If the U.S. Postal Service is losing money, why is it cutting these deals?
The boom in Internet retailing has provided a rare bit of good news to the beleaguered U.S. Postal Service, which is delivering packages at a historic pace — and reaping revenue that helps offset billions of dollars of losses elsewhere in the agency’s budget.¶ But the Postal Service isn’t the only one making money when a mail carrier brings a new pair of shoes or a school backpack to your door. ¶ Private companies compete fiercely to sell postage, prepare labels and help retailers find the best deals for shipping their products. And several of them argue that a single company, Stamps.com, is getting unusually good deals from the Postal Service, allowing it to undercut the prices of rivals and reap profits that should be going to the government.
As exhibit one, these competitors and other critics within the shipping industry point to a run of astonishing quarterly profit reports for Stamps.com — with gross margins often topping 80 percent — and a skyrocketing stock price that has increased by more than 500 percent over the past three years. It was up by more than 40 percent last week alone, following yet another sterling earnings report Wednesday.
This comes at a time when the Postal Service has run deficits for 10 years in a row, including $5.6 billion in losses in 2016.
The package-shipping business that Stamps.com and its rivals compete in is not the reason for these losses, which are driven largely by fixed personnel costs such as medical insurance and retirement. But the Postal Service’s dire finances underscore the importance of maximizing the agency’s revenue. And it is this point that has generated sharp controversy within the industry, with officials at several companies complaining that the Postal Service has tipped the scales against them while wasting money in the process.
“Everybody’s getting cannibalized, and they don’t know what to do,” said Bert Hamilton, founder of Harvey Software, a developer of shipping software and a rival of Stamps.com, who has brought his concerns to the Postal Service, the Office of Inspector General and his representative in Congress — all to no avail.
At the heart of this dispute is the Postal Service’s use of discount deals, called negotiated service agreements, that allow some companies to sell postage for less than others even though the underlying service — having the Postal Service deliver a package to a particular address within a specified period of time — is identical. The details of these deals, and even the identities of companies receiving them, are not public because of the Postal Service’s broad exemption from public disclosure laws when it comes to its dealings with private businesses, leaving rivals to guess at who is getting better terms and why.
Several current and former industry officials say they believe that Stamps.com, through several subsidiary companies, has gotten particularly lucrative discount postage deals from the Postal Service and is using them in novel ways that give Stamps.com an unfair competitive advantage over other companies.
Stamps.com and Postal Service officials say that such negotiated service agreements are mutually beneficial, helping win customers away from private sector shipping rivals FedEx and United Parcel Service.
Stamps.com — directly or through subsidiaries ShipWorks, ShippingEasy and ShipStation — provides postage for hundreds of millions of packages each year, including one-third of the roughly 1 billion Priority Mail shipments by the Postal Service. These companies, Stamps.com said in a statement to The Washington Post, essentially act as the Postal Service’s sales force, recruiting customers, selling postage and preparing deliveries in a system that has helped to dramatically increase its shipping volume amid fierce competition from FedEx and UPS.
“Like many other businesses, the USPS allocates a part of that discount to be shared with the customers, and the remainder is to be retained by its partners in order to help fund their sales, marketing, support, IT infrastructure and product development,” Stamps.com said in response to written questions. “By sharing some of its revenue, the USPS has been highly successful in attracting a significant number of companies to focus their businesses around driving USPS growth.”
Priority Mail is a particularly lucrative part of the Postal Service’s shipping business, earning $1.7 billion in extra revenue in 2016 — beyond the costs of running the service — helping to cover massive losses elsewhere in its budget as traditional staples, such as the mailing of letters, continued their long decline.
But several industry officials, some of whom spoke on the condition of anonymity because of their fear of damaging relationships with the Postal Service and business partners, estimate that the Postal Service could collect $100 million a year more in revenue by reforming or eliminating the discount programs that Stamps.com and some other companies use.
The startling growth of Stamps.com, meanwhile, has drawn scrutiny from journalists and investors as well. The Capitol Forum, a Washington-based investigative news and legal analysis publication, has run a series of articles over the past year detailing what it has portrayed as Stamps.com and several subsidiaries taking advantage of a poorly managed Postal Service discount program.
The coverage has illuminated a complex web of companies that profit from the Postal Service’s shipping of packages. Some, like Harvey Software, make money mainly from monthly or annual subscription fees for providing software portals that allow businesses with products to ship to quickly find the best price, whether from the Postal Service, FedEx or UPS.
