Ending Denominated Stamps

USA Today reported on December 28, 2010 that all First Class stamps in 2011 will be forever stamps.  Currently, forever stamps are only available in a limited number of generic designs. The switch puts commemorative stamps on a equal competitive plain as more generic stamps sold in booklets and sheets.

The shift reflects a final blow to the traditionalists and penny counters at the Postal Service that held onto denominated stamp concept far beyond the point that it made business sense for either First Class mail or for the Postal Service's commemorative program.  For those with some memory of the regulatory process, the forever stamp was pushed for many years by the Postal Regulatory Commission's Consumer advocate and approved in 2007 after long opposition from the Postal Service.  

The elimination of denominated First Class stamps should provide a limited boost to the Postal Service in three ways.

• Eliminating the purchase of 1 and 2 cent stamps when there is a rate change saves the Postal Service money.   If one assumes that it would take 1 minute of a postal clerk's time to sell stamps, it would cost the Postal Service on average 13 cents if the clerk was paid the federal minimum wage and received no benefits.   So in order for a purchase of low denomination stamps to be profitable, a minimum of 14 cents worth of stamps would have to be sold at a time.   Given that postal clerks are paid well above the minimum wage and have benefits, the break-even point for selling stamps (assuming the cost of the service was already paid for in the existing postage purchased) would be at least 40 cents.  So unless a person needs to purchase forty 1 cent stamps, the Postal Service would be losing money on each purchase at a retail counter.
• Eliminating the purchase of 1 and 2 cent stamps improves customer satisfaction and the quality of retail services.  By eliminating the need to buy these stamps, the Postal Service makes First Class mail easier to buy.   Consumers can buy stamps once and not have to worry about when the stamps will be used.  Also eliminating the need to buy low value stamps, improves the Postal Service's ability to quickly serve retail customers needing to buy all other services including higher priced parcel services.
• Eliminating denominations on commemorative stamps should increase their acceptance.   Consumers now can buy commemorative or generic stamps with an equal assurance that the stamps will be good for First Class mail for as long as they will need them.   This should have the effect of increasing sales of commemorative stamps and ensuring that the entire print run of commemorative sell-out.

Forever stamps represent one element in the Postal Service's program to simplify the purchase of its services.   Flat rate boxes, pre-stamped greeting cards, and pre-paid postage shipping cartons are other illustrations of this trend.    These steps all reflect an expansion of the convenience factor which is critical when vying for the business of time-strapped consumers

Web Sales - Who Delivers?

As we close another holiday season, the increasing importance of web based shopping becomes increasingly evident.  Marstercard Advisers reported that Internet sales rose 15.4%.  This increase is consistent with the results generated by the monthly surveys of retail activity conducted by the Commerce Department.   What the Postal Service, FedEx and United Parcel Service need to do is delve a bit deeper into the data as they begin to make their plans for handling the even larger volumes of parcels that will be delivered next year.

Mastercard Advisers estimated that total web-based sales were $36.4 billion in the fourth quarter of 2010.  However, Mastercard Advisers figures underestimate the total value of electronic and mail order sales that the Census Bureau will likely report early next Spring for both the holiday period.    The following chart illustrates the long term trend in e-commerce and catalog sales from retailers that generate most if not all of their business from catalog and e-commerce sales.  These figures most likely do not include the e-commence sales from some of the largest web retailers including Best Buy, Macy's, J.C. Penney's, Radio Shack, Target, and Walmart and dozens of others that sell most of their merchandise through standard brick and mortar outlets..  

These figures are still small relative to all retail sales other than gasoline, heating oil, and food and beverages sold in restaurants and bars.   In 2010, 7.4% of retail sales that could be purchased via the web or catalog and delivered were purchased in this way.   While a small proportion the share is a significant increase from 5.8% that such sales represented in 2009.  Expanded access to high speed web, shifting demographics, and new mobile-based means of ordering items to be delivered will likely increase the share of deliverable retail sales that are delivered to homes and offices.

The growth in e-commerce while strong across all sectors this season, appears to be strongest for products that are in many ways that create the most challenges for home delivery as they are lighter in weight and bulkier than shipments that the large parcel carriers handle for their business-to-business deliveries.    The Wall Street Journal reported that SpendingPulse reported that Web based sales from apparel specialty stores grew by 25%.   According to Bloomberg, Macy's, a large mid to upper end department store retailer saw its online sales in November grow by 32%.   The mix of products that Macy's needs delivered most likely reflects a large proportion of apparel and domestics (e.g. towels, and sheets) as those categories reflect the largest share of Macy's overall sales.

The private sector carriers have handled the challenge of delivering the increased volume of apparel and domestic items purchased for home delivery through a combination of operating and pricing changes. (The Postal Service handles a very small portion of these shipments without involvement of FedEx Ground, United Parcel Service, or another parcel consolidator.) These include:

• Shifting delivery of parcels under 2 pounds to the Postal Service.    FedEx Ground uses the Postal Service for nearly 30% of all of its deliveries and much of its volume growth reflects Postal Service delivered parcels.
• Increasing prices for home delivery.   Home delivery is more expensive than delivering to businesses due to the lower density of parcels delivered per address or stop and the distance between stops.    Home delivery charges have existed for many years but they have increased at a much faster rate than the base transportation rates that the carriers charge.
• Modification of the factor used to measure dimensional weight.  Both UPS and FedEx reduced the factor that they use to calculate dimensional weight.   This affects bulky shipments of apparel and domestics more than other product categories.  The dimensional weight factor will have the greatest impact on expedited shipments.

 For the Postal Service, the e-commerce trend requires that their delivery network and the tracking software and hardware used can seamlessly work with the sales and transportation networks of its partners.  Ensuring that the Postal Service can do this will require significant capital expenditures for vehicles, hand-held scanners, software and communications infrastructure upgrades.  If the Postal Service cannot raise the capital, then consumers will face higher delivery costs, and may reduce their purchases via all retail modes thereby slowing retail sales and economic growth for many years to come.  

Who Will Lead Postal Reform in the House?

Congressman Darrell Issa (R-CA), the incoming Chairman of the House Oversight and Government Reform Committee has recently announced the creation of three subcommittees in the next Congress and their chairman.  They are as follows:

• National Security, Homeland Defense and Foreign Operations, Chairman Jason Chaffetz (R-UT) - This subcommittee appears to have a similar jurisdiction to the National Security and Foreign Affairs Subcommittee.  This appointment moves Congressman Chaffetz, who was ranking member of the subcommittee handling the Postal Service, from primary responsibility for developing postal legislation

• Regulatory Affairs, Stimulus Oversight and Government Spending, Chairman Jim Jordan (R-OH) - This subcommittee appears to have a very broad mandate covering government regulations across both executive departments and independent regulatory agencies.  It is possible that this subcommittee could have some interest in the impact that the Postal Regulatory Commission has on the American economy.

• TARP, Financial Services and Bailouts of Public and Private Programs, Chairman Patrick McHenry (R-NC) This subcommittee will likely to focus on oversight of agencies dealing with the financial services industry and other industries in which the Federal Government has or will propose to make investment and ensure that both government and private enterprises are held accountable for how they spend taxpayer dollars. To the extent that adjustments to the Postal Service retiree benefit calculations are perceived as a "bailout" this subcommittee could take charge of this issue and for that matter any legislation designed to change the business model of the Postal Service.

It is always possible that the Postal Service will continue to fall under a catch-all subcommittee as it did this year that includes the District of Columbia and the Federal Workforce.  However, with the shift of Congressman Chaffetz to national security oversight, the other two Republicans that remain in Congress are unlikely to chair a subcommittee dealing with Postal legislation.  Congressman Bill Shuster  is in line to chair the House Transportation Subcommittee on Railroads, Pipelines, and Hazardous Materials where he will likely have to deal with railroad regulatory issues) and Congressman Brian Bilbray will not even be on the Committee in the next Congress.

