Competition: Interview with Swiss Post USA CFO

Post and Parcel posted an interview with the CFO of Swiss Post USA Debbie Deakin.   In the interview she provides a fairly good picture of the services that Swiss Post USA offers.   She notes the difference between offering services in the unregulated European market and the regulated US market and provides a picture of how Swiss Post will cope with the decline in letter volumes that the United States Postal Service could only dream of.

From an American perspective, her approach to answering questions and the answers themselves illustrate a stark difference from what is often said by Postal Service executives whom are always cognizant of the political and regulatory restrictions and overseers watching every move they make.

The interview lasts a little over 5 minutes and is well worth a watch

Five Day Delivery: Do polls of the general public matter?

Today Gallup published the results of a new poll asking Americans about what they think about the idea of reducing mail delivery by one-day a week.   The poll asked Americans their opinions about several options for reducing the Postal Service's losses 

This survey should aid the Postal Service in convincing members of Congress that supporting its 5-day delivery proposal would not result in political suicide.   The survey would appear to suggest that consumers would prefer reducing access to the Postal Service and delivery by the Postal Service to all other options.    However, the second Gallup question puts into context why consumers are sanguine regarding a reduction in service. They don't need the services that are willing to do without

About two-thirds of the public used the mail to pay a bill and about half to write a letter.  Both products require the use of regular postage stamps that can be purchased nearly 24-7 at any supermarkets.   Neither of these uses of mail is affected much by how many hours a post office is open or how many days a week mail is delivered, so it is not surprising that most people are willing to accept cutbacks in post office hours or days of delivery.

Most of the options that the public appears to not accept reflect opposition to actions that could affect their pocketbook.  I am willing to bet that if Gallup asked a question as to whether people to choose among a number of options to allow banana growers to become more profitable that they would prefer to have bananas only available in the market on Tuesday, Wednesday and Thursday or an increase in banana prices or a government subsidy of banana growers, that they would prefer the option of having bananas available less frequently.

The public's objection to the closure of post offices reflect the desire that post offices be available when they have the need to use one, even if that occasion may be rare.  If using a post office was important, than the public would likely find cutting hours equally objectionable.  Instead, you could argue that the public would accept post offices that were open only two or three hours a day, just because they might need to use it sometime.   The desire to have available a post office that they do not use is similar to why many of us hold onto clothes that do not fit because maybe some day we will gain or lose the weight necessary in order for the clothes to be moved from the back to the front of the closet.

More importantly, the Gallup poll does not ask questions that would help understand how cutting a day of delivery will affect the perceived value of mail to the sender, most of whom mail in quantity.  If you are going to ask questions of the general public they should instead try to determine:

• If the mail does not come on Saturday, how will that affect the public's willingness to subscribe to publications that may not arrive until Monday?
• If the mail does not come on Saturday, does the effectiveness and the value of advertising change if it is delivered a day earlier or a day later?
• If a bill does not arrive on Saturday, how does bill payment change when mail may arrive a day earlier or later especially when the bill's grace period does not change?

These and other similar questions are the ones that Gallup needed to answer in order to really understand how changing the number of delivery days would affect the public.  It is also the answers to these questions that will determine whether those that mail in quantity continue to generate volumes they do now and how much the Postal Service's cost savings will diminish due to loss of volumes from mailers who either find that mail no longer provides a return greater than its costs or meets the minimum service requirements that make hard copy delivery by the Postal Service viable.

Leaving the Mailstream: Checking, Savings and Credit Card Statements

At most banks, customers opening a new account have the option of paper or electronic statements.   Yesterday, for the first time I was offered an account for which paper statements were an option that included a $5.00 fee.   The fee will not affect my decision over which bank I choose, as I had planned to only have on-line statements anyway.  What I did not like was that this bank only allowed access to on-line statements for 18 months where other banks with similar accounts offer on-line storage for twice as long.

Nor is it likely to affect this bank's customers most of whom are businesses and non-profits.  In fact, charging a fee fits with the bank's marketing strategy of catering to businesses in the Washington D.C. metropolitan area.