Others make money mainly by selling what is called “PC Postage” — meaning postage sold online rather than from a post office — and profit mainly from taking a portion of the discount allowed by the Postal Service on each package. The Postal Service has only approved a few companies, including Stamps.com, to sell postage in this way.
Stamps.com operates in both parts of the industry because, though it once was mainly a PC Postage company, in recent years, it has acquired several subsidiaries that more closely resemble Harvey Software and work directly with businesses looking to ship products through a software portal that compares prices and prepares labels. That has allowed Stamps.com to offer discounted postage to the customers of its Some industry officials were particularly surprised to learn in the Capitol Forum stories that postage discounts had been made available to businesses that ship relatively small numbers of packages, rather than the high-volume shippers that many in the industry thought were the typical beneficiaries of negotiated service agreements. That has raised questions about whether the Postal Service is administering its discount program in an evenhanded way.
“It’s hard for me to say whether it’s working well or not working well because it’s opaque,” said shipping industry consultant Gordon Glazer of Shipware, a San Diego-based shipping consultancy that helps businesses trying to trim transportation costs. “We don’t get to see how others are using it. From what I can see, the program has net benefits growing volume” for the Postal Service. But Glazer added, “Greater oversight would make sure that the program is used as it was intended, which is to drive net new revenue to the Postal Service while protecting revenue at risk. The big question that remains is whether it is appropriate for very small shippers . . . to participate in a . . . program where the net costs to the USPS is the same as a larger shipper.”
To determine the extent of the discounts, which are closely held secrets by the Postal Service, the Capitol Forum acquired dozens of shipping labels for three subsidiaries of Stamps.com and several other companies and had them analyzed by Yousuf Lodhia, cofounder of Micronite, a developer of postal software in Roseville, Calif.
Using a program that reads the bar codes on shipping labels, Lodhia was able to determine how much the various companies paid the Postal Service for the postage that was eventually provided to a shipping customer. For smaller packages, Lodhia found that discounts averaged $1 to $2 — about 15 percent. It is a difference that adds up quickly for companies that sell postage for hundreds of thousands of packages a day. But for larger packages traveling longer distances, discounts studied by Lodhia have in some cases exceeded 30 percent and even more when a package was sent overseas.
Lodhia’s research made clear that several companies, including some not affiliated with Stamps.com, had found ways to profit from the Postal Service’s discount programs. But other companies, which don’t benefit from the PC Postage rates, could offer their customers only the official — and invariably more expensive — rates available to any business dealing directly with the Postal Service.
“The post office also talks about needing to raise postage rates, so why are they giving these huge discounts?” Lodhia told The Post.
A virtual sales force
The Postal Service has long had different prices for shipping depending on who was paying. The rate paid by an ordinary customer who walks up to a post office is the most expensive. Commercial shippers get cheaper rates, helping the Postal Service better compete with private-sector rivals. More than 1,000 shippers have gotten even deeper discounts by negotiating directly with the Postal Service for deals, the details of which are not made public. (Amazon.com, whose chief executive Jeffrey P. Bezos owns The Post, has a discount agreement with the Postal Service. Amazon told Forbes in July that: “As is the case with all of its customers, our partnership with USPS is reviewed annually by the Postal Regulatory Commission, which has spent decades reviewing and approving USPS costing and pricing practices.”)
The Postal Service declined multiple requests for interviews regarding its postage-discount programs and did not respond to written questions from The Post. The Postal Service did issue a statement saying, “Like any prudent business, the Postal Service does not publicly discuss the specifics of our business relationships. Nevertheless, every Postal Service [discount contract] is reviewed by our independent regulator and can only be approved after a finding that the arrangement will in fact be profitable.”
Postal Regulatory Commission officials said they review only whether a discount deal will generate more revenue than it costs to provide the service. They do not assess whether a better deal — or no deal at all — would generate more revenue.
After declining The Post’s requests for interviews, a senior Postal Service official, Chief Customer and Marketing Sales Officer Jim Cochrane, discussed negotiated service agreements and other discount programs Tuesday with a Stamps.com marketing executive for a blog post on the company’s website. The use of discount deals, Cochrane told Stamps.com, “allows us to compete better for the larger shippers, and really customize a solution that looks at everything from the size of the packaging, the amount of the volsubsidiaries. ume, where the packages are going to. So all that matters, and once again the key issue is to grow with our customers.”
Cochrane attributed some of the Postal Service’s success to its “excellent partners” such as Stamps.com.