The Washington Post notes that that the other five returning Congressman who will be assigned to the full committee already have Committee or subcommittee chairmanships lined up.  The Post indicated that responsibility could fall upon one of the freshman who will serve on the committee who has not been given a subcommittee chairmanship elsewhere.   They are: Justin Amash(Mich.), Ann Marie Buerkle (N.Y.), Scott DesJarlais (Tenn.), Blake Farenholt (Texas), Paul Gosar (Ariz.), Trey Gowdy (S.C.), Frank Guinta (N.H.), Mike Kelly (Pa.), Raul Labrador (Idaho), James Lankford (Okla.), Dennis Ross(Fla.), Tim Walberg (Mich.), and Joe Walsh (Ill.). 

Whether Congressman Issa chooses to put the Postal Service under one of the subcommittees he has already created or in a new subcommittee chaired by a freshman member of Congress is not known at this time.  His choice could have a big impact on how the House of Representatives frames legislative changes in the next Congress.

Can the Postal Service Do Direct Mail for Itself?

In order to promote its buy stamps by mail program, the Postal Service sent out a direct mail piece promoting its holiday stamps.   Only problem with the mailing is that it arrived too late for customers to order by mail or internet and receive the holiday stamps before the deadline for mailing Christmas cards passed.

While buying stamps by mail may be a great program, this mailing was a waste of money in the same way that advertising that arrives after a sale (or an election)  is a waste.  When this happens to an advertising mailer every vendor from the advertising agency to the printer to the Postal Service is challenged to find out why the mailing did not arrive in time to have the appropriate impact.  If there is evidence that the Postal Service did not meet its obligation, especially in the case of political mail, there are usually news stories that get picked up by many national media outlets.  

The marketing office that paid for the mailing should find out where the failure in the mailing process occurred.    Finding out why the mailing arrived late, and how Postal Service operations may have caused the late delivery, might help Postal management understand how service needs to improve to ensure that advertising mail remains a competitive mode for delivering advertising.

Best Christmas Stamps

It is not uncommon for countries to use cultural icons on their Christmas stamps.   One of the best examples are the Christmas stamps produced by Royal Mail that illustrate Wallace and Grommit celebrating the holidays.  They clearly put one in a festive spirit.

Here is a beautiful stamp from Luxembourg.

The simplicity of this design is fairly spectacular

In Australia, they issued a series of bird stamps linked with Christmas Island

Again from Australia, a set of stamps relating to Santa.

If you have other links send them on and I will add them to to the post

Increased Competition in the US Parcel Market

Yesterday, Transforce, Inc., one of Canada's largest transportation companies announced that it had reached an agreement to purchase Dynamex, North America's largest same day courier.  The purchase will more than double Transforce's revenue from parcel delivery with its total North American revenue after the acquisition running around $800 million U.S.

With this purchase Transforce now owns five companies that provide parcel delivery services in the United States and Canada.  

• Canpar - a traditional parcel carrier focused on business-to-business services with its largest market share in Eastern Canada
• ICS Courier - an express carrier serving all major markets in Canada.   ICS Courier's service description suggests that it service centers around fixed routes with consistent pick-up and delivery times.
• ATS Solutions - a parcel carrier that specializes in the logistics needs of brick ad mortar retailers in Canada
• ATS Health care - a parcel carrier that specializes in the unique needs of delivering drugs and other medical supplies reacquiring special handling to pharmacies, hospitals and medical clinics in Canada.
• Dynamex - a same day parcel carrier that manages two distinct parcel delivery businesses.  One business provides an on-demand delivery service which may include regular and one-off pick-ups and deliveries. The other provides a dedicated fleet for a single customer's parcel delivery needs.  Dynamex also provides same day delivery for Amazon in selected markets.

 The breadth of services that Transforce's parcel companies offer illustrate that services required by shippers go beyond what traditional parcel carriers offer.   The services that these companies offer illustrate just a couple of examples of how small companies can take market share away from much larger competitors by focusing on the specific needs of an industry or customer.

The combination of these five companies along with Transforce's extensive less-than-truckload service in Canada and business relationship with Estes Express should give shippers with trans-border parcel distribution needs more options.   In addition, Transforce's should be able to reduce Dynamex's overhead through combining back-office operations and eliminating duplicate information systems which should improve its margins and allow it to expand its footprint in North America.   

How will the 1.8% increase affect Bulk Rates?

One of the readers of this blog asked the question that is the title of this post.  To answer this question before the Postal Service files a case requires both a review of the exigent rate increase as well as some fairly simple calculations.  Here would be my working assumptions and are based on what would appear to make the most business sense from the Postal Service's perspective.  However there may be regulatory or legal restrictions that prevent using the the pricing authority in a way that would maximize the Postal Service's revenue from the available authority to raise rates.

• Bulk First Class Rates will likely rise by less than the 1.8% average for First Class as whole.  The size of the increase will be smaller than the average to allow for increases in single piece rates by full penny amounts and to raise First Class parcel rates  (and more than likely the extra ounce rates) in line with rate increases announced for Priority Mail.
• Bulk Standard Class Rates will likely see increases in parcel rates at least as great as rates announced for the Postal Service's competitive products.  If the Postal Service can cost justify the rate increases, I would not be surprised if the Postal Service tried to use as much of the the rate increase authority for Standard Mail that it can on Standard Mail Parcels which should hold other Standard Mail rate increases at no more than 1.5%.
• All other Bulk Rates are in classes that will likely see rate increases close to the average permitted by CPI index.

The other major change that a likely February increase will have will be the shift the timing of future annual rate increases from late Spring to February.  This will put rate increases of all Postal Service products closer to the time when most of its competitors also raise rates.

Developing a Flat Mail Distribution Network

The Postal Service is in the midst of deploying its automated FSS machines in a limited number of sites.   There has been significant criticism of the program given the significant decline in the volume of flat mail.   However, a map contained in a recent presentation by Quad Graphics suggests that the Postal Service's placement of FSS machines makes some sense if the goal is to create a network that is designed to optimize the transportation and handling costs without building a new flats distribution network from production location to delivery location.    

So here are the maps that allowed me to draw this conclusion

Quad Graphics Periodical and Catalog Printing Plants

 Similarities Between the Maps

What is clear from Quad Graphics map of plants is that catalogs and periodicals are printed in a limited number of locations.  The FSS Deployment locations are generally close to the location of the Quad's plants, although they tend to be in large facilities near the population centers that are closest to a Quad Graphics plant.

Completing the End-to-End Analysis

In order to complete a full end-to-end analysis, additional information on production locations and volumes would be needed from plants producing flats in significant volumes from the ten largest printers of catalogs, magazines and other high volume flat-shaped mail.   In addition, the Postal Service would need to add information on First Class single-piece flats and flats produced in smaller volumes but still eligible for discounts that are not produced by the largest printers in the United States. This information could then be analyzed along with transportation costs for moving flats from these plants to Postal Service plants, sorting the flats at origin plants and sorting the flat mail into carrier sequence order in high-volume flat sortation facilities that were optimally located given the location of production facilities and the ultimate destinations, and then transporting this carrier-route sorted flat mail to the delivery units.

This analysis would easily show whether the mailer (e.g. magazine publisher or advertiser) gets a better deal using an optimally designed flat-mail network or one that is designed using existing facilities that minimizes both capital spending and disruptions in where  Postal Service employees work.  This analysis could also show whether mailers do better with the current discount structure and the Postal Service's flats distribution network that uses a limited amount of automation or one with fewer drop-shipment locations but with a streamlined and more automated network.

The analysis could also be used to determine if the Postal Service could make flat-shaped mail more attractive by reducing the time it takes to move mail from printer to delivery.  If as I suspect, this streamlined network would reduce the time associated with moving mail, then mailers may find new uses for flat-shaped mail that require quicker concept to delivery time.

Unfortunately, given the financial problems of the Postal Service, this analysis would be little more than an academic exercise.   There is no money to build optimally located plants or handle the transition costs associated with moving employees into new plants, so the Postal Service must use facilities that have extra capacity even if they increase the total delivered cost of delivering flat-shaped mail.  

The fact that it is an academic exercise does not mean conducting the analysis, and a similar analysis for handling letter mail is not worthwhile.   In fact these analyses would be a critical step in understanding the full capital needs of the Postal Service and understanding that the financial problems of the Postal Service go far beyond a problem of not having sufficient cash to meet its current obligations.

