Concensus Economic Forecasts Now Lower Than Those Available When Last USPS Public Forecast Made

Here is the latest list of announcement of slower economic growth announcements:

Goldman Sachs trimmed GDP growth to 2.6 percent for all of 2011 from 3.1 percent.

JP Morgan  cut GDP growth to 2.5 percent annual pace in the second quarter of 2011 from the previous estimate of 3 percent.  This followed a cut in full year growth to 2.5% from 2.6%.  The small decline in full year GDP growth reflects a shift in auto sales from the 2nd quarter to later in the year once supply disruptions caused by the Japanese Earthquake are resolved.

Macroeconomic Advisers has cut their GDP growth rate from 2.8% annual pace in the second quarter of 2011 from the previous estimate of  3.2%.

The slower growth forecasts were generally made before new data on housing sales and consumer spending were announced that indicated that neither housing nor retail sales are experiencing robust growth.  

Why does this matter for the Postal Service?

The decline in First Class mail, and in particular statements and bills, increases the Postal Service's reliance on economically sensitive advertising and parcel shipping.    So not only does the Postal Service face declines in revenue from the product that has traditionally generated most of its revenue, the revenue that remains becomes more sensitive to the business cycle.

 If revenue will increasingly rise and fall with the business cycle, so must costs.    Contracts with employees, transportation companies, and other contractors that assume a steady demand for services over an extended period of time need modifications that will allow the Postal Service to modify schedules as demand changes. 

The Postal Service made this change with the new APWU contract, and will seek similar changes in its other agreements. 

Similar changes are needed in its highway and air transportation contracts.   If contractors are not willing to provide service allowing for such flexibility, then the USPS may actually find it cheaper to use its own employees who can work a flexible schedule to handle certain movements.

Finally, the Postal Service needs to be able to look at its processing plant network as less of a fixed asset and more as a sunk asset.   The optimal network today will be different from the one needed five years and ten years down the road.  The Postal Service most likely already knows that only consolidating into existing facilities produces both sub-optimal cost-savings and sub-optimal service quality.   However, lack of capital prevents the Postal Service from creating an operating network that will fit the volume and mix and mail that a Postal Service focused on serving economically sensitive customers need.

Marketing Mail in a Competitive Market

Third Sector reported the results of a TNT Post announced the results of a survey that it conducted in Great Britain on the effectiveness of mail for gaining contributions by mail.   The results illustrate not only why mail is an effective marketing tool for non-profits but also how postal operators in competitive markets work to expand sales.

Findings of the TNT sponsored study

• One-third of people who make donations to charity are prompted to do so by receiving direct mail from the organization.
• 57% of those who respond to mail appeals respond by mail.
• 87% of those who want more information get that information on-line.  Only 10% use the mail to get more information.

The results illustrate that even in an environment where potential donors use the web to seek information on a charity, mail plays a major role in getting donations.   In the article, both spokespersons for the Centre for Charitable Giving and Philanthropy and TNT Post about the importance of charitable organizations to use a multi-media strategy to solicit contributions.

What is unique about the survey is that it was conducted for TNT Post and and not the national post, Royal Mail, or for a trade association for direct marketers.  TNT is trying to differentiate itself from Royal Mail and a survey of the public is an inexpensive way to gain publicity for their service.

TNT Post's survey is particularly interesting once one looks at the websites of both the website of TNT Post's United Kingdom operations and Royal Mail.  Both firms provide nearly one-stop-shopping of all components of a direct mail campaign from design and printing, to delivery is done by Royal Mail, TNT Post or other delivery means, and analytics evaluating the effectiveness of the advertising campaign.

Based on what is happening in Great Britain, competition in the mail business in the United States could make it easier for advertisers that are hesitant to use mail or other forms of delivery of printed advertising to manage the process.  Clearly having multiple delivery companies marketing services could help expand the market.  The largest mailers will likely not need the services similar to those that TNT Post and Royal Mail are offering and continue to use the large printers to manage their needs

The United States market is not nearly as competitive as markets in Europe.   Restrictions exist as to what services the Postal Service can offer that would integrate delivery with all of the other activities associated with producing mail.   No company in the United States offers an alternative delivery network comparable to what TNT Post and other firms offer either.    Given that print fits well in a multimedia marketing strategy but is often shunned due to the production and delivery costs, it is worth posing two questions:

• Would print be better off in a competitive postal market? 
• How would the impact on economic growth if all aspects of printed advertising were sold in competitive markets?

Could a retail slowdown help mail advertising?

