Why do I think the future of the mail business is positive even though the Postal Service's situation is dire?
First, it appears that the worst of the economic decline is over. The economy may still be sick, but the fever has finally broken. The businesses that have survived the downturn all see a turnaround, some as soon as this fall and clearly no later than the fall of 2010. The recovery of the stock market suggests confirms that investors, as a group no longer see a catastrophy but just see a return to a normal recessionary cycle. (Unfortunately, everyone had to endure the last 9 months to get back to just a recessionary cycle.)
Second, and most importantly mail dependent businesses are starting to see the smoke clearing. In particular advertising mailers are beginning to notice that while mail volumes are down, mail and advertising has not been hurt as badly as other media as advertising budgets were cut. In particular, chain retailers have found that glossy coupons can have a far greater stimulative effect per dollar spent than what television, cable, or even internet display advertising. Mail is not the only recipient of this movement toward "value-oriented" advertising as free standing inserts in newspapers have done even better than mail as the delivery costs are lower than what the Postal Service now offers.
As one of the largest mailers, Valassis illustrates where mail advertising is today in its July 30 conference call. The following are some relevant excepts from the comments of Allen Shultz, the CEO of Vallassis.
Business is bad but not as bad as the competition.
"From a revenue perspective, although the economy has driven down client media spending, we continue to outperform most other media companies who are reporting advertising revenue declines in the 13 to 30% range. Our reported revenue for the quarter was down 8.6% versus prior year quarter. When you remove 9.8 million of revenue from divested and discontinued businesses and the 1.8 million impact of currency fluctuations from the prior year quarter, revenue declined 6.7% on a pro forma basis this quarter."
Business Profits are improving even at lower volumes
"The revenue decline in our Shared Mail segment was due to a reduction in mass merchandiser spending, continued grocery retailer light weight and the general competitive of the market place. On the plus side, we are pleased that Shared Mail margins continue to do well, which may seem counter intuitive considering the high operating leverage associated with this business.
As you saw in our release, revenue decline 10.5% but segment profit increased 2.6%. We continue to drive efficiency with package optimization efforts, newspaper alliances and overall improvement and expense management. We also made a small improvement of 1 percentage point in unused postage and a 3% increase in pieces for package versus last year."Seasonal advertising patterns may be returning
"in terms of third quarter Shared Mail business, I would say in general, Shared Mail and kind of across the Board in terms of our product portfolio, I think we have seen a relatively strong back-to-school promotional time period."
The Economic downturn has generated more price competition
"Basically what I am referring to in terms of competitiveness in Shared Mail, it's a market place where everyone that we're competing with is living through the same economic downturn that we are living through and everyone is being very competitive from a price perspective in order to secure business."
Postal Costs Matter
"What we try to do is blend newspaper and Shared Mail and digital into an optimized solution for customers and so if postal cost go up, then we could see ourselves shifting business into other media."