Monday, December 28, 2009

Postal Service as Editorial Fodder

A recent editorial by the Washington Times and a columnist in the Los Angeles Times provide illustrations as to how ideological predilections and reporting on a deadline produce more heat and less light about how to solve the problems facing the Postal Service.   These commentaries reflect the seasonal interest in the Postal Service use it to ship packages and send correspondence that they rarely send in the other 11 months of the year.

Readers of this blog are more familiar with the problems that the Postal Service faces these writers.   They will have no problems identifying how the writers of the two pieces illustrated their minimal knowledge of the postal market or the USPS.

Common to both pieces is a misunderstanding of how limited the competition between the Postal Service and United Parcel Service and FedEx really is.   The Postal Service is in the business of delivering documents, small parcels (those under 10 pounds) shipped by all senders, and larger parcels shipped by households and others that ship parcels infrequently.  FedEx and UPS focus on business-to-business shipments and household deliveries of larger parcels.   FedEx and UPS use the Postal Service to deliver small parcels to households as the revenue generated to drop one small parcel at a household is not equal to the cost of delivery for those two carriers.   More of the Postal Service's volumes compete with newspapers like The Los Angeles Times and Washington Times, than with UPS and FedEx.

So why does what is printed now in two newspapers matter to postal stakeholders?  They are important because they provide some hint as to what the debate over the future business models will look like.   Right now, postal policy is most likely a low level priority of both the Obama Administration and Congress.  Postal Policy is not a hot button issue in the blogosphere, talk radio, cable news except when used to illustrate why the financial health of the Postal Service suggests that public option is a bad idea.

This will change when the Government Accounting Office issues its report on potential business models in March or April of 2010 and the issue of postal operating losses and retiree healthcare payment schedules raise the threat of default on payroll next fall, and the risk that debt limit will be hit in 2011.    Postal policy will bubble to the top of public discourse in the spring and summer of 2010 because the blogosphere, talk radio, and infotainment programs on the cable news networks will see postal policy as an issue that their readers and listeners can easily understand, or more importantly understand an ideological position relative to future postal business models.  

The rise of postal policy in public discourse will be helped by the fact that the "hot button" issues of 2009 will have mostly be dealt with.   This includes health care, financial industry reforms, and possibly even energy policy and global warning.  At that time, there will be few other "hot button" issues on the plate of Congress that the blogosphere, talk radio, cable news  can talk about that every reader, listener, or viewer will easily understand and writers, hosts, or panelists can easily frame the problems of the Postal Service around their ideological perspective.

The Washington Times editorial uses the Postal Service to present a polemic against government provided services.   It links together a series of anecdotal stories about poor customer service at retail outlets and the inability of the Postal Service to meet its Priority Mail commitment with references to news stories illustrating evidence that its operating process are breaking down.  In conclusion, the Washington Times does not present solution, instead it concludes with a remark suggesting that households abandon the Postal Service for parcel delivery.

The Los Angeles Times piece (reprinted in the Allentown Morning Call) is more thoughtfully written but David Lazarus but illustrates the types of conclusions that are drawn when based on misinformation provided by the Postal Service employees who have a real interest in maintaining the status quo, limited understanding of customers of and competition within the document and parcel delivery markets that results, and limited time to assess the information collected in interviews.

The remainder of this post reflects comments that I sent to Mr. Lazarus and represent my initial reaction to a number of the points that he raised.

Can this system be saved?
 The answer is yes. However, it cannot survive as it does now. It is also clear from other countries that a postal service can provide universal service, even places as remote as the Australian outback and the Arctic areas of Canada at a uniform price. Put another way, is it time we privatized the postal service?I think the answer here is yes as well but not in the manner that you are thinking. By 2020, The Postal Service and mail in general will primarily be a means of delivering advertising. (It is close to that now.) What should the US Government's responsibility for advertising delivery be? Personal Correspondence is less 4% of all mail volume and bill payments by check will likely disappear by around 2030. (There is already no check clearinghouse in Great Britain or Sweden.)

The question of privatization is often tied to the question of the monopoly.  A privatized Postal Service does not require eliminating the monopoly.   Examples of privately owned, legal monopolies exist among regulated utilities serving large territories and unregulated rural retail monopolies selling everything from gasoline to groceries.

"The postal service is asking for a national dialogue on this," Richard Maher, a Postal Service spokesman in Los Angeles said. "What is our role going to be in the future? We need to have a conversation about that."
The dialogue was mandated by Congress and GAO will have a report on the subject that the USPS is trying to influence at the end of March. They wrote a paper on the topic and hired 4 independent thinkers, including myself to look at the question. For more information go to for links to all papers an links to presentations made on the topic at a recent conference in DC.

Who wants the take over the Postal Service's business?
The interviews with FedEx and UPS are reflective of their view. They do not want to get in the “mail” business because it is not a growth business like parcel shipping in Asia. They are being a little disingenuous as FedEx is the USPS’s largest transportation supplier.  UPS is a significant supplier.  Both use the USPS to deliver parcels under 5 pounds to households and to addresses that FedEx and UPS call “remote” For them, remote means many zip codes in outer suburbs of big cities. They also like having a competitor who is undercapitalized and a bit inefficient as it allows them to charge more for services in the US and use those profits to invest in faster growing markets abroad. They will be major players in policy debate to come.

If not UPS or FedEx who?
The only other US private sector firm who would be a logical buyer would be Pitney Bowes but the USPS might be too big for them to swallow. Similar problems would exist for foreign buyers, including Canada Post, Deutsche Post, and TNT Post Group. Buying the USPS, especially given its current financial position, business model, and restrictions on operations, customer relationships, etc would be not viewed as a viable proposition. Also, these companies, as well as UPS and FedEx have better uses of capital than in investing in the USPS.   TNT has specifically indicated it is exiting the mail business outside of the Netherlands.

The big private shippers probably would be happy to cherry-pick profitable urban routes but would want nothing to do with having to schlep mail up and down unprofitable rural roads.
FedEx and UPS already do that with their pricing structure. The private carriers (they are carriers and not shippers; those that send stuff are shippers) have substantial surcharges on home delivery and “remote” delivery, and retail services, (e.g. anyone who does not have a corporate account) All of these surcharges makes the USPS cheaper for individual shippers of parcels and commercial shippers of light weight parcels to homes and remote areas. So they already cherry pick in the parcel business. There is some indication in Europe that entry into the mail delivery market even into the most high-volume high-income neighborhoods is difficult to do profitably  Furthermore not all urban carrier routes are profitable as routes in low income urban neighborhoods have much less mail per stop than those in high income neighborhoods and "cream skimmers" may find that the number of routes that could be served profitably are too few to justify investment in a start-up delivery business. 

It seems to me that the only privatization scheme that stands even a remote chance of working would be to break the postal service network into hundreds of regions and territories, and then have local companies compete for mail-delivery rights in each area. But you'd still have to wonder how any such private-sector players would be more successful at the game than a long-established heavyweight like the Postal Service.
Breaking up the Postal Service has been suggested before. The problem with this solution is that almost all buyers of mail service want the company that collects / accepts the mail to have the ability to seamlessly deliver to any address in the US.   Mailers, and in particular larger mailers, want to maximize their purchasing leverage by buying from one or two transportation sources not 50. That is why both FedEx and UPS have national parcel, express and freight networks and ATT, Sprint, T-mobile, and Verizon all offer nationwide wireless service.  The privatization scheme that would have the best chance of working would be an IPO with a significant employee ownership. It could come only after the USPS could show it could operate profitably under private sector business and employment law. This is what happened with Conrail in the 1980’s.

"If the system was privatized, it might cost 44 cents to get a letter across Los Angeles but $5 to get it to Connecticut," said Richard Maher, the postal service spokesman. "When you think about a network that delivers to all homes every day -- it's huge," he said. "Would a private company be able to do that? I don't think so. I think we would lose universal service."
These are canards. Every country uses a uniform rate for single-piece mail and in many cases for Parcels. (look at the rate structure for parcel in Germany where you can send a parcel anyplace in the world and only have to choose among some 20 or so rates based on the size of the box and the destination country.) Business mailers (LL Bean, Bank of America, etc, may see rates that are not uniform. In fact, those advertising mailers that drop their mail at local post offices rather than anyplace in the country already have the distance based rates that Mr. Maher says would be so terrible. If distance based rates are introduced to First Class for commercial mailers, percentage differences between local and distant rate will likely be much less than 100% rather than the 1,136% that the Postal Service spokesman describes.

