American Elephants


The Interesting Relationship Between Online Business and American Retail Business. by The Elephant's Child

It’s pretty clear that online business is playing hob with retail in general. Retailers are hurting as consumers turn to online sources where they can get quick service, particularly from Amazon, and not have to go trailing through a mall to try to find what they need.

A story in the Wall Street Journal today exposes an uncomfortable relationship between the federal government and Amazon. “The U.S. Postal Service delivers Amazon’s boxes well below its own costs. Like an accelerant added to a fire, this subsidy is speeding up the collapse of traditional retailers in the U.S. and providing an unfair advantage for Amazon.”

This arrangement is an underappreciated accident of history. The post office has long had a legal monopoly to deliver first-class mail, or nonurgent letters. The exclusivity comes with a universal-service obligation—to provide for all Americans at uniform price and quality. This communication service helps knit this vast country together, and it’s the why the Postal Service exists.

But people went online too, and first class mail is down some 40% from its peak. I contact many friends by email now, rather than writing a letter, and you probably do too. The post office still visits each mailbox each day, but there’s less traditional mail, so the service has filled its spare capacity by delivering more boxes. But when the post office delivers 10 letters and one box and a passel of junk mail to one mailbox how do they allocate the cost of the postal worker, the truck, and the network and systems that support the postal worker?

In 2007 the Postal Service and its regulator determined that, at a minimum, 5.5% of the agency’s fixed costs must be allocated to packages and similar products. A decade later, around 25% of its revenue comes from packages, but their share of fixed costs has not kept pace. First-class mail effectively subsidizes the national network, and the packages get a free ride. An April analysis from Citigroup estimates that if costs were fairly allocated, on average parcels would cost $1.46 more to deliver. It is as if every Amazon box comes with a dollar or two stapled to the packing slip—a gift card from Uncle Sam.

Amazon is big enough to take full advantage of “postal injection,” and that has tipped the scales in the internet giant’s favor. Select high-volume shippers are able to drop off presorted packages at the local Postal Service depot for “last mile” delivery at cut-rate prices. With high volumes and warehouses near the local depots, Amazon enjoys low rates unavailable to its competitors. My analysis of available data suggests that around two-thirds of Amazon’s domestic deliveries are made by the Postal Service. It’s as if Amazon gets a subsidized space on every mail truck.

I don’t know which stores will be gone in a few years, or if they will survive. Right now, it’s clear that retail is hurting, and some retailers are in trouble. Will our malls survive? The federal government has”had its thumb on the competitive scale for far too long.” They need to stop picking winners and losers. I believe that the country will be better off if online and retail  compete and continue to survive.

I don’t know if the retail problems cover all kinds of goods or just some. Are Home Depot and Best Buy as much affected as say, Nordstrom and J.C. Penney? I need more evidence. Amazon just bought Whole Foods, in anticipation of making a big push for the grocery business, but Amazon is planning to build stores, where everything you select is tallied up automatically on your card as you take it off the shelf. We tried Amazon’s online groceries when too sick to get to the store, and it was prompt and  good service. Someone remarked that they saved money because they weren’t tempted with impulse items online. I prefer to go to the store.

The Government is subsidizing Elon Musk as he has fun with new engineering ideas, but Tesla is running into major problems, and solar is turning out to be a flop, just as his first experiments with this big vacuum tube thing for moving people has had it’s first success in a miniature version. All very interesting, but I don’t understand why he gets government subsidies. One might assume that we got an early lesson with Solyndra.

 

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2 Comments so far
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The reason explained is by James Madison, Federalist Paper #62

http://www.constitution.org/fed/federa62.htm

No politician should be allowed to receive a campaign contribution from any person, group or business that profits (receives a benefit) from a law to be passed or has been passed during their term of office in addition to the current anti-corruption laws. IF it is illegal to directly receive money or in kind gifts for voting on a law, it should also be illegal to receive a campaign contribution as well.

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Comment by dscott

Subsidy example:

It looks like the state of California is bailing out Tesla

http://www.businessinsider.com/tesla-stock-price-california-state-government-bailing-out-2017-7?IR=T

Who pays? Guess…

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Comment by dscott




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