Thanks to President Donald Trump, the investment community is now taking a closer look at Amazon’s (AMZN) relationship with the United States Postal Service.
Namely, examining whether an increase in postal rates would have a meaningful, negative impact on the online retailer’s bottom line.
Late Thursday, the White House announced that Trump ordered the creation of a task force to review business practices at the USPS. In this announcement, Trump said the postal service is “on an unsustainable financial path and must be restructured to prevent a taxpayer-funded bailout.”
And in a note to clients on Friday, analysts at Credit Suisse looked at two scenarios of how an increase in prices at the USPS could impact Amazon.
“Given Amazon’s dependency on the USPS to push its consumer value proposition, we went into this analysis looking for a potential silver bullet which may disrupt the level of service,” Credit Suisse said. “The two unknowns at this point are the percentage of total US packages that the US Post Office delivers for Amazon as well as the magnitude of any price hike.”
The firm estimates that 40%-50% of Amazon’s shipping costs in the U.S. are associated with the USPS and, assuming a 15%-20% increase in shipping costs, there are $1-$1.8 billion in potential shipping costs Amazon may have to absorb in 2018.
Additionally, every 5% change in USPS costs likely adds $400 million in shipping costs for Amazon.
Amazon could raise its Prime membership rate
Were Amazon to elect not to absorb these costs in the event of a USPS rate hike, Credit Suisse says the firm could increase the cost of its Prime membership, which has been $99 a year since 2014 while Amazon has added more video, music, and faster shipping options to the membership.
“We estimate that Amazon had ~104mm Prime subscribers as of the end of 2017 and if we assume ~60mm in NA, a ~$20 rise in the annual subscription fee should cover most if not all of the aforementioned shipping cost increases,” Credit Suisse said. “At any rate, this highlights the importance of Prime Now and its Flex Driver network as the long term product hedge against greater USPS dependency.”
In its fiscal year 2017, the USPS lost $2.7 billion. And in recent tweets and other public statements, Trump has reiterated his belief that Amazon’s agreements with the postal service over delivery rates is a “scam” and that the online retailer is to blame for the postal service’s financial situation.
Trump’s focus on the post office and its relationship with Amazon, however, seems likely to be connected to his clear dislike for Amazon CEO Jeff Bezos, who also owns The Washington Post through his personal investment vehicle. Trump has previously called The Washington Post the “Amazon Washington Post.”
A number of Trump’s tweets about the USPS and its relationship with Amazon also referenced an analysis that said the postal service loses $1.50 for every package it delivers for Amazon. The website Save The Post Office, however, recently did a lengthy analysis outlining how Amazon almost certainly pays the postal service more than it costs to ship packages and that taxpayers are not subsidizing Prime’s two-day free shipping.
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Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland
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