In the three years to 2017, the price of letter and parcel delivery service prices has been rising at an estimated annualized rate of 2.5%. Prices have been growing despite sharp declines in fuel prices, which have been driven by the expanding domestic production of oil. The resulting decline in supplier purchase costs has placed downward pressure on price; however, demand increases in conjunction with high market share concentration have caused prices to rise nonetheless. Rate increases from USPS, which controls nearly half of this market, have also contributed to the overall increase in price.
In the three years to 2017, demand for market services has been rising in line with growth in the number of businesses, total trade value and per capita disposable income. Increases in total trade value and the number of businesses have led to a rise in domestic and international shipping volumes, particularly by businesses. Meanwhile, rising per capita disposable income has made it easier for consumers to purchase goods and have them shipped to their residences. Moreover, e-commerce has been growing during the past three years, driving further demand for market services, which are used to ship nearly all small goods purchased online.
Furthermore, the high market share of the top four carriers has allowed suppliers to significantly increase prices in response to heightened demand. Although the number of market carriers has grown slightly, the resulting increase in competition has not curbed price growth much. New entrants to the market do not considerably boost competition because they have minuscule market shares. Furthermore, USPS, this market’s largest player, has been implementing significant rate increases in the past three years to boost revenue; the agency’s stamp prices, package shipping rates and postage rates have risen overall, to buyers’ detriment.
Buyer power is also hindered by a moderate level of price volatility. Because fuel costs are passed to buyers directly, drastic fluctuations in the world price of crude oil have caused market prices to shift significantly from one year to the next. Moderate price driver volatility makes it more difficult for buyers to budget for their future letter and parcel delivery expenses. Unfortunately for buyers, long-term contracts in this market do not prevent rate increases, and rising fuel costs will be passed onto buyers regardless.
During the three years to 2020, letter and parcel delivery service prices are forecast to rise at an annualized rate of 4.0%, due primarily to further increases in demand from businesses and consumers. Additionally, rising fuel prices will spur faster growth in market prices during the coming years, although buyers will benefit from a reduction in price volatility.
Key indicators of demand, including the number of businesses, per capita disposable income and total trade value, are forecast to continue growing during the three years to 2020, boosting the volume of goods shipped among domestic and international businesses and to consumers. The number of businesses is expected to increase due to higher consumer spending and relaxed credit conditions, while per capita disposable income will rise due to general wage growth. Total trade value will continue to benefit from improving domestic economic activity. Additionally, e-commerce sales are expected to continue to grow strongly, boosting parcel shipments to residences and businesses. Rising demand for market products will, in turn, allow suppliers to increase prices without risking losses in business.
Furthermore, because the world price of crude oil is forecast to return to growth quickly in the next three years, carriers’ fuel costs are anticipated to rise, pressuring prices upward. However, carriers are also increasingly investing in more fuel-efficient transportation methods, including natural-gas vehicles and lighter cargo planes. In addition, most major vendors have agreements with fuel distributors to guard against significant price spikes. The broader use of natural-gas vehicles and long-term fuel supply agreements will help dampen the rate of fuel cost growth and, therefore, price gains during the next three years.
Fortunately for buyers, service price volatility is anticipated to fall to a low level during the next three years, making it easier for buyers to plan for service costs. Because suppliers’ profit margins will remain low on average, however, discount availability will continue to be minimal. Suppliers with low profit are typically reluctant to offer discounts because doing so would cut into their already-slim profit. Rather, buyers will be able to achieve favorable market rates through ad hoc shipping, rather than shipping under long-term contracts.