Until recently, Banks and merchants have encouraged paperless statements by promoting the environmental advantages to their customers.   However more are beginning to charge new account holders a fee for paper statements.  For example, Ann Taylor and Victoria's Secret are now charging $1 a month for paper statements.  Other banks are forcing customers to choose free paper statements as one of the limited set of free services associated with their account.  If they do not choose paper statements as a free service, the bank charges $2 to add paper statements as an account feature.

In a survey of Quest Communications customers conducted by Aspen Marketing Associates for Fiserv, the customers that received their bills electronically were on average 10 years younger and had used the services of Quest Communications for 8 fewer years.   These differences reflect the fact that customers receiving their bills electronically were more likely to have started service recently than those receiving paper bills.

The primary purpose of the study was to see if electronic bill payment and presentment improved customer retention over paper bills and other payment methods.  The key findings were as follows:

1. Consumers that use e-bill are 7-15% less likely to churn than those receiving a paper bill
2. After controlling for all other factors, Aspen found that consumers that use recurring bill payments are 10-15% less likely to churn than other customers. 
3. Among non-recurring payments, bank e-Bill presentment and payment was the optimal option from Qwest’s perspective, followed by EFT, paper check, and then credit card. 
4. Bill presentment and bill payment need to also be examined holistically; because the way that people receive their bill has a significant impact on how they will pay their bill. Sometimes, the same payment, paired with a different presentment type, leads to different outcomes.

Consumers are shifting to electronic payments even if they still receive paper bills due to either a requirement of the merchant or the convenience that electronic payment offers.   The report illustrates that merchants now face the challenge of managing the consumer's choice of electronic payment method as credit card and debit card as credit card payments are much more expensive than most other methods.  Having successfully shifted most customers to higher retention electronic payment methods, the new challenge for merchants will be to cajole customers to both accept e-bills and choose the lowest cost electronic payment methods.   The value of taking on that challenge is illustrated in the following chart taken from the report.

 

Credit card and debit card as credit card payments are much more expensive than most other methods including paper checks.  

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.    

USPS: Last Post Standing

The Japanese government announced yesterday that it will begin the process of privatizing Japan Post.  (See: Business Week)  The decision by the Japanese government leaves the United States Postal Service alone as having a business model with many characteristics of a government department.

The following chart illustrates where many of these posts sit on a continuum from government department to a corporation with only private shareholders.     Postal Operators operating as a government department, in a manner similar to the pre-Postal Reorganization Act Post Office would be placed on the far left side of the chart.   A national post with only private sector shareholders would be placed on the far right side. National posts located between the center and the far right sides of the chart all operate as government owned or partially government owned corporations operating under standard or nearly standard corporate, employment, and tax law. 
 

Once Japanese government sells shares in the its national post to the public, this chart will look particularly unbalanced.  All other posts will fall somewhere between the center and the fully privatized side of the chart.   In the instances of the Swedish, Danish, and Belgium posts, the current positions will likely shift toward privatization once they begin selling shares to the public.

The shift toward privately owned national posts are happening in countries with governments that are considered both left and right of center.   The decision Swedish and Danish governments to begin privatizing their posts reflect concerns that the national operators cannot raise sufficient capital from private debt markets alone to cover capital needs to manage the transition to a business model that is less reliant on document delivery.

In the near term, privatization appears unlikely in Australia, Canada, Finland, France, and New Zealand.  In these countries, cultural norms allow government owned corporation, operating under commercial business, employment, and tax laws to fully or nearly fully compete with the private sector.  In some of these countries, privatization would be politically unpopular.  In others, there is no political drive to privatize the national post and postal management has not expressed a need for the capital that selling shares would provide.

Privatization is off the table for the Postal Service until its finances improve.   This chart illustrates that privatization is unlikely to remain off the table for ever.

Pension Legislation Could Help United Parcel Service

Senator Bob Casey (D-PA) plans to introduce legislation that would change some of the rules controlling multiemployer pension plans, or union-operated retirement pools to which United Parcel Service as well as companies in trucking, retail grocery and a number of other industries participate.

