Sunday, June 26, 2011

Congressman Ross Open to Tradeoffs in Postal Reform Bill

In a set of tweets relating to a tweet promoting the Post, "Congressman Ross Clarifies His Position on Retiree Obligations," Congressman Ross states that

Dennis Ross

Congressman Ross Clarifies His Position on Retiree Obligations

In response to a comment on his Facebook Page, Congressman Ross clarified his position on prefunding and overpayments of retiree liability.

Doc Piper's Comment

Rep. Ross, if you truely denied the overpayment of USPS to OPM, you are intentionally lying. OPM collects it into their budget with no reguard to the overpayment. If you are an honest Representative you will admit the money paid and demand it into a trust fund, so that no taxpayer will have to supplement the USPS. But you canot deny the payment made and then refuse its return. That's a plain lie.

Congressman Ross's Response

Post #1

FERS, perhaps, but not CSRS. The prefunding requirements is in line with the number of retirees and the per person benefit cost per retiree. $11,000 per person at 500,000 retirees. The USPS IG says there is an overpayment, but the OPM denies the overpayment. I do not believe there is an overpayment into CSRS, especially since retiree numbers will continue to rise as will the obligations. As OPM correctly points out, it is easy for USPS to not want to prefund or claim an overpayment - if they are wrong, or do no prefund, and can't meet retiree benefit obligations, it isn't USPS that will go under, it is a liability of the taxpayer.

Post #2

In the end, if you eliminate taxpayer liability (which means from this day forward, no retiree cost or benefit will be backed by the taxpayer - since all current retirees are under the taxpayer umbrella), and the USPS stops prefunding, then. everyone who works for USPS today better hope their unions were telling them the truth about the financial solvency of the USPS. Because the only way you will ever eliminate prefunding, within the current failed USPS business model, is if unions and management agree to end the federal backstop.
Congressman Ross's first comment, "FERS, perhaps, but not CSRS" suggests that he would concede that there is a FERS overfunding.   This is a different position than what is contained in the Issa/Ross postal reform bill.   The difference needs to be clarified by Congressman Ross and Congressman Issa.
Congressman Ross's support of the OPM-IG's conclusions in the first Post over the conclusion of the USPS-IG and the Postal Regulatory Commission confirms that he supports measuring the liability in a a way that minimizes any overpayment and maximizes what the Postal Service must pay to cover its retiree liabilities.  As noted in a previous post this is a position supporting the interests of the creditor over all other stakeholders.  (See A Creditor's Plan for the Postal Service.)
The final sentence in Post #2, Because the only way you will ever eliminate prefunding, within the current failed USPS business model, is if unions and management agree to end the federal backstop is accurate.  Given the budget challenges, the only way the Postal Service would be able to fund its retiree health benefits at the same level as United Parcel Service and other firms that offer the benefit would be if they were no longer guaranteed by the Federal Government.  
 However, it should be noted that future Federal budgets and legislated levels of compensation could eliminate retiree health care benefits.   So it is not clear how secure retiree health benefits will be for postal or government employees who are starting a government career now right after high school or college.   (The Issa/Ross bill illustrates that Congress has the power to adjust wages and benefits of postal and federal employees so that if benefits offered federal employees now are eliminated in the future, they can be eliminated for postal employees either through law or arbitration decisions.
Congressman Ross's Response to this Post
My original tweet (the link takes you right back to this Post):

Alan Robinson
Did change his position on FERS overpayment? What else did he say about retiree payments?

Congressman Ross's response.

Dennis Ross
@ didn't change positions at all. even OPM says FERS is a diff story than CSRS. still, FERS "overpmt" is not in hand.

My respone to his.
Alan Robinson
@ Then why is a "FERS fix" not in your bill?

Is Privatization Worse for Labor than the Issa/Ross bill?

Congressman Dennis Ross made the following comment in a discussion on his Facebook page suggesting the alternative to the Issa/Ross bill is privatization.  The quote in full:

I have sat down with NALC, Rural Carriers, APWU and many others. I have met with the PMG on countless occasions. What your union wont tell you is, the status quo, will lead to privatization of the USPS in less than 5 years and ...a nullification of every contract. The current path of the USPS is financially unsustainable and for the last time, it has NOTHING to do with prefunding. Those are the facts. 

Congressman Ross is correct that the current path is financially unsustainable.  It is unsustainable if retirement liabilities and payments are adjusted and it is even more unsustainable if they are not.   The problem is the Postal Service is a transportation company and has to have financial goals similar with other transportation companies to be a sustaining enterprise.   The Postal Service cannot meet a standard financial target without addressing the retiree payments and unless it can operate with a standard financial target it will never have the cash necessary to make investments needed to serve its existing and future customers.  

Also, Congressman Ross in his bill confirms that an adjustment is needed by adding debt to the Postal Service's balance sheet that is used to pay its retiree obligations.   Technically, what is happening is the Postal Service is borrowing money from the Treasury Department to pay the Office of Personnel Management which deposits the money in the Treasury Department.   Metaphorically , the Treasury Department is doing little other than shifting money from its left pocket to its right.   By increasing the Postal Service's debt, the Issa/Ross bill "reduces" the Postal Service's problems by changing a cash obligation into additional debt that may or may not be paid in full.

He is also wrong that privatization means nullification of every contract.   Labor contracts that the Postal Service now has will change regardless of whether it is privatized because changes in demand for services has been so great.   Nullification of Postal Service labor contracts will occur only if the Postal Service enters bankruptcy as a private corporation.   (This does not mean that contract provisions will change in negotiations but it does not mean they will be nullified outside of bankruptcy.)

