President Trump is continuing his Twitter attack on Amazon over its deal with the Postal Service. Yesterday Trump tweeted, “Only fools, or worse, are saying that our money losing Post Office makes money with Amazon. THEY LOSE A FORTUNE, and this will be changed. Also, our fully tax paying retailers are closing stores all over the country… not a level playing field!”
A couple of days ago, his tweets were more specific: “While we are on the subject, it is reported that the U.S. Post Office will lose $1.50 on average for each package it delivers for Amazon. That amounts to Billions of Dollars…. If the P.O. ‘increased its parcel rates, Amazon’s shipping costs would rise by $2.6 Billion.’ This Post Office scam must stop.”
The attacks were in the same vein as his earlier tweets back in December. They are apparently based on an op-ed in the Wall Street Journal by Josh Sandbulte published last July. Sandbulte claimed that each Amazon parcel was getting a $1.46 subsidy. “It’s like a gift card from Uncle Sam,” said the WSJ headline.
As Vox has noted, Sandbulte is a money manager who works for a firm that owns FedEx stock, but that may or not be relevant. Anyone invested in mutual funds probably owns some FedEx. In any case, he didn’t invent the subsidy idea. It came from an analysis done by Citigroup published in April 2017.
The thesis of the Citigroup report is that taxpayers are essentially paying for the free shipping offered by Amazon. As the Citi analysts write, “In this note, we examine the true profitability of the Post Office and show that by charging below market rates on parcel volume (mainly eCommerce) the Post Office has essentially turned free shipping into a future tax payers’ burden.”
The Citigroup report, it should be noted, is intended to give advice to investors in the stock market. It claims that “a day of reckoning” is coming when the Postal Service will have to implement a significant increase in shipping rates, and this will provide a large “revenue opportunity” for the Postal Service’s competitors, FedEx and UPS — something on the order of $15 to $19 billion a year in additional revenue. This, they say, “supports upside for both stocks.”
The Citigroup report is somewhat less bullish on Amazon because it will have to bear the brunt of rate increases by the Postal Service and also FedEx and UPS, who will be in a better position to raise rates themselves. According to the analysts’ “worst case scenario,” Amazon will have to pay $2.6 billion a year in additional shipping costs.
As a closer look at the Citigroup report reveals, the case for a huge Postal Service rate hike on parcels is seriously flawed, and the report provides no evidence for Trump’s tweets that the Post Office is losing a fortune on the Amazon deal.
Before we get to the Citigroup report, it will be helpful to lay out a few basic facts about the types of U.S. mail, the way postal accounting works, and the particular service Amazon is using. If you’re familiar with all this, you can cut to the chase and go to the section below on the Citigroup analysis. Read More