Sunday, August 31, 2008

Why Weight Matters

Most of the attention to date has been on the decline in both Postal volume and revenue. However, to fully understand the drivers of revenue change, one needs to look at the average weight of a mail piece, which is the best publicly available proxy for the changing mix of mail handled. The changing mix primarily reflects three influences: 1) the Postal Service's increasing specialization as the carrier of light weight parcels, 2) the switch away from hard copy delivery for longer documents, manuals and brochures with the increasingly improving ability of the Internet to deliver high quality images and longer documents to more recipients; and 3) the slowdown in the market for all advertising.

A recent report by Morgan Stanley looked at the Postal Service's Priority and Express Mail volume numbers in drawing its conclusion that DHL, FedEx, UPS, will face increased competitive pressure from a Postal Service now that the USPS can offer both competitive service and contract terms. What Morgan Stanley missed is that the Postal Service's parcel products serve a different segment of the parcel market, specializing in lighter weight parcels, where its private sector competitors dominate in the delivery of parcels over 5 pounds, and especially smaller parcels for delivery to households. The average weight of Express Mail is under a pound, Priority Mail is under 2 pounds and Parcel Post is now just over 4 pounds. The Postal Service's advantage in delivering light weight packages is illustrated by UPS's decision to sell USPS delivery under its brand name at prices nearly twice what the Postal Service charges for the same level of service. The extent that DHL, FedEx and UPS and others have exploited the Postal Service's delivery network and Parcel Select price structure for light weight parcels can be seen in the decline in the average weight of Parcel Post (the vast majority being sold as Parcel Select) dropping from 5.17 pounds in the 3rd quarter of FY2003 to 4.1 pounds in 2008.

The Internet can deliver full sheet (8 1/2 x 11), brochures, manuals, and many other documents through attachments to e-mails, websites, and downloads of pdf files. Over the past 5 years the breadth of recipients with access to high speed Internet services has expended the Internet delivery network to include nearly all businesses and business locations and an increasing percentage of households. As such, documents that would have been sent as Priority Mail based on the weight of the item, now can be delivered electronically. The decline in the document delivery market can be seen in the increase in the average weight of Priority Mail which has seen a 7.5% in average weight (a gain of over 2 ounces) since 1993. As the volume of documents delivered via Priority Mail continues to decline until the volume reaches a new post high-speed Internet equilibrium, the Postal Service will see its Priority Mail document business contract and its Priority mail parcel business increase in prominance.

The Internet has also had an impact on how mailers use standard mail. The expansion of high speed access has allowed catalog merchants to improve the usability of their on-line presence with better color, animation, and images. As such, the need to delivery full catalogs and large format brochures has decreased as customers use the Internet to get the information that would have been delivered by mail. The Postal Service encouraged this switch through its introduction of shape based rates that increased the cost of flat-shaped mail at a greater rate than letter-shaped mail. So over the the past 5 years, the average weight of standard mail has declined by nearly 11%. (This trend may have been exacerbated by political mailings that rarely used heavy mail pieces.)

The final influence, the decline in advertising reflects more transitory changes in the economy. As the economy has shrunk, advertisers have cut back on advertising modes and mail is no exception. While some of this cut back results in fewer pieces being sent, an additional impact occurs as mailers reduce the weight of their mail pieces. In the past year, periodicals have seen a 5.7% decline in average weight reflecting a decline in advertising pages. This single-year decline is greater than the five year decline, suggesting that periodical average piece weight could increase once the advertising budgets begin to grow again.

While the declining advertising market may have had some impact on the amount of material printed and mailed per Standard Mail piece, the statistics do not show an obvious trend. Clearly catalog merchants are continuing to reduce page counts and mail piece size. However, a switch from other advertising modes to mail may be mitigating the the reported decline in average mail piece weight.

Now how does a decline in average mail piece weight affect the bottom lines of the Postal Service and mailers. Clearly, for the Postal Service, this trend means that revenue declines faster than volume (discounting for the impact of rate increases). For the future, the Postal Service will find it more difficult to determine what portion of a revenue increase should come from the lowest weight increment and what portion should come from weight related charges. Mailers may find that traditional relationships between mailing cost and piece volume verses mail piece weight will be changing as the Postal Service needs to meet its revenue needs from a new mix of lighter weight letters, flats and Parcel Post parcels and heavier weight Priority Mail.

1 comment:

Anonymous said...

The Post Office created their own disastrous monster situations by giving massive discounts to bulk mailers.
Well, guess what the competitors use this rule now too for parcels!


1. The competitor gets the majority of the revenues on the p/u end as high as 90% I do believe?
2.Any hidden damages no seen at time of acceptance, the delivering carrier 'USPS' is responsible (unless noted when accepted).
3. The competition drops off stuff that's not profitable nor fuel effective to deliver themselves and pays the minimal fees because they try to get it to the closest PO for a drop shipment.