Privatization offers two benefits for Postal Service employees that the Issa/Ross reform does not.   1) Privatization allows for the infusion of private capital as well as cash generation opportunities from the sale of assets that can make Postal Service employees more productive, allowing the Postal Service to pay its employees more than they would have otherwise.   2) Privatization creates the possibility that employees will receive a share in the company in return for changes in labor contracts and compensation levels.  Trading reductions in compensation and changes in workrules for an ownership stake is common when negotiating changes in labor agreements inside and outside of labor agreements.   The opportunity for employees to receive a share of the business in return for changes in contracts does not exist as long as the Postal Service remains a government entity.

A Creditor's Plan for The Postal Service

The Issa/Ross Postal Reform Bill presents a future for the Postal Service and stakeholders that serves the interests of two of the Postal Service's creditors: the Office of Personnel Management, to whom the Postal Service currently must make payments for retiree benefits and the Department of Labor, which administers workers compensation programs.   The bill forces changes in Postal Service operations, labor contracts, and rates all designed to ensure that those payments are made according to the schedules currently in law.

If the Issa/Ross Postal Reform Bill is signed into law, the Office of Personnel Management and the Department of Labor face minimal risk that the Postal Service will not pay them.  For the Office of Personnel Management and the Department of Labor this is a good bill, as they will likely get 100% of what the law now states they are owned regardless of what happens to the Postal Service and postal market once the obligations to them are paid.

The Issa/Ross Postal Reform bill does not leave the Federal government as a creditor off the hook.   By expanding the Postal Service's borrowing authority by $10 billion, the bill increases the risk facing the Department of the Treasury.  Given the losses and cash needs of the Postal Service, by 2020,  the Department of the Treasury will then hold $25 billion in Postal Service debt with no clear indication as to whether demand for Postal Service's products will give it the revenue needed to pay off that debt.

By increasing the debt held by the Department of the Treasury, the Issa/Ross Postal Reform bill creates a conflict between two of the largest creditors (i.e. the Office of Personnel Management and the Department of Labor) and other large creditor, the Department of the Treasury.    This bill should force the Department of Treasury to become more involved in postal reform policy as repayment of Postal Service debt requires either a business plan that creates a financially viable Postal Service or a plan to liquidate assets as the delivery and other services of the Postal Service are wound down over time.

By focusing on meeting the needs of two of the creditors, the Issa/Ross downplays the federal government's ownership role  as it relates to the Postal Service.  By ignoring the ownership role, the bill has little interest in maintaining the value of the enterprise so that it can thrive as either a government entity or private corporation.   

Finally, the Issa/Ross develops postal policy that takes the Postal Service in a different direction than nearly every other government has taken then national postal operator.   In most of the world, the national postal operators have been put on a path involving corporatization and eventually privatization.  In these countries, the goal is to ensure that there is a postal operator that can operate as a viable business that can attract private debt and possibly equity investors as the best way to develop the digital and physical communications delivery infrastructure as well as a parcel delivery infrastructure necessary for the growth of on-line and mobile retail sales.

Instead, the Issa/Ross bill takes the Postal Service in the opposite direction.   Over time the Postal Service will increasingly look more like any other United States government entity and less like the businesses that handle other parts of the print and parcel delivery supply chains or the enterprises that run the national posts outside of the United States.  


Thursday, June 23, 2011

FedEx Conference Call Transcripts

Seeking Alpha has published the full transcript of the FedEx 4th quarter and year end conference call that was held yesterday.   Anyone interested in the express, parcel, air freight or trucking markets should read the full transcript. 

Below are some excerpts that illustrate how e-commerce is changing FedEx's business.

From the opening statement of Alan Graf, Executive Vice President and CFO

Looking now at the Ground segment. Revenues climbed 15% to $2.26 billion, while operating income soared 31% to $417 million. Operating margins hit an all-time quarterly record of 18.4%. Revenue per package increased 7% primarily due to yield management actions. And package volume grew 6%, driven by increases in the business-to-business market and Home Delivery service. SmartPost average daily volumes surged 24% due to the growth in e-commerce, while yields increased 8%.

At Ground, we expect strong operating income growth due to efficiency improvements such as automated operational planning systems and improved transit time across numerous shipping lines. Segment revenue growth will be led by a continued growth in commercial, Home Delivery and SmartPost volumes resulting in additional market share gains. SmartPost is expected to continue to strengthen its market position by continuing to leverage the FedEx Ground network to insert at the optimal United States Postal Service entry point. Yields for FedEx Ground are also expected to improve as a result of our yield management initiatives and improved market penetration for our FedEx Home Delivery services.

Comments on Economic Growth from Mike Glen President of FedEx Services

There is no question that we're in a soft patch right now largely due to transitory issues such as the Japan supply chain disruptions. Obviously, we had a tremendous amount of weather impact, and the oil prices that were on the rise during the quarter. So we had some economic challenges during the quarter. We expect the GDP to accelerate through the calendar year. Our projections on a quarter-by-quarter basis for GDP in the second quarter is 1.9%; third quarter, 3.5%; and then the fourth quarter, 3.4%. So for calendar '11, we're anticipating 2.5% GDP growth; and in calendar '12, 3.0% GDP growth, with industrial production around 4.2%, 4.3%.

Comments on how SmartPost serves e-commerce customers from Mike Graf

SmartPost is a key part of our residential delivery portfolio. Obviously, there are a lot of very light weight items that move to residences that are perfect for the SmartPost network, which is why we invested in that network and have continued to invest in that network going forward. It gives us a distinct competitive advantage because it offers the right price point for the right value delivery system and complements our Home Delivery network very well. It allows us to focus the Home Delivery network on heavier packages, and many of which that require unique features that only FedEx offers such as day-definite delivery, appointment delivery and things of that nature. So it is a strong combination of services, complemented by our Express residential delivery services, which offers unique value for e-commerce customers.

Comments of Fred Smith on Consumer Spending and the peak season

It's certainly early to really start that. We have started planning and having some conversations with customers, but they have not released their forecasts. I would say the encouraging news on that front as oil prices subside, we do anticipate consumer spending to be stronger in the second half of the year. So hopefully, we'll see some of that going into peak season, but it's a bit early to make that call.