The percentage difference between local parcels and those shipped cross-country vary with weight.  The percentage does not exceed 100% until the parcel exceeds 17 pounds.  This suggests that the impact of transportation on rates for items that are sorted at origin and destination would be quite small.

The Universal Service Obligation (USO) argument has been gone over many times.   The driver of the USO is commercial mailers, who must mail to every possible address.   The rates charged these mailers can be set to cover the total cost of delivering to every address printed on their mail using either a uniform or distance-based rate.   The acceptance of remote surcharges by customers or FedEx and UPS illustrate that private sector carriers can devise non-uniform rates that allow them to deliver to all addresses in all 50 states. UPS and FedEx have a common carrier obligation which creates a common law requirement to actually deliver to all points that they say they reach according to advertised service commitments.   Similar obligations exist for other trucking, rail, air and telecommunication carriers and are enforced by regulators and courts.  In addition, there are lots of publicly traded utilities that provide “universal service” as it is within their charter to offer the service to every potential customer. With a common carrier obligation, the only financial problem for the Postal Service would be developing rates that cover the costs of single-piece mail sent or received by single piece mailers in the nation's most rural areas as defined by the Department of Agriculture.

Moreover, why limit the system's network of post offices to stamps and boxes? Why not have the post office deal in all manner of communications, from book and cell phone sales to DVD rentals? Heck, why not sofas, lattes and Wi-Fi access?
I agree with you that the USPS should be able to do more beyond what it does now. I also believe that just as private health insurers did not want a public option to compete with them, Starbucks, ATT, Amazon, Banes and Nobel, Citibank, and all kinds of other firms in the private sector do not want a government entity competing with them. In the United States we do not have a tradition of having a government entity actively competing with the private sector. Also the employment laws and business laws that apply to the government do not work really well for an entity like the USPS that gets 70% of its revenue now from customers that mail more than 500 pieces at a time. If the Postal Service must expand outside traditional mail business, then the only choice is a corporate private-sector model for the Postal Service. 

This brief post illustrates the massive education effort that lies ahead for stakeholders in the mail industry. Editorial writers and business journalists have influence far beyond the few people who buy their papers and contacting them individually or in groups will be critical for stakeholders. But stakeholders can not stop there as the primary source of news and opinion on the future of mail will come from the web, talk radio and cable news.   The tea-party movement shows how the internet, talk radio and cable news could drive and amplify a public policy issue that every voter uses, has a personal connection to, and can develop a vision for its future based on their political ideology and personal interests.   With the Government Accounting Office report coming out this spring, it is time for stakeholders to begin this effort.  Without it, Congressional reaction to the report will be driven by influences whose livelihoods and businesses do not depend on the future of mail.

Tuesday, December 22, 2009

The Cost of Reducing the Workforce

The postal industry is in the midst of efforts worldwide to reduce its workforce.   The combination of automation, more efficient operating networks and declining demand all require reductions in production employees far greater than attrition allows.

The Detroit News reported that Ford has just announced new incentives for employees to retire or seek new employment.  The incentives that Ford announced yesterday came about 6 months after they were previously offered.  Ford's incentives are more generous than anything the Postal Service has offered.  Ford is offering a retirement package of $20,000 for unskilled workers and $40,000 for skilled workers plus an additional $20,000 or $25,000 toward the purchase of a new car.   Employees not eligible for the retirement incentives were offered a $50,000 buyout offer plus additional $20,000 or $25,000 toward the purchase of a new car.  While these incentives are large compared to what the Postal Service has offered, in July, only 1,000 Ford employees took similar incentives to leave the Ford payroll.

In the past year, the USPS has implemented two early retirement incentive programs that in total cut the workforce by less than 25,000 employees.   Given potential volume losses of 4-6% of years, these incentive programs could become a bi-annual process.    The Postal Service may find greater success in convincing employees to retire with its incentive programs in the future as the economy improves.    It will still face challenges as incentives will not be equally attractive in all regions with the differences reflecting the strength of the local economy and the strength of ties employees have to their local community. 

The size of the incentives that Ford offers suggests that getting employees to leave in communities currently experiencing high levels of unemployment may be even larger than what has been previously offered to reduce the workforce at a rate equal to reductions in the demand for labor.  The financial position of the Postal Service, and in particular its lack of cash reserves, make larger incentives unlikely even if they would save money in the long run.

In developing long range business plans, the Postal Service and entities evaluating the future of the Postal Service will need to include the costs of retirement incentives and severance payments in estimating potential profits and losses going forward.  These long-range business plans should include provisions for extraordinary costs so that stakeholders reviewing these plans have an honest assessment of the transition costs of matching the postal workforce to mail demand.

Thursday, December 17, 2009

Becoming a Multi-modal Postal Company

Today, RR Donnelley announced a new mobile application for broker/dealers and financial advisors.  This application is part of a suite of digital products and services that RR Donnelly offers to the financial services industry.

RR Donnelley's significant presence in digital documents may be a surprise to many readers of this blog who only know of the company as the largest printer of documents that are delivered by mail in the United States.   Illustrative of this change is how RR Donnelley describes its business.

RR Donnelley is a global provider of integrated communications. Founded more than 145 years ago, the company works collaboratively with more than 60,000 customers worldwide to develop custom communications solutions that reduce costs, enhance ROI and ensure compliance. Drawing on a range of proprietary and commercially available digital and conventional technologies deployed across four continents, the company employs a suite of leading Internet based capabilities and other resources to provide premedia, printing, logistics and business process outsourcing services to leading clients in virtually every private and public sector. (Emphasis added)

In this entire description, the word "printing" appears only once.   Instead, RR Donnelley sees itself as a communications company and "printing" is only one modality to deliver communication.    RR Donnelley clearly envisions a world in which it is multi-modal provider of document delivery, whether by print, the Internet or through a mobile smart-phone.

RR Donnelley is clearly still primarily a printing company.  Most of the services described on its website relate to the process of taking communication concepts and turning them into printed documents.   In a similar fashion, RR Donnelley does not break out the revenue of its digital document business separately in its quarterly financial statements, suggesting that the revenue in that business is still not large enough to note separately.

The change in its definition of its business suggest that RR Donnelley understands that to continue to serve its print customer needs, it must be capable of providing solutions that allow the delivery and/or storage of documents digitally to reflect the demands of recipients.   Other firms that serve parts of the postal supply chain, such as Pitney Bowes, Canada Post, Deutsche Post, and Xerox, are making a similar transition.   For all companies in the "postal" business, the changing environment raises three questions:
  • Is my company prepared to be a competitive multi-modal postal firm?
  • What changes does my company need to make to remain relevant in a multi-modal world including acquisitions, divestitures, partnerships and mergers?
  • What strategy does my company have to deal with legacy physical-delivery focused assets and divisions so that they can generate an acceptable financial return for as long as customers exist for that portion of our business?

Tuesday, December 15, 2009

Closing Post Offices ... in Switzerland

The United States Postal Service has announced that the list of post offices being closed is down to 168.   The process of whittling the number of possible closures from 3,600 to 168 raise real questions about what the Postal Service was doing when it made the original announcement of closures.
  • Why did the Postal Service even started the process with such a long list of possible closing Post Offices?
  • Why did it not do the due diligence and confidential local market research  that resulted in trimming the list of post offices to be closed prior to announcing possible closings rather than once the closings were placed before the Postal Regulatory Commission?
  • Would the Postal Service had had an easier time dealing with the turmoil that announcing post office closings had if it had started with a shorter list of potential post office closings backed by proper due diligence and confidential local market research? 
  • How much did the entire process cost the Postal Service in the time of lawyers and other employees and how was that cost affected by starting with such a long list of potential closures?
  • How much did the entire process, including the repeated reduction in the number of potential closures, cost the Postal Service in lost credibility before the Postal Regulatory Commission and on Capital Hill?
  • Would the Postal Service have had a different result in post office closings if it had a plan in place for each possible closing for replacing the location with a contract or franchised outlet?
 The issue of post office closing is not unique to the United States.   The attached video from that was posted last April shows that announcing the potential closure of a post office generates the same arguments that are made in the United States.   The one difference is the tag line of the report. The Swiss Post has a plan B, a retail outlet in the local supermarket.   The only change would be the elimination of the Post Office's service of collecting bill payments at a window.