Time for Mailers to Stand Up

These are hard times.   Over 15 million Americans are out of work, and over 6 million have been out of work for more than six months.   When the economy is tough, foodbanks become the primary source of food for thousands of people who do not have the resources to feed their families.  Living without is toughest during the Christmas season when all media is saturated with advertising encouraging spending.

One of the greatest programs to help provide food for the poor has been the National Association of Letter Carriers food drive.  For 18 years letter carriers have collected non-perishable foods from households which have gone a long way to fill the shelves at foodbanks.  This program has become so successful, that alternative sources of donations could not fill foodbank shelves without the National Association of Letter Carriers and sponsors that promote the food drive.

Unfortunately, in upstate New York the food drive was canceled this year due to the lack of a sponsor to promote the drive.   The Utica Observer-Dispatch reported that "corporate underwriters pulled funding in 2008 that was used to purchase about 1.5 million postcards used to notify residents about the food drive."  In 2009, the drive was held without sponsorship but collections dropped by 87.5%.   "Carriers in Rome, New York, had annually collected about 8,200 pounds of food. In 2009, when no notices were mailed, those carriers collected about 1,000 pounds.", Maureen Marion, a Postal Service spokeswoman told the reporter for the paper.

Without a sponsor, only word of mouth was available to promote the 2010 drive.   Given the lack of success in 2009 without postcards and other publicity, trying to do it this year was deemed futile so the food drive was cancelled.

Now how much money is needed to get this drive back in business? To tell the truth, I have no clue.   But I am sure there are many people who read this blog who know to the penny how much it would cost and might even have some idea regarding how much it would cost to reinforce the postcards with the use of web based advertising and social media.    Could there be a better advertisement for mail than a concerted campaign to use mail in conjunction with other media to feed the hungry? 

Time is short to get something going but I am sure the letter carriers in upstate New York would be glad to make the extra effort to collect the non-perishable food even during this heavy mailing season as they had done for the previous 18 years.  Who among the readers of this blog is willing to the get this food drive restarted in upstate New York.  

Integrated Plan(s) for Financial Self Sufficiency

The Board of Governors and Congress requires an Integrated Financial Plan that illustrates the financial course necessary for the Postal Service to be financially self sufficient under both the current business model and regulatory framework as well as alternatives to the existing model.  The 2011 Integrated Financial Plan does not meet this requirement. 
  Alternative plans are needed reflecting what could be accomplished under different business models and regulatory frameworks.  These plans have to look beyond marginal changes in the business model that the Postal Service proposed last March in its Action Plan.    Those changes all assumed maintenance of the current business model and a regulatory framework that is not much different than the one that currently exists.  These plans should include financial plans that would allow the Postal Service to shrink to its "public service" obligations as well as financial plans that would allow the Postal Service to prepare for corporatization or privatization. 


A second failing of the plan for examining what is needed to ensure that a vibrant postal market exists in 2020 is its time frame.   The plan is a one-year plan, a time frame that is sufficient for budgeting purposes, but insufficient for either the Board of Governors of Congress to understand the best course for the future of the Postal Service.    For instance, a one year plan is insufficient for illustrating the financial and operating and rate changes necessary to ensure a self sufficient Postal Service.   At a minimum, the financial plan should illustrate financial forecasts for three to five years in order to illustrate the impact of management decisions that take more than a single year to complete.  

A third failing of the plan relates to Capital Plan included on pages 5 and 6.    The Capital Plan suggests that capital spending, with few exceptions is not limited to fixing a deteriorating physical plant, vehicle fleet, and replacing an information infrastructure that cannot meet the needs of the Postal Service or its customers.  The Capital Plan clearly suggests that the Board of Governors and Congress need an independent evaluation of the physical plant, vehicle fleet and information infrastructure in order to see if the plans in place are sufficient for the transition to the infrastructure required to ensure that a viable delivery network exists for 150 billion pieces of mail and parcel that the Postal Service will still be delivering in 2020 including the expectations of postal customers in regards to the information that the Postal Service provides about the real-time progress of mail delivery. 

A multi-year capital plan is critical as without it a key question in fixing the Postal Service's business model and regulatory framework.   Does the current business model and regulatory framework allow the Postal Service to generate sufficient cash from operations and debt to cover the capital needs required to serve the needs of the postal market?   If the answer is no, then there are four choices, raise rates, cut labor costs even further, reduce service, or restructure the Postal Service's retiree obligations as part of a process of transitioning the Postal Service towards a business model that would allow it to attract private capital.

Finally, a multi-year financial plan must include elements of an operating and business plan that is focused on providing a cost-effective service to commercial mailers and ensures that single-piece mail prices remain reasonable at the same time that they cover the costs of reducing the workforce and infrastructure that now exists to handle this mail which are not currently estimated as part of regulatory cost models.  The Postal Service's action plan illustrated operating and business plan changes that could be included in such a plan but as the rate increase in the plan was rejected, and the 5-day delivery proposal appears unlikely to be approved before FY 2012 if at all, the operating and business plan should illustrate options that would be available to a market-focused unregulated firms, railroads that are subject to limited regulation, European Post offices, as well as market-focused U.S.-based regulated utilities.

New Integrated Financial Plan Needed

Why would the Postal Service need a new Integrated Financial Plan less than a month after it was presented to the Postal Regulatory Commission?  A new plan is needed to reflect changes in economic trends and costs of key inputs and operating plans.
 
The problem of changing economic trends, input trends and operating plan changes exists because by the time a plan is produced approved by the board of governors nearly all of the economic and cost assumptions used in the plan are out of date.   The older economic forecasts most likely underestimate both revenue and costs

Revenue - Revenue estimates are driven by  forecasts of GDP, retail sales, and other economic indicates.   The revision announced today of third quarter GDP growth upward to 2.5% combined with data already published early this year indicates that the 2010 data used in the Postal Service's revenue and volume forecast most likely underestimates the health of the economy and mail volume.   The underestimation of mail volume has a bigger impact on the most economically sensitive products used to deliver advertising (Standard Mail and Periodicals) and to a lesser extent the Postal Service's parcel product.   The revision of economic factors as a lesser effect on bulk First Class mail and a minimal impact on single piece mail volumes and revenue.   The resultant shift in mix toward lower margin mail products will boost the Postal Service's total revenue at a rate somewhat below the increase in total mail volume.  A revised Integrated Financial Plan will show that.

Cost -  The impact of the economic changes on costs relate to the resources the Postal Service requires to provide its retail, processing, transportation and delivery portions of its service as well as the cost of major inputs to its service.   A more rapid growth in advertising mail increases demands on delivery networks at a somewhat higher rate than processing networks.   However, given that much of the delivery network costs are fixed, the resulting increase in volumes should not have as large of an impact on costs as the increase in advertising-oriented mail volume.  

The shift in the mix of mail continues to put pressure on mail processing and transportation costs as the need for labor and transportation resources needed to handle single-piece and minimally pre-sorted First Class mail continues to shrink at the same time resources needed to handle sortation of mail to carrier route and walk sequence increases.    This shift makes its easier for the Postal Service to shrink its processing network without reducing service quality and should result in management doing everything in its power to accelerate consolidation proposal that have already been announced and announcing additional ones to be investigated for implementation in the first half of fiscal year 2012.  The shift may justify more extensive use of early-retirement incentives to deal with the reduced workload in mail prep, manual sortation, and automated originating sortation in order to accelerate work-hour reductions in fiscal year 2011. 


Finally, changes in the value in the dollar and the improving economy puts pressure on the price of diesel fuel.   As the Postal Service notes in the risk section of its 10-K, "a 1% increase in fuel costs would result in a $23 million increase in expense."  According to the Department of Energy, the retail price of diesel fuel at the beginning of fiscal year 2011 is up by $0.418 or 16.19% above the level from the beginning of fiscal year 2010.  The increase in diesel prices increases the Postal Service's transportation costs by  $372 million dollars.  As diesel prices have risen an additional 0.6% since then, transportation and other costs liked to the cost of oil are likely to be higher than what was projected in the 2011 Integrated Financial Plan.

