Tuesday, February 2, 2010

Who will brief Obama on the nature of the mail market?

At a You Tube forum, President Obama was asked, "'Mr. President, our deficit (national debt) is higher than ever at $12 trillion. Will you consider allowing the private sector to buy and take over the most troubled government-run agencies such as the U.S. Postal Service?"

The President's response suggests that his administration has left him poorly prepared for questions about the future of the Postal Service.   As questions about the future of the Postal Service will likely be on his plate over the next 9 months, it is time for his staff to do the legwork that will have him better prepared.   This post reviews information that he needs so that he can develop the level of understanding necessary to direct his staff in regards to future of the Postal Service.

Competition with FedEx and UPS
FedEx and UPS do not have the "high end" business-to-business portion of the postal market.  They serve the parcel side of the parcel market.   Yes they dominate business-to-business parcel delivery, but that is not to say that they do not also deliver a substantial volume of parcels to households, including households in the most rural sections of the Great Plain and Mountain West states.  They make these deliveries at a profit, just like they make profits in their business-to-business parcel deliveries.

Where FedEx and UPS compete with the Postal Service is in portions of the parcel market that fit the capability of the Postal Service's network.   The Postal Service is the specialist in handling, and more importantly delivering parcels under 5 pounds.  In this role, the Postal Service not only delivers small parcels that are dropped at a Post Office, but also an increasing share of the light weight ground parcels that FedEx and UPS picks up from its customers.  In fact, both FedEx and UPS are doing their best to convince their customers to shift light weight ground parcels to their products that use the Postal Service for delivery as a way to both lower the shipment price and provide service to that customer at a profit.  (It is not known what portions of the profits from delivering these parcels are received by UPS and FedEx or the Postal Service.)

The Postal Service is also the specialist in handling the parcel shipping needs of households. Households are a very tiny portion of the parcel delivery business.   Household shippers generate most of the Postal Service's heavier parcels.  The preference that household mailers have for the Postal Service makes the Postal Service an ideal provider of return services, as the new joint Postal Service-UPS service shows.  Households are the Postal Service's best customers because 100 years of marketing parcel delivery services to households creates a level of comfort that is tough to shake.  

Businesses in general use FedEx and UPS for their parcels, even if the Postal Service does the actual delivery, because the service levels and prices are better.  In addition, business customers find the characteristics of the customer relationship, from methods of payments to tracking capabilities, to the responsiveness of both telephone and in-person sales people are better at UPS and FedEx than the Postal Service.

Private Sector Firms Would Deliver Only the Most Profitable Business
The Postal Service's delivery competitors outside of the parcel market all focus on either the Postal Service's lowest priced or lowest margin products.  

For over 25 years, the Postal Service has faced competitors in the delivery of periodicals, a product that the Postal Service's cost system currently indicates are handled by the Postal Service at a loss.   The Postal Service's competitors deliver periodicals to every business address in metropolitan areas from Boston to Los Angeles, and in New York to buildings with doorman.  These businesses limit their deliveries to points where there is no mailbox and therefore no need to violate the Postal Service's exclusive right to the mailbox access.  The firms also offer a better quality service, as the periodicals and newspapers that they deliver are delivered earlier in the day than the Postal Service and their delivery service often includes replacement copies if the original is not received by the recipient.  The longevity of these firms is a testament that the private sector can deliver at a profit a product that the Postal Service delivers at a loss.

Today, Valassis announced the expansion of its use of private delivery of advertisements to households. Valassis will have the private carrier, CBA Industries, deliver what the Postal Service calls Enhanced Carrier Route (saturation mail) to addresses that do not receive the Newark Star Ledger.  CBA Industries is offering Valassis a service equal to or better than the Postal Service's lowest priced product for commercial advertising mail.

Finally, rural communities have always had shoppers and other free advertising focused journals delivered to boxes nailed to the post that is there for the mailbox.     These products could use the Enhanced Carrier Route products that the Postal Service offers.   However, private delivery offers the producers of the shoppers shorter lead times between the sale of advertisements and actual delivery than what delivery using the Postal Service would offer.   The decades long success of shoppers suggest that firms offering delivery in rural areas can earn sufficient profits to maintain and grow this business. 