Monday, December 14, 2009

Congress and the Postal Service

The United States Postal Service is unique among publicly-owned postal operators in that no executive department has the "shareholder." responsibility for the enterprise.   By default, this responsibility has fallen on Congress.  Since the passage of the PRA, Congress has tended to downplay its shareholder role which has resulted in Congressional actions that undermine the competitiveness of the Postal Service and the value of the enterprise.

The problem with Congress reflects the inherent conflict between its interest in the Postal Service as shareholder and its institutional interest in reelection.   As such, the Postal Service has frequently become a tool to help balance the Federal Budget, with these actions constantly weakening the financial position of the Postal Service.   (See. USPS-OIG white paper, Federal Budget Treatment of the Postal Service)     Other actions reflect institutional interests in serving constituent groups that could be affected by postal business strategies, many times to the detriment of the enterprise.

The Postal Service has not helped its shareholder see these conflicts as its business strategy has been opaque to even many seasoned observers.   Its current strategy focusing on reducing costs by reducing retail locations and delivery days raise this question again.   As the observer, Rag Content notes:

The potential impact of changing operations is something the Postal Service seems to be doing without much thought to its customer base these days.  As it hides behind the line - matching resources to revenue, it continues to downsize its operations from closing post offices to reducing the remittance mail processing on Sundays in some locations to its AMP consolidation effort. The post office closing is the only docket open before the Postal Regulatory Commission at the moment, yet every change the Postal Service is making operationally affecting its ability to provide uniform service throughout the country.

A similar question is now being raised by shareholders by another troubled enterprise, General Electric.  General Electric, a diversified financial, manufacturing, and entertainment company, has gone through probably the worst year in the company's history.  The company had to take funds from TARP funds to shore up its financial unit and has sold nearly $10 billion in assets and slashed its dividend by two-thirds in order to improve its liquidity.

Now shareholders are looking for a clearer picture of how General Electric will earn a competitive return on investment dollars going forward.  A recent Bloomberg News story covering General Electrics upcoming December 15,2009 shareholders meeting illustrates how involved shareholders think about a company with an unclear business plan.

General Electric Co. Chief Executive Officer Jeffrey Immelt says a financial crisis like the one he faced this past year often demanded action first and explanations later. Later is now, investors say.

“People want them to do a better job explaining what the return hurdles are for the businesses going forward,” said Mark Demos, who helps manage $19.8 billion at Fifth Third Asset Management in Minneapolis. “GE has a mixed track record on putting capital to work over the past five years.”

The shareholder of the Postal Service needs to ask the same types of questions that the shareholders of General Electric are asking GE's management.
  • What is your long-term strategy to ensure a commercially viable, and more importantly self sufficient enterprise?
  • How do short-term cost cutting efforts affect that long-term strategy?
  • What is the long-term business strategy that the changes identified in the Postal Service's business model paper support?
  • Is that strategy financially viable and what risks could derail its viability?
  • How much capital and cash is needed to execute that strategy?
  • If existing capital and cash is not sufficient, what is your strategy to raise more capital?
  • What are the risks to the shareholder and the existing holders of Postal Service debt and other unfunded obligations?
While these are questions that Congress, as shareholder should ask both now and on a regular basis in the future.   Given Congress's track record on taking their responsibility as shareholder as seriously as General Electric's shareholders do, it may make sense to explicitly give some other government entity that responsibility, especially if solving the current financial crisis will require the Postal Service, like General Electric to seek relief from either unfunded obligations or expansion of its borrowing capabilities. 

Sunday, December 13, 2009

Publicly Traded Industry Firms

Direct Communications Group has updated its list of publicly traded firms in the courier, express or postal service industry. The list of firms includes firms that provide:

  • Physical Delivery Services
  • Printing and Document Preparation
  • Mailroom, Sortation, and Mail Preparation Equipment
  • Software
  • Consulting/Outsourcing
  • E-Commerce

The list can be found on the new Direct Communications Group website.

Saturday, December 12, 2009

Purolator USA, Canadian in the US Parcel Market

When DHL exited from its United States domestic business, most commentators suggested that shippers would face only the duopoly of UPS and FedEx. The Postal Service was considered a marginal player that could not meet the service quality needs of business to business customers. More importantly, it rarely was price competitive on shipments over 5 pounds.

In a previous post, I noted that Amazon in its drive to shorten the time from order to delivery is expanding the number of competitors that compete in the parcel delivery market as it uses same-day couriers to delivery parcels that UPS or FedEx would have delivered previously. Amazon can expand the list of potential vendors to include same day and regional parcel carriers because its warehouses are close to the customers that it wants to serve but can only be served by carriers that can operate with more flexibility than the two national carriers.

New competition in the United States does not just come from these regional carriers. Purolator USA, a Canada Post subsidiary, is slowly expanding its domestic United States business as a complement to its cross-border business. By expanding its domestic United States business, it can serve more of the North America needs of its customers, making it easier for it to get a larger share of the business of customers with significant cross-border parcel and express traffic.

The growth of Purolator USA can be seen by looking at its web site and some of the older items that Purolator has not updated. Purolator, operating as a subsidiary of the Canadian courier has been in the United States since 1997, and under the Purolator USA name since 2004. For most of its existence, its focas has been on cross border traffic into Canada where it is the largest parcel and express carrier.

In its brochure describing its cross-b0rder service, Purolator describes four (4) United States based consolidation terminals in Seattle, New York, Buffalo and Chicago. It's website now lists the ten (10) gateways listed below. Clicking on any of the gateways will show the service times that Purolator USA promises to customers served by that gateway. The maps are comparable to service times of UPS and FedEx but somewhat narrower than what is offered by some regional carriers.

(Readers using Internet Explore may have some difficulties with some of these downloads as you have to tell IE that you want to download the file and then try a second time. They all work fine in Firefox. If you have a fix send a comment.)

Buffalo, NY
Dallas-Fort Worth, TX
Itasca, IL
Los Angeles, CA
Melville, NY
Newburgh, NY
Philadelphia, PA
Raleigh-Durham, NC
Seattle, WA
Taylor, MI

The growth in gateways, and the service area of each gateway suggests that Purolator USA is growing its cross boarder business and using that growth to organically grow regional and inter-regional traffic within the United States. This is similar to the strategy that Roadway Package Express used to grow the ground network from scratch that is now FedEx Ground. This contrasts with the failed strategy of DHL to buy US market share by buying Airborne, a company that at best was marginally profitable as an independent firm. Purolator USA's strategy in the United States domestic market has a reasonable chance of success if it can offer domestic US service as good as the cross-border service it offers its customers as well as the service offered by UPS and FedEx.

Given the success of numerous regional carriers, Purolator USA may now be enticed to speed the process by buying profitable regional operators. The DHL experience will likely ensure that any mergers are pursued cautiously and will likely focus on regional operators in areas that it does not now have gateways.

Purolator USA's domestic service unlikely provides more than a fraction of 1% of the total US domestic parcel and express market. However, even niche competitors can have an impact on the pricing strategies of UPS and FedEx as they negotiate with US customers that currently use Purolator for Canadian destined shipments.

Thursday, December 10, 2009

Is the Future in Letter Mail?

In his most recent statement, Here We Go Again, on the current debate on postal policy, APWU President Burrus makes a fairly bold statement.

The future of the Postal Service is tied to the revenue generated from letter mail. (All quotes in this post are in italics.)

