Could Same-Day Delivery Save the Post Office?

US Postal office
US Postal office

The bills just keep piling up at the U.S. Post Office.

Recently clocking in at $8.5 billion in annual losses, USPS announced a massive $15.9 billion loss earlier this month, and the problem's getting worse, not better.

According to official estimates, by 2015 USPS is expected to be losing money at a rate of $20 billion a year. Can anything stop the bleeding?

Yes ... Maybe

The Post Office sure hopes so. In fact, it's got a pilot project under way that aims to do just this -- stop, or at least slow down, the rate at which USPS loses money.

In San Francisco, USPS is going to begin doing business a bit more like its archrivals in the private sector, FedEx (FDX) and UPS (UPS).

Specifically, on Dec. 12, USPS will start up a new "same-day delivery" service in San Francisco, called "Metro Post." Order a product online at any of several major retailers (they're still working on the list of who's participating) by 2 p.m. or 3 p.m. (yeah, they're working out those details, too), and USPS will guarantee delivery from a local warehouse to your doorstep by the end of the day.

It's not exactly a new idea. (AMZN) has a project of its own like this under way in 10 pilot cities, charging $8.99 plus $0.99 per item ordered under its Local Express Delivery Service. Walmart (WMT) is testing a Walmart To Go service in at least five cities that's similar, or even cheaper, at a flat $10 fee for same-day delivery.

Still, seeing the Post Office try to think outside the box with a plan like this is heartening. That's not to say the idea will work, though.

Another Budget Balancing Idea Where the Math Just Doesn't Work

If USPS's aim in setting up Metro Post is to bring its business into the black, it's almost certainly doomed to fail.

Here's why: According to regulatory filings, USPS thinks it can generate $10 million to $50 million in additional revenue from running Metro Post in San Francisco over the course of the next year. If that project proves a success, USPS plans to further expand the program into nine more cities.

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Best case, therefore, USPS is looking at $500 million in additional annual revenue, which works out to just 3.1 percent of its budget deficit.

One might think that if running Metro Post in one city brings in $X, and running it in 10 cities brings in $10-times-X, then running it in every city in the U.S. would result in USPS bringing in so much extra revenue that its deficit problems become a thing of the past.

Wrong. The problem here is that there just aren't that many cities of San Francisco's size where $50 million in potential revenues are to be had. In fact, there are only 13 cities with populations greater than San Francisco's 813,000.

Worse, even if Metro Post were expanded to cover all 13 of these cities -- Austin, Texas; Indianapolis; Jacksonville, Fla.; San Jose, Calif.; Dallas; San Diego; San Antonio; Phoenix; Philadelphia; Houston; Chicago; Los Angeles; and New York -- that's still just 27.3 million people, or 33.5 times San Francisco's own population, total. Logically, therefore, the most money USPS could make from such an expansion is 33.5 times $50 million, or $1.675 billion -- 10.5 percent of USPS's annual deficit.

Add in the next 20 cities, smaller than San Francisco but with populations greater than 500,000, and you close the gap by another 4 percent.

As you can probably imagine, at that point, the returns are going down rapidly with each new city added, given the increase in logistical hurdles and costs of running the program.

USPS has made a valiant effort to think like a private business and create a service for which people might want to pay a little more. Sadly, the Metro Post idea is too small to fix the problem. Whether Metro Post succeeds or fails as a concept, we're still in for a future of continued postal rate hikes, service cuts, and post office closings.

Anyone who tells you different might as well be telling you "the check's in the mail."

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Motley Fool contributor Rich Smith has no positions in the stocks mentioned above. The Motley Fool owns shares of Motley Fool newsletter services recommend, FedEx, and United Parcel Service.