Monday, August 3, 2009

The Patient is not Dead

Reading recent news reports about the Postal Service, one would think that it is on its deathbed. While times are dire and a major restructuring is in order, the underlying business may be better than what some of its competitors face even if the Postal Service's ability to remain a sustaining enterprise under the current business model looks increasingly unlikely.

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."


5 comments:

Anonymous said...

I'M NOT SURE YOU HAVE A COMPLETE PICTURE OF THE DIRE SITUATION THE POSTAL SERVICE IS IN. THE MAIL VOLUME SPEAKS FOR ITSELF. ONE THING THAT CAN BRING BACK REVENUE IS TO STOP GIVING DISCOUNTS TO MAILERS..FIRST CLASS OR STANDARD. WE HAVE ALL THE EQUIPMENT TO PROCESS ALL MAIL SUBMITTED. WE NO LONGER NEED MAILERS TO PRESORT OR BARCODE. THE POST WILL AND MUST MAKE ALL MAILERS USE FULL POSTAGE.

fnlvnchk said...

It probably should be noted as well, that the continuing drumbeat about postal mail volume being negatively affected by e-commerce is questionable at best. As Murray Comarow has noted, the highest mail volume years -- ever -- were 2005, 2006 and 2007. Certainly there was considerable e-commerce then. Dr. Comarow goes on to observe that mail volume -- and the relative health of the Postal service -- is far more dependent upon economic conditions. The fall off in mail volume during the 1990-1992 recession was, I believe, actually greater as a percentage of total volume than the current reduction. Finally, there is the almost universaly accepted concept that the retirement pre-funding pushed on the USPS -- the only government agency saddled with such a provision -- is devastating. Had it not been for this odious pre-funding requirement, the USPS would have shown a relatively healthy $2B plus profit during the last fiscal year.

fnlvnchk said...

To Anonymous: Actually, I agree with you completely! The rate situation for the USPS is totally out of whack. That, however, is ancillary to my point. The conduct of the PRC has been incredibly stupid at best (although they are hamstrung by some really dumb regulations), and needs revision -- fast. My larger point (that of the recession having the biggest impact on mailing) is pretty much irrefutable given historical data. Furthermore, look at the drop off in shipping through UPS and FEDEX during this period.

Mattsdad0917 said...

I work for the USPS, and I get angry when I see this: an envelope from a corporation that gets a discount rate via a mailing company encouraging people to stop using the mails. How many "businesses" would allow their patrons to advertise for the business' destruction?Too many times, I see a bank direct people to "save a stamp" or "go paperless".and the idea to have FedEx and UPS help carry our mail is three shades above ridiculous.

fnlvnchk said...

Actually, the nasty little secret out there -- which upper level postal/union management would probably only admit to if "inhanced interrogation techniques" were employed, is that mail volume is increasing as the economy shows signs of improvement (UPS and FEDEX are seeing the same thing). Some USPS facilities are having trouble keeping up due to reduced headcount. Potter and company were thinking ahead, as usual - not.