Comments of Mike Glen on Business Growth and Consumer Spending

But obviously, oil prices was a big part of that, disruptions in the Japan supply chain were a big part of that. While that is recovering, we still are seeing impacts of that and we're not back up to speed in that regard. The sentiment on the consumer side continues to be an issue. As a result, our forecast for consumer spending in the first half of this calendar year is lower than it is in the second half as we believe that, that will improve in the second half of the year. So that's been the biggest issue. Those have been the biggest 3 factors that we've been saying that have resulted in this soft patch.

Is Postal Compensation too Low? In Manning, ND It Is.

Arguments over what is a competitive wage for a Postal employee is a political hot potato.   A recent article in the Dickinson, ND Press indicates that determining when a wage level is too high or too low is a lot more complicated than the arguments in Washington about postal employee compensation might suggest.

Manning, ND is losing its Post Office.   Manning is an unincorporated community that is the county seat of Dunn County North Dakota.   The population of Manning is 74 and Dunn County has 3,536 residents in 2010.

The closing of the Manning Post Office illustrates one of the problems in determining whether compensation is too high or too low.   In Manning's case,  job opportunities in the community are sufficient to make a small town postmaster job unattractive at compensation levels that the Postal Service can afford (or maybe not afford) to pay.   The following except from Dickinson Press story is telling.

“Everyone is concerned about the post office closing,” USPS Manager of Post Office Operations Wanda Cleveland said. “We just don’t have anyone to run it.”

The current postmaster, Cheryl Borth, said that she has been looking for a replacement for over three years and is retiring June 30. She added that trying to fill the position at this point might be a lost cause.

“No one has applied for the position,” she said. “If we got someone to apply they would have to go through the proper two-week training and then work in the office for at least a year.”

Cleveland said the office would cease operation at noon on June 30.

Resident Curt Kralicak said that it would be nearly impossible to attract applicants with the wages being offered, adding that area fast-food restaurants offer more competitive wages. The position was advertised for $9.45 per hour.

Borth said she “lost hope early” about filling the position because of the low pay.

The story clearly shows the challenge of offering the same wage structure nationwide as well as making broad statements about Postal employs being overpaid.  North Dakota is experiencing an employment boom due to the energy industry and a Postmaster job in a small town may not be as attrctive as it was when the current postmaster took the position.    A different story may be found in rural West Virginia or Mississippi where job prospects are much more difficult.  


The loss of a Post Office in Manning will leave one Post Office in the county, in Kildeer, ND.  Kildeer is the largest town in the county with a population in 2010 of 751.  Kildeer is less than 10 miles away and also has the closest supermarket auto dealer and medical clinic.

Another Post office is in Dickinson, ND, around 23 miles away where retail services are available from United Parcel Service and self service Express boxes can be found for both FedEx and United Parcel Service. 

Wednesday, June 22, 2011

Representative Ross Indicates that Issa/Ross Bill will have no Change in Retiree Payments

In a tweet, Representative Dennis Ross hinted that the bill that Representative Darrell Issa and he will introduce tomorrow will not contain any change to the payment schedules for retiree obligations that are now contained in all other postal reform bills.
Dennis Ross

, this is why you prefund retiree benefits. | "no one else does..." and this is where they are now.
While these provisions will save the Postal Service money, it is unlikely that they will reduce Postal Service costs sufficiently and sufficiently quick to eliminatethe Postal Service's deficits and allow it to continue to make the retiree healthcare payments.   To do that, Representatives Ross and Issa may need to include a provision in their bill to institute a reduction in force (RIF) of around 10% of Postal Service employees to reduce payroll quickly to match income and possibly a provisions to reduce Postal salaries and/or benefits beyond those proposed by Senator McCain and others and that these cuts would include cuts in compensation to both employees that are and are not covered by labor agreements.    

A reduction of 10% of the Postal Service Workforce reflects the workforce cuts that Representative Issa, Ross and Chafitz introduced in HR 2114.   While that bill would reduce the the Federal workforce over 3-4 years, to get the cost savings required, the Postal Service would need to reduce its workforce almost immediately by 10% to get the cost savings needed to reduce costs to break-even levels.  It is unclear how far or how quickly cuts in salaries or benefits could be implemented to employees who are and are not covered by labor agreements.

USPS Everywhere Locator Not Up to Snuff.

I just checked out the USPS Everywhere Locator and quickly identified four problems that keeps it from being user friendly.

Locations are missing

Stamp Consignment Locations - Stamps are sold at all Giant supermarkets in the Washington DC area.  However, the locator does not include Giant supermarkets on Blair Road in Silver Spring, or University Boulevard in Wheaton, MD.   It does include the Giant supermarket in Bethesda.   

Post Offices are Missing - The Bethesda, MD Post Office is not identified in the locator.  If you switch the view to satellite and zoom in to the metro stop, you will see that Google knows where the Post Office is even if the Postal Service does not.

Locations are Misidentified

Post Offices are Misidentified - Correction 6/23/2011 10:05: The website identifies the Arlington Road Postal facility in Bethesda, Maryland as a full service facility.  In fact it is only a carrier depot.  The Post Office retail facility is the missing facility listed above.  Correction:   The Arlington Road postal facility in Bethesda, MD is a Post Office.  However patrons of busy shopping centers on both sides of Arlington Road would have a great deal of difficulty recognizing that the Arlington Road facility is a full service Post Office.   (I have been driving by it for over 15 years and never knew there was a retail counter inside.)

Pinpoints are in Wrong Location - The National Naval Medical Center Post Office has its pin on Bethesda Ave in Bethesda, MD   The actual post office is around a mile away on Wisconsin Ave where the National Naval Medical Center is actually located.   Anyone looking for a Post Office on Bethesda Avenue will find some fine restaurants, a bike shop, and a Mercedes dealership but no Post Office.