But other companies are not as happy with how the Postal Service is handling its partnerships.
Window Book, based in Cambridge, Mass., said that it has lost many customers to rivals offering shipping discounts through the PC Postage program.
“We feel that the Postal Service has given an unbelievable deal to the PC Postage guys because no one else can get discounted postage. It’s an unbelievable deal, and it’s not fair,” said Jeff Peoples, founder and chief executive of Window Book. “It just killed our business.”
Peoples said he too has complained to Postal Service officials, saying, “Hey, look, guys, you guys have decimated my business” by allowing Stamps.com and other PC Postage providers to have access to discounts that Window Book wasn’t allowed to offer. “If I could do that, I would be making billions.”
As the controversy has grown, some investors have spoken publicly about taking short positions on Stamps.com’s stock, hoping to profit from a drop in the rapidly growing stock price amid growing scrutiny of the postage-discount programs.
Prescience Point Research Group repeatedly tweeted about Stamps.com last summer, predicting “precipitous decline in $STMP revenue” in the weeks after the first Capitol Forum story.
But in the year since, the stock price for Stamps.com has more than doubled, not fallen as some investors had expected.
Walls and bridges
Many within the industry say that the negotiated service agreements were intended to persuade large shippers to increase their use of the Postal Service, helping it bolster revenue. Many also say that the agreements functioned in a better and fairer way in an earlier era, when there was something of a wall between the few companies that were permitted to sell PC Postage — including Stamps.com — and the companies such as Harvey Software and Window Book that helped large numbers of business customers shop for the best prices and prepare shipments.
But the market fundamentally changed when Stamps.com made a series of acquisitions in recent years. One move that drew immediate attention was the purchase in 2015 of PC Postage rival Endicia, one of only a few companies that at the time were allowed to sell postage. Another, Pitney Bowes, had not yet moved into the PC Postage market aggressively, so a marketplace that once appeared to have several competitors had consolidated substantially.
“When I heard they were buying Endicia, I just panicked,” said Hamilton, who founded Harvey Software in 1983. In addition to fearing the rising market power of the newly merged company, Hamilton had contracted with Endicia for some shipping services and worried that Stamps.com could poach his customers.
Hamilton said that he shared his concerns with the Justice Department, whose antitrust division was reviewing the deal. But the acquisition was approved over industry complaints.
Less controversial at the time was the company’s purchase of several other companies — ShipStation, ShipWorks and ShippingEasy — that worked directly with hundreds of thousands of Internet retailers and other businesses. The massive volume handled by these companies allowed Stamps.com’s subsidiaries to bundle the shipments of many smaller retailers so that their packages were eligible for the same discounts that many within the industry thought were available only to larger shippers.
Additionally, industry rivals expressed frustration that Stamps.com used the lure of its postage discounts to win customers away from them — including customers who already were using the Postal Service for most of their shipping. In the process, the amount paid to the Postal Service declined by the amount of the discount while the profit to Stamps.com grew.
Stamps.com, however, said such complaints reflected a misunderstanding of the Postal Service discount programs, which Stamps.com said are intended to keep customers from leaving for rivals such as FedEx and UPS. Federal law gives the Postal Service wide leeway to negotiate prices with individual customers so long as the cost of providing the service does not exceed the revenue collected for it.
“The reseller [discount] program is meant both for the acquisition of new package volume and the retention of existing package volume, both of which must happen in order for the USPS to generate growth in package volume,” Stamps.com said in its statement. “The Postal Service’s overall goal with the reseller [discount] program is to grow package volume, and the USPS has set up the program to be equally applicable to both ‘new’ and ‘existing’ customers.”
But others such as Hamilton saw it differently, maintaining that a discount program they thought was intended to help the Postal Service take business away from FedEx and UPS was being used by Stamps.com and its subsidiaries to undercut rivals’ prices.
The ultimate irony, said several industry officials, including some who support the Postal Service’s discounts generally, is that much of the supposed competition for shipping customers was not real. The Postal Service, they said, generally offered better prices for smaller packages than FedEx or UPS. Most shippers would have used the Postal Service anyway — discounts or not.
“All this stuff has really changed my understanding of the U.S. government,” Hamilton said. “I always thought they would always be there to help me if things went bad. Now, I realize I was very wrong.”
A U.S. Postal Service carrier, top, loads mail into a truck in Shelbyville, Ky. Several private companies are complaining that a Postal Service discount deal with Stamps.com to sell postage online has created business difficulties.