His statement is both true and troubling. It leads to two simple questions.
  1. If the future of the Postal Service is tied to letter mail, are there initiatives that can grow letter mail enough to replace revenue lost to the transition to the digital documents in order to maintain a workforce of 600,000, current levels of service quality, and the current operating and retail network; pay the costs associated with an accurate calculation of the Postal Service's retiree obligations, debt incurred for current operating losses and workers compensation payments; and generate sufficient cash to invest in improving service and efficiency to meet the needs of mailers in 2020 and beyond?

  2. If not, what changes are necessary to ensure that mail remains a critical economic driver as we work our way out of the great recession as well as 2020 and beyond?
These are questions that I had to think about as I looked at potential business models for the Postal Service. I saw the same facts that President Burrus did.

: In and of itself, restructuring has not and will not increase mail volume. Correct, restructuring is a response to changes in mail volume. To the extent that that restructuring makes the Postal Service more efficient, the Postal Service more competitive in shipping service products, and introducing the value of mail to customers who previously thought it was too expensive.

Fact: Major mailers independently determine the amount of hard-copy mail they send, and “reform” will have little influence on their decisions. The PAEA, which the large mailers unanimously supported, was followed by the most significant decline in mail volume in the history of the Postal Service. Mail volume since PAEA has been driven by the emergence of digital strategies developed by the major customers of the Postal Service and the increasing dependence of the Postal Service on economically sensitive advertising and parcels. The decline of single-piece letter mail that began over a decade ago reflects both a switch to digital alternatives for payments and a decline in payments reflecting lower economic activity. It is not clear whether a rebound in the economy that will increase mail payments or the new mortgages, phone services, credit cards, etc will only offer paperless transactions.

Fact: There is stiff resistance to government competition in the private marketplace. Therefore, it is unlikely that the USPS will be permitted to engage in banking, phone sales, and other new commercial activity. There is minimal tradition at any level of government in the United States of government entities competing in the private marketplace. This means expanding to provide customers complementary services in conjunction with letter or parcel services or expanding retail much beyond existing "postal products" will meet resistance from the private sector and Congress as long as the Postal Service remains a governmental entity. This restriction on the Postal Service serves neither postal customers nor postal employees. It is one of the reasons that I concluded that governmental models were wanting.

Fact: The opportunity to fix the PAEA by removing the crippling obligation to prefund retiree health care – a correction that is desperately needed – is hampered by Congressional “scoring” procedures, which prevent Congress from passing bills that add to the deficit. (Although the USPS is not part of the federal budget, it is part of the “unified budget,” so the Congressional Budget Office demands “offsets” when changes are made to the payment schedule.) The retiree health care illustrates a second failure of governmental models. As long as Congress has an opportunity to tie the Postal Service to the federal budget it can tax postal customers and employees with onerous calculations of retiree obligations, refusal to pay for services performed for free, and other assaults on postal cash and revenue.

Fact: Because they fail to address the fundamental challenges facing the Postal Service, reducing the number of employees, slashing the number of mail processing plants, and eliminating retail units are not long-term solutions. They are misguided cutbacks that diminish service and harm those who are the least “connected.” Burrus here highlights his real problem. Almost all of the proposals that the Postal Service have suggested to deal with declining volumes affect APWU members more than any other postal stakeholder.

Lower volumes will require continuous re-optimization and most likely consolidation of the operating network. As a previous post noted, the Postal Service may have both too few retail outlets and too many corporate outlets and existing outlets offer a range of services that are too limited to serve the needs of its retail consumer and business customers. Changing to a more aggressive network optimization strategy and a customer-focused retail strategy requires the Postal Service to show why these strategies will in the long-run improve service, maintain service to the least "connected," and provide postal employees with the best possible jobs that it can offer. By only showing cost savings, the Postal Service left stakeholders with a feeling that all it is thinking about is how it gets through the next fiscal year. All other stakeholders have a longer and broader perspective that is left unaddressed.

Given these facts, where options are there?

As it is in the interest of President Burrus to maintain the jobs APWU for as long as possible, he focuses on options for increasing revenue, as the Postal Service can avoid significant reductions in its workforce if revenue starts growing again. He rejects the "dream of a Postal Service that survives by providing a smorgasbord of services “around the edges” of mail processing and delivery." He sees these ideas, including some presented at a recent Congressional hearing as having negligible impact on the bottom line. It is here that he presents two options that can generate sufficient revenue growth that he sees is needed to "maintain the national network of more than 30,000 facilities; employ more than 600,000 workers, and deliver mail to every home six days a week."

Here are his options:

  1. Raise rates - He argues that rates do not drive volumes, factors beyond the Postal Service's control drive the overall trend and therefore rates can be raised without much affect on the long-term trends. While the price sensitivity measured in volume forecasts suggests that customers are not sensitive to price changes and price increases would have minimal affect, the positive impact of the summer sale on volumes suggest that large customers when given price incentives to mail do increase both volumes and total revenue. The impact of the summer sale suggests that we should be less confident about the value of price sensitivity measures filed with the Postal Regulatory Commission when evaluating pricing innovations. More information is needed on the value of mail for specific types of customers, and in some cases specific customers, to set prices that both maximize volume and revenue. Otherwise, the Postal Service is most likely leaving revenue on the table and mail pieces unprinted. A customer-focused pricing structure should be able to increase revenue and avoid the rate increases that his approach would produce.

    Relying on higher rates that are not designed around the specific value of mail to specific customers will likely depress volumes, revenues, and net income. Until more customer-specific pricing becomes common place, along with the internal infrastructure and regulatory framework to support it, increasing prices will remain an unpalatable option for growing revenue.

  2. Expand Services to Small Businesses Underserved by the Postal Service. This idea repeats his earlier statement that the future of the Postal Service is in advertising. Here he goes further to note there are many postal customers that are underserved by the Postal Service as well as the private sector. His description of the problem that small business have with Internet advertising is the same problem that they have with all other media, their ads get lost in the clutter.

    For example, let’s assume you operate a small “gutter cleaning” company and you want to inform homeowners about your services. Television is a very expensive way to advertise, and viewers may or may not have trees around their homes. The same is true for advertising on the radio or in newspapers. If you use the Internet for advertising, your business will be listed with hundreds of other gutter-cleaning companies. As a result, you may decide to post signs at traffic lights and distribute leaflets in parking lots. You probably never thought that you could afford to send a letter to every home in the community that might need your service.

    This is an opportunity to marry the Internet to hard copy and, in the process, save the Postal Service.

    In many ways, President Burrus understates the problem of underserved potential customers. Small businesses are underserved by the problem goes beyond small businesses to those that want to advertise in communities that fall outside the core city in a media market or looking to replace advertisements that previously were delivered to every address within a newspaper. The private sector attempts to meet these needs through envelopes filled with coupons, marriage mail, and pennysavers that are delivered by mail as well as free newspapers that are delivered to a local community.

    The kind of partnership that President Burrus envisions involves more than accepting the efforts that private sector firms catering to serve small businesses. In his words: We have a golden opportunity to do what no other company can do: transform an idea into an advertising message, convert it to hard-copy mail, and deliver it to a specific audience. This is known as one-stop shopping. (If you want to apply real discounts, give them a package deal.) President Burrus is describing introducing vertical integration to the process from concept to delivery as a way to cut costs and improve service. In implementing this idea, the Postal Service would confront one of the key facts that President Burrus outlines, resistance to government competition with the private sector.

    The kind of product that President Burrus envisions also requires rethinking the definition of postal products. Postal products, regardless of class, need to be thought in terms of day certain delivery. The internet and mail work together best if the sender is certain when both will arrive. Networks need to reflect this and untamed processes, now managed by the private sector and the Postal Service, for moving mail from concept to delivery have to be eliminated to remove delivery uncertainty.

In summation, President Burrus has shown that even his best ideas to save the jobs of his members cannot succeed due to barriers that exist in the current business model and regulatory framework. Three barriers are noted in this post: resolution of the retiree benefit payment issue, independence from the Federal budget and Congressional interference, and inability to fully take advantage of all opportunities to serve customers due to the Postal Service's status as a government entity. Removing those barriers in a new round of legislation would give his members their best shot for maintaining the greatest number of existing good-paying jobs. Removing these barriers will require a new business model that includes changes far greater than envisioned by the authors of the PAEA.