Integrated Plan(s) for Financial Self Sufficiency

The plan illustrates the best estimate the Postal Service's finances based on the assumptions employed when the plan was developed including assuming no change in the current business model or regulatory framework.   Alternative plans are needed reflecting what could be accomplished under different business models and regulatory frameworks.  These plans have to look beyond marginal changes in the business model that the Postal Service proposed last March in its Action Plan.    Those changes all assumed maintenance of the current business model and a regulatory framework that is not much different than the one that currently exists.  These plans should include financial plans that would allow the Postal Service to shrink to its "public service" obligations as well as financial plans that would allow the Postal Service to prepare for corporatization or privatization.

A second failing of the plan for examining what is needed to ensure that a vibrant postal market exists in 2020 is its time frame.   The plan is a one-year plan, a time frame that is sufficient for budgeting purposes, but insufficient for either the Board of Governors of Congress to understand the best course for the future of the Postal Service.    For instance, a one year plan is insufficient for illustrating the financial and operating changes necessary to ensure a self sufficient Postal Service.   At a minimum, the financial plan should illustrate financial forecasts for three to five years in order to illustrate the impact of management decisions that take more than a single year to complete. 

A third failing of the plan relates to Capital Plan included on pages 5 and 6.    The Capital Plan suggests that capital spending, with few exceptions is not limited to fixing a deteriorating physical plant, vehicle fleet, and replacing an information infrastructure that cannot meet the needs of the Postal Service or its customers.  The Capital Plan clearly suggests that the Board of Governors and Congress need an independent evaluation of the physical plant, vehicle fleet and information infrastructure in order to see if the plans in place are sufficient for the transition to the infrastructure required to ensure that a viable delivery network exists for 150 billion pieces of mail and parcel that the Postal Service will still be delivering in 2020 including the expectations of postal customers in regards to the information that the Postal Service provides about the real-time progress of mail delivery.

A multi-year capital plan is critical as without it a key question in fixing the Postal Service's business model and regulatory framework.   Does the current business model and regulatory framework allow the Postal Service to generate sufficient cash from operations and debt to cover the capital needs required to serve the needs of the postal market?   If the answer is no, then there are four choices, raise rates, cut labor costs even further, reduce service, or restructure the Postal Service's retiree obligations as part of a process of transitioning the Postal Service towards a business model that would allow it to attract private capital.

Is Deputy PMG Pat Donohue moonlighting as a letter carrier?

Is it just me or does the letter carrier photographed on the upper right corner of the cover of the Fiscal Year 2011 Integrated Financial Plan look like Pat Donohue?   If true, I wonder what provision of the NALC contract allows the DPMG to deliver mail?  Or is this an indication that the Postal Service may be used in an episode of undercover boss?

APWU Contract: Facing a Tradeoff

Recent statements from APWU President Cliff Guffey clearly indicate that union leadership realizes that the next contract will result in a trade-off of job security and wages.  In announcing the extension of negotiations for an additional three days, he stated “Every proposal we have made to preserve jobs for our members.  Restoring work that has been outsourced or assigned to managerial personnel will bring stability to APWU members who have suffered extensive excessing and reassignments." 

In agreeing to extend negotiations, APWU President Cliff Guffey clearly understands that the union faces the question:  "Is the risk that the trade-off between jobs and wages could provide less job security if consummated as part of arbitration without providing any relief form the wage and benefit proposal that the Postal Service made in its economic proposal to the union?"

In its economic proposal, the Postal Service proposed a two-tiered wage structure with new-hires earning less than existing employees.  Two-tiered wage proposal have recently been implemented in union agreements at Caterpillar, Chrysler, General Motors, Harley Davidson, and other U.S. manufacturing firms facing challenges relating to the recession and increased competition from manufacturing plants overseas.   A recent New York Times article noted that two-tiered wage agreements in contracts signed recently differ from similar arrangements that were introduced two decades ago in that wages no longer snap back to the higher level at the end of the economic difficulty.  Instead, the new lower wage structure becomes the new wage structure of the company and only existing workers remain grandfathered into the higher wage structure. 

In arbitration, the Postal Service could present the results of union agreements at these firms as well many others to support its economic proposal.   Given the Postal Service's financial condition, and a clear indication that the number of plants and retail facilities where APWU members work will be declining over the term of the next contract to support both the economic proposal and a relatively weak proposal preserving jobs of existing APWU members.

APWU President Cliff Guffey and his leadership team have a difficult job in these negotiations as the cards that the APWU has going into arbitration are weak.  Possibly even more difficult is trying to sell to the rank and file a negotiated contract that introduces wages and benefits for new employees at lower levels that those that existing employees now receive while existing employees receive relatively limited assurances of job security given an expected increase in the pace of plant consolidation.

The Postal Service and APWU could help ease this process by including a number of provisions in their agreement that could ease the mind of employees whether they are asked to ratify a negotiated agreement or required to live with the results of one consummated via arbitration.   These should include:

• A streamlined process for implementing incentive-based early retirement programs with the focus on allowing the Postal Service to implement early retirement programs on a facility by facility basis.   This would give employees faced with the possibility of a long distance transfer, when a plant is consolidated or volume drops faster than anticipated the a real option to retire rather than accept the transfer.   Both the APWU and the Postal Service would need to jointly work with Congress to show why not fixing the retiree cost issues may prevent the Postal Service from reducing its costs quickly by preventing it from offering realistic early retirement incentives.
• A joint task-force of APWU and postal executives to examine how the two-tiered wage structure could be used to compete with Pitney Bowes and other pre-sorters for sorting mail with type-written addresses.    Given that both pre-sorters and the Postal Service use similar machines to handle sortation, and this mail is significantly less likely to require manual sortation than single-piece mail, a lower wage structure could allow the Postal Service to effectively compete on price for origination sortation.   The primary challenge here is the continued linkage of single-piece mail rates and presorted rates that could prevent the Postal Service from effectively competing for this business.   
• A joint task-force of APWU and Postal Service executives to examine the retail infrastructure with a particular focus on looking at 1) how the Australian model of retail services could improve the financial viability of existing outlets, and 2) developing a new job-category for APWU employees to support a retail infrastructure that includes a combination of corporate owned, franchised, and self-service outlets.    For example, APWU members could provide the staff necessary to run and maintain a network of off-site self service outlets similar to current automated postal centers (APC's).

All three of these ideas are based on information previous prevented in this blog.  They offer opportunities that allow existing APWU members to more easily deal with the transition to a Postal Service that has a smaller footprint as well as create real opportunities for both existing and future APWU members in the competitive postal marketplace. Most likely there are numerous other ideas for easing the transition to a smaller Postal Service footprint or creating new opportunities for APWU members and I look forward to seeing additional ones from introduced in comments to this blog.  

Social Value of Mail

Last week the Postal Regulatory Commission announced on its website that it has funded six studies examining the social value of mail.     The Commission's studies provide a couple of snapshots as to the impact of the Postal Service on the markets and communities that it serves.   The summary of the studies are as follows:

• SJ Consulting will quantify the benefit of the Postal Service’s rural services by measuring the percent of population affected by Delivery Area Surcharges and determine if there is a cost basis for the Delivery Area Surcharges by the two major parcel carriers and the benefits from the Postal Service having a more frequent delivery network in rural areas.

• Urban Institute will measure the Economic Effects of Post Offices by researching available data and providing an impact analysis of the presence of post offices on real estate values, business activity, and employment through sampling the impact of about 125 closed post offices.

• Urban Institute will research the role and benefits of Price Leadership of the Postal Service from lower priced postal products such as parcels or expedited services, money orders and post office boxes to determine the competitive advantages the Postal Service offers with these products compared to its competitors.

• Urban Institute will quantify the benefits of the Postal Service to Community Security and Public Safety by researching Postal Service and NALC data, and Metropolitan Police Department crime data to measure the impact on crime in the District of Columbia by changing retail service hours and postal carrier routes, considering neighborhood characteristics, and Postal Service personnel training regarding community security and public safety reporting.

• Leong Consulting will quantify the benefits of the Postal Service’s Disaster Response, Emergency Preparedness, and Safety including its role in neighborhood safety, as a first responder and as a communications network in an area devastated by natural disaster by estimating the “savings” to government agencies from Postal Service performance of these duties and assess the Postal Service’s role in the Nation’s preparation for bioterrorism, including neighborhood safety, and the Cities Readiness Initiative (CRI), the Bio-Detection System, and the Custom-Trade Partnership Against Terrorism (C-TPAT).