Today a number of stories illustrated the weakness in the consumer economy.

The Associated Press reported that consumer spending in July, the traditional beginning of the back to school season continued to decline in items other that food, gasoline, and automobiles.   is resulting in a below expectations back-to-school season "Sales were down 1 percent at department stores and also dropped at specialty clothing stores, furniture stores, hardware stores and appliance stores."

Bloomberg reported Both J.C Penney's and Kohl's, department stores that cater to a broad cross-section of American consumers both reduced guidance in the third quarter. (July-though September) "J.C. Penney is counting on consumers doing their back-to-school shopping later this year as they shop closer to the start of the school year."   The lowered earnings guidance and reliance on later season sales suggests that a higher share of back-to-school across all retailers will be sold at a discount and greater promotional activity (i.e. advertising across all modes including mail) will be required to induce consumer spending.

Another indication that retailers may have anticipated stronger retail sales than are now developing is the continuing growth in both domestic and international intermodal rail volumes.  A recent W.H Blair analysis reports the following:

Absolute [rail] intermodal volumes at 2008 levels, +20% yoy for week 31 (+0% vs. 2008). 2Q's seasonal momentum has continued into 3Q. Intermodal volumes to end [of] July / begin[ing of] August were 2% above mid-June volumes, modestly better than traditional seasonal 1% improvement; improvement was realized within both international and domestic lanes. We expect both domestic and international growth to continue given ongoing domestic truckload conversion, rebounding ocean freight import volumes and modest economic growth. 

So what does this mean for the Postal Service and firms trying to sell mail as an advertising media?

Now is the time to start contacting retailers before they realize how serious their need is likely to be. this is particularly true for smaller retailers that have the least sophisticated sales tracking systems that most major chains now have.  Now is the time to develop ideas for using the mail to boost sales earlier in the season to reduce the risk that items in the supply chain from overseas suppliers will need to be sold at a large end-of-season discount and begin presenting these ideas to potential customers.     Finally, now is the time to start talking to retailers about the need to plan print purchases in order to ensure that the print capacity they need is available when they will need it.  

USPS: February Financial Results, Still Not Good Enough

In February, the Postal Service continued to show financial results that were significantly better than plan and slightly better than last year.   Its results reflect a more robust advertising environment that resulted in the first month of growth in Standard mail volume in revenue this year and a smaller decline in periodical revenue than volume that most likely indicated that periodicals in February had more advertising pages per issue than a year earlier.

The results for February continue to illustrate the risks going forward for the Postal Service.  The continuation of high single digit declines in First Class mail at a time that advertising is flat if not growing, suggests that the shift of transaction and correspondence mail to digital formats now occurs at a rate faster than what occurred before the recession. Excluding the holiday season, November and December, First Class mail volume has decline year-over-year at a 10.4% rate.   First Class revenue in the non-holiday months declined at a 7.8% rate   

While it is clear that the Postal Service's financial results are better than plan they are not sufficient to ensure its self sufficiency.  The following chart traces the monthly EBITDA ratio (earnings before interest, taxes, depreciation, and amortization divided by revenue) with and without the retiree health payment. The chart shows that removing the retiree health payment would result in the Postal Service earning a small operating profit every month this year.   The chart also shows that removing the retiree health payment is not sufficient to ensure postal self sufficiency as self sufficiency would require an annual EBITDA ratio of between 10% and 15%.  After five months the Postal Service's EBITDA ratio is 9.8% if you exclude the retiree health payments.  This ratio will decline between now and the end of the fiscal year as the Postal Service faces 6 to 8 more months of seasonally lower revenues and volumes that traditionally results in monthly financial returns that fall below the annual average. 

Financial self sufficiency requires the Postal Service to increase revenues by 5 to 6%, reduce costs by around 6% beyond what its current efforts produce, or some combination of the two in addition to the removal of the retiree health payments to become self sufficient.   More importantly, the Postal Service needs to find the fastest way to increase its EBITDA ratio in order to generate the cash necessary to cover the transition costs that creating a Postal Service that efficiency delivers universal service for mailers that mail only 150 billion pieces annually, most of which will be advertising.

Currently, the easiest option to make the changes necessary is for the Postal Service to raise rates.  The process to raise rates is known as is the time that would pass between the filing of the case and the implementation of higher rates. The Postal Service will file an exigent rate case asking for an increase of around 5% this summer, a rate increase that would be nearly sufficient to generate an EBITDA ratio excluding retiree health benefit payments to put the Postal Service close to a level of self sufficiency.  If the retiree payment issue is not resolved in the Postal Service's favor than double-digit rate increases would be required.   

