Friday, July 29, 2011

Post Offices Currently Under Review

As an article in Auction Bytes notes, the Postal Service now has two processes ongoing that are or will examine whether Post Offices should be closed.   The Retail Access Optimization (RAO) Initiative has a list of nearly 3653 postal retail facilities.  In addition, there are 728 additional postal retail facilities that are currently under review for closure under existing processes.  The following chart lists the 13 states with the largest number of closures from both processes.  The chart shows that a standard process of identifying postal retail facilities that may be closed was further along in many states than others.
The following chart shows the states that have 20% or more of the postal retail facilities currently under review under the current process and are not part of the Retail Access Optimization process.

Postal Reform and the Debt Ceiling Vote

Last night, the House of Representatives put off a vote on Speaker Boehner's bill to cut the deficit and raise the debt ceiling.   An examination of Republican members on the The Subcommittee on Federal Workforce, U.S. Postal Service and Labor Policy and the full Oversight and Government Reform committee shows that Republicans that will be crafting postal reform legislation are among the most conservative members of the House of Representative. 

The vote on the Speaker's bill was put off because the Speaker could not convince 216 Republicans to vote for his bill.  Six of the seven Republicans on The Subcommittee on Federal Workforce, U.S. Postal Service and Labor Policy, that will have the responsibility for reviewing Postal Service reform laws are among the 26 or 27 Republicans planning to vote no.  While only 11% of all Republicans plan to vote against the Speaker, 86% of Republican subcommittee members plan to vote that way.

The list compiled by Think Progress is below with members of the subcommittee highlighted in red.
Republicans Committed or Leaning to Vote No 

1. Todd Akin (R-MO) [The Hill]
2. Justin Amash (R-MI) [The Hill] 3. Michele Bachmann (R-MN) [ThinkProgress]
4. Paul Broun (R-GA) [Call to office]
5. Jason Chaffetz (R-UT) [The Hill] 6. Jeff Duncan (R-SC) [The State]
7. Jeff Flake (R-AZ) [Twitter]
8. Trent Franks (R-AZ) [National Journal]
9. Phil Gingrey (R-GA) [Twitter]
10. Louis Gohmert (R-TX) [National Review]
11. Trey Gowdy (R-SC) [NYT]
12. Tom Graves (R-GA) [Twitter]
13. Andy Harris (R-MD) [Baltimore Sun]
14. Tim Huelskamp (R-KS) [The Hill]
15. Steve King (R-IA) [The Hill]
16. Jim Jordan (R-OH) [The Hill] 17. Jeff Landry (R-LA) [National Review]
18. Connie Mack (R-FL) [Politico]
19. Mick Mulvaney (R-SC) [The Hill]
20. Ron Paul (R-TX) [Call to office]
21. Dennis Ross (R-FL) [National Review] 22. Steve Southerland (R-FL) [RCP]
23. Joe Walsh (R-IL) [MSNBC]
24. Joe Wilson (R-SC) [National Journal]
25. Tim Scott (R-SC) [Fox News, 4:20PM]
26. Tom McClintock (R-CA) [KBFK Radio]
27. Michael Turner (R-OH)  (The Hill) who is leanning to vote no

Looking at the full committee, there are two members beyond those on the subcommittee committed or leaning towards a no vote. (No votes are highlighted in red on the list of members below.) Of the 23 Republicans on the full committee, 35% are either committed or leaningtowards a no vote.  This is more than three times the proportion of Republicans in the House planning to vote against the Speaker.

Oversight and Government Reform Committee
Chair: Darrell Issa (CA-49)
Justin Amash (MI-3
Anna Marie Burkle (NY-25)
Dan Burton (IN-5)
Jason Chaffetz (UT-3)
Scott DesJarlais (TN-4)
Paul Gosar (AZ-1)
Trey Gowdy (SC-4)
Frank Guinta (NH-1)
Blake Farenthold (TX-27)
Jim Jordan (OH-4)
Mike Kelly (PA-3)
Raul Labrador (ID-1)
James Lankford (OK-5)
Connie Mack (FL-14)
Pat Meehan (PA-7)
John Mica (FL-7)
Patrick McHenry (NC-10)
Todd Platts (PA-19)
Dennis Ross (FL-12)
Michael Turner (OH-3)
Tim Walberg (MI-7)
Joe Walsh (IL-8)

Thursday, July 28, 2011

UPS Comments On Postal Service's Financial Troubles

During its 2nd Quarter, 2011, United Parcel executives responded to two questions about how proposed changes in operations at the Postal Service would affect UPS's business.  Here are the questions and answers from the transcript provided by Seeking Alpha.