• Leong Consulting will also quantify the Essential Services for the Unbanked Population provided by the Postal Service using publicly available data from banking industry organizations and consumer advocacy groups and assess the value of Postal Service products provided to the unbanked population and identify other areas where the Postal Service could offer useful financial-type services, particularly to those receiving hard-copy checks.

The studies that the Postal Regulatory Commission funded are examples of studies that are necessary in order to fully develop a postal market policy and the business model that the Postal Service should follow and the regulatory structure under which the Postal Service should operate.  Many of these studies could help clarify questions about whether the Postal Service could continue to provide the benefits that it provides the nation if it operated as a private sector corporation, a government corporation operating under standard business law, the current model, or as government department.    Similar questions need to be asked about the impact of regulatory policy on the social benefits and economic impact of the Postal Service and private sector participants in the postal market.  

Beyond the broad questions of business models and regulatory frameworks, these studies can help Congress understand more fully the impact of changes in the operating model, including changes in how retiree obligations are calculated, the network of sortation facilities and sortation plans for single piece and bulk-tendered mail, and the retail strategy including the types of products and services that a Postal Service retail outlet can offer, and the mix of contracted and corporate facilities used to provide service that will be necessary to ensure that the Postal Service finally becomes financially self sufficient and the risks to the economy and the nation's communities if it does not.   

How Does Walmart Offer Free Shipping?

Today, Walmart announced that purchases on its website will ship for free.   Walmart is not alone in offering free shipping as Amazon.com, JC Penney, LL Bean and Target all offer free shipping, although Amazon, JC Penney, and Target currently have minimum purchase amounts for their free shipping offers.

How do these companies justify free shipping?  

•  The New York Times article cites the Distribution Management Group which has reported air shipping prices for big retailers are about 70 percent less than for a small company.   For large shippers to get discounts this large, they have to negotiate sharp discounts in surcharges for home delivery and rural delivery.   While discounts of 70% may be unusual, it is clear that those shippers spending more than $1 million annually on parcel shipping pay significantly lower rates than smaller shippers.   The reason that they pay less is that they take the time to negotiate carefully and carriers are willing to make the effort to compete on price as well as service.
• Larger retailers have more warehouses which allow them to ship more of their items in zones 2 and 3 which has lower air and ground shipping rates.  This is a variation on zone skipping that shippers have tried to do for decades.  The difference now is that retail items manufactured abroad are now shipped to regional warehouses directly so the "zone skipping" involves both domestic and international transportation.
• Larger shippers pack shipments to minimize costs.  Larger shippers have found that it can save money by choosing the right sized box and finding the lowest cost way to ship a multiple item shipment, whether by combining shipments to one delivery address to finding the cheapest way to ship the item based on whether it means packing the items in one box or multiple boxes.
• Larger shippers have made significant information technology investments.   Significant improvements in software have allowed carriers to do real time price comparison among carriers and among offerings of carriers.   The software also improves inventory management and allows direct shipment of inventory to the warehouse closest to where demand for a product is or to stock different sizes or colors based on the popularity of the particular sizes or colors.  Software has also allowed shippers to check addresses and telephone numbers customers enter on line before the order is completed to ensure that both the address and telephone number is correct which eliminate charges for bad addresses and upcharges for home delivery when no telephone number is provided by the shipper.
• Retailers are learning to compare the "cost of sale" from a brick and mortar location and on line sale.   Delivery costs to the store as well as the cost of employees, and facility costs that are born in the price of item sold in a retail store can be compared to shipping and other distribution costs of an on-line sale.   Free shipping makes sense when the shipping and distribution costs are comparable to the costs of selling through a retail outlet.
• Retailers are starting to see opportunities for low cost delivery of larger and high value items using services of FedEx and the Postal Service that involve delivery to a retail location.   These services allow Walmart and other retailers the opportunity to ship these items reasonably and know that the customer will be able to pick it up when needed.

Hits and Misses in Parcel Pricing

Most analyses of the Postal Service's proposed parcel rates and service initiatives will come from the shipper perspective.  However, given the Postal Service's financial condition, they need to be viewed from the same perspective that investment analysts look at pricing decisions of FedEx and United Parcel Service.   From this perspective, the changes look like a mix of hits and misses.

Hits

• Expansion of the number of flat rate boxes and envelopes is a hit for consumers and small businesses - It allows the Postal Service to sell pre-posted boxes at nearly any retailer in a manner similar to its arrangement with Office Depot.
• Expansion of Hold for Pick-up Service - This should be a big hit with one major caveat.   Items that are either bulky (i.e. comforters, pillows, fragile items), large (i.e.  High Definition televisions and microwave ovens), or valuable now have a USPS delivery option.   This should be most valuable for shipments to rural areas.    The caveat is the number of hours that Post Offices are open.    For this service to be truly effective, Post Offices need evening hours.
• Increases in rates to DDU for light weight parcels - The volumes that FedEx SmartPost, UPS Mail Innovations and other consolidators are generating are sufficient to justify raising rates significantly on the lightest weight shipments that they now tender to the Postal Service.   These weight cells must be as profitable as all others.

 Misses

•  Timing of announcement - The Postal Service should have waited at least another week to allow its rate increase to come after both United Parcel Service and FedEx.   Given its market share, the timing of its announcement should reflect its position as a price follower.
• Uniform national drop shipment rates - The Postal Service is creating significant opportunities for cream skimming by charging the same drop-shipment rates to DDU's and SCF's regardless of where they are in the United States.   The market for last mile service is very different in Montgomery County, Maryland (DC Suburbs) and Garrett County, Maryland (far western Maryland).  The cost of serving these two markets is different as well.    By charging the same rate for both locations, the Postal Service is under-pricing the service to Garrett County encouraging carriers to drop-ship items that may not be profitable for the Postal Service to handle.    The opposite is true in Montgomery County Maryland.   With differential prices the Postal Service could increase the fuel allowance for rural carriers that will be delivering the parcels in rural areas that UPS and FedEx do not want to deliver.   (Royal Mail's destination entry pricing are geographically based and it has worked well for both Royal Mail and mailers.)
• Average rate increase - The Postal Service's average rate increase of 3.5 percent for Priority Mail and all 3.6 percent for all Shipping Services is below the rate increases that UPS and FedEx have announced and most likely below the rate increases that they will be able to get from their commercial customers.    In particular, retail Priority Mail rates should rise at the same rate FedEx Ground and UPS for Zones 1-3 and 2nd day air for longer distance zones.   Commercial Priority Mail rates should increase a bit less to reflect the competitive of commercial markets.  

Unclear

•  Impact of pricing on positioning Shipping Services in the marketplace.    The Postal Service's pricing moves should significantly differentiate USPS prices from that of its competitors.   The lower prices fit the perception in the commercial marketplace that the USPS offers a lower cost, lower quality service.   The Postal Service is forced to be the low-cost, low-quality provider until its transit times for Priority Mail meet those of FedEx Ground and UPS for shorter distance shipments.
• The impact of flat SCF drop-shipment rates on the use of the Postal Service for last mile delivery.   The Postal Service faces a risk that its last mile delivery service will be less profitable than it should be given the lack of geographic-specific drop-off rates.
• Whether the Postal Service's cautious view of the pricing power of parcel carrier's is correct.   Both FedEx and United Parcel Service are beginning to see that its price increases are sticking in contracts that they are signing this fall.   The Postal Service's approach requires an economic forecast that is less robust than what United Parcel Service and FedEx now project.
• Missed Flat-rate opportunities.    While the Postal Service introduced a new padded envelope, it could have also created multiple sizes for padded or even un-padded envelopes.  The larger envelopes would serve the needs of shippers of clothing that now ship in large envelopes that can hold two to four pairs of jeans.   Why not have a flat rate product for every size padded envelope that is generally sold in the local office supply store.