If the retiree health care issue is not resolved by the time the Postal Regulatory Commission files its opinion on the exigent rate case, Postal Regulatory Commission precedent suggests that the PRC may have little choice but to recommend the double-digit rate increase necessary to cover the retiree health payments. The only caveat relates to the 5-day proposal, as the Postal Regulatory Commission could take into account savings from the 5-day delivery proposal in recommending rates.  However, I am not sure as to whether the 5-day delivery proceeding could be resolved before an exigent rate case is completed.

All other options require Congressional approval (e.g. 5-day delivery, and modifying the retiree health payments), freedom from Congressional interference (e.g. network optimization) and/or negotiations with unions (e.g. changes in work rules including increasing the proportion of part time employees, a process to manage employee dislocation during optimization including localized early retirement incentives and severance pay for layoffs when needed ).  In addition all of the significant cost savings options take more time from proposal to implementation than increasing rates and some will have transition costs to deal with employee dislocation.

The Postal Service will start the clock running on 5-day delivery within the next week.   It should see if it can start the clock on the other initiatives and negotiations sooner than now planned.  Otherwise, it will have no choice but raise rates repeatedly at a time that its customers increasingly find digital alternatives to be more convenient and cost effective.    

The End of the Monopoly

The postal monopoly has ceased to exist. This is a bold statement given that no law has changed. However, the economic downturn has forced every sender of mail looks at their alternatives and many have found competitive alternatives from electronic and physical delivery options that are faster and more cost effective than the mail.

The shift in demand means that mail is now primarily a means to distribute advertising. Nearly all advertising has alternative modes of delivery and mail is used only if it provides a higher financial return than other advertising modes. But now two postal competitors, newspapers and United Parcel Service have found ways to chip away at the delivery monopoly that illustrates how little power the legal monopoly actually has.

The delivery of saturation advertising has always faced competition from local newspapers. While newspapers may find that their circulation, display and classified advertising advertising is declining, they have one bright spot in free standing inserts. Spending for free standing inserts grew by 4.6% in the first half of this year. At the same time spending on postage for delivery of saturation mail advertising (Enhanced Carrier Route) declined by 10%. Valassis and its competitors will prepare an advertiser's copy for delivery by mail or free standing insert depending on which mode the advertiser finds most cost effective. The shift in market share from mail to free standing inserts suggests that the Postal Service is losing market share and iits delivery prices are not competitive to newspaper delivery of the same copy. Further losses in this market may come as newspapers expand their delivery of "mini-papers" composed of 4 pages of newsprint surrounding coupons and other free standing inserts, most likely at prices below what it would cost Valassis to pay the Postal Service to deliver.

The competition from newspaper focuses on part of the hard-copy advertising market that has always fallen outside of the monopoly. The newspapers will try to skirt the monopoly slightly by targeting the "mini-paper" to homes that do not receive a newspaper. In this way they deliver two different items to specific addresses without having to put an address on any piece. Subscribers get the newspaper. Non-subscribers get the mini-paper.

Another assault on the monopoly on addressed advertising is coming from United Parcel Service which has just found another way around that restriction. Yesterday, United Parcel Service announced Direct to Door, a new product that delivers small boxes of advertising, at a price below the cost of direct mail. UPS offers the low price because it only delivers to addresses where it also delivers a parcel.

UPS's new product is attracting some of the Postal Service's best customers and more importantly customers that mail to some of the highest income and highest mail volume zip codes in the country. UPS's initial customers include Men's Warehouse, Finish Line, Williams Sonoma' s Pottery Barn and West Elm divisions, Sephora, and Zappos, an on-line shoe company owned by Amazon. As these customers use the higher prices regular standard mail products to reach their potential customers, UPS is competing against regular standard mail rates and not the lower enhanced carrier route rates.

UPS and advertisers are targeting recipients that buy over the Internet and more importantly likely buy higher priced products over the Internet. In this way, UPS goes after the key advantage that the Postal Service had over all other advertising media, the ability to target specific customers. UPS's effort along with targeted e-mail, Internet search and display advertising erode the value of the addressed advertising monopoly to the point where the value may be quite minimal.

So what services are left within an effective monopoly?

Most transaction mail no long is without competition. Few new bank, insurance, credit card, gym club, cell phone, or brokerage accounts have mail as the default option for paying or receiving bills and statements. Only health care bills, statements, and payments remain as nearly exclusive users of the mail and electronic records could eventually allow the health care industry to follow financial services and telecommunications into a paperless environment.