The press conference announcing the bill was attended by representatives of the Teamsters and two large less-than-truckload companies, ABF Freight Systems, and YRC Transportation.  ABF Freight Systems, and YRC Transportation are the last remaining large nationwide less-than-truckload trucking firms that existed when the Motor Carrier Act was passed in the 1980's. 

The legislation would make the following changes in existing law:

• Mergers and Alliances – The language in the bill would enable multi-employer funds to combine resources for purposes of reducing administrative costs. 
• Partition (ERISA Section 4233) – If a plan satisfies certain requirements, the plan will transfer to a separate account all benefit liabilities attributed to orphans (participants of employers who withdrew from the plan without paying withdrawal liability) and assets equal to a maximum of 5-years of projected benefit payments.  The PBGC will handle the initial application, drafting of partition agreement and monitor financial assistance to the plans.  PBGC does not provide notices, calculate benefits or in any other form administer the plan.  The orphans benefit will be fully guaranteed as if the orphan was still receiving benefits from the multi-employer plan.
• Order the Department of Labor and Department of Treasury to prepare a report on whether the qualified partition program has strengthened the financial condition of the original plans and improved the ability of the contributing employers to these plans to remain in business.

Teamster multi-employer pensions are in trouble as competition from non-union firms and rail intermodal services as well as changing market conditions resulted in the bankruptcy and/or liquidation of most of the firms that contributed to the pensions over the past 30 years.   Today, these pensions are paying benefits to more retirees from firms that are no longer in business than they pay to employees of firms that are still in business.  The first two of these three provisions would relieve companies still contributing to these pension plans from the burden of paying for all of the benefits of employees of defunct firms. 


United Parcel Service is one of the largest if not the largest firm still making contributions for active employees to nearly all of the underfunded Teamster plans in which it participates.    United Parcel Service successfully extricated itself from the largest underfunded plan, the Central States Pension plan and set up a single-employer pension plan for the Teamsters that worked in the territory covered by the plan.  To do so, United Parcel Service paid $6.1 billion to cover the withdrawal liability required to exit the underfunded plan.  United Parcel Service would face similar withdrawal liabilities in order to withdraw from the more than a dozen other plans that it contributes to for it employees. 

Consolidating the smallest of these plans would reduce the administrative costs UPS pays to administer its employee retirement benefits.   The segregation and eventual Pension Benefit Guarantee Corporation handover of the liabilities for pensions of employees of defunct companies would reduce the liability that United Parcel Service now holds (but is not on its books) for covering future payments for employees of these companies.  

The companies that attended the press conference and support this proposed legislation differ from United Parcel Service in that they do not have the financial where-with-all to pay the withdrawal liabilities from multiemployer plans.  While United Parcel Service would benefit from the legislation, its absence from the press conference suggests that it has a somewhat different legislative strategy in regards to multiemployer pensions than other less financially strong participants.   The lack of consensus among multi-employer stakeholders will slow if not derail any change in current law relating to multi-emeployer pensions

Understanding the Postal Regulatory Commission's Power.

In a number of previous posts, I indicated that the Annual Compliance Review had the potential to become a mini-rate case.  In her remarks before the Financial Services and General Government Subcommittee of the Senate Appropriations Committee, Postal Regulatory Commission Chairman Ruth Goldway laid out a view of the Postal Regulatory Commission that more than reinforces that view.

Chairman Goldway, in response to a question from Senator Durbin, noted that the PRC's opinion on the Postal Service's 5-day delivery proposal was advisory.  The PRC could not stop the Postal Service from implementing a service change that it advised against.   However she indicated that the Commission had the power to compel the Postal Service to reinstate service if it finds as part of the annual compliance review that the change results in the Postal Service no longer providing the universal service required by the law.

Her exact quote was:

Every year we have to make a report on whether the Postal Service has complied with the law and that means whether it [the Postal Service] has met its obligation to provide an efficient and fair level of universal service.  So if they don't take our advice on this [the 5-day delivery proposal] and at the end of the year they entered into an activity that we deem is less than universal service, we can find them out of compliance and require them to start up some new activity again.   But we could not tell them at the time of our advisory opinion what to do.