Postal Service Prices Last Mile Aggressively in 2011

The Postal Service has just released its 2011 rates for Express Mail, Priority Mail and Unregulated Parcels.   Going through the entire proposal will take some time.   However, a quick review of Parcel Select rates indicates that the Postal Service has not chosen to follow the rate increases of United Parcel Service and FedEx in its pricing of the last mile.   Instead, its pricing for 2011 suggests an aggressive effort to gain market share over the last mile while focusing on ensuring that delivering parcels under 1 pound are profitable.  The Postal Service's rate increases for Priority Mail also suggest an aggressive effort to gain market share on end to end shipments.

• The Postal Service has proposed no rate increase in parcel select shipments regardless of weight dropped at the destination SCF.
• The Postal Service has significantly raised rates on shipments not dropped at the destination SCF that weigh less than a pound.   These rates rose between 4 and 30% depending upon zone and machinability.  Rates for shipments to zones 3, 4 and 5 are all up double digits.
• Rate increases for heavier shipments are below increases announced by UPS and FedEx.   These rates are between zero and 3% with the largest increases found among heavier shipments traveling long distances.  The rate increases proposed are more than likely lower than the cost increases of United Parcel Service and FedEx and should expand their effort to selling the services that they provide jointly with the Postal Service.
• Priority Mail Commercial Plus rates are rising only 2% on shipments over 2 pounds.   Shipments under 1 pound are rising by larger single-digit percentage increases with 1 to 2 pound shipment rate increases depending upon distance.

Overall, consolidators that use Parcel Select service, as well as most of their customers, should be quite pleased with these rate increases.   These rate increases combined with FedEx and United Parcel Service's 10% increases in rural and remote area surcharges will likely expand the geographic area where parcel select is competitive and the low rate increases for shipments over 1 pound may encourage shippers to consider parcel select for more shipments than they have in the past.

Is Advertising Mail Dying or Are New Uses Replacing Old?

This week Direct Marketing News presented two contradictory headlines on the same day. Are advertisers "Abandoning the mail" or is it true that "direct mail gains new potency as online marketing evolves?"  After reading both articles, what is a person to believe?

David Hay, VP of marketing at Plow & Hearth, which has catalog, bricks-and-mortar retail and Internet sales arms. They began reducing its marketing dependence on USPS three years ago, after significant rate increases. The move was also driven by customers migrating to online retail.  In the interview, Direct Marketing News published, he stated: “We are reappraising our reliance on catalogs as our main marketing vehicle, and we are developing a multi-year plan to reduce our spending on catalogs in relation to other media. We see catalogs as still having relevance to our business, but being a smaller part of the mix than they are now. There are instances where catalogs will continue to be effective, but that proportion is growing smaller and smaller and every day, and that's a big driver for our move. But we have no active plans to phase them out.”

Taking the opposing position is Andy Cutler, Chief strategy officer, Mercury121.  He notes that the rush to "the Web has had a significant effect on direct mail: volumes have dropped dramatically over the last decade. This has been painful for those of us on the service side of the business − not to mention for the US  Postal Service − but it has created an opportunity for our clients. Because each mail piece is not competing with as many other pieces in the mailbox, response rates are climbing. At the same time, e-mail response rates are declining due to overuse."

To illustrate, he provides an example of one of his retail clients that compared the performance of direct mail, e-mail and in-store promotions. The study showed that direct mail was the best performer with response rates up 150% vs. the previous year with no significant changes in strategy.  In this example direct mail outperformed the cheaper in-store and on line options.

While the two headlines that prompted this post suggest two distinct scenarios for advertising mail, the strategies that Plow & Hearth and Mercury 121's client's are now pursuing in their use of mail are most likely quite similar.   Mail will be used where it is most effective.   Mass distribution of full-line catalogs to a company's full customer base may no longer make sense.   However, targeting advertising and "mini-catalogs directing customers to buy on the web will remain with improved ROI's as the limited clutter in the mailbox allows an advertisement to stand out and create web-based sales.

A recent article in Advertising Age, highlighted this point.  While electronic alternatives, may be free or nearly so, the clutter in the e-mail box causes most to be deleted or shunted to the dreaded (for advertisers) junk-mail box.   Even worse are banner ads which compete with the content that recipients came to a website in the first place.     The issue of on-line clutter and the limited efficacy of on-line advertisements explains why most of the $4 billion spent on political advertisements this fall was spent on broadcast and mail advertisements, with mail dominating spending in "political markets" where broadcast media could not target effectively the particular market.

In terms of a long term strategy, the Postal Service, and for that matter, all companies in the mail supply chain, need to track the value of mail as well as the value of competing advertising media in order to fully understand the ROI's advertisers expect.  It is this value of mail, and not any measure based on economic theory that should determine both the prices that printers and the Postal Service can charge and the costs of operations necessary to ensure profitable operations.  Without this information, these companies (and regulators when they are involved) are operating blindly.  When suppliers are blind, companies like Plow and Hearth will speed their effort to find alternatives to mail.   Opening up the pricing eyes to the importance of sender ROI  could slow and possibly even reverse this trend.

Rate Increase Coming in 2011

In a letter to the Postal Regulatory Commission, the Postal Service asked for clarification regarding the total increase in rates under the cap.   The Postal Service stated that it wanted the clarification so that it could better to do its financial planning for Fiscal Year 2011.  However, mailers should clearly understand that rates will be rising in calendar year 2011.

Rate increases will be relatively modest.   Rate increases will be rising on average around 2% and most likely slightly below that figure.  

The price of  a single piece stamp will likely increase by a penny to 45 cents. (2.3%)   Bulk First Class mail will rise slightly less to ensure that rates for the entire class rise less than the cap.

The largest rate increases will likely be felt by Standard Mail parcels and non-machinable flats.   The Postal Service will likely raise these rates by between double and quadruple the cap for Standard Mail as a whole. The large rate increase on this product will occur due to the confluence of two factors that generally influence pricing decisions at any firm offering a product in commercial markets.  First, it is in the Postal Service's interest to ensure that all parcel products earn a positive return, and eventually a return equal to the firm wide average.   As single piece First Class mail volume declines, the Postal Service can no longer to price products that do not have a legislatively mandated discounted rate at a loss. 

Second, both UPS and FedEx are making significant changes in their rate structure that would allow the Postal Service to raise rates in small parcels significantly without affecting its market position.   The two private sector carriers are raising the minimum shipment charges on express shipments and expected to raise the minimums on ground parcels that large shippers pay for low weight shipments going to destinations in zones 2 through 4 or 5.  For smaller shippers what matters is not only the rate increases that the private carriers set for the base rate but also changes in accessorial charges for remote and home delivery, as well as changes in the method of calculating package density that can push a light-weight parcel into a heavier weight cell.   All of these changes combined means that shippers spending less than $100,000 annually on parcel and express shipments may see rate increases from in light weight parcels in the high single digit range from the private sector carriers early in 2011.   

The previous two times that that the Postal Service raised rates under the cap, the increase went into affect late in 2nd calendar quarter.   Clearly the Postal Service would like to raise rates earlier.   Whether the Postal Service could propose a rate increase under the cap that would go into affect earlier in 2011, and closer to the timing of the rate increases of United Parcel Service and FedEx requires greater knowledge of the law than I have. 

Corrections to Yesterday's post

I have made two changes to yesterday's post, The Postal Service Should Default on Its Retiree Health Care Obligation from the original version to correct errors.   Accounts payable replaced accounts receivble in the first paragraph.  Both are bad but as the USPS collects revenue up front it has minimal accounts receivable.  It does have substantial accounts payable and other liabilities that need to be paid for which it does not have needed revenue.  The paragraph on geographically oriented rates would was changed to correct an error regarding rates to high density areas.   Rates there would go down not up.  Geographically oriented rates are used outside of the US by postal operators for providing only last mile services as a means to prevent cream skimming either in terms of creating a competing delivery service or exploiting anomalies in the rate structure as compared to the cost structure in ways that would cause the Post to handle substantial volumes below costs

I apologize for the errors and whatever confusion they may have created.

The Postal Service Should Default on its Retiree Healthcare Obligation

The Postal Service is broke.   It has expenses far above revenue and has contract agreements and accounts payables far above its ability to pay.    Besides payroll its largest obligations are to the Federal government and transportation companies like FedEx.  It cannot afford to offer the services it is required to provide.  A recent report from the USPS Office of Inspector General states that the Postal Service is even less likely to be financially viable under the current operating model if volumes continue to decline.