Mail delivered periodicals compete every day with in-store and Internet delivery of content. A subscriber has to actively want the hard copy now to receive the periodical. Many business and industry publications have illuminated hard-copy editions completely. For a periodical to continue using the mail, the mail must compete with alternative modes and increasingly have a customer willing to pay more to receive hard copy.

Non-profit mailers showed these past two years that even if their low-priced mail may not be price sensitive, it is highly sensitive to the economy. With tight budgets driven by lower levels of contributions, non-profits are looking at mail as a cost center and newsletters, solicitations, and other documents that used to be sent by mail are now sent electronically. For these organizations, mail at even non-profit rates do not provide sufficient value to justify the production and postage expense especially when e-mail, search engine advertising, social media can deliver the same newsletter or generate the same net-revenue. The mail that they still send must compete with the value that alternative media provide.

This leaves two parts of the mail stream where the Postal Service provides service with minimal concerns about competition: 1) correspondence, and in particular announcements, greeting cards, invitations, and holiday cards; and 2) transactions for those not connected to the web. This is a very small part of the Postal Service's $60 billion in revenue. Having a monopoly to protect these customers seems hardly worthwhile.

Advertising Delivery: A Governmental Function?

In his thought provoking piece, APWU President William Burris summarized the challenge facing the Postal Service and its employees succinctly. I would like to focus on two quotes from his piece that highlight the challenge that he and his membership as well as all postal stakeholders will have to struggle with as Congress rethinks the business model for the Postal Service. Both of these quotes will like be central to one question that Congress will likely to debate: "Is the Postal Service's business still a governmental function?"

His first quote goes to the heart of what will be the policy debate, the core business of the Postal Service and governmental responsibility for ensuring that a provider exists to serve that market.

"Mail is what we process, transport, and deliver, but as the dominance of business mail demonstrates, the Postal Service is in the advertising business." [emphasis from original]

Mail advertising constitutes the bulk of the volume the Postal Service handles in its non-parcel postal products. Even bills and statements contain advertising.

No other advertising delivery business in the United States is government owned. The one possible exception is the Corporation for Public Broadcasting which allows sponsors of program to craft advertisements that are included at the end and beginning of programs.

No other advertising media is regulated to the extent that the Postal Service is regulated. Newspapers and periodicals that use newsstand, supermarket or home delivery are not subject to any regulation regarding what they can charge advertisers or the reading public, and are not subject to regulation as to how, where, and when those delivered to the household must be delivered. There is limited regulation of the broadcast industry but broadcast networks and local stations are free to set prices that they charge advertisers. Cable operators have some regulation regarding what they can charge customers and the range of their service offerings but do not have to submit to a regulatory process like the Postal Service.

The second quote focuses on the issue of business constraints.

"The Postal Service could do so much more to actively encourage citizens and business owners to use the USPS Web site to create customized messages for delivery by the Postal Service. Invitations to weddings or birthday parties; announcements of new business ventures; promotions of products and services — the possibilities are endless, constrained only by the imagination. Why isn’t the USPS advancing this concept rather than relying so heavily on messages developed by others?

We must use advertising as a tool that generates mail. The USPS has the potential to become a full-fledged advertising giant that, with extensive use of electronic media, creates volume."

The Postal Service is constrained to only provide "postal services" as defined by the Postal Regulatory Commission. This constraint prevents the Postal Service from doing what President Burris suggests. The constraints exist because competitors do not want the Postal Service, a governmental entity to compete with the private sector.

Removing the business constraints on the Postal Service that would allow it to enter businesses that relate to the delivery of advertising would create a more vertically integrated process, and possibly a lower cost process from conception to delivery. However, removing the constraint creates a significant policy quandary. If survival of the Postal Service requires it to enter a broader range of businesses related to advertising delivery that puts it in direct competition with private sector firms, should its existence as a governmental enterprise change?

I d0 not think that President Burris or APWU membership is prepared to accept the privatization option that might be required to fully take advantage of the Postal Service's capabilities as a deliverer of advertising. For too long privatization has been tied to cutbacks in jobs and reductions in compensation for APWU members or leadership to accept. However, the current financial challenges of the Postal Service suggest that those cutbacks and compensation reductions may come even without privatization. President Burris' message to his members suggests that it may be the time for the APWU to seriously invest resources to flesh out how a Postal Service free to pursue all opportunities relating to advertising delivery, and for that matter any business that could use the capabilities of postal employees and network of sortation and retail facilities, could improve the long-term prospects of the Postal Service and the APWU members that it employees.