ATLANTA—Escalating its attack on the U.S. Postal Service, United Parcel Service Inc. is quietly rolling out a new, bare-bones service that will soon begin dumping thousands of packages a day into the mail system for regular letter carriers to deliver.
The new service, called UPS Basic, is designed to steal some of the post office's biggest customers, especially mail-order merchants that often avoided UPS because of its comparatively steep rates. UPS Basic, which has angered post-office officials and UPS's own Teamsters union, exploits a postal discount program that was designed for very different purposes. Because of the discount, customers pay UPS less for its new service than if they went straight to the post office.
The move underscores a growing campaign by UPS to recapture business lost during the past few years to the post office and smaller competitors that have pecked away at the company's longtime dominance in the $25 billion-a-year U.S. ground-shipping industry. If the initial rollout of UPS Basic is successful, the company could increase to hundreds of thousands a day the number of its packages whose final delivery is made by the mailman.
UPS archrival FedEx Corp. is expected to begin a similar test. The Postal Service already makes residential deliveries for the former Airborne Inc., which was acquired in August by Deutsche Post AG's DHL Worldwide Express unit, and other large mailers that bundle their shipments together using companies known as consolidators.
The key to the UPS move is the little-known postal discount program, called Parcel Select, through which 285 million packages moved in the fiscal year ended Sept. 30. The program was designed to cut Postal Service costs by giving the consolidators huge price breaks. Consolidators typically presort their packages and haul large loads of them to the local post office nearest their final destination. Local mail carriers then deliver the shipments as part of their regular routes.
Because of UPS's ability to zero in on the exact cost of delivery to any given destination, the company can essentially cherry-pick the most profitable packages from among those shipped. These are mainly deliveries destined for dense urban areas. But for as much as 25% of the packages shipped with UPS Basic, the company says it plans to consolidate the parcels headed for the most rural or difficult-to-reach locations and then dump only those into the mail system. The mailman will have to take over from there, making a final delivery at a lower cost than sending a UPS driver. UPS pockets the savings.
The big customers that UPS is targeting can either ship through consolidators, or pay for higher-cost services offered by the post office or private shippers such as UPS. Under UPS's new service, the company will act as its own consolidator, carrying shipments by truck to its sorting hubs and then either delivering the items itself or dropping them off at a post office for the final leg. UPS will pay the Postal Service established rates set for Parcel Select.
UPS won't disclose its rates for UPS Basic, which are being negotiated individually with major shippers. Those deliveries, unlike UPS's regular ground shipments, have no money-back guarantee and will take longer to arrive.
For a one-pound, Los Angeles-to-San Diego ground shipment, a regular UPS customer typically pays $4.54 for delivery to a residential address, with delivery guaranteed by the end of the next day. The same shipment sent by the post office's Priority Mail costs $3.85 and would probably arrive in one day, but with no money-back guarantee. A consolidator charges $3 or less, said Doug Caldwell, an analyst at AFMS Transportation Management Group, a Portland, Ore., consulting firm that helps negotiate delivery contracts. The consolidator, which negotiates delivery schedules with each customer, would pay the Postal Service a fixed rate of $2.01 to handle the final delivery and keep whatever is left over.
In a recent internal e-mail, reviewed by The Wall Street Journal, U.S. Postal Service officials suggested that they had underestimated the potential threat of UPS. As long as any outside company meets the rules for using Parcel Select, that company is entitled to the discounts.
"This is a net loss of revenue and volume," wrote Robert P. Fisher, a top postal executive, in the e-mail. The new UPS service "is resulting in large, immediate revenue losses," Mr. Fisher said. "We'll get rural and anything that they can't make money on."
UPS officials confirmed that the package-delivery giant has reeled in two new customers for the new service, is close to reaching agreement with two other large mailers and is in talks with a number of other companies. According to the Postal Service e-mail, UPS has won the business of Altria Group Inc.'s Gevalia Kaffe unit and apparel retailers Chadwick's of Boston Inc. and Brylane LP, both units of Pinault-Printemps-Redoute SA. A Gevalia spokeswoman confirmed the switch for later this month. A spokeswoman for Chadwick's and Brylane didn't return phone calls seeking comment.
The tactic also could harm UPS by cannibalizing existing customers from the company's higher priced services, even though the new service's features are more stripped down. UPS Basic, for example, will make only one attempt to deliver a package instead of three, as UPS does now. Another risk is that UPS could see its reputation damaged if deliveries by letter carriers are less reliable.
The move also puts UPS on a collision course with the Teamsters union, which represents roughly 200,000 employees at the company and has had generally peaceful relations with management since reaching agreement last year on a new contract. Union leaders claim the new service will violate provisions of the six-year pact that restrict the use of outside labor. Two weeks ago, Ken Hall, who led the contract talks on the union's side, filed a formal grievance over the company's plans that could complicate efforts to expand the service. "We would not develop a service that we feel is in violation of our contract," a UPS spokeswoman said.
For years, UPS has fought to push the post office's package-delivery rates higher, accusing the agency of using its monopoly on first-class mail to keep its shipping rates artificially low. In February, Michael Eskew, UPS's chairman and chief executive, told a federal panel that the Postal Service "need not, nor should it be, engaged in markets that are already well served by the private sector."
UPS officials played down the immediate significance of the new service, saying it is being launched as a "pilot test" that adds only a few thousand packages to the carrier's average daily load of about 13.3 million. "The entire thrust of this is to attract new business for which we are now not price competitive," a UPS spokesman said.
John Rapp, the Postal Service's senior vice president of operations, said it "is really too soon to tell" the impact of UPS's new service. There isn't much the Postal Service can do to stop UPS. As long as any company meets the agency's one-size-fits-all rules, it must be allowed into the Parcel Select program. "I can't treat one customer different than another," Mr. Rapp said. "We have to take it and deliver it."
FedEx also is in talks with the Postal Service to hand over certain packages to letter carriers, but the negotiations appear to be at a preliminary stage. A spokesman for the Memphis, Tenn., delivery company, which carries some shipments for the Postal Service in its own planes, declined to comment on "potential future developments" but said FedEx has "an excellent relationship with the Postal Service."
The Postal Service discount program being joined by UPS saw its volume grow 9% during the most recent fiscal year, according to the Postal Service. Overall mail volume was flat compared with a year earlier. Priority Mail volume has tumbled in the wake of a double-digit percentage rate increase last year, and postal officials had to scramble to reverse a slide in service quality about two years ago. The agency's package operations also face extra pressure from UPS's moves in the past four months to chop at least a day from the time it takes to ship certain items by ground.