Question on Ending Saturday Delivery

John Barnes - RBC Capital Markets, LLC

Okay, all right. That makes sense. And then lastly, given how public the postal service's problems have become and with all the rhetoric anywhere from getting rid of Saturday delivery to 15 years from now going to 3-day delivery, whatever it may end up being. Have you seen -- is that uncertainty around their service creating any further opportunities on the parcel side now? Or do you think that, that bears fruit 2 or 3 years from now?

Kurt Kuehn - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Treasurer
I don't think it's a big issue in the short term. Most of the very deep integrated B2B business is not with the post office, and those are the ones where a long lead time would make a big difference in the supply chain. So they're focusing on finding their strengths and working on the last mile. We are collaborating with them and competing with them. Clearly, the post office have to make dramatic changes to improve their financials, but I don't see that as a big issue for day-to-day customers decisions.

Scott Davis - Chairman, Chief Executive Officer and Chairman of Executive Committee
Yes, John, I think the Saturday delivery is probably the most imminent issue right now for customers. And there are some looking for different solutions, so that could have a more immediate impact on us. If they do go eventually down the road from 5 days to 3 days, that changes the game pretty dramatically, but that's down the road.

Question on Closing Post Offices

Jeffrey Kauffman - Sterne Agee & Leach Inc.

I want to follow up on the question John asked with respect to the post office. There is an announcement just yesterday that the post office was going to close about 3,600 locations. On one hand, you compete with them on a number of services. On the other hand, you utilize parts of their delivery network. If the post office were to close 3,600 locations, is this a net opportunity for you? Would it be kind of a net push with some offset? How do you think about that?

Kurt Kuehn - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Treasurer
I think anytime a competitor pulls back capacity and access, it's an opportunity. So clearly, we will look at the gaps that are there, and we've got a wonderful footprint with the UPS Store and offering consumers and small businesses good access. So we'll look for opportunities where it makes sense. As Scott mentioned, the more dramatic their network changes, then the more opportunity. At the same time, we'll look for collaboration alternatives as the post office looks to outsource some parts of their network, maybe where they're not best-in-class, so it's a balancing of competing and cooperating.


These comments clearly show that operating changes that will come to improve the Postal Service's finances have business risks.  Finding ways to minimize these risks will be critical for the Postal Services survival

Wednesday, July 27, 2011

Politics of Studying Closing Post Offices

Closing a Post Office or processing plant has always caused blowback on Capital Hill.  The following two maps show where the Post Offices under study for closure and the results of the 2010 Congressional election using the traditional red for districts that elected a Republican and Blue for Congressman that elected a Democrat.   The two maps show that most of the Post Offices on the closure list that fall outside of the large metro areas are located in districts represented by Republican.  (Districts in urban areas are too compact to tell whether they are represented by a Democrat or Republican.)

Looking at voting results in the 2008 Presidential election by county developed by the Los Angeles Times further suggests that the closure of Post Offices in rural counties will generally vote Republican even in years that Democrats do particularly well.   Therefore, the voters who will be most upset about closing Post Offices in rural areas will bethose who regularly vote for Republican candidates. It should be interesting to see how this influences the shape of future reforms of the Postal Service.  In addition, the fate of rural postal services could become an issue in the Republican Presidential primaries, especially in Iowa which has so many Post Offices on the list.

The Post Office List: Maps That Explain the Impact

Yesterday, the Postal Service announced that it will be study closing 3,653 Post Offices.  The Washington Post has published a very useful map hat locates all of the Post Offices under study.  

This map shows that the Post Offices on the list are concentrated in certain regions.   Looking at a map of rurality developed by the Department of Agriculture that identifies counties by how rural they are shows what looks like a correlation between the more rural sections of the United States and Post Offices on the list. 

This can be seen by putting the two maps side by side.

Rural America is a prime target for Post Office closures because 1) populations have generally declined over the past few decades and sale of mail products will shrink as population declines; and 2) the non-farm income in rural America is less than in urban America and mail use is related to income. 

The next set of graphs show a graph that reports population growth by county in the past decade and the location of Post Offices being closed.  The graphs appear to suggest that the list may focus on communities that have lost population or have seen growth below the national average..

