Wednesday, November 18, 2009

The End of Mail? (Just Kidding)

In its 10-k, the Postal Service honestly reported that 2009 was a terrible year. Its forecast for 2010 is not much better as it projects:
  • a loss of an additional 10 to 15 billion pieces of mail;
  • an operating loss of 7 billion which means the USPS will have an operating loss of $1.5 billion before accounting for retiree health benefit payments;
  • the need to borrow $3 billion in 2010 and borrowing needs in 2011 that will exceed its statutory borrowing limits; and
  • a continuation of the freeze on construction of most new facilities, which severely limits its capability to optimize its processing and transportation network; and
  • a cut in employee work hours of between 80 and 90 million on top of the 115,000 cut in 2009.
Many postal stakeholders are counting on the economic recovery to generate volumes better than what the Postal Service projects in order to stave off some the worst of the impacts on postal finances, rates in 2011, and postal jobs. Unfortunately, looking at mail volume trends over the past decade, and efforts by major mailers to adapt to customers who want access to information that traditionally was suggest that many years may pass before mail volumes stabilize.

This conclusion is drawn by looking at volume data over the past decade combined with information that the Postal Service published in its most recent Household Diary Study. The rest of this post presents the data upon which I drew this conclusion.

For the purpose of this analysis, it is useful to think of the Postal Service as serving four types of customers.
  • Single piece mailers of payments
  • Single piece mailers of correspondence
  • Volume mailers of financial documents (e.g. bills, statements, proxy statements, etc.)
  • Volume mailers of advertising and parcels (e.g. all mail other than First Class mail financial mail)
The following table shows the year to year change in mail volume for these four types of customers.

From looking at this table it is clear that the future of single-piece mail and in particular single-piece bill payments is bleak.

  • Single piece payments now represent around 52% of single piece mail and its share of single piece mail declines as consumers choose other methods to pay bills. Single piece bill payments were declining at more than 6.5% year to year even before the recession began in 2007. (Note the recession began in the fourth quarter of 2007 which would have been the Postal Service's first quarter of 2008.)
  • Single piece correspondence declined in every year but one would expect that a forecast of single piece correspondence would see annual declines of 1-2% less than declines in payments.
  • The volume-tendered transaction mail column shows some moderate impacts of the economic cycle in 2007 through 2009. However, it is not clear how much of this change reflects the economic cycle, and how much reflects consumers who are no longer making payments by mail choosing to no longer receive their financial documents by mail either. A recovery in financial/transaction mail would normally follow the increase in the number of financial accounts households open as the economy improves However, there are serious questions about whether households will continue to prefer hard-copy mailed bills, statements, and reports in the future. For the cohort of households in 2015 headed by someone younger than 30 today, familiarity with the web and smart-phone technologies will make a preference for mail increasing less likely.
  • The advertising mail column clearly shows a product that is sensitive to economic cycles. Volumes of volume-tendered advertising were growing when other mail products were stagnant or declining. When the recession hit, the bottom fell out of advertising mail volumes. Again, there is anecdotal evidence that some of the decline in mail advertising reflects shifts to electronic modes. Expectations of volume increases in the current recovery should by muted to reflect the availability of low-cost, impact-measurable electronic alternatives that did not exist when the Postal Service came out of previous economic downturns

So what would be reasonable working expectations to assess whether econometric forecasts generate reasonable results for the Postal Service of 2015?

  • Single piece payment volumes will continue to decline by at least 6.5% a year as, service providers begin to mandate electronic payments, comfort with electronic alternatives grow with older Americans, and an increasing share of the bill-paying public never start the practice of paying bills by mail.
  • Single piece correspondence continues to decline at a rate slightly less than that of payments. The most optimistic scenario would result in correspondence mail hitting a plateau sometime in the next 6 years.
  • Volume-tendered financial mail will begin to decline even as the number of accounts that require communication of financial information grows. Fewer customers that do not use the mail to pay bills will receive their bills, statements and other financial documents by mail. The rate at which volume-tendered financial mail declines will depend upon the recipients’ preference for mail or electronic delivery, and the entry into the workforce of individuals that have since they opened their first checking account only used the web, smart phones, and ATM’s to receive and send financial information. Demographic factors will likely drive this decision as much as any incentives that mailers employ to encourage electronic delivery.
  • Finally volume-tendered advertising volumes will depend on three factors. First the speed and extent of recovery will determine the overall amount of spending on advertising. Second, how the value of mail for the sender relative to other advertising modes changes as electronic forms of advertising improve their ability to serve needs of advertisers. Third, the ability of the Postal Service to adapt to new service requirements for the delivery of parcels and advertisements and in particular the ability of the Postal Service to ensure advertisers that both the mail and e-mail will arrive on the same day. The fact that all non-financial/transaction mail has grown at less a 1% annual rate since 2000 does not suggest that the Postal Service will see volumes grow at a faster rate in the face of emerging Internet competitors.

So what would be a reasonable, back of the envelope, forecast for mail volume in 2015?

  • Single Piece First Class – 24 billion pieces down from approximately 33 billion handled in 2009.
  • All Other Mail – 141 billion pieces up from approximately 139 billion handled in 2009.
(Authors note: 2009 numbers based on estimate of 2009 4th quarter. Currently the Postal Service reports that total volume in 2009 was 176 billion pieces, slightly more than the sum of the two figures for 2009)
If this forecast turns out to be right, then by 2015, single piece mail will drop from the 20% of volume today to around 15%.
The Postal Service will need to downsize its retail network, collection efforts, and origination sortation, and transportation from origin to destination facilities to what is needed to handle almost a third less volume. The destination sortation network would require some modest trimming as well, reflecting the decline in single piece mail.

Finally, in 2015 the Postal Service would be delivering about the same volume of mail to more households. With delivery density declining, the Postal Service's carriers would likely find themselves delivering less mail over their workday. Today's delivery optimization efforts would need to be intensified to deal with lower density.

Congress will likely require a public forecast from the Postal Service, the PRC and other entities with econometric skills and budgets. Congress would be well served if multiple analysts examine the future of mail volumes so that a consensus emerges about the scale of changes that required for the Postal Service to be financially self-sufficient in 2015 and beyond. The sooner these forecasts are made public, the sooner questions about network optimization, retail modernization, long-term needs for postal operating and management employees can be assessed.


Anonymous said...

It would be helpful if you could break out parcels in a separate category. The growth of retail on the web & the decline of retail in stores should show a significant increase in parcels, especially with the partnerships USPS has with consolidators like UPS & FedEx


Anonymous said...

Just how large can the letter carrier routes get? Who's going to walk 10 miles a day for 30 yrs in all kind of weather and be physically fit to reach retirement, no one!

Anonymous said...

How many times MUST it be said?? Eliminate 30% of management & no one would "MISS A BEAT", except that would NEVER happen!! They're toooooo busy protecting they're phoney-baloney jobs!!!!!

Anonymous said...

In every comment that I read everywhere everything is blamed on management and supervisors, true in some cases there is too much upper management. But how about some of the bum carriers that cant do their jobs? sit out on their routes reading magazines or taking 20, 30 minute breaks and hour lunches or shopping on the job? Do they account for any of the problems we face? It a shame for the good and exceptional carriers who do a fair days work for a fair days pay. I am a carrier and you cant just blame all the problems on management all the time. Its a shame because of the few bad apples in carriers can ruin the whole bunch same as a supervisor.