National Envelope Company Bankruptcy

The Wall Street Journal reported that the National Envelope Company, the largest envelope manufacturer in the United States filed for bankruptcy today. The bankruptcy filing indicated that the company had between $100 and $500 million in both assets and liabilities.  The company is family owned.

National Envelope Company is unlikely to cease operations under bankruptcy.   The bankruptcy proceeding will allow it to renegotiate existing contracts with employees  and vendors, renegotiate terms of loans, and renegotiate or terminate real estate leases that could not be completed outside of bankruptcy. 

National Envelope Company's bankruptcy follows a nearly two year process during which it has been consolidating operations.   During this period it has closed facilities, ended production, or curtailed production in:

• Chino, CA,
• Union, NJ,
• Long Island City, NY, and
• Houston, TX

The Houston TX closure represented the last step in the consolidation of three facilities in Texas into a new facility near Dallas.

National Envelope bankruptcy most likely represents an orderly way for it to deal with the need to reduce capacity at a pace faster than just waiting for existing capital and real estate leases to expire would allow.   It also allows some more flexibility in adjusting its workforce, that currently numbers around 3,000 employees.  However, there is no information yet available that would indicate that renegotiating union agreements, which may be permissible under bankruptcy, is anticipated.

The financial challenges that caused National Envelope to close these four facilities and now file for bankruptcy reflect the decline in the demand for mail and therefore the envelopes that National Envelope Company produces.  National Envelope is not alone in requiring significant consolidation of capacity.  The recent merger of Quad Graphics with Quebecor World Color will likely result in consolidation of printing operations of these two companies that will likely include some plant closures.   If the supplier's of the envelopes see the speedy consolidation of existing production facilities as critical to their survival as financially viable enterprises, it would seem that the Postal Service cannot delay its consolidation efforts either.  

What National Envelope Corporation's bankruptcy says to postal stakeholders is that mail volume declines, particularly in single-piece first class mail and flat shaped mail across all classes, may not allow the Postal Service to use painless ways to reduce capacity.   The decline in mail volume, combined with improvements in mail automation, means that the number of employees that the Postal Service needs is declining at a rate faster than the rate of attrition.   Similarly, the number of plants that the Postal Service needs may be declining faster than the rate that real estate leases are expiring.

The Postal Service could even find itself in the position, like National Envelope Company found itself in Texas, that it needed a new facility in a different location to replace a group of existing facilities that are no longer optimally located to provide efficient and timely service.  In this case the capital investment in a new optimally located facility could reduce both operating and transportation costs and creates the possibility of improving service previously served by the facilities that are replaced.

Unfortunately, the Postal Service does not have the ability to go through a pre-packaged bankruptcy process like National Envelope Company is likely about to begin. Nor will it have the financing needed to handle the transition costs to a move quickly to a smaller and more efficient mail-processing network that National Envelope Company will have so that it can streamline its current production network during its bankruptcy proceeding. 

It may be worthwhile now for the Postal Service to lay out the capital and transition costs necessary to reduce operating costs and consolidate its processing and transportation network.   This information could be quite valuable in trying to develop a case for restructuring the retirement expenses that the USPS-OIG has indicated should be adjusted.

The problem of capital and transition costs is illustrated in recent statements from Postal Service officials to mailers regarding the automated flat sortation and how a key constraint to fully taking advantage of the technology is availability of funds.    While flat volumes are down significantly, a streamlined flats sortation network modeled after the NDC network could handle bulk flats efficiently with the ability to automate sortation to the finest level that the technology allows at a lower cost to periodicals, catalogs, and other bulk flat mailers.  Such a network would allow mailers to reduce transportation costs by drop-shipping flats to fewer facilities that specialize in sorting flats using automation and then the finely sorted flats would be transported directly to delivery units, or transported to downstream plants for cross-dock movements onto transportation to delivery units.   A full explanation of the capital and transaction spending needed to put such a network in place should be demanded by flat-shaped mailers.  

The current problem with flats is just the canary in the coal mine.  The next product that will face an equivalent challenge will be single-piece mail and.   Single piece mail is declining now at above 10% year-to-year, a rate faster than what was seen before the recession.  This is different from nearly all other postal products which have seen volumes stabilize at 2009 levels and it does not seem unreasonable to believe that demand could rise from that low level as advertising spending across all modes begins to increase in 2010 and 2011.   

The problem with single-piece mail is two-fold.  First, it is highly profitable and its loss reduces contribution to overhead that must be generated elsewhere.   Second, its decline is far faster than the rate of retirement of employees that process single piece mail.    Therefore, the Postal Service will face continuing excess capacity of employees, and especially employees working on shifts handling originating single-piece mail unless it plans to reduce its workforce to reflect the decline in demand in the mail that has the greatest processing requirements. Similarly excess capacity will exist in facilities and possibly equipment.   Now is the time to plan the network for single-piece volume in 2015 and beyond.  A network planned geared for this change would go far to convince stakeholders and Congress that the Postal Service is serious in its efforts to manage its business which will be needed to get the changes in retirement obligations and postal labor law that the Postal Service wants.