Universal Service Could Not be Provided by the Private Sector

The experience of foreign postal operators suggests that rural service, including service to Lapland in Sweden and Finland, the rural plains of Saskatchewan and Manitoba, as well as the Arctic regions of Canada, and the Outback in Australia can be provided under private sector business objectives.   These firms, while all currently owned by the national government all have a charter that requires universal service for both citizen and business mailers.  In the case of Australia, the charter requires many more postal outlets per capita than the Postal Service has now.  All of these enterprises operate at a profit and operated at a profit through the recession.

Sweden Post, which in many ways has distribution patterns that are not much different that states in the Mountain West, with a couple of big cities and a vast rural areas that have tiny villages hundreds of miles from urban centers, has shown that it can offer universal service at a profit even if you face a competitor that only delivers mail sent by large volume business mailers in Sweden's urban areas.   Sweden Post will soon become a private sector corporation as the government of Sweden will be selling shares to the public soon.

The reasons why these posts can profitably offer universal service are the same reasons that FedEx and UPS deliver to every address in the United States.   First, their largest customers demand it.     Large customers want the entire mailing delivered and look at the total delivery cost of the mailing in making their assessment of the value of the delivery service.   As such, these customers are likely to accept any pricing scheme produces a reasonable total delivery cost for a mailing.   If simplicity requires a uniform price, as it often does with letter mail, then the price offered for each piece must earn a profit for the mailing.  Single piece mail is similar in that a uniform rate is set to ensure that the product is profitable including items delivered and tendered to the most urban and rural areas

For higher priced items, like the parcels that FedEx and UPS handle, surcharges to rural areas that reflect cost differences ensure that each parcel is handled profitably. pieces going to the bottom of the Grand Canyon, and each of these customers business can be priced to insure that the entire mailing is profitable.  If there is a need for a subsidy, as there is for parcels to the Canadian Arctic, then there are specific government subsidies paid to Canada Post. 

Finally, what makes universal service work for postal operators, that work under private sector business objectives is the flexibility to change every aspect of how the services are provided, from the characteristics of retail outlets, to pricing of single piece and volume products, to extensive freedom to offer new services that customers want even if other firms in the private sector now offer them.   This flexibility and commercial freedoms are not available to the the Postal Service.   The Postal Service is not likely to gain this flexibility and commercial freedom under governmental models.

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The Obama administration is supposed to come up with a solution for the retiree health liability shortly.   Postal stakeholders know that resolving retiree health payment scheudle is only a part of the solution that is needed in developing a new business model and regulatory framework.   Let's hope that they take the time to fully understand the mail market and the unique needs of the Postal Service's customers, the processes of producing mail, the characteristics of the Postal Service's workforce, and  how postal operators outside of the United States provide universal service at a profit with private sector business objectives before that complete their analysis of the Postal Service's problems and potential solutions. 


Anonymous said...

Last week the Office of Inspector General announced that the USPS and Board of Governors had overfunded CSRS (retirement) for USPS employees by $75 billion. So much for the lie regarding the USPS financial troubles. The BOG had many Bush era appointees, until Obama replaced two of them yesterday.

Postal Sanity said...

President Obama's top advisers for postal issues likely consider various opinions from varying sources. But making the right choices to ensure the survival of USPS will require that the decision makers have a wholesome understanding of the postal industry. This will be a formidable task, not impossible to achieve, and interesting to watch.

skep said...

That last sentence make me feel like I'm on LSD. What does it say?

Alan Robinson said...

You are right the last sentence was awful. I cleaned it up so that it is more understandable. Thanks.

Anonymous said...

Yesterday, it was announced that the mail processing plant in Charlottesville VA. will be closing, and the area it services mail will spend 4 extra hours a day on the road. Obama showed how much he knows when he, with no basis in fact, cast aspersions on the Postal Service in comparison to Fedex and UPS. While Obama fumbles around trying to figure out postal business, these so-called network improvements are incrementally destroying the ability to provide universal service in an "efficient and timely" manner as set forth in US Code. We are not Canada, we are not Australia, we are not Japan. Our Postal Service was the brain child of our founders, to "bind the nation together" as it were. It should be as sacrosanct as the US military and not accepting of mercenaries to perform it's duties. If I am wrong in my assertions, then let the Congress change the law to reflect their disdain of our heritage.