Cash-strapped post office tests same-day delivery

Emboldened by rapid growth in e-commerce shipping, the cash-strapped U.S. Postal Service is moving aggressively this holiday season to start a premium service for the Internet shopper seeking the instant gratification of a store purchase: same-day package delivery.

Teaming up with major retailers, the post office will begin the expedited service in San Francisco on Dec. 12 at a price similar to its competitors. If things run smoothly, the program will quickly expand next year to other big cities such as Boston, Chicago and New York. It follows similar efforts by eBay, Amazon.com, and most recently Wal-Mart Stores Inc., which charges a $10 flat rate for same-day delivery.

The delivery program, called Metro Post, seeks to build on the post office's double-digit growth in package volume to help offset steady declines in first-class and standard mail. Operating as a limited experiment for the next year, it is projected to generate between $10 million and $50 million in new revenue from deliveries in San Francisco alone, according to postal regulatory filings, or up to $500 million, if expanded to 10 cities.

The filings do not reveal the mail agency's anticipated expenses to implement same-day service, which can only work profitably if retailers have enough merchandise in stores and warehouses to be quickly delivered to nearby residences in a dense urban area. The projected $500 million in potential revenue, even if fully realized, would represent just fraction of the record $15.9 billion annual loss that the Postal Service reported last week.

But while startups in the late 1990s such as Kozmo.com notably failed after promising instant delivery, the Postal Service's vast network serving every U.S. home could put it in a good position to be viable over the long term. The retail market has been rapidly shifting to Internet shopping, especially among younger adults, and more people are moving from suburb to city, where driving to a store can be less convenient.

Postal officials, in interviews with The Associated Press, cast the new offering as "exciting" and potentially "revolutionary." Analysts are apt to agree at least in part, if kinks can be worked out.

"There is definitely consumer demand for same-day delivery, at the right price," said Matt Nemer, a senior analyst at Wells Fargo Securities in San Francisco. "The culture in retail traditionally has been to get a customer into the store, with the immediacy of enjoying a purchase being the main draw. So same-day delivery could be huge for online retailers. The question is whether the economics can work."

He and others said that consumers are a fickle lot when it comes to shipping, seeking fast delivery, but also sensitive to its pricing. Many will order online and pick up merchandise at a store if it avoids shipping charges, or will agree to pay a yearly fee of $79 for a service such as Amazon Prime to get unlimited, free two-day delivery or even purchase a higher-priced item if it comes with "free" shipping.

"Customers do like same-day delivery when it gets very close to a holiday or it otherwise becomes too late to shop," said Jim Corridore, analyst with S&P Capital IQ, which tracks the shipping industry. "But while the Postal Service has the ability to deliver to any address, they are not always known for their speed. To increase their speed might prove to be a much more complex offering than they're thinking about."

As the Postal Service launches Metro Post and sets pricing, its target consumer is likely to include busy professionals such as Victoria Kuohung, 43. A dermatologist and mother of three young children, Kuohung for years has gone online for virtually all her family's needs, including facial cleansers, books, clothing, toys, diapers and cookware.

Kuohung lives in a downtown Boston high-rise apartment with her husband, who often travels out of town for work. The couple says they would welcome having more retailers offer same-day delivery as an option. Still, at an estimated $10 price, Kuohung acknowledges that she would likely opt to wait an extra day or two for delivery, unless her purchase were a higher-priced electronics gadget or a special toy or gift for her son's birthday.

"I prefer not to spend my time driving in a car, fighting for parking, worrying about the kids, dealing with traffic and battling crowds for a limited selection in stores," said Kuohung, as her 1-year-old-twins and 4-year-old son squealed in the background. "But right now Amazon delivers in two days since I'm a member of Prime, so it would have to be something I can't get at the corner CVS or the grocery store down the street."

Under the plan, the Postal Service is working out agreements with at least eight and as many as 10 national retail chains for same-day delivery. The mail agency says nondisclosure agreements don't allow it to reveal the companies. But given the somewhat limited pool of large-scale retailers — they must have a physical presence in 10 or more big U.S. cities to be a postal partner — the list is expected to include department stores, sellers of general merchandise, clothiers, even perhaps a major e-commerce company or two.

Consumers will have until 2 or 3 p.m. to place an online order with a participating retailer, clicking the box that says "same-day delivery" and making the payment. Postal workers then pick up the merchandise from nearby retail stores or warehouses for delivery to homes between 4 and 8 p.m. that day. In San Francisco, the post office will closely track work hours and travel, which could quickly add to costs depending on traffic, total package volume or the proximity of merchandise in a delivery area.

"We're trying to revolutionize shipping; we're not simply trying to get a niche market of consumers," said Gary Reblin, the Postal Service's vice president for domestic products. He believes people of varying ages and income levels — young adults who don't own cars, older Americans who are less mobile — will welcome avoiding costly or time-consuming trips to the store.

By targeting big partners, Reblin said, the post office eventually hopes to push pricing down by making same-day delivery a standard option on retail web sites.

The new same-day offering is part of the post office's blossoming shipping and packaging business. That sector was one bright spot in the mail agency's dismal 2012 financial report, which showed a loss of $15.9 billion and forecast more red ink next year

This holiday season, the post office expects a 20 percent jump in its package volume, higher than its shipping rivals.