It’s time to fact check the fact checkers on President Trump’s tweet:
I am right about Amazon costing the United States Post Office massive amounts of money for being their Delivery Boy. Amazon should pay these costs (plus) and not have them bourne by the American Taxpayer. Many billions of dollars. P.O. leaders don’t have a clue (or do they?)!
The “Fact Checkers” have already declared President Trump to be completely wrong. We’ll use Politifact’s No, the Postal Service isn’t losing a fortune on Amazon article and see why these people and the Post Office are clueless.
Let’s start with the basic talking point you’ll read from any of the “fact checkers” this morning. As Politifact said:
The post office is losing a fortune, but Trump is wrong to blame Amazon.
FACT: President Trump has at no time blamed all of the Post Office’s losses on Amazon. What’s important here is that no one contests (I guess that makes it an actual FACT) that the Post Office’s net loss was $2.7 billion for 2017.
In other words, the Post Office has been borrowing money from the Government to pay retirees and this came to an end. In the real world, not having actual money in a retiree’s account will get you sent to jail. It certainly in no way excuses the Post Office’s loss.
Now we get to see the ol’ switcheroo in terminology as the “fact checkers” turn from measuring profit to measuring revenue. This is key since any businessperson knows that the quickest way to go out of business is to reduce your prices so that your revenue skyrockets without a commensurate rise in profit margin. Profit margin, by the way, is (Price-Cost)/Price. If something costs you $1.25 to produce and you sell it for $4.00, your profit margin is ($4.00-$1.25)/$4.00 = 0.6875 or 68.75%.
UPS operates at a gross profit margin of 73% and FEDEX at 62%.
Package delivery, however, was one of the few bright spots in its latest financial statement. In 2017, parcels brought in $19.5 billion, or 28 percent of USPS’ annual revenue. At $2.1 billion, packages contributed the largest revenue increase.
Here’s the thing — it doesn’t matter at all what the revenue is (from a business perspective) if it doesn’t generate a profit.
Deals with private shippers like Amazon accounted for $7 billion of the $19.5 billion in revenue. While we know that Amazon is the biggest e-commerce player, we don’t know exactly how much of the $7 billion comes from Amazon, because the details of the postal service’s deals with private shippers are considered proprietary and not made public.
Now we’re getting to the nitty gritty. Why are deals with private shippers proprietary? Well, they’re likely crap deals. How would we know if it’s a crap deal? That’s easy . . . if the profit margin is much lower than 68.75%, it’s a crap deal and I’m pretty sure President Trump knows what the number actually is or he has a pretty good guess.
“By law our competitive package products, including those that we deliver for Amazon, must cover their costs,” an August 2017 USPS press release said. “Our regulator, the Postal Regulatory Commission (PRC), looks carefully at this question every year and has determined that they do. The PRC has also noted that competitive products help fund the infrastructure of the Postal Service.”
And here is where the stupidity lives. The Post Office is losing a ton of money but if you do something that doesn’t cause you to lose more money, it’s OK. Only in the federal government is this OK! It’s just plain insane!
What does “cover costs” actually mean?
Jim Sauber, chief of staff for the National Association of Letter Carriers, explained the Postal Service can offer lower prices than their private competitors because they already “go to every house, every day.”
“We’re already going there to deliver mail and bills and advertising, so the marginal cost of delivering an extra package is not high, especially in the low-density areas,” Sauber said.
What this means, I suppose, is that if you’re delivering junk mail to my mailbox anyway, the cost of delivering an Amazon box is actually really pretty close to zero so anything you make is gravy.
ERMAHGERD!TM Here we have a wildly profitable business as demonstrated by UPS and FedEx that we virtually give away because it’s not costing you and me all that much extra.
This brings us to Marketing 101 which is that price should be based on the value received and not on the cost of manufacture. Competition is what keeps the price in check by forcing companies to reduce cost to maintain an adequate profit margin.
Just a note from a recent personal experience. I forgot my laptop charger while I was out of town last week. I ordered a new one from Amazon and it arrived on Sunday. I have Amazon Prime so that $17 charger was delivered as part of the $99 I pay each year. The value of a 2-Day FedEx delivery for this charger is $35.21 and I would have had to wait until Monday to get it. There’s clearly something rotten in Denmark!
That said, it’s possible that the Postal Service could be charging Amazon more for package delivery and therefore get a better deal. That still doesn’t mean USPS is losing a fortune.
We rate this claim False.
At the Sparta Report, we rate Politfact’s claim of False as:
By the way, the reason the stock market is reacting is that investors really know that Trump’s right.
If any sort of real business savvy was applied to the Post Office, Amazon would be in serious trouble.