growth in low revenue deliveries (i.e. light weight shipments that with rates of $4 or less) can create significant pressures on profit.  Paying the Postal Service around $2 per piece allows FedEx to earn a larger profit on light weight and home delivery shipments than it could if its contractors delivered the same item.

The recent growth in FedEx Ground's use of the Postal Service has contributed to FedEx Ground's gains in market share.  In it's most recent quarter FedEx Ground's daily originating shipment volume grew 13.9% year-to-year while United Parcel's daily ground parcel volume declined by 2.9%.   Clearly the ability of FedEx Ground to continue to grow its business and more than likely United Parcel Service find a way to stop the slide in market share will depend on the continuing existence of a reliable and competitively priced parcel delivery service that the Postal Service now offers.