In this financial state, the Postal Service must default in its obligations to the Federal Government and force Congress and the administration to choose between restructuring and liquidation.  Clearly, liquidation is not an option as the economic impact of ending mail service would be catastrophic and shifting mail delivery to the private sector would require a significant gap in time when no service would exist.

Default would force OMB and Congress to act and should force changes both at the Board of Governors (BOG) and senior management.  As such, the BOG and Postal management need to take an action that could cost them their jobs.

What would a restructuring look like?

• Introduction of a financial target requiring revenue greater than what is needed to ensure accounting break even as that target does not ensure financial self sufficiency.
  
• Immediate implementation of the Office of Inspector General's plan to cut area and district level employees.   Even if the plan is not perfect, there is not the money available to wait for a better plan.
  
• A new operating plan for handling bulk flats and sorting them to carrier route sequence order using a network of between 50 and 100 facilities.
  
• Streamlined review of network consolidation proposals under consideration.   The goal would be to implement consolidation proposals already announced in the second and third quarters of FY '11.  This cuts the normal time needed to implement consolidation efforts by six months or more.
  
• A second set of consolidations would be introduced for FY '12 by July of 2011.
  
• Increases in rates.   Rates would rise immediately on single piece mail to generate revenue to cover severance and other costs of reducing the workforce for this rapidly declining product and parcel services to both cover costs and/or match rate increases of UPS and FedEx.  Increases in rates for advertising focused mail would likely follow both the timing and size in increases in rates that other traditional advertising media charge as advertising rebounds with the pick-up in consumer spending that appears to be accelerating.
  
• Introduction of geographically based prices for drop shipped mail and parcels.   This will raise rates in low density areas and lower them in high density areas.  On average this will not affect rates and could expand mail use in areas that have lower delivery costs.
  
• All labor contracts would expire with the restructuring.    New contracts would show limited deference to work rules, compensation and other provisions in existing contracts.
  
• Consolidate retail services into fewer locations open for longer hours and self service locations by the end of FY 2012.

What would the Federal Government have to cover?

•  Most if not all of the retiree heath care costs.   Congress would have to accept modifications in the CSRS calculation and use the overpayment to pay off most of the retiree health care
  obligation and accept modifications in retiree health care calculations in order to reduce the remaining liability.
  
• The costs of early retirement incentives and severance payments to reduce the work force.
  
• All capital costs to rapidly expand self-service to retail using proven technology.  
  
• All capital and other transition costs associated with consolidation and closing facilities.

This is not a pretty picture.  Statements from members of Congress do not suggest that they are yet ready to give current management another year of relief from retiree health care payments, and forcing receivership of the Postal Service goes far beyond that step.  However, Postal management should eschew their self interest and default on the retiree health care payments to force Congress's hand. Then and only then, will Congress look for solutions that go beyond tweaking the status quo.


9/30/2010 - Two changes were made in this post from the original version to correct errors.   Accounts payable replaced accounts receivable in the first paragraph.  Both are bad but as the USPS collects revenue up front it has minimal accounts receivable.  It does have substantial accounts payable and other liabilities that need to be paid for which it does not have needed revenue.  The paragraph on geographically oriented rates would was changed to correct an error regarding rates to high density areas.   Rates there would go down not up.  Geographically oriented rates are used outside of the US by postal operators for providing only last mile services as a means to prevent cream skimming either in terms of creating a competing delivery service or exploiting anomalies in the rate structure as compared to the cost structure in ways that would cause the Post to handle substantial volumes below costs

Senator Carper's Bill: D.O.A

Senator Tom Carper introduced a new postal bill, the ‘‘Postal Operations Sustainment and Transformation Act of 2010’’ (The POST Act of 2010), to modify the Postal Service's business model on September 23rd.   The bill includes all of the legislative changes that the Postal Service requested as part of its action plan last March.  The strong support that Postmaster General Potter shows for the bill in the press release from Senator Carper's office confirms that this bill can be thought of as the "Postal Service's bill."

Unfortunately for Postmaster General Potter, Senator Carper's bill is effectively dead on arrival.  Why?

• The bill was introduced at the end of the legislative session.    With both the House and Senate going on recess to campaign, the consideration of the bill will not even begin until after the election.    The bill still will require mark-up in the Senate and then mark-up and passage by the House.   The clock will most likely run out before passage in one house of Congress, let alone two.
  
• The expected Republican gains in the Senate and House will make any lame-duck session particularly contentious and further reduce the chance that any major legislation will pass.   If Republicans gain control of one or more houses in Congress, it is in their interest to make the lame duck session as ineffective as possible forcing legislative actions to be put on hold until the next Congress.
  
• It is easier to stop legislation than to pass it.   The Post Act has a number of provisions that immediately generate opposition.
  
• Provisions in the legislation to fix the retiree benefit issues easily can be opposed in a Tweet describing the fix as a bailout of a failed federal agency.   This is exactly what Congressman Darrell Issa said in his op-ed in the Washington Times.  Given opposition to bailouts of private sector firms, Congress is unlikely to pass any legislation labeled as a "bailout" of a government entity in the press, in the blogosphere, on cable TV news or on talk radio.
  
• Provisions to allow the Postal Service to eliminate Saturday delivery will receive opposition from a majority of Congress. 
  
• Provisions to allow the Postal Service greater flexibility to cut rural post offices will face opposition from primarily the Republican and Blue Dog Democratic members of Congress that represent most of rural America.   While these members are opposed to bailouts, they are also opposed to cutting services to their constituents.
  
• Provisions allowing the Postal Service to expand into new services that use its physical, technological and human capital that are in the public interest will receive opposition from companies that fear competition from the Postal Service.
  
• Provisions calling for a change in labor arbitration decision criteria will have opposition from Postal unions and their supporters in Congress.

Finally, if this bill does not pass this Congress, it is even less likely to pass in its current form in the next.   Republicans will control the agenda on modifying the Postal Service's business model in the next Congress.    Representative Issa, who has already called the Carper bill a bailout, appears likely to chair the committee writing Postal reform legislation in the House.   His bill will likely require significant changes in the business model beyond what the Postal Service has proposed before accepting the need to fix the retiree benefits issues, let alone include any of the other proposals that Senator Carper has included in the Post Act.  When that occurs, all that may remain of the Post Act will be the legislation's title.

Could FedEx be Beating USPS and UPS in Expanding the use of its Retail Network?

In a story today, the Wall Street Journal reported that Walmart is introducing a program that allows customers to buy online and pick up the item at FedEx Office locations as well as Walmart stores.  Walmart added this delivery option this summer in Los Angeles and Boston, where FedEx has 24 and 18 FedEx Office locations respectively.  In both cities, Walmart has few stores where customers can collect items shipped to a store.

This program allows Walmart to sell its products more effectively to customers who are rarely at home during the day.  Also FedEx Office delivery significantly reduces the cost of delivery of large and heavy items making Walmart's site-to-store via FedEx Office a major advantage for online sales.

Randy Scarborough, vice president of marketing for FedEx Office comments to the Wall Street Journal clearly indicates that FedEx Office is looking at parcel pick-up as a significant new revenue stream for its FedEx Office division.   He stated that FedEx Office expects "other large retailers to take advantage of this."  He further noted that FedEx is planning its "physical network to accommodate this because we do anticipate additional demand." 

The current experiment most likely is focusing on:

• removing the logistical kinks in the process both within the FedEx distribution networks and within the FedEx Office retail locations, 
• help FedEx determine the revenue that a FedEx Office location will receive for acting as a parcel delivery location and 
• help Walmart identify the customers and products that are most likely shipped to a FedEx Office location and which ones still require home delivery.   

Once FedEx begins to expand this program beyond Walmart, it will need to look at secure and less labor intensive means of holding and tendering parcels at its retail locations, especially if demand for parcel pick-ups is concentrated in the same early evening time window that customers are shipping parcels.  At that point kiosks such as those used by Deutsche Post and Post Danmark will begin to look attractive as a cost effective means of allowing customers to get their parcels without having to wait in line for a FedEx Office employee.