Tuesday, December 8, 2009

Mail Model For Rural America

In previous posts, this blog has described the retail strategies in Germany, Sweden and Denmark. While northern Sweden has some rural areas which are as rural as any in the Continental United States, these countries have a urban-rural mix equivalent to a state east of the Mississippi with the most rural areas similar to rural areas in these states as well. (See: Should the Postal Service Close All Post Offices?, Marketing the Packstation, Packstation Vender, Creating a Self Service Footprint and Section 3.5 (page 26) of Examination of Potential Postal Business Models)

Australia is much more characteristic to the population density of mountain West and Great Plains. Australia has a number of large cities with population well over a million but most of the country is sparsely populated. Vast stretches of Western Australia is desert and much of the country not near the coast are home to ranches, farms, and mining villages.

Australia Post has a tighter universal service requirement for providing retail access than the United States Postal Service. Australia Post is required to have 4,000 retail outlets with 2,500 located in remote and rural areas. Given that the United States has nearly 14.47 times the population, the Postal Service would have to have nearly 58,000 outlets with 36,000 in remote and rural areas. The focus on remote and rural areas reflects the fact that Australia has a population density of 7.5 people per square mile compared to 82.9 in the United States. (For reference: Sweden is 53.7; Germany is 594.0; and Denmark is 331.7)

So how does Australia Post handle this burden and not go broke and in fact exceeds its mandate and operates 4,433 outlets? (Information from this post drawn and quoted from Post and Parcel. (quotes are in italics))

Corporate Owned Stores (827 locations, 19% of all outlets) are standard post offices offering the full range of Australia Post services in facilities owned or leased by Australia Post. Employees working in corporate owned stores are Australia Post Employees

Franchise Outlets (28 locations, 1% of all outlets) serve small communities that have between 800 and 1,000 customers. These locations sell Australia Post products and services exclusively. Australia Post has the lease for all franchise outlets, pays for their fit out and owns the inventory. Franchises are set for a fixed ten year period. Operators pay a fee for the licence and receive an exit fee when they end the lease.

Licensed Post Offices (2,941 locations, 66% of all outlets) act as agents for Australia Post products and operate in large and small markets. Approximately half operate in association with another business. There is no fixed period for a licence and outlets are bought and sold on the open market. Licensees are responsible for the premises and own the inventory in the post office. They are independently owned businesses and their retail merchandise range is traded on a wholesale basis. Licensees are only obligated to stock a core product range which is primarily mail service related.

Community Postal Agents (637 locations, 14% of all outlets) are small operations usually located in rural and remote areas. They provide mail delivery services and are also required by Australia Post’s community service obligations to sell stamps and accept mail from people living in rural and remote areas. These facilities are outsourced and operators receive payment based on their volume of activity.

Australia Post's retail outlets offer a range of services that make them like a combination of a Post Office, an office supply store, and a card and gift shop. Some are co-located with coffee shops, making them more like community centers where people come to do business but may stay and chat over a cup of coffee or tea. In addition to postal products and mailing and shipping supplies, these outlets sell general merchandise such as CD's and DVD's books, souvenirs, gift cards, technology products, pre-paid cell phone time cards, and in some locations provide banking teller services under contract with one or more Australian banks.

A better picture of Australia Post's dominant retail model, Licensed Post Offices, comes from advertisements for the sale of these businesses. A web search identifies a couple of outlets that are available for sale in small markets and illustrates that retail services can be provided profitably in even very small towns.

Currently on the market is a licensed postal outlet in Cloncurry, Queensland, Australia. The business is selling for 370,000 Australian dollars plus the value of inventory.

The advertising indicates that the business makes sense for a married couple working with one part-tine clerk.

The outlet is in a town of less than 2,500 people (less than 4,000 in the county (shire) and 75 miles from the nearest postal outlet. The town and the surrounding area are populated by people working the mining and ranching.

The business that is being sold includes not just the retail outlet but the right to operate the 5 delivery routes that serve the surrounding territory. The pictures clearly shows the type of stock that the outlet carriers that in addition to the stock that postal outlets generally carriers also sells soft drinks and Darrell Lea Chocolates.

The sale price also includes the building that includes two offices that are currently rented.
What Australian Post has done is show that even areas that are the most rural in the United States can be served profitably by contract operations. However, Australia Post's approach is very different in setting up these contract outlets. Australia Post give its outlets sufficient management support to make the contract operation a turn-key business solution including all non-postal and shipping supply inventory but also offers a full range of non-postal services at wholesale prices that its contractors can buy as well. Australia Post most likely advises its outlets how to expand their business by expanding the breadth of products that they offer with the hope that Australia Post becomes the supplier of those products. Finally, it appears that Australia Post offers rural outlets to expand its revenue and profits by offering both retail and delivery services in a territory. In that way a local business person becomes a partner because growing his business also grows Australia Post's business.
Australia Post's effort to transform its contract outlet business toward a franchise model further shows the difference between the approaches that the Postal Service and Australia Post have taken to expand retail access. The brochure on franchising is designed to allow Australia Post to compete with all other firms offering franchise opportunities and shows that creating a successful contract approach requires more than just allowing someone to sell postal products.
Transitioning to a contract model for rural service would be traumatic for employees now working in those offices. The Postal Service could ease the transition in one or two ways.
First, it could offer significant early retirement and/or severance packages to those employees that could be affected. As a rule of thumb, the cost of these packages, including transfers and training would be about equal to half a year's salary.
Second, it could offer local postmasters the right of first refusal to buy the postal outlet moving from a corporate to a contract model. This is similar to what happens during a condominium conversion. The latter model would be less expensive for the Postal Service, even if the selling price was modest. This opption would also give existing postmasters real opportunities to advance and remain in their community. As illustrated by what rural post offices do in Australia, postmasters that chose to buy the local postal outlet would have substantial opportunities to use their knowledge of their community to expand their product offerings to add revenue and profits to the outlet. It is foreseeable that these new contract postal outlets would be responsible for delivery routes originating from the outlet as well.
Changing to a contract outlet model would also require revamping the whole concept of managing retail. Instead of managing employees, the Postal Service would be managing a large number of independent businesses. Managers would then focus on and be rewarded for making the contract outlets and the local "postmasters" within their responsibility as successful as possible. Headquarters would have to create a Post Office University just like McDonald's Hamburger University.
Fleshing out this model would be a substantial effort. Those looking at potential business models need a more detailed examination of this approach including the financial and organizational impacts on the Postal Service and the possibility of profits for those chosing to buy a local post office outlet. Postmaster Associations, whose members know their communities and their community needs better than anyone in Washington, could provide valuable input into what would be required to allow a postmaster to take over the local operation and turn it into a profitable business. Now is the time to begin this effort.

Sunday, December 6, 2009

Amazon: Avoiding the Post Office

In Rethinking the Parcel Market, I noted Amazon's effort to offer same day delivery and what that means for UPS, FedEx and the Postal Service in the United States. Today's Times Online reports that Amazon has launched "a secret search for bricks-and-mortar stores to support its rapidly growing website. It is understood to be scouring the country for high-profile sites."

According to the article, Amazon is not looking to open retail outlets where customers can buy goods that the store has in inventory. Instead, the stores will provide a delivery point for customers that order larger items that mail or truck delivery is inconvenient.

[Monday 12/7/2009 Amazon has subsequently denied the story. Given the success of Apple stores and Amazon's success in revolutionizing the retail supply chain, the idea that Amazon would add a brick and mortar option seems logical. The brick and mortar option clearly fits with Amazon's clear interest in reducing the time from order to delivery. The post was edited following its original posting to reflect why Amazon may have explored the possibility of retail even if it has for now rejected the available brick and mortar options.]

Amazon's move if completed would put it in direct competition with Argos, Tesco and John Lewis which all offer similar services. The Times reports that Argos' customers pick-up 18% of their Internet purchases in brick and mortar outlets rather than have the items delivered by parcel carrier or road transport. Argos will generate half of their television sales this Christmas via the combination of a purchase on the Internet and delivery to a brick and mortar outlet.