Services Contract Locations Offer Cannot be Easily Identified

The red pins on the map represent non-USPS facilities.  They do not differentiate between supermarkets, drug stores, and banks that only sell stamps, and other locations that offer parcel shipping and other services.  There are two options to fix this
  1. Color locations that sell parcel services differently than places that only sell stamps.   This is similar to what the United Parcel Service website does.
  2. Let customers choose what they want to do, buy stamps, ship a parcel, get a passport at the same time they pick an address or zip code.   Then when the pins pop up all the locations identified will offer the service that the customer wants.
Maps are not Necessarily the Easiest Way to View the Data

Both UPS and FedEx use a combination of maps and lists to view the locations nearest an address or zip code.   USPS Everywhere Locator should do the same for its web application and possibly its mobile application.      Lists with distances from a zip code or an address is helpful for finding a place to buy postal services when one is not familiar with the area.  For example, look at how the Allpoints ATM Network displays its locations to see how a combined approach would work.   Pins are great when you have at least a minimum understanding of where the pins are and if all of the pins provide the service that the user wants.  (see item 2 in the previous section.)  but a list that says how far a location is from an address might be even more helpful.  

One challege is that different approaches may be needed for web-based and mobile applications.   Clearly there is room for improvement in how data is displayed to make it as user friendly as possible.

Fixing this website is not hard (although it may not be cheap), so lets hope the Postal Service gets version 2.0 up and running soon.

FedEx Earnings and SmartPost and Parcel Select

FedEx announced its earnings today.   The Associated Press reported that earnings were ahead of analyst expectations.   FedEx is forecasting strong earnings growth in its First Quarter, 2012 (which starts June 1, 2011) and all of its FY 2012

 FedEx Ground delivery volume grew 6% in the quarter which is stronger than total industry growth.  This growth was paced by FedEx SmartPost where "average daily volume increased 24% due to growth in e-commerce and gains in market share. FedEx SmartPost revenue per package increased 8% primarily due to growth in higher-yielding services and increased fuel surcharges."

Since 2008, FedEx SmartPost has grown from 4.9% of FedEx Ground Revenue to 7.4% of Ground Revenue in 2011.   During the same period, FedEx SmartPost has grown from 15.5% to 27.7% of shipments that FedEx Ground picks up from its customers.

In the conference call a FedEx executive on the call  made the following statements:
  • "Smart Post is a key part of a residential delivery portfolio.  
  • There are a lot of light weight items in that network.  
  • It gives us a competitive network. 
  • It allows us to focus our home delivery network on heavier items and items that require special features such as day definite or time definite delivery.
When a transcript of the statement is available later today,  the full statement will be added to the blog as and the person who made them will be identified.


Implications for the Postal Service

FedEx's success with SmartPost raises questions about the success of the Postal Service's Parcel Select and Parcel Select Light products.   Clearly FedEx's volume is growing faster than the Postal Service's reported volume.   FedEx SmartPost appears to be taking market share away from other parcel consolidators that drop parcels at postal facilities.  Also, the growth of FedEx SmartPost suggests that the Postal Service may have some pricing power in its parcel select products, particularly in terms of delivering light weight parcels for more remote locations, that it needs to explore as it tries to maximize profits from its parcel products. 

Tuesday, June 21, 2011

The Death Spiral: Could it Be Driven By Service Quality as well as Costs

The previous post, "Businessweek fires the Postal Service," identified a  recent effort of a major mailer to switch to alternative delivery.   Previously, this blog has noted that Valassis has expanded its use of alternative delivery for saturation advertising in the post, "Is it time to Choose Alternative Delivery."  The Businessweek move may be more significant for four reasons:
  1. it represents the first time in over three decades that a non-saturation mailer has decided that alternative delivery is a better delivery option on a service basis for a large number of its recipients;
  2. it illustrates that the return on delivery costs is affected by service quality and is not just price driven; 
  3. it represents a shift of volume from the Postal Service's highest income recipients; and
  4. it illustrates why the the title of the last Congressional Hearing on the Postal Service, "Postal Infrastructure: How Much Can We Afford?" asked the wrong question.
Service Quality Matters

Businessweek illustrates that there for print to be competitive in the world of digital content, there is a minimum level of service quality that a print delivery service must meet to be competitive.   The earlier critical entry times, inconsistent delivery service, and the potential loss of Saturday delivery are all examples of service quality factors that make the printed Businessweek product delivered by the Postal Service less competitive than its other print competitors and digital content.

To the extent that financial challenges force cost cutting that affects service, the most service driven customers will leave.    This is no different from what happens with the railroads prior to bankruptcy as they delayed the capital investments to meet the needs of customers even though rates were held down by rate regulations by the Interstate Commerce Commission.

This is not to say that if the Postal Service charges 20 cents per delivery and the competition is $1 that the delivery firm will chose an alternative means of physical delivery.  It means that the print delivery customer may be willing to pay 25, 30 or 40 cents to get the service that they require for print delivery from any provider and decide to shift customers that cannot be served via print delivery at a reasonable price to its digital offerings.   

Businessweek also illustrates that service quality for "Periodical Mail" is not identical.   If Hot2C service is required by certain publications, then that is a very different product than standard processing of periodicals, and periodical mail requiring tighter delivery standards needs to be handled as a different product than those periodicals that do not need such service.  

Similar differentiation most likely exists among Standard mailers.   Many standard mailers have specific in-home dates that matter precisely.   Others have less concerns about when the mail piece arrives.    These two groups of Standard Mail customers should be treated as different classes of customers to ensure that they get the service that they require at a price that distinguish the levels of service.   