Why Tablet Based Newspapers and Magazines will Succeed

The following ad from Newsday illustrates why ipad and other applications will succeed.  Watch it once to get the joke.   Watch it a second time to see how thr reader is holding the iPad.   It looks like the iPad can be physically handled not much differently than a newspaper. 




The only problem is bright light that might favor the less expensive Kindle and Nook for books and other text only applications.  This is illustrated in the following ad for Kindle that competes nicely with a printed book.

FedEx Earnings - Implications for the USPS

FedEx's earnings announcement and conference provided some insights into the parcel market and the increasing integration of the Postal Services delivery network with the marketing and distribution capabilities of FedEx.   The comments relating to FedEx Smart Post seem to indicate that United Parcel Service and other carriers that compete in the market for delivering small parcels to households, whether by their own drivers or by the Postal Service may be losing market share to FedEx.

Here are the relevant excerpts:

 Parcel Volume

Dave Bronczek – President and CEO of FedEx Express from the Q & A

Well, Art, as Fred mentioned in his opening remarks, we expect a very solid peak season. It always gets a little cloudy after that with the key focal point being Chinese New Year. So, we're optimistic about going into the holiday period and I think we'll have strong performance both in our U.S. networks and international networks through the peak season, but it always gets a little cloudy after that with the important period being around Chinese New Year.

We do expect solid industrial production numbers for the calendar year 2010 and going into 2011 in the 4% to 5% range, and we expect a little bit of consumer spending pickup. Our numbers are around 1.5 in calendar year '10 and about 2.6 in calendar year '11. So those are numbers that we’re very comfortable with in terms of supporting our business levels. Obviously, we'll need to wait a little while after peak season to see what the remainder of the year looks like.

The Postal Service can expect an increase in parcels in the 4th quarter and beyond at least as much as large as what FedEx expects.  As will be shown below, the volume of parcels that the Postal Service delivers is tied to how many parcels FedEx and other similar firms feed to its delivery network.

Distribution Patterns

Alan Graf  - CFO from the Q and A

 Let me just add, particularly in the high-tech sector, our customers don't have any inventory. And what's happening, the market is coming to us as there's a disintermediation of intermediate distribution. Items are going directly from where they are manufactured to point of consumption, which is called International Priority Express, and that's what’s so exciting about the next few years around here is, that's going to continue, and with the reliability that we put up, there's no need to have an intermediate warehouse and there's no need to have a backlog of things that can go obsolete on the shelves and that's part of the excitement that we see around here.

In response to a question about inventory, Alan Graf highlights one of the challenges competing in the domestic home-delivery parcel market.   Inventory of items manufactured overseas, and in particular items that weigh less than ten pounds are no longer shipped to a domestic warehouse for shipping to the household customers.   As the retailer does not know where in the United States the sales will come from or for that matter, what color, size, and in the case of computers, the processor, specific amount of memory, size of hard drive, and other components that the customer plans to order, keeping inventory in the United States becomes quite expensive.  Given the difference in labor costs, it becomes cheaper to pay international air freight than to ship a basic model to the United States, and then modify it for individual orders.  

FedEx continues to deliver these items within its Express network and United Parcel Service delivers them within their standard network.   The Postal Service could enter the market for the delivery of foreign sourced retail sales for home delivery only if it offered a price competitive delivery service in conjunction with DHL or TNT or a foreign post that offered the same security as what FedEx and UPS offer (signature requirements and tracking service) at a competitive price for the total end to end transportation charge.  It could more easily offer a price competitive service that allowed for pick-up at a Post Office or automated kiosk in conjunction with any carrier for a price well below the cost of home delivery.


Parcel Prices:

Mike Glen - President and CEO of FedEx Services from the Q & A



We were pleased with the Domestic Express volume performance. It is also being driven by the high-tech high value added sector. But the particular point that I want to make here is about the strong yield management activities that are in place and we will continue going forward. That is our primary objective. While we want to continue to grow volume and expect that we will do that, our primary focus is on improving yields, at the domestic Express business as well as in Ground and certainly LTL. So, our primary focus is not on market share so much as opposed to continuing to improve yields.


Dave Bronczek – President and CEO of FedEx Express from the Q & A

This is Dave. I’ll just add to what Mike said, and I've mentioned this a couple of times before and we'll talk about it in a couple of weeks here. Yes, the volume is up 3% and yes, my yields are up 7% for an overall revenue increase of 10%, but again, the global network that FedEx Express is, the more international packages that end up in the United States in the inbound, or outbound part of my cycle drives more and more profits automatically. So, the more international packages that end up in my U.S. domestic trucks coupled with the yield improvement program that Mike just talked about is a significant profit driver for FedEx Express.

FeEx's increases in yield (average revenue per piece) reflect a concerted effort to raise the average rate that its customers pay.  While some of the increase in reflects an increase in weight and a higher proportion of international shipments for FedEx Express, it is clear that even in an economy with slow growth, FedEx is able to raise its prices for parcel delivery services.


Service Quality:

Fred Smith from opening statement

FedEx Ground continues to accelerate its network providing a clear speed advantage over the competition. Quite simply, FedEx Ground is faster to more U.S. locations than any other ground carrier.

Just since this last January, FedEx Ground has increased the speed of nearly 3,700 lanes. Since June 2003, FedEx Ground has accelerated its delivery times by one day or more in about 82,000 lanes. FedEx Ground now delivers more than half its volume of packages in two business days or less, and more than 80% in three days or less. FedEx Ground service levels are at all-time highs.

For the Postal Service, FedEx Ground's improved service standards pose a competitive threat to Priority Mail as for many origin destination pairs FedEx Ground rates are less than Priority Mail.   To the extent that United Parcel Service is also expanding the geographic area that has delivery in less than two or three days, they create a competitive advantage over Priority Mail.

Integration with the Postal Service Delivery Network:

 Mike Glenn - President and CEO of FedEx Services

I want to comment on one thing and caution you about looking at the Ground numbers in a vacuum. One of the strategic advantages that we have is SmartPost. SmartPost allows us to attack the residential lightweight business in a very efficient and profitable way. So rather than trying to steer that traffic into the Ground network and the Home network in particular, we steer that traffic into the SmartPost network.

So by definition, some of the growth potential that might otherwise go to Ground is going to SmartPost, and I think you can see the very strong performance we have there. So you have to look at our Ground strategy as an overall residential strategy, including SmartPost. We are very pleased with our ability to continue to have industry-leading growth rates and very strong yield improvement efforts at Ground, and I think that's based upon the combination of a great sales team that is armed with the tremendous value proposition and that's a formula for success.

Fred Smith from the Q & A

So, a good example of that is what Mike Glenn just talked to you about. If you really want to talk about the most cost-sensitive segment of the market, it is lightweight, low value-added retail items going to the home. There is no one that has the density that can compete with United States Postal Service. That's why several years ago, we came up with the strategy of developing a SmartPost service, and why it is growing at huge rates. So, we firmly believe that our strategy which has allowed us to pick-up in the commercial ground sector, what about 12 market share points...

Alan Graf - CFO from the opening statement

FedEx SmartPost average daily volumes grew 9% to $1.1 million as a result of gains in market share and the introduction of new service offerings. Yields at FedEx SmartPost increased 19% primarily due to lower postage costs as a result of increased deliveries to U.S. Postal Service, final destination facilities and higher fuel surcharges.

FedEx clearly sees its SmartPost service as a competitive advantage.   Given that it offers shippers in a highly price sensitive market very low parcel delivery rates a competitive service it increases what the Postal Service delivers.   Pricing this service to FedEx requires a great deal of understanding as to what FedEx is charging customers and what portion of that charge represents the Postal Service's part.   Trying to set this rate within a regulatory context is particularly difficult and raises a question as to whether the rate increases for the Postal Service's portion of the revenue from a parcel delivery shipment should reflect the ability of FedEx and similar carriers to raise prices for end to end service or some other standard.  

To the extent that regulated parcel services are primarily originated by FedEx and similar firms, then the value of the regulation to the shipper of regulated rates may be diminished by the benefits that FedEx and similar firms capture for themselves.