If Amazon goes ahead with a retail strategy, it should be able to haul items for pick-up to its "stores" using contract carriers dedicated to their retail network. Amazon's business case would most likely show that both customers prefer to pick-up their larger items at a retail outlet and the overall delivery costs, including the cost of operating retail outlets, is less than the cost of home delivery. Amazon could then decide to hold some inventory of fast moving items at retail outlets to further reduce costs and allow for same day pick-up of these items. For this strategy to be successful, the customer's experience in retail outlets has to be just as good as the experience on the website.

A retail initiative by Amazon's would be a direct assault on Royal Mail, DHL, UPS, TNT, FedEx and road transport companies that handle items that weigh over 75 pounds (34 kilo). The reported new initiative would also be a direct assault on retail outlets of Royal Mail and its competitors that could provide a similar service to replace the loss of sales as single-piece letter mail volume decline.

Amazon is unlikely to pursue a similar strategy in the United States. Pursuing this strategy in the United States could require Amazon to collect sales taxes on sales in those states where it opened retail outlets. Losing the sales tax advantage would eliminate a price advantage that Amazon has over Best Buy, Sears and other s that offer store pick-up of Internet sales. Given the peculiarity of U.S. tax law there is an opportunity for FedEx, UPS, and the Postal Service to work with Amazon to expand the hours of a limited set of their retail outlets to make them pick-up points for Amazon and other Internet retailers. Alternatives any of these competitors could follow the lead of the German and Danish Post Offices and open self-service lock-boxes for after hours parcel delivery.

National Conversation on the Future of Mail

The Postal Regulatory Commission has recently posted on its website the text of a letter that Chairman Ruth Goldway sent to 162 organizations asking for input for what she calls a "national conversation on the future of mail and hardcopy communications in the United States and how changes currently underway may affect your members." (The entire letter and the list of organizations contacted is included at the end of this post.)

She asks for input in three separate areas:
  1. The Postal Service's effort to close stations and branch Post Offices;
  2. A new PRC study the Commission is initiating "on the present and future role of mail in American society and the societal impact of the existence of the postal system;" and
  3. The Postal Service's proposal to reduce the number of delivery days from 6 to 5.
In her letter, she notes that input into the first and third areas should come within established Postal Regulatory Commission (PRC) proceedings. The PRC actions in these two items follow standard legal requirements when the Postal Service makes changes in service.

The second item is new and is not in response to any action taken by the Postal Service nor is it a mandated study required by the PAEA. This should be a significant effort as if done right. It could provide a reasonable picture of the range of possible demands on the postal system, including both physical and digital delivery of documents as well as the delivery of parcels both five and ten years hence. That time frame is important given both the speed of legislation, organizational change, and regulatory change will likely result in a new business model and regulatory framework taking between five and ten years to implement.

Most likely, the PRC will use the information that the organizations contacted provide as the basis for its testimony before Congress on the PRC's view of what the Postal Service's future business model and regulatory framework should be. The organizations that the PRC contacted should look at this request as their first chance to frame the record that Congress will use to develop the new business model and regulatory framework for the Postal Service.

* * * * * * * * * * * * * * * * * * * * *


In December 2006, the Postal Accountability and Enhancement Act became law, changing the nature of government regulation over postal service in America. Under the Act, the U.S. Postal Service was given more flexibility in setting rates, entering into special postal service contracts, and offering new products. However, in exchange, the Service was also required to provide greater transparency for the public in areas such as financial reporting and service performance measurement. In addition, the renamed Postal Regulatory Commission was granted increased regulatory responsibility over the Postal Service.

Within our regulatory framework, I would like to encourage a national conversation on the future of mail and hardcopy communications in the United States and how changes currently underway may affect your members. (emphasis in original)

As you are probably aware, the Postal Service faces serious financial challenges. For some time, consumer shifts toward electronic communications and online bill payment have resulted in gradual declines in First Class mail volume. The current economic downturn has greatly exacerbated the problem, causing substantial, across-the-board mail volume declines.

The Postal Service has responded by downsizing their workforce and operations, reducing the number of facilities, eliminating a large fraction of mail collection boxes, altering delivery routes, and proposing further changes that could potentially have a significant impact on its customers and service nationwide. The Commission seeks your views on what these changes mean for you, your members and our nation.

Your input would be most helpful in the following three areas:

First, the Commission requests comments on a recent Postal Service proposal to consider whether the closing of station and branch post offices throughout the nation will result in a substantial nationwide change in postal service, and if so, whether that change would be in compliance with applicable laws. This includes a review of issues such as the public communication process and appeal rights for affected customers where a final determination has been made to close an office.

The Postal Service recently provided the Commission with an initial list of several hundred offices that it is reviewing for possible closure. These offices are located in metropolitan regions throughout the nation.

The Commission welcomes information on what effect such changes might have on your members and our nation’s mail service. The list of offices being reviewed and the public records on this proceeding can be found at our website ( under Docket N2009-1 – Station and Branch Optimization and Consolidation Initiative.

Second, we would welcome your thoughts on a study the Commission is initiating on the present and future role of mail in American society and the societal impact of the existence of the postal system. Your perspective and insights would be very much appreciated.

Finally, the Postal Service will likely seek an advisory opinion from the Commission on a proposal to decrease mail delivery service by one day a week, from the current six-day-a-week service to five-day delivery. If and when this occurs, we will solicit public comments and hope that you and your members will transmit your views on this proposal and its impact.

Please note that last year, at Congress’s request, the Commission completed a study of the Universal Service Obligation (USO), which assesses the level of postal services required to be provided in this country. The final report and the appendices are available on the left hand column on the home page of the Commission’s website

Your unique perspective is valuable to the PRC in carrying out its responsibilities. We will provide you with whatever documents we have available and assist your staff in understanding the Commission review process. If you have any questions on the most appropriate way to participate in this dialogue and to submit comments in any of the Commission dockets, please contact the Commission’s Public Affairs and Government Relations office. Contact information is below.

Ruth Y. Goldway
Postal Regulatory Commission

Postal Regulatory Commission
Public Affairs and Government Relations Office
Attn: Ann Fisher, Director
901 New York Avenue NW #200
Washington, DC 20268