The mail product for customers with specific delivery dates should be shifted to a defined delivery day product with the delivery date scheduled in advance so that local managers can schedule employees to meet demand. In this way the Postal Service would compete directly with other advertising media that can promise specific delivery dates.   (This is very different from First Class Mail that has delivery standards but not scheduled delivery dates.)   The less time conscious Standard Mailers can continue to be viewed using the traditional view of Standard Mail as deferred mail

Return on Delivery Cost Matters

Businessweek's focus on service first, and cost second illustrates that what matters is the economic return of delivering a printed mail piece.   As noted above, the delivery price must include delivery on the day that ensures that the  mail piece has a positive return.   A Businessweek delivered on a Monday or Tuesday has a much lower return to Bloomberg than one delivered on Friday.   The content is less fresh and therefore the advertisements are less likely to be seen.  

Price does matter but if the weekly magazine does not arrive on Friday or Saturday, or the advertisement does not arrive before the sale, the election notice or campaign advertisement doe not arrive before the election its value to the sender is less or even zero.   Unless the Postal Service can ensure that its service quality meets the service needs of its commercial mailers, it will not provide a delivery service that makes print a competitive form of communications.   This will speed the shift of recipients to digital delivery regardless of the how low the Postal Service's rates are.

Cherry Picking of Customers

BusinessWeek's shift of subscribers illustrates the ultimate form of cherry picking.    It shifts customers from not just whole zip codes but from portions of zip codes.   In many ways, the shift may come very close to shifting volume from individual carrier routes to alternative delivery.

The problem for the Postal Service is that the loss of volume will occur at high income, high volume delivery stops.  These stops occur on routes where every stop now receives more volume per day on average and rarely if ever receives no mail.

While the Postal Service's and Postal Regulatory Commission's cost model estimate long run marginal costs associated with mail, they represent long-run marginal costs over all routes.  These models would suggest that the loss of Businessweek should be a net gain for the Postal Service as the cost of delivering periodicals are less than revenue.  

However, Businessweek is shifting volume from the Postal Service only on the highest income, highest mail volume routes.   As such, the loss of Businessweek will have minimal if any impact on delivery or transportation costs of the Postal Service and only affect processing and other non-capital related costs associated with handling the lost pieces.  As such, the loss of Businessweek will likely increase losses at the Postal Service rather than reduce them as the cost models would project.

Cherry picking of customers raise questions about the future of the Universal Service Obligation.   Clearly, alternative delivery will deliver to Potomac, Maryland, the Hamptons in New York, and Beverly Hills in California.  Those who live in more modest surrounding are less likely to see their print communications switch to an alternative print delivery service and instead they will be encouraged to shift to digital delivery.   

The problem of Cherry picking illustrates another problem facing the Postal Service, uniform pricing.   Once service issues are resolved, the Postal Service will need the freedom to charge different rates depending on the distribution of mail pieces sent by a commercial mailer.  The cost structure of handling Businessweek's periodicals is different than the cost structure of handling delivery of Time, Lucky, Christianity Today or ESPN Magazine due to differences in the distribution of recipients of these publications .    Regional pricing is used by Royal Mail, and shipper specific pricing is used by United Parcel Service, FedEx and all other delivery firms.  

Adjusting to cherry picking competitors is not only a Periodical Mail issue.  To survive, the Postal Service will have little choice than to price according the costs of individual commercial customers.   Continuation of uniform prices for commercial mailers is unsustainable if the Postal Service is to remain a self sufficient enterprise that provides universal service.

Postal Infrastructure and Its Customers

Over 90% of all mail is sent or received by businesses, governments or non-profit organizations.  These entities use mail because it provides a positive economic benefit to their enterprise.  If alternatives can provide a bigger impact at the same price, or the same impact at a lower price they will chose it.   The service problems facing Businessweek, illustrates that the Postal Service as an enterprise has to have the physical, information technology, human capital, and intellectual property assets to meet business needs or the customers that generate 90% of its revenue will go away.

The fact that decisions to invest in the Postal Service infrastructure need to reflect business decisions and not political decisions is well known.   Questions regarding location of mail processing and retail facilities using considerations other than whether the investment improves the return on the postage paid my the Postal Service's customers unless local, state, or federal government entities are willing to subsidize the Postal operation.

The question that The Subcommittee on Federal Workforce, U.S. Postal Service and Labor Policy asked, "Postal Infrastructure: How Much Can We Afford?"  focused on the political question.   It is also couched in a manner that one might ask about other government programs,  such as

  • How many national parks can we afford?
  • How much medical care can we afford to offer senior citizens or children? and
  • How much military spending can we afford to ensure that that the United States is safe?
The problem is for Businessweek and all other commercial mailers, the Postal Service, while a semi-government entity, is not a government entity to them.   It is instead a critical part of the print delivery supply chain.  Its ability to invest capital to create or buy the collection, processing, transportation, and delivery network that meets the print communications customer's needs will determine the ability of the rest of the supply chain to survive in the face of competition from traditional, digital and social media competition.

Creating a Postal Service that can meet these needs is going to require significant capital investments the scale of which are unknown.    The delivery fleet requires replacement at a cost of around $7 billion.   Additional expenditures are needed rather rapidly to:
  • replace processing equipment that may be reaching the end of its useful life just as delivery vehicles have and to meet the needs of processing strategies that minimizes the time that mail spends in processing plants to allow for longer times in trucks and other forms of transportation,
  • restructure the processing network beyond just consolidating plants to reflect that not all plants are the right size or in the right location to meet service needs of customers and operations of fast turn-around processing operations,
  • install information systems needed to modernize retail operations, integrate track and trace operations with that of FedEx, UPS, and other parcel carriers, implement mail scheduling for time definite mailing, and improve management of postal operations;
  • replace existing costing systems to allow for bottom-up costs and customer-based contract pricing for all commercial customers;
  • cover transition costs including, retirement incentives, severance costs, training costs, transfer costs associated with rightsizing and restructuring the workforce to reflect the operating and skill needs of a more customer-focused, flexible set of employees.
Before, the The Subcommittee on Federal Workforce or any other Congressional Committee moves forward, they need to look at what the Postal Service means to the businesses that depend on delivery of communications and parcels.   This inquiry will clearly show that for these firms the Postal Service needs to be a business first or what they now deposit in the mailstream will move to digital, mobile or physical alternatives.   Second, Congress needs to look at how uniform pricing encourages cherry-picking and will speed the death spiral rather than retard it.  Finally, Congress needs to look at the Postal Service's capital and cash needs from a business perspective.   Only after this is completed, will Congress have a clue as to whether the Postal Service has or will have the resources as a government entity to meet the business needs of its customers with a particular focus on determining whether resolving the retiree healthcare issues in the Postal Service's favor would give it the cash and capital resources necessary to meet the needs of its commercial customers whose business will determine if the Postal Service can remain self sufficient.

