A Citigroup analysis finds each box gets a $1.46 subsidy. It’s like a gift card from Uncle Sam.

Why the Post Office Gives Amazon Special Delivery

A Citigroup analysis finds each box gets a $1.46 subsidy. It’s like a gift card from Uncle Sam.

By 

Josh Sandbulte

July 13, 2017 7:12 p.m. ET

In my neighborhood, I frequently walk past “shop local” signs in the windows of struggling stores. Yet I don’t feel guilty ordering most of my family’s household goods on Amazon. In a world of fair competition, there will be winners and losers.

But when a mail truck pulls up filled to the top with Amazon boxes for my neighbors and me, I do feel some guilt. Like many close observers of the shipping business, I know a secret about the federal government’s relationship with Amazon: The U.S. Postal Service delivers the company’s boxes well below its own costs. Like an accelerant added to a fire, this subsidy is speeding up the collapse of traditional retailers in the U.S. and providing an unfair advantage for Amazon.

This arrangement is an underappreciated accident of history. The post office has long had a legal monopoly to deliver first-class mail, or nonurgent letters. The exclusivity comes with a universal-service obligation—to provide for all Americans at uniform price and quality. This communication service helps knit this vast country together, and it’s the why the Postal Service exists.

In 2001 the quantity of first-class mail in the U.S. began to decline thanks to the internet. Today it is down 40% from its peak levels, according to Postal Service data. But though there are fewer letters to put into each mailbox, the Postal Service still visits 150 millionresidences and businesses daily. With less traditional mail to deliver, the service has filled its spare capacity by delivering more boxes.

Other companies, such as UPS and FedEx , compete with the Postal Service to deliver packages. Lawmakers, to their credit, wanted a level playing field between the post office and its private competitors. The 2006 Postal Accountability and Enhancement Act made it illegal for the Postal Service to price parcel delivery below its cost. 

But with a networked business using shared buildings and employees, calculating cost can be devilishly subjective. When our postal worker delivers 10 letters and one box to our home, how should we allocate the cost of her time, her truck, and the sorting network and systems that support her? What if the letter-to-box ratio changes?

In 2007 the Postal Service and its regulator determined that, at a minimum, 5.5% of the agency’s fixed costs must be allocated to packages and similar products. A decade later, around 25% of its revenue comes from packages, but their share of fixed costs has not kept pace. First-class mail effectively subsidizes the national network, and the packages get a free ride. An April analysis from Citigroup estimates that if costs were fairly allocated, on average parcels would cost $1.46 more to deliver. It is as if every Amazon box comes with a dollar or two stapled to the packing slip—a gift card from Uncle Sam.

Amazon is big enough to take full advantage of “postal injection,” and that has tipped the scales in the internet giant’s favor. Select high-volume shippers are able to drop off presorted packages at the local Postal Service depot for “last mile” delivery at cut-rate prices. With high volumes and warehouses near the local depots, Amazon enjoys low rates unavailable to its competitors. My analysis of available data suggests that around two-thirds of Amazon’s domestic deliveries are made by the Postal Service. It’s as if Amazon gets a subsidized space on every mail truck. 

I do not know which stores in my neighborhood will be gone five years from now, but I am certain my household will continue to receive numerous boxes from Amazon. I also believe that society would be better off if competing retailers, online or brick-and-mortar, continue to thrive. Congress should demand the enforcement of the Postal Accountability and Enhancement Act, and the Postal Service needs to stop picking winners and losers in the retail world. The federal government has had its thumb on the competitive scale for far too long.

Mr. Sandbulte is co-president of Greenhaven Associates, a money-management firm that owns FedEx common stock.