Phone: 202-789-6800
Fax: 202-789-6886

Initial Stakeholder Contact List

  1. Access Technology Association
  2. Aricultural Circulation Association
  3. Alliance of Independent Store Owners & Professionals
  4. Alliance of Nonprofit Mailers
  5. American Association of Collegiate Registrars and Admissions Officers
  6. American Association of Retired Persons
  7. American Association of Retirement Communities
  8. American Association of State Colleges and Universities
  9. American Association of University Administrators
  10. American Bankers Association
  11. American Booksellers Association
  12. American Business Media
  13. American Catalog Mailers Association
  14. American Chamber of Commerce
  15. American Council of the Blind
  16. American Council on Consumer Interests
  17. American Federation of State, County and Municipal Employees
  18. American Hospital Association
  19. American Institute of Philanthropy
  20. American Library Association
  21. American Medical Informatics Association
  22. American Public Health Association
  23. American Real Estate and Urban Economic Association
  24. American Seniors Housing Association
  25. American Association of Museums
  26. Antiquarian Booksellers Association of America
  27. APPA (The Association of Higher Education Facilities Officers)
  28. American Postal Workers Union
  29. Assisted Living Federation of America
  30. Associated Mail & Parcel Centers
  31. Association for Education & Rehabilitation of the Blind and Visually Impaired
  32. Association for Mail Electronic Enhancement
  33. Association for Postal Commerce
  34. Association of American Colleges and Universities
  35. Association of American Publishers
  36. Association of Fish and Wildlife Agencies
  37. Association of Fundraising Professionals
  38. Association of Governing Boards of Universities and Colleges
  39. Association of Public Television Stations
  40. Association of Small Foundations
  41. Authors and Publishers Association
  42. Blinded Veterans Association
  43. Braille Authority of North America
  44. Check Payment System Association
  45. Citizens Against Government Waste
  46. City & Regional Magazine Association
  47. Coalition of Religious Press Associations
  48. Consumer Federation of America
  49. Continuity Shippers Association
  50. Council of State Community Development Agencies
  51. Council for Affordable and Rural Housing
  52. Council of Literary Magazines and Presses
  53. Council of State Chambers of Commerce
  54. Council of State Governments
  55. County Executives of America
  56. Custom Publishing Council
  57. Direct Marketing Association
  58. DMA Nonprofit Federation
  59. Edison Electric Institute
  60. Electronic Funds Transfer Association
  61. Envelope Manufacturers Association
  62. Executives Council for Community and Economic Research
  63. Farmers Educational and Cooperative Union of America
  64. Financial Services Roundtable
  65. Florida Gift Fruit Shippers Association
  66. Fulfillment Management Association
  67. IDEAlliance
  68. Independent Charities of America
  69. International Association of Audio Information Services
  70. International Association of Clerks, Recorders, Election Officials and Treasurers
  71. International Downtown Association
  72. International Economic Development Coun.
  73. International Municipal Lawyers Association
  74. International Mailers' Advisory Group
  75. International Rural Sociology Association
  76. Lexington Institute
  77. Mailing & Fulfillment Service Association
  78. Magazine Publishers of America
  79. Mail Contractors Association
  80. Mail Order Association of America
  81. Mail Order Gardening Association
  82. Mail Systems Management Association
  83. Mailers Council
  84. Major Mailers Association
  85. National Association of State Universities and Land-Grant Colleges
  86. Nation Institute
  87. National Alliance of Postal and Federal Employees
  88. National Association of Consumer Advocates
  89. National Association for Printing Leadership
  90. National Association of Advertising Distributors
  91. National Association of College and University Mail Services
  92. National Association of Consumer Agency Administration
  93. National Association of Counties
  94. National Association of County and City Health Officials
  95. National Association of County Recorders Election Officials & Clerks
  96. National Association of Election Officials
  97. National Association of Independent College and Universities
  98. National Association of Letter Carriers
  99. National Association of Perishable Shippers
  100. National Association of Postal Supervisors
  101. National Association of Postmasters of the United States
  102. National Association of Presort Mailers
  103. National Association of Realtors
  104. National Association of State Administrators and Supervisors of Private Schools
  105. National Association of State Utility Consumer Advocates
  106. National Association of Towns and Townships
  107. National Association of Working Women
  108. National Black Chamber of Commerce
  109. National Catholic Development Conference
  110. National Congress for Community Economic Development
  111. National Consumers League
  112. National Council of Local Human Service Administration
  113. National Council of State Agencies for the Blind
  114. National Council on the Aging
  115. National Family Business Council
  116. National Federation of Independent Business
  117. National Fraternal Congress of America
  118. National Governors Association
  119. National Grange of the Patrons of Husbandry
  120. National Industrial Transportation League
  121. National League of Postmasters of the United States
  122. National Newspaper Association
  123. National Postal Mail Handlers Union
  124. National Postal Policy Council
  125. National Retail Federation
  126. National Rural Letter Carriers' Association
  127. National Small Business Association
  128. National Small Business United
  129. National Star Route Mail Contractors Association
  130. Nationwide Alternate Delivery Alliance
  131. Netflix
  132. Newspaper Association of America
  133. 9to5, National Association of Working Women
  134. Offering Envelope Association
  135. Parcel Shippers Association
  136. Periodical Publications Association
  137. Pharmaceutical Care Management Association
  138. Printing Industries of America
  139. Public Broadcasting Management Association
  140. Public Citizen
  141. Public Library Association
  142. Recording Industry Association of America
  143. Red Tag News Publications Association
  144. Saturation Mailers Coalition
  145. Small Business Council of America
  146. Small Business Legislative Council
  147. Specialized Information Publishers Association
  149. The Association of Boarding Schools
  150. The Association of Educational Publishers
  151. The Media Institute
  152. United Amateur Press Association of America
  153. United Farm Workers of America
  154. United States Chamber of Commerce
  155. United States Hispanic Chamber of Commerce
  156. United States Junior Chamber (Jaycees)
  157. Urban Affairs Association
  158. Urban Financial Services Coalition
  159. Urban Land Institute
  160. Urban Libraries Council
  161. Writers Guild of America, East
  162. Yellow Pages Association

Friday, December 4, 2009

Mailing to Santa

Santa Claus's Main Post Office
Arctic Circle, Finland

Given all of the troubles the USPS is having with mail to Santa this year, I took a quick look at how it is handled in other countries. Mail to Santa is a worldwide phenomena and countries close to the North Pole all receive thousands of pieces of mail addressed to Santa. Many have formalized programs to answer the letters.

A couple of Posts have websites that help children (and their parents) send letters to Santa. All of these countries reflect English culture. Here are three.

Australia Post - handles over 100,000 letters to Santa. They have a special address and Postal Code. Australia Post works with Santa's elves to ensure children who write a letter to Santa at his special address receive a reply. The website includes pdf files of special stationary for Santa letters

Canada Post - replied to 1.4 million letters and 63,000 emails in 2008. Like Australia Post, Canada Post has a specific address and zip code for Santa letters. Its website also has the link to Santa's e-mail address which allows it to digitally savvy children. The website also includes holiday games and a weekly posting from Santa.

Royal Mail - has a special address for Santa letters and responds to as many as possible.

Posti (Finland Post) - has both a mail and e-mail address for Santa. Finland Post receives mail from children worldwide at a real Post Office on the Arctic Circle. It appears that you can get request a letter from Santa as well.

What is common among all of these postal operators is that they turn the Santa letters into a way to promote the corporate image to both children and their parents. Too bad the Postal Service is constrained from taking advantage of this image building opportunity.

Cutting Hours or Cutting Post Offices

Sometime in the next few months the Postal Service will receive an advisory opinion from the Postal Regulatory Commission (PRC) on the potential closing of less than no more than 241 post offices, stations or branches. This is a far cry from the more than 3200 sites in its initial proposal that it presented to the PRC. Once the opinion is issued, the Postal Service will likely close most of th 241 sites now on the list.

Those communities that found their Post Office on the original list but are no longer under consideration for closing are likely relieved that their Post Office will remain open. These communities will be less pleased when the hours that the Post Office is open shrink as the Postal Service looks at ways to deal with declining demand for retail services.

The Postal Service has reduced operating hours at Post Offices across the U.S. for much of the past year. The Portland Press Herald recently reported on decisions affecting 52 offices in New England. Similar actions have taken place in Maryland, including my local post office in Silver Spring.

What the Postal Service is now doing is not much different than what public libraries, recreations centers, parks and other government service centers do when struck with declining budgets. When the agency cannot close a library do to community or political pressure, it finds it politically easier to cut hours of all libraries instead. Community pressure is less intense if the hours are cut by 10% instead of cutting 10% of facilities.

The impact of politics in this process does not necessarily improve service. While a community may like a library nearby, the library provides no service at hours when the community needs the service. For example, years ago, the City of Rochester had to choose between cutting library hours across the board or closing its least used facility and expanding hours at the closest nearby facility and maintaining extended evening and weekend hours at other libraries. A study of use of library services by patrons showed that customers would be best served by expanded hours. An examination of the addresses of patrons that used each branch showed that the branch to be closed was used by patrons that often used the neighboring branch as well. In the end, the least used facility was closed, and the expanded hours resulted in increased library use in the community that lost its neighborhood branch.

The Postal Service's actions show how its decisions, as influenced by regulatory, political, financial, and labor contract constraints, reflect the pre-eminence of the governmental characteristics of the organization. While the Postal Service does offer other ways to buy stamps and postage, its "retail strategy" appears to be no more than to shrink its business by reducing access at a rate most likely equal to the rate of retirement of postal clerks. The Postal Service appears to be managing more to the budget available to provide retail services rather than in following a coherent strategy to serve retail customers.

The Postal Service's strategy will likely drive business away, particularly among small businesses that will ship their overnight and two-day items via FedEx or UPS because their retail outlets are open an hour or more longer than Postal Service outlets. These customers will be paying FedEx and UPS's higher retail prices just because they have no other choice that day.

The Postal Service could follow actions that its domestic competitors and foreign postal operators have chosen and switch their retail presence from primarily corporate offices to primarily franchise offices. It could expand the use of automation and replace part of the line of retail windows with a line of automated postal centers like food and home retailers like Giant Foods, Stop and Shop, Kroger, Safeway and Home Depot have.