Walmart vs. Amazon: Who Wins the Retail Future?

The following graphic from Minyanville illustrates how the shift in retail to online sales affects employment and commercial construction.   Amazon generates 1/12 the sales of Walmart and has 1/60 the number of employees.  Even if one assumes that subcontractors and delivery firms employ one person for every person employed by Amazon, the Amazon retail model requires fewer employees than Walmarts.

As far as real estate, the difference is obvious.   Amazon needs only its distribution centers.   Walmart needs both distribution centers and retail stores.   Amazon's model requires lower capital requirements to build selling space than Walmart, reducing construction spending as compared with the traditional retail model.  Amazon's model also moves jobs away from communities that are close to the ultimate consumers to the distribution locations that are further away. 

Walmart is trying to replicate Amazon's model and grow its on-line sales as brick and mortar sales stagnate.  Still as the chart at the bottom of the graphic shows, Amazon may eclipse Walmart's sales by the middle of the next decade.
Walmart Vs. Amazon2
Via: Online MBA

More Information on Trademarks

Here are some links to news stories using some of the new trademarks.

Authentidate, Inc. Signs Strategic Agreement With U.S. Postal Service to Provide Electronic Postmark Service

Wikipedia has more information:

Office Depot is the first national retailer to offer mailing and shipping options for consumers as an Approved Postal Provider — an initiative between the Postal Service and business partners to offer USPS products or services at vendors’ locations.

In Sacramento there are over 100 Approved Postal Provider locations in the 958 ZIP Code.

Postal Service Initiates ePacket Service with Hongkong Post

Parcel Select Lightweight is a new subcategory within the existing competitive Parcel Select Product category.

Monday, June 20, 2011

Businessweek Fires the Postal Service

Last week, Businessweek told many of its Washington DC customers that the Postal Service will no longer deliver the magazine.  Instead, the weekly magazine will use the Washington Post's delivery service to deliver the magazine early on Friday morning at the same time that it delivers newspapers.

In an interview, Bernie Schraml stated that Washington DC is the fourth market that Businessweek has turned to alternative delivery.  It started the shift in Philadelphia in December, 2010; followed by San Francisco in February, 2011 and Boston, MA in June, 2011.

Combined, alternative delivery now represents 10% of Businessweek's 850,000 subscribers. This shifts 4.42 million magazines from the mailstream annually.

Currently, Businessweek is negotiating with delivery firms in four additional markets which it hopes to bring on-line by the end of the year.   Mr. Schraml indicated that Businessweek is looking for distribution partners in other cities to expand the use of alternative delivery beyond the eight markets already in operation or under negotiation.  

Mr. Schraml indicated that the delivery company in two of the markets is The Washington Post and the Philadelphia Inquirer.  Businessweek is delivered by the newspaper delivery network early on Friday morning at the same time that the Friday paper is delivered.  The magazine arrives at the recipient's address in the same manner as the daily newspaper.

While alternative delivery has shifted subscriptions from the mailstream in four markets, not all subscribers in these markets receive their Businessweek via alternative delivery.   The contracts with delivery firms specify the 5-digit zip codes that the delivery firm delivers to, and in some cases the portion the portion of the 5-digit zip code that it serves.   All other recipients continue to receive their magazine by mail.   Even with the cherry-picking of delivery points, the alternative delivery firms have made a major shift in volume.  Mr. Schraml expects that contracts in other cities will be similar with the delivery firm delivering magazines to a significant portion of Businessweek's subscribers and the Postal Service delivering to only those subscribers that alternative delivery firms cannot reach.

Mr. Schraml indicated that the primary driver in shifting to alternative delivery is service.  In order for Businessweek to compete with the Wall Street Journal's Saturday edition, Barron's, and the Sunday New York Times as well as its own and competitor's web-based content, it needed to arrive on the same day or before these competitors arrived.  Therefore, Businessweek requires delivery on Friday or Saturday with as late a drop-off time as possible.  In cities where Businessweek has begun alternative delivery, Mr. Schraml stated that delivery quality was better than both Postal Service standards and his experience with Postal Service delivery.   The newspaper delivery networks have delivered 100% of its issues on Friday morning.  With the Postal Service, only 30-35% arrived on Friday and no more than 69% were delivered by Saturday.

The alternative delivery networks also offered Businessweek greater flexibility as their critical entry times were no earlier than late afternoon Thursday, and in one city, Friday delivery could be made with entry as late as just before midnight the night before.  Critical entry times for the Postal Service are currently earlier than that of alternative delivery, and starting July 1, they will become even earlier putting the Postal Service at even a larger service disadvantage.   (See Dead Tree Edition)  The potential loss of Saturday delivery creates further problem as that could push the share of magazines with entry into the mailstream on Thursday and delivered before the weekend below 50%.  (For Businessweek and other publications that need late critical entry times due to competitive concerns, earlier critical entry times and the loss of Saturday delivery could make their print product noncompetitive.)

