The End of Postage Discounting for Lower-Volume Shippers?
This is a guest post by Gordon Glazer, director of modal optimization and affiliate strategies at Shipware, a parcel audit and consulting firm. In the interest of full disclosure, Gordon recently took a small short position on Stamps.com after the two reports mentioned were published. Also, Shipware provides access to discounted postage pricing through one of the Reseller agreements mentioned in the reports.
On July 8, a report from The Capitol Forum, a provider of investigative analysis, issued a provocative piece on Stamps.com titled: “Reliance on Negotiated Service Agreements with USPS Relationship with Intuiship Leaves Stamps.com with Significant Regulatory Risk; USPS Can Terminate with 30 Days’ Notice if Agency Finds Abuse.” The report attempts to make the point that Stamps.com is profiting at the Post Office’s expense by abusing specific NSA (USPS Negotiated Service Agreement) participatory agreements.
Prescience Point Research Group (PPRG) updated its report on Stamps.com on July 14, commending the work of the Capitol Forum report. It was much larger in scope, titled: Stamps.com – The Software Valeant? It begins with this statement: “Shares of Stamps.com are grossly overvalued” and that they have discovered “STMP’s Big Secret” ~ “undisclosed business affiliates (e.g., IntuiShip) that STMP has aligned with to exploit legacy USPS postage reseller discount contracts to skim 100%-margin revenue from the USPS.”
The Motley Fool reported on July 18: Shares of Stamps.com suffered a 13 percent hit after a subscription service raised some regulatory concerns and another publication issued a bearish report
These participatory NSAs are in the background of all the discounted postage reseller programs that are typically accessed through “middleware” providers — i.e., any provider that helps shippers process their parcels. Middleware providers act as a conduit between the shipper’s IT systems (ERP, WMS and TMS), including shopping carts, and the USPS, and in many cases there are more than one. For example, it's very common for an end user to incorporate a “multicarrier shipping solution” provider and use Endicia in the background to process the postage. Stamps.com over the last couple years has acquired ShipWorks, ShipStation, Endicia and just recently ShippingEasy. According to the PPGR report, the arbitrage is driving “financial results that defy expectation and logic.” Arbitrage in this case is the margin between the costs of postage paid to the USPS and the price sold to the end user.
Wall Street analysts were scratching their heads, trying to understand how Stamps.com was regularly outperforming all expectations. PPRG believes that if the USPS ended the ability to participate in these NSA arrangements, 65 percent of Stamps.com EBITDA would vanish!
What would this mean to shippers? I'll explore some possible scenarios, but first it's important to put this “news” into context. According to Rick Munarriz of The Motley Fool, “Prescience Point Research Group is a publisher of shorting recommendations.” PPRG believes that Stamps.com stock may lose the majority of its value (at time of this article, it's trading at nearly $78 a share) and may fall as low as $15.
However, Munarriz reports “Stamps.com fired back, telling Bloomberg that it doesn't believe that its service agreements with the USPS can be simply nixed with 30 days' notice. It also suggests that the integrity of the report could be compromised since the primary source in the piece is a major Stamps.com rival.” (Inferring that the primary source was Jeff Crouse, vice president of shipping for Pitney Bowes Global SMB, who was listed as a source in the Capitol Forum Report.)
Both reports reference legal filings in the litigation between Endicia and ShipStation. This litigation began while Stamps.com and Endicia were competitors. PPRG also lists the litigation between Rapid Enterprises (dba Express 1) v. Auctane (dba ShipStation) as an additional source for its report. This lawsuit was filed on Aug. 14, 2014, and settled (after Stamps.com acquired ShipStation on Aug. 6, 2015) for $10 million. Per The Capitol Forum Report “the closeness of the relationship suggests that Stamps.com may be receiving a greater portion of the revenues from IntuiShip than it did from Express 1.” The report further explains: “Indeed, retention of a larger portion of the spread that IntuiShip receives by virtue of being a postal reseller could help explain Stamps.com’s significant revenue growth since 2014, which outpaces the 15% industry growth in e-commerce. Also, Stamps.com’s average monthly revenue per paid customer (ARPU) has also increased dramatically.”
Both the Capitol Forum and PPRG reports explain how the majority of the profits are generated from the postage margin (arbitrage) vs. the transactional service fees. PPRG reports “Stamps.com is happy because it now collects 7x the monetization it would have received had it been working directly with the USPS. IntuiShip is happy because, without doing an ounce of work, it is collecting 20% of the spread for volumes it would not have gotten without its relationship with Stamps.com and can play golf all day. “
On July 19, Copperfield Research in a report titled, "STMP – Long Case," wrote “Based on our own extensive diligence, we believe the negative arguments are factually incorrect and that USPS reseller relationships are not only stable, but integral to their market share gains. We also believe that one of the most impactful components of the recent short thesis is premised on a USPS table that appears to have been manipulated to misleadingly add credence to the cannibalization argument.” It goes on to state: “The segments the table does show, Priority Mail and Priority Mail Express, are of course USPS monopolies that are in secular decline and not particularly relevant to resellers and the high-volume shipping market that has driven Stamps.com growth and ARPU.”
