Amazon and USPS Negotiations Are Crumbling. Will This Hurt the eCommerce Giant’s Stock?
Amazon (NASDAQ: AMZN) once relied heavily on the United States Postal Service (USPS) to fulfill its “last mile” deliveries. That partnership was mutually beneficial: Amazon secured bulk shipping discounts from the USPS, while the USPS filled its unused delivery capacity. Amazon’s delivery speeds also accelerated after the USPS started delivering its packages on Sundays in 2013. By delivering more packages, the USPS offset its declining letter mail revenues.
But over the past decade, the e-commerce leader has expanded its first-party logistics network, Amazon Logistics, to reduce its dependence on USPS, UPS (NYSE: UPS), and other third-party couriers. That expansion transformed Amazon from a partner to a competitor, giving the company even more leverage to negotiate lower delivery rates with its third-party partners.
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Amazon plans to reduce its USPS shipments by at least two-thirds when its current contract with the postal service expires on Oct. 1. The two parties were in talks to negotiate more favorable terms for a new contract — but Amazon recently disclosed that those negotiations abruptly collapsed last December after the USPS backed out at the “eleventh hour”. That retreat was surprising, since the USPS could run out of cash this year as its total deliveries decline.
Amazon generates most of its revenue from its e-commerce business, but most of its profits come from its cloud infrastructure platform, Amazon Web Services (AWS). Both businesses are under pressure right now as the Iran War drives up energy prices, throttles consumer demand, disrupts deliveries in certain regions, and drives companies to rein in their cloud spending.
Since Amazon’s e-commerce business already operates at lower margins than its cloud business, it must secure discounted bulk delivery rates with the USPS, UPS, and other logistics services to generate stable profits. Yet UPS — which counts Amazon as its top customer — has already been reducing its deliveries for the e-commerce giant as it prioritizes margin stabilization over revenue growth. The USPS seems to be following UPS’ lead.
Amazon’s expansion of Amazon Logistics could eventually reduce its delivery costs, give it tighter control over its own shipments, and curb its dependence on third-party carriers. But for now, it still needs partners like the USPS and UPS to fulfill its expensive last-mile deliveries.