Businessweek's focus on service as the primary motivator for alternative delivery is different from the driver of alternative delivery over two decades ago.  The larger periodical publishers created a nationwide alternative delivery network in 1990 called Publishers Express with a goal of delivering periodicals at a lower cost than the Postal Service. (Pittsburgh Press, Pittsburgh, Pennsylvania) October 29, 1990, pages B5, B7)  Publishers Express acted as a middleman between the publishers and printers and the local delivery firms in both large and small metropolitan areas. This alternative delivery network went out of business in 1996 (Lawrence Journal World, Lawrence, Kansas, February 28, 1996, p. 4D) as it met neither the profitability nor the service requirements that its publishers/owners demanded as well as efforts of the Postal Service to counter the competitive threat.

When asked about price, Mr. Schraml indicated that the total cost of alternative delivery was competitive or less but he did not provide specific cost information.  

He did indicate that alternative delivery had lower preparation costs for Businessweek as addresses were not printed on the magazine, magazines did not have to be combined in bundles to reflect presort requirements and magazines could be loaded on full pallets for alternative delivery as opposed to partial pallets for the Postal Service.  The difference in pallet size reflect the presort requirements of the Postal Service.   The difference in mail preparation and palletization lowers Businessweek's printing and transportation costs.  

Mr. Schraml indicated that he is interested in talking to other publishers about his experience and potential delivery firms about delivering Businessweek in other markets.  Given the speed that he has moved so far to shift subscribers to alternative delivery,  he should be able to shift well over half of his subscribers to alternative delivery within a year.  

Impact on the Postal Service

For a commentary on the impact on the Postal Service see:

The Death Spiral Could It Be Driven By Service As Well As Costs

What do USPS Trademark Applications Tell About the Future?

Trademarks are used in advertising and marketing.  Followers of companies known for their marketing prowess follow these applications to get hints of new products.  The following is a list of trademark applications that the Postal Service has filed with the United States Office of Patents and Trademarks since February 2011.  Please comment on what you think this means for the Postal Service.  I have put in bold those that sound new to me.

  1. 85345599                PRIORITY MAIL RETURNS              
  2. 85345584                USPS RETURNS           
  3. 85069794                US POSTAGE PAID        
  4. 85121633                WE'RE EVERYWHERE SO YOU CAN BE ANYWHERE
  5. 85322722                USPS BLUE EARTH        
  6. 85252023                POSTAL REGIONAL GROUND         
  7. 85300712                EVERYWHERE I AM        
  8. 85172124                SEE IF IT FITS!        
  9. 85288878                COMMERCIAL FIRST-CLASS PACKAGE SERVICE         
  10. 85281028                EVERY DOOR DIRECT MAIL - RETAIL        
  11. 85312926                APPROVED POSTAL PROVIDER               
  12. 85308333                UNITED STATES POSTAL SERVICE U.S.MAIL          
  13. 85316561                PRIORITY MAIL REGIONAL RATE            
  14. 85315681                YOUR OTHER ADDRESS             
  15. 85314052                PRIORITY MAIL OPEN AND DISTRIBUTE              
  16. 85302130                POST OFFICE IN YOUR HOME AND IN YOUR HAND      
  17. 85281070                EVERY DOOR DIRECT MAIL - BMEU          
  18. 85279781                IT'S TIME TO RETHINK YOUR SHIPPING             
  19. 85034221                CRITICAL MAIL          
  20. 85304523                APPROVED POSTAL PROVIDER               
  21. 85322757                ELECTRONIC POSTMARK            
  22. 85322745                USPS ELECTRONIC POSTMARK               
  23. 85322733                UNITED STATES POSTAL SERVICE ELECTRONIC POSTMARK               
  24. 85155718                PRIORITY MAIL FLAT RATE        
  25. 85092549                PUTTING OUR STAMP ON A GREENER TOMORROW
  26. 85091695                PARCEL SELECT LIGHTWEIGHT              
  27. 85091723                POSTMARK AMERICA PASSPORT              
  28. 85269692                DE RING IN NEW WAYS            
  29. 85251941                DE RING TRUST          
  30. 85251730                EVERY DOOR DIRECT MAIL         
  31. 85253319                SAMPLING THROUGH THE POSTAL SERVICE            
  32. 85211936                USPS EPACKET           
  33. 85211923                EPACKET        
  34. 85204859                SECURITY: IT COMES WITH THE STAMP              
  35. 85203928                REPLY RIDES FREE
  36. 85203651                PARCEL SELECT REGIONAL GROUND          
So what new products does the list suggests may be coming?

  1. Priority Mail Returns - how does this compare to Priority Mail and other return services that involve private sector firms? 
  2. Approved Postal Provider -  This sounds like a name that will be used on signs and other marketing material relating to non-USPS locations selling postal services
  3. Parcel Select Lightweight - This sounds like a re-branding of Standard Commercial parcels.
  4. USPS Electronic Postmark and United States Postal Service Electronic Postmark - Is this a product in development?
  5. USPS Epacket and Epacket - It is unclear what product these terms could be associated with.

Sunday, June 19, 2011

Canada Post Strike - Impact Just as Projected

A Sun News story today confirmed the projections made in this blog over the past two weeks about the impact of the Canada Post strike.   The strike has shifted volume from Canada Post to competitors and has negatively affected the Canadian economy.  

Now here are the relevant quotes from the Sun News article:

Losses of Mail Volume

To Purolator:
Purolator even had several battle plans in place to handle the surge in customers that comes with a work stoppage.

"We considered an alternative in case orders increased even by 20%," said Roch. "The challenge for our logistics team is to make the process flexible enough to accommodate new customers without affecting the quality of our current service. So far it's working."

To Expedibus:
Expedibus uses passenger buses to deliver mail between terminals at low cost. It usually books up to 50,000 packages a month in different cities, but volume has doubled recently.

To United Parcel Service:
UPS has warned customers against flooding its network with mail.

"Since we cannot absorb all of (Canada Post's) intra-Canada volume, we will be limiting existing customers to a 10% increase in their normal daily volume," UPS said on its Canadian website.