On July 20, PPRG responded: “the reason we only include Priority Mail/Priority Mail Express is that the table displayed in our analysis is that is the only product USPS resellers are allowed to resell. It is also the only product Stamps.com is able to monetize on a volume basis, as evidenced in STMP’s 10-K, ~ The rest is irrelevant. ~ the only real debate is whether the USPS is cannibalizing Priority Mail volumes. And the reason this is important is Priority Mail is the only service from the USPS that competes with FDX/UPS.”
Copperfield Research missed the point. It's general knowledge that Priority Mail is highly relevant to both clients, postage resellers, middleware providers and Stamps.com. Both original reports point out that all of the NSA agreements they researched include a 30-day termination clause. Therefore, could the USPS cancel them? Likely the answer is yes, but more likely the Postal Service will institute controls to ensure proper use of NSAs. Again, the purpose of these NSA reseller agreements is to help drive new volume to the USPS from competitors like UPS, FedEx and others by providing customized contract pricing.
What Does the Future Hold?
- It's likely too early in the process to understand what's going to happen, over what time period and to whom.
- We do know that the purpose of USPS discounts are to drive new volume to the USPS or to protect volume at risk from competition.
- The USPS Office of Inspector General (OIG) is likely to conduct an investigation. If the OIG is able to get a hold of the transactional data, then the facts will determine the merits of the alleged arbitrage.
- The USPS announced prior to the Jan. 17 rate change that it would eliminate CPP discounted pricing for Priority Mail by 2017, and that it would depend on NSAs to attract and retain business directly. In that rate change, the USPS did effectively eliminate CPP pricing for all International modes, Priority Mail Express and FCPS (First Class Package Services).
- Generally, the largest shippers command the best discounts from the private carriers. To compete against these deeply discounted rates and accessorial concessions, the USPS needs to discount to remain competitive, especially in the higher weight ranges.
Therefore, one might conclude that the result of this could be the elimination of reseller postage discounts for the smaller shipper. If the USPS substantiates the claims within these reports that the reseller programs aren't being used as intended and that it's being harmed financially as a result, it's likely that it will take steps to mitigate its losses while retaining the business. In the spirit of retaining business, the USPS understands that larger shippers need discounted programs in order to route meaningful volume to the Postal Service. Smaller shippers will still save money shipping with the USPS at nondiscounted rates since USPS base rates are often more competitive than street pricing from the private carriers.
This means that if there are small-volume shippers enrolled in these programs, and if they're removed, it will not cause a loss of business to the USPS. However, to continue the reasoning, if these smaller shippers are in fact enrolled in these reseller programs, and if they make up the majority of the volume that Stamps.com and its subsidiaries are producing, then the loss of this arbitrage will greatly impact Stamps.com’s profitability. This is what the reports are trying to convey, but there are a lot of “if's.”
There are well over a hundred “middleware” solution providers, and in the past they made money by providing services, solving unique interface and go-to-market needs one client at a time. With the rise in e-commerce however, fast-growing startups can quickly and inexpensively process their shopping carts automatically with low-fee, cloud-based provider platforms. This new revenue model has transaction-based fees from FREE to about 5 cents a package, with the burden to integrate and customize shifted to the client. What's often not disclosed is that these providers may be making the majority of their profit from the arbitrage share, not the service fees.
If the arbitrage were to go away for the smaller shippers, then those providers that were dependent on them would need to shift their pricing back towards a transactional service fee model. The net costs to ship for smaller shippers would increase. The NSA holders and their partners would have to shift their focus to the purpose for which these programs were developed — to drive new business to the Postal Service.
Have you ever wondered why there was little to no regulatory pushback when Stamps.com acquired Endicia? Many in our industry did and the common rational was that there were going to be new providers and ways to print postage. Pitney Bowes, which was already an approved PC Postage provider, has opened up its platform for general use. There's now a new variant on how to evidence postage. It's known as “e-Postage” and the first e-Postage provider available to independent shippers is a company named “Shippo.” It's operating under the guidelines of the USPS beta test phase (a process that every postage provider must go through). Both Shippo and Pitney Bowes offer multicarrier solutions or the ability to just print USPS shipping labels. In addition, shippers still have the option to use metered postage and EVS manifesting.
There is much afoot, and it would be a good idea to schedule time to step back and take a holistic look at your small parcel transportation profile to better understand how your business might be affected. In addition, third-party consultants are available to assist those companies that need help and are often funded from the savings they're able to help generate.