<u>New competition for USPS</u> Just when the Presidential Commission on the U.S. Postal Service is getting ready to draft its report on the future options for USPS and its parcel services, United Parcel Service has dropped a 21,000-pound bomb on its efforts. With the rebranding of Mail Boxes Etc. as the UPS Store, UPS is marching head-on into U.S. Postal Service territory to capture its dominant share of the retail parcel market. Not since 1985 when RPS introduced volume discounts for large business-to-business shippers, a strategy also adopted by UPS, has the USPS faced such an assault on its parcel services business. Since then, USPS's share of the commercial parcel market has fallen significantly. Now, USPS is facing the prospect of losing revenue from the retail parcel market. Though USPS has lost customers in the business-to-business and business-to-consumer markets to UPS, RPS and parcel consolidators over the years, it still had a considerable advantage in the consumer-to-consumer and consumer-to-business markets. USPS's network of 38,000 postal offices and retail centers was too big for parcel carriers to compete against. Even with the opening of private shipping centers (like Mail Boxes Etc., Postal Annex and Pak Mail), USPS retained a pricing advantage as these shipping centers placed a huge markup (up to 100 percent) on the published rates of parcel carriers. In addition, even the largest of these chains, Mail Boxes Etc. had only 3,000 stores nationwide. This gave USPS almost a 50 percent share of the infrequent-shipper parcel market and almost a 70 percent share of the cash-and-carry segment of the retail parcel market. This last stronghold of USPS in parcel services is now under attack. The rebranding of Mail Boxes Etc. as the UPS Store is aimed squarely at capturing market share in the retail parcel market from USPS. Parcel services at the UPS Store will be priced only 10 percent higher than UPS's published rates. With those rates about 15 percent lower than parcel post and about 30 percent lower than Priority Mail rates, the UPS Store now will have a pricing advantage. Since about 83 percent of UPS Ground Service parcels are delivered in three days or less, retail customers may consider it a suitable alternative to Postal Priority Mail. In addition, the UPS Store will compete effectively with USPS when it comes to customer convenience, with its presence in retail centers, extended business hours and one-stop shopping, and it will be supported with a $15 million marketing campaign to draw postal customers. By diverting some of the postal traffic to the UPS Store, UPS also is taking a shot at another archrival: FedEx Corp. Since FedEx has installed its drop boxes at some 10,000 post offices, UPS is hoping to take away traffic that otherwise would have used those FedEx drop boxes for express documents and packages. With competition in the B2B parcel market increasing (the DHL-Airborne entry will add new pressure) and higher discounts to large shippers reducing the profits from B2B service, UPS is focusing on improving its competitive position in the faster growing and more profitable retail parcel market. Recent developments have made UPS and other private parcel carriers the preferred choice for retail shippers because: - The UPS Store rates for commercial deliveries will be more attractive than Priority Mail rates. - UPS rates include $100 in insured value, which costs $1 extra with USPS. - UPS offers delivery confirmation, while USPS has a 35-cent surcharge for that service. - UPS Ground Service offers greater accountability and predictability with guaranteed delivery commitment. - Customers can measure UPS's on-time performance with detailed tracking and tracing features available from the UPS website. In addition to the UPS Store, customers can ship via UPS or other private carriers through thousands of retail shipping centers offsetting a key advantage of USPS with its 38,000 postal offices. With B2B parcel volume lost to private carriers via discounting and now retail volume being targeted with lower rates and 3,400 UPS Store locations (which will place pressures on other private retail shipping centers to lower their rates), USPS now is faced with a new challenge to redefine its value proposition as a parcel carrier for the retail market. USPS may find that its best value proposition is that which also fits its strongest operational competency. The Postal Service still has the largest number of retail centers nationwide and the largest number of delivery couriers with daily deliveries to 138 million homes. This is almost 10 times more than the total number of domestic parcels handled daily by all private carriers combined. By focusing on these two areas - acceptance and delivery - USPS can eliminate huge costs associated with supporting all other operational and marketing aspects of its parcel services and thereby further reduce its cost for delivery. The result will be that more private carriers will emerge to compete with UPS and FedEx, bring more packages to USPS for final delivery and provide shippers with more options for parcel services.