Doing the comparison on income is not as easy but the following graph of income by county would suggest that a correlation could be found between the income of the county and the location of a Post Office being on the study list.

Tuesday, July 26, 2011

House of Representatives Losing Post Offices

Today the Postal Service announced that the beginning of a study to close 3653 Post Offices.  Among the list are four on Capital Hill.
  • Capital Station
  • Cannon Station
  • Longworth Station
  • Rayburn Station.
For those not familiar with the geography of Capital Hill, the list includes retail stations located in each of the three offices in the House of Representative and one office located on the House side of the Capital next to the flag office.

The four Post Offices in the House of Representatives are run by the Postal Service due to the Post Office Scandal of the early 1990's.  If it turns out that these offices are money losing, then it would appear that the Postal Service has been subsidizing the administration of the House of Representatives for a very long time.

No Post Offices are slated for a closure study in the Senate as the Post Office in the Dirksen Senate Office Building is a contract station. 

Tuesday, July 19, 2011

On-line Sales Share of Retail Sales Hits New High in May

The U.S. Census Bureau retail sales data released last week showed that in May, the share of retail sales that are sold on-line or via a catalog rose to 20.5% of retail sales from merchants selling products that are sold both in brick and mortar stores, on-line or through a catalog. This means that 20.5% of all retail sales that could be delivered by FedEx, United Parcel Service or the United States Postal Service, are being delivered by these firms. (Details on how the proportion is calculated is at the bottom of this post.)
May represents the sixth month in a row that on-line/catalog merchant sales were more than 20% of sales of items that could be delivered to a consumer were delivered to the consumer rather than purchased at a retail store A year ago 18.8% of sales of items that could be delivered to a consumer were delivered. The following chart shows retail sales data dating back to 1992 as provided by the Census Bureau.  
The chart also includes an exponential trend, and for the statistical geeks, the trend equation and R-squared. The trend line illustrates that the shift to on-line retailing has grown exponentially since data was available with deviations occurring only around the two recessions in the period graphed.  The statistical properties of the exponential trend are improved insignificantly from last months trend.

The shift to retail sales from on-line and catalog merchants may partially explain the decisions of Borders, American Eagle, Gap, Lowe's and other brick and mortar retailers to close stores or stop expansion as the total dollar sales at brick and mortar outlets stagnates as on-line and catalog sales grow.

Explanation of Chart Data

The proportion illustrate in the chart represents the proportion of catalog and on-line sales estimated by the Census Bureau as a portion of sales at furniture & home furnishings (442), electronics & appliances (443), clothing & accessories (448), sporting goods, hobby, book, and music (451), general merchandise (452), office supply, stationery, and gift stores (4532) stores as well as on-line and catalog merchants (4541). [The numbers in parentheses are the NAICS codes used by the Census Bureau to classify businesses.]

Monday, July 18, 2011

The Clock is Ticking

In Washington, two clocks are ticking.   The clock associated with the debt limit will hit zero days, zero hours, zero minutes and zero seconds on August 2.  The clock associated with the Postal Service will hit the same point next year.

Earlier this year, Postal Service CFO Joseph Corbett stated that the Postal Service's zero hour will come in July 2012.  However, he noted that the date could come sooner or later depending on Congressional action, changes in economic growth, and changes in operating cost factors.

CFO Corbett's projection of a July 2012 shutdown date required the Postal Service to stop making its FERS annuity payments and default on its legal obligation to make a payment to fund its retiree health care liability.   He also assumed that the Postal Service will make changes in its retail and processing network currently under consideration as expeditiously as possible.   Finally, he assumed that the Postal Service could fully take advantage of the cost savings derived from the APWU contract, including cost savings that will affect Supervisors and Postmasters as soon as the law permitted.

What CFO Corbett, did not expect when he made his May, 2011 projection of a July, 2012 Postal Service shutdown was the slowdown in the U.S. economy.   Friday, Reuters reported that Goldman Sachs issued its second downward revision to economic growth since CFO Corbett's pronouncement.  The projection of economic growth has dropped from 4.0% to 1.5% in the quarter just ended (the 2nd quarter 2011) and its forecast for the 3rd quarter has dropped its GDP growth projects from 3.5% to 2.0%.    Goldman stated that it is currently reviewing its forecasts for the 4th quarter and beyond which suggests that it is not willing to make a projection beyond the current calendar quarter right now.   