The Postal Service needs a real retail strategy with real revenue, capital and expense budgets that is focused on serving retail customers profitably. These budgets should reflect what is needed to successfully serve retail customers profitably, not just what can be done with existing capital resources and current employees. These budgets have to reflect the decline in retail letter mail, work to stem the decline in retail parcel traffic.

With a real retail strategy that retains widespread access to the network, the Postal Service could transition to a new retail approach without scaring communities that they will be abandoned. This transition will not be easy. Retail postal customers in Sweden where corporate Post Offices were all closed were resistant to the closure of their local corporate offices and often expected the worse. Surveys conducted since the switch to an all franchise operation show that customers are more satisfied with Sweden Post's retail services. In particular, the expansion in hours and shorter lines made Sweden Post's retail products more competitive with others offering retail parcel and express services.

Thursday, December 3, 2009

Dynamex - Earning Profits in Local Delivery

I recently posted that Dynamex will be a significant part of Amazon's new effort to offer same day delivery. Dynamex is the largest same-day delivery firm with operations in the United States and Canada. They are also the only one that is publicly traded which provides a window on a segment of the Courier, Express, and Postal Market within which UPS, FedEx and the Postal Service do not compete.

The company just announced its First Quarter Earnings of $0.31, 5 cents better than analyst estimates of $0.26 cents. Dynamex (DDMX) was able to increase its earnings even though revenue was down 13.9% overall and 9.2% excluding changes in fuel surcharges and the value of the Canadian dollar.

How did Dynamex increase its profits in tough times? The company made a strong effort to control sales, general and administrative costs. Compensation and benefit costs declined by 12.9% which included a major effort to streamline overhead through the closing of their Canadian administrative office. Most of all of Dynamex's delivery drivers are contractors and the decline in demand is reflected in a decline in spending for contract transportation.

In its conference call, Dynamex President James Welch stated that they have seen little improvements in economic activity over the past year. He acknowledged that sales activity today is the best it has been in the year he has been at the company. Given that Dynamex has been able to earn strong profits through the recession, it would seem that its prospects going forward could improve if their sales activity becomes actual sales and the economy improves.

Tuesday, December 1, 2009

Financial Insolvency

In a recent post, APWU President suggested that the Postal Service's financial problems has one cause and one cause only, the onerous payment schedule for funding retiree health plans. He is right that this is a serious problem. There are reasonable arguments that both the amount that Office of Personnel Management (OPM) says the Postal Service owes significantly overstates what the Postal Service actually owes and that payment schedule makes no sense for the enterprise. (See USPS-OIG white paper, PRC Report) Furthermore, the position that correctly measuring the Postal Service's CSRS payments by excluding obligations for time credited while not in USPS employment needs to be reexamined on its merits regardless of the Federal budget consequence.

Given the problems with retiree health plan expenses, I have come to think of the disagreement between the Postal Service and OPM in two ways
  1. OPM, and Congress, by putting the payment terms in legislation, is acting as a creditor with overwhelming power over individuals that owe it money. It can both determine the amount of the debt using whatever assumptions it chooses make and change the payment schedule at whim.
  2. OPM and Congress are acting like creditors with severe liquidity problems and see the Postal Service as borrower that it can squeeze to improve its financial position. In this position, the creditor is more concerned about its own finances than the impact that its actions have on debtors ability to operate as ongoing entity.
Unfortunately, even if the retiree health benefit disagreement was resolved to the Postal Service's satisfaction, it would still leave the Postal Services earning losses for many years to come. The following graph illustrates losses under the current legislated payment schedule. The graph was presented by Mary Anne Gibbons Senior Vice President & General Counsel U.S. Postal Service Linda A. Kingsley Senior Vice President, Strategy & Transition U.S. Postal Service presented in their presentation at the Center for Research in Regulated Industries Workshop on November 20th (Page 8 of the presentation: A New Business Model for the United States Postal Service)

Now what happens to that gap if one changes the Postal Service's payment for retiree health benefits in order to fund various measures of its unfunded liability. The next chart compares current law with payment estimates calculated by the USPS-OIG, PRC and one assuming that the entire pre-funding obligation is covered in over payments in CSRS obligations. This chart shows that all potential options result in losses through 2012. Eliminating additional pre-payment of retiree obligations puts the Postal Service to break even in 2013 and earn a minuscule profit, assuming a long range revenue forecast is right in 2014. All other payment schedules continue to generate losses through 2014.

This graph uses the Postal Service's numbers with little information on the Postal Service's long range pricing and revenue generation strategy, its plans to manage operating costs and overhead; and its capital spending plans including whether those plans are sufficiently robust to make the investments necessary to sustain the business or maintain its existing its existing infrastructure.

Given these projections, financial insolvency appears inevitable without a combination of 1) change in the pre-funding requirement; 2) additional revenue from existing products; and substantial cuts in operating costs beyond what attrition generates. These projections suggest that Congress, in trying to develop a new business plan will likely have to deal with the challenge of funding operating losses for the foreseeable future unless there are significant changes.

Monday, November 30, 2009

Potential Business Models

The range of potential business models include nearly a continuum of options that run the gamut from a government department to a corporation owned by private shareholders. How close a particular model is to one end of the continuum or the other depends on choices regarding to corporate governance, employment and labor law, financial management, operations management and marketing management. This paper divides potential models into two groups, governmental and corporate models, depending upon whether the characteristics of the model are more similar to the characteristics of the models on either extreme of the continuum. In total five models were looked at:

Governmental Models
  • Government Department – This is how the federal government currently provides air traffic control, weather, agricultural marketing, national parks, museums and other services to businesses and consumers. In all of these examples, the service is provided under standard federal government law, civil service and all or a significant portion of revenue is generated from the users of the government service or private donations.
  • Government Enterprise as defined by current Postal law – This is the existing model under which the Postal Service operates
  • Government Enterprise with relaxed human capital, financial, and operating constraints – This model maintains the governmental characteristics of the enterprise but modifies specific characteristics in a manner similar to other government enterprises.
Corporate Models
  • Government Owned Corporation – The Postal Service operates under standard private-sector law and is owned by the federal government.This is most similar to the structure of municipal owned utilities and publicly owned commuter railroads. Many foreign postal operators fall under this business model. A government-owned private-law corporation can be loss making or profit making.
  • Private Sector Corporation with or without government shareholders – A private sector corporation would include private sector owners and operate under a charter granted by the federal government. Services provided on behalf of the federal, state or local governments would be provided under contract and could include services that fall within the charter that are not sufficiently remunerative to justify their provisions .
The three governmental models reflect the general approach that the federal government has taken with business-oriented services. The corporate models reflect what foreign posts have chosen. The corporate models also reflect the models of all of the Postal Service’s competitors including those offering physical and electronic delivery, and those that compete by providing sortation or transportation of mail. The table below (can be seen on pages iv through vi of the full document as I am not sure how to put it in the blog) summarizes how well each of the models handles the challenges facing the Postal Service and policymakers. Examination of how well each of these models would handle the challenges facing the Postal Service finds all of the governmental models wanting. While relaxing the some of the constraints of the current model would be a reasonably safe choice, it would not be sufficient to serve the Postal Service’s retail and wholesale customers, and ensure that the Postal Service’s obligations to the Treasury are paid. Instead, the best solutions would involve preparing the Postal Service to operate as a government corporation, working under private sector law.

Making this transition will not be easy.The Federal Government has done this only twice with the US Enrichment Corporation and ICAAN. Neither organization was as large as the Postal Service. In particular, neither had the challenge of transferring more than a few hundred employees from civil service to private sector employment, nor did the have significant financial needs to cover modernization, debt and unfunded. However, the experiences of foreign posts, many which employ tens of thousands of employees and had similar financial woes illustrates how this can be done, and how it can be done with minimal disruption of the careers of postal employees.

Executive Summary Part 1: Choosing a Mail Industry Policy
Executive Summary Part 2: Challenges facing all Business Models
Executive Summary Part 3: Potential Business Models (this post)

Full Paper: Examination of Potential Business Models