To Electronic Delivery:
Irwin Kramer, president of the e-commerce firm iCongo, says the company's now using online solutions for its payable and receivable accounts.

"We no longer receive cheques from our customers and cannot pay our suppliers," he said. "Canada Post is not reliable."

Impact on the Canadian Economy and e-commerce
Sun news further reports Amazon and Chapters switch carriers resulting in delays in shipping.  This also more than likely increased shipping costs and either higher prices to cover more expensive
shipping or lower profits.

CNW reports that the Union Gospel Mission faces concerns about loss of contributions as 87% of contributions are made by mail

The Toronto Star reports that Beekeepers face challenges ensuring a strong honey harvest as well as pollination of fruits and vegetables if the strike continues as there are few alternatives for shipping live bees.

MSNBC is reporting that PinkCherry Adult Toys, an adult novelty firm is absorbing $1,000 a day in increased shipping costs so that it can maintain its free shipping policy due to the need to switch delivery carriers from Canada Post. 

These are just a small example of the economic impact of the strike and represent only those examples reported in on-line news services.   Clearly calls to other e-tailers, charities, and businesses would identify other instances of  increased shipping charges reducing profits of Canadian e-tailers and raising costs of Canadian consumers; slower contribution receipt to charities results in reductions in services provided by these organizations; and  slower delivery of bills and payments creating cash flow problems for Canadian businesses and households.    These impacts illustrate that while it is easy to say that Canada Post is obsolete, all it takes is a shutdown for a few days show how essential it still is.

Previous Posts:

Impact of the CPC Strike on the Canadian Economy

Canada Post Strike a Lose-Lose Proposition for CUPW

Household Formation Slowing: Good or Bad News for USPS?

In a recently released blog post, Mark Doms, Chief Economist, U.S. Department of Commerce commented on the increasing gap between population growth and household formation.   He notes that " though the slowdown in household formation coincided with the recession, as the economic recovery began and strengthened last year, household formation has yet to pick up."  Increased household formation results an increase in the number of delivery points and operating costs. 

A slowdown in household formation relative to the adult population results in more mail delivered per stop as each stop represents a slightly larger number of adults.   This trend should help the Postal Service as it reduces pressure to expand its delivery resources.

While pressure on delivery resources may be reduced, the continuing disconnect between household formation and population growth indicates economic strains that is bad for mail volume.   New household formation generate a significant amount of mail associated with utility, mortgage, and advertising that would not be sent if the person lived in a home/apartment already occupied by others.   Slower household formation may also reflect the economic challenges of individuals who are choosing not to establish separate households.   To the extent that mail volume is driven by advertising to individuals capable of buying, lower household formation suggests that the number of potential customers of advertisers may not be growing as fast as the adult population.

Going forward, even if employment levels improve over the next few years, there is little evidence that compensation levels will grow rapidly enough to reverse the trend of slower household formation.  In addition, the reversal of easy lending practices for first-time home buyers, will further slow household formation as individuals and couples save the 20% than many lenders are requiring for a down payment.   

The Postal Service and mailers have to follow this trend carefully to see if continues or reverts back to the pattern of the late 20th Century and early part of the last decade.   The Postal Service needs to look at how this trend affects the forecasts of the Boston Consulting Group and McKinnsey.   Mailers need to look at what they must do differently to ensure the effectiveness of their mailings that are sent to multi-adult households, and in particular multi-adult households that include children who live at home following graduation from high school or college.

Wednesday, June 15, 2011

Could Canada Post Just Stay Shuttered?

Canada Post announced today that it is halting mail delivery nationwide.  In a statement, Canada Post spokesman Jon Hamilton  stated "If we allow the uncertainty created by the rotating strikes to continue - and we've seen customers walking away from Canada Post - our ability to remain financially self-sufficient and not become a burden on taxpayers certainly is going to be in jeopardy."

The lockout by Canada Post is designed to put pressure on CUPW to modify its demands to the point that the the two sides can agree on a contract.   But what happens if there is no movement toward an agreement and the Harper Government does not force an agreement?

There are numerous examples in the private sector of similar impasses.   More importantly, the examples of similar impasses in industries facing declining demand due to technological or competitive factors clearly show that the longer the impasse lasts, the worse the prospects for the company and employees involved.   The best example is Bethlehem Steel, which shuttered during a similar impasse in union-company negotiations.   Similar stories exist in the U.S. textile, rubber and steel industries.  

There is a possible out for both sides but it may require Parliamentary action.   The out adds employee stock ownership as a way to bridge the differences,   Giving employees a share of Canada Post's success and profits may not be a panacea but it gives employees a share in the benefits that the Canada Post's proposed contract changes are expected to produce.  Delivery of print communications and consumer delivery of parcels will continue to have a role in the Canadian economy for decades to come and employee shares in that enterprise could generate real divends and capital gains.  Given the intractable nature of the impasse, and the propect of a much smaller Canada Post without a quick settlement, maybe its time for a solution that is not even on the table.

Tuesday, June 14, 2011

On-line Sales Share of Retail Sales Hits New High

The U.S. Census Bureau retail sales data released today showed that in April, the share of retail sales that are sold on-line or via a catalog rose to 20.3% 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 20.3% 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.)

April represents the fifth 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 18.5% 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 shift to retail sales from on-line and catalog merchants  may partially explain the decisions of 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.  

The Courier, Express and Postal Observer will post the proportion of deliverable retail sales on a monthly basis going forward. 

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.]

As many retailers, (i.e., Walmart, JCPenney, Target, Best Buy, Limited Brands (Victoria's Secret, Bath and Body Works) and Best Buy) that currently generate most of their sales from brick and mortar outlets now generate a growing but small proportion of their total sales from their websites, this proportion represents a conservative estimate of the share of deliverable retail sales that FedEx, United Parcel Service or the United States Postal Service are delivering.