Goldman is not optimistic regarding employment growth either as it projects that the unemployment rate will be 8.75% at the end of 2012.   The unemployment rate projection suggests minimal change in employment levels over the next 18 months.

Today, the mix of mail makes the Postal Service highly sensitive to changes in the economy and that sensitivity grows as it loses market share in the delivery of recurring bills and payments.  The dramatically lower forecasts of economic growth and higher forecast of unemployment suggest that CFO Corbett was highly optimistic in assuming the Postal Service would have sufficient cash to continue operations through July 2012.  The slower economic growth suggests that a new projected shutdown date will fall in the Spring of 2012.  CFO Corbett needs to tell postal stakeholders now what his current forecast projects.   

Tuesday, July 12, 2011

Bloomberg Businessweek Expanding Use of Alternative Delivery

Bernie Schraml, Bloomberg Businessweek's Director of Manufacturing and Distribution has told the Courier Express and Postal Observer that the magazine will more than double the number of weekly issues delivered by alternative delivery when the magazine switches delivery in the Los Angeles, CA, San Diego, CA, Chicago, IL, and Portland Oregon media markets in August.  With the addition of these four markets, Postal Service competitors will deliver around 20% of all of Bloomberg Businessweek's circulation, or around 170,000 copies every week. 

Mr. Schraml told the CEP Observer that additional markets, will switch to alternative delivery in September with the timing depending upon finalization of negotiations of with delivery firms.

Since the publication of the last article on Businesweek's switch to alternative delivery, Mr. Schraml stated that other periodicals and periodical associations have contacted him to get more information on both costs and service quality. Delivery firms have also contacted Mr. Schraml and he indicated that these delivery firms could allow expansion in markets beyond those that he expect will start in September.

With this expansion, Bloomberg Businessweek will use alternative delivery in the following markets at the end of August:
  • Los Angeles, CA
  • San Diego, CA
  • San Francisco, CA
  • Washington, DC
  • Chicago, IL
  • Boston, MA
  • Portland, OR
  • Philadelphia, PA

Tuesday, July 5, 2011

Is it Cheaper to Offer Early Retirement?

In a recent article in Sioux City Journal on the moving of mail processing from Sioux City, IA to Sioux Falls, SD, Jim Price, Sioux City Postal Workers Union Local 186 officer contends that, "Employees who would drive from Sioux City to Sioux Falls and back would include that drive-time as part of their work day."   The map below shows the shortest route from Google maps between Sioux City, IA and Sioux Falls.  The distance is 87.9 miles with most of the miles on Interstate Highway 29.   

View Larger Map

If Mr. Price is correct, the Postal Service will be paying employees that commute to Sioux Falls for 3 hours of driving time daily.  This makes little sense for the Postal Service or the employee.   [I urge readers of this blog to add a comment referencing Postal or employee contract documents that describe the basis for Mr. Price's comments.]  

If true, the Postal Service would be well served to offer employees in Sioux City and Sioux Falls early retirement.  This saves the Postal Service money in two ways.  First, early retirement would save the Postal Service $506 per week associated with pay for commuting costs.   Second, if a new employee is needed to fill a position that the newly retired employee would take, his/her compensation would be lower than the salary of the retired employee.   If the compensation difference between an employee at the top of the pay is $10 per hour, the Postal Service would save $400 per week to switch by replacing a retiree with a new hire.  

In total, offering early retirement would save the Postal Service around $900 per week.   In other words, the Postal Service would break even by offering a $15,000 incentive if the employee would retire 17 weeks (3 months) earlier than they might otherwise.   The savings would be larger if no new employee needs to be employed.  

This simple calculation suggests that any time a consolidation of plants would involve paying for any commuting time between two locations, early retirement incentives of $15,000 to employees at the consolidated plant community would be well worth it.   Given how quickly the Postal Service covers the cost of the retirement incentive, the Postal Service might even find it worthwhile to pay the incentives in one payment unless the employee prefers two payments for tax purposes.  

The savings from early retirement identified here raises two more interesting questions.  Could offering early retirement incentives in selected cities to APWU members and either not replacing these employees, or replacing them with lower-paid new hires reduce the Postal Service's expenses in fiscal year 2012?  Does the Postal Service have the cash needed to offer these incentives?