The PRC will issue its review of the Postal Service's 2009 Annual Compliance Report in the next few weeks.   This quote suggests that the Commission will assert that it has the power to compel the Postal Service to change any aspect of its rates or service in order to comply with the law. 

The Public Representative and others presented testimony in the annual compliance proceeding stating that Postal Service rates put it out of compliance with the law.   Given Chairman Goldway's understanding of the Commission's powers, the possibility exists that the Commission could concur with these assessments and require the Postal Service to adjust its rates upward to comply with the law.  

Mailers and the Postal Service appear likely to find an outcome in the PRC's review of the Annual Compliance Report to their liking only if the Commission does not find that the testimony arguing non-compliance was convincing or identifies a way to defer its power to compel Postal Service action.

Earlier Posts on this topic:

• Rethinking the Value of Postal Regulatory Policy
• Regulating the USPS into Financial Stability
• Re-regulating the Postal Service

Why the Postal Service Matters: FedEx Needs It

The financial data unveiled along with the FedEx earnings report that was announced yesterday revealed how closely tied the fortunes of FedEx and UPS are tied to the Postal Service.  FedEx is one of the Postal Service's largest suppliers.  It provides the postal service with a significant portion of the $2 billion spent on air domestic air transportation annually.   FedEx uses the Postal Service to deliver a significant portion of its light weight ground parcels.

While the size of the air transportation contract with the Postal Service is proprietary, FedEx reports its use of the Postal Service as a delivery supplier.  The following chart shows that FedEx's Ground delivery service has increasingly relied on the Postal Service to deliver parcels.  The shift to Postal Service delivery of ground parcels began in the fall of 2008 (FedEx's FY 2009 2nd quarter).

The shipments delivered by the Postal Service for FedEx Ground generally are 1) lighter weight than those that FedEx Ground delivers itself; and 2) more likely require delivery to a household address. FedEx Ground charged its customers less than $4 per shipment.  Of that the Postal Service received about $2 per shipment and FedEx Ground recorded the rest as its revenue. The most recent quarters for which the Postal Service and FedEx provided data had the Postal Service recording revenue of $1.92 per shipment and FedEx recording revenue of $1.59 per shipment.  Using the Postal Service to delivery lighter weight and home delivery shipments, allows FedEx to:

• Offer customers a delivery product with an attractive price.   With an average price running below $4, FedEx Smart Post offers a service that allows companies selling large quantities of light weight items on the web to offer those products at an attractive delivered price.
• Improve the profitability of its delivery contractors, and in particular home delivery contractors by increasing the average revenue per shipment they deliver.  By shifting low weight shipments to the Postal Service FedEx Ground increases the total revenue associated with all shipments delivered on a delivery route as low revenue items are removed from the contractor delivered network. This is most important for home delivery contractors who can deliver fewer shipments per day as the number of items delivered per stop and the distance between stops are greater than those routes in the same geographic area focused on commercial addresses.  It is hard to imagine any contractor able to cover his costs and earn a profit at $1.92 per shipment.
• Grow its parcel delivery business faster.   Volume growth requires increasing the capacity of the network and in particular delivery routes and delivery drivers.   The use of the Postal Service allows FedEx to better manage this growth and to ensure that its own network grows only as rapidly as heavier weight shipment volume grows.  Also, FedEx Ground would be less likely to invest in the marketing and distribution capacity required to accommodate growth if it had to use some of the $1.59 it now generates per shipment for profitably handling marketing and distribution of the lightweight parcel service to pay for delivery. 
• Grow its parcel delivery more profitably.   Even though FedEx Ground uses a contractor model, it is not immune to the economics associated with delivery networks.  Growing delivery network capacity to handle the growth in low revenue deliveries (i.e. light weight shipments that with rates of $4 or less) can create significant pressures on profit.  Paying the Postal Service around $2 per piece allows FedEx to earn a larger profit on light weight and home delivery shipments than it could if its contractors delivered the same item.

The recent growth in FedEx Ground's use of the Postal Service has contributed to FedEx Ground's gains in market share.  In it's most recent quarter FedEx Ground's daily originating shipment volume grew 13.9% year-to-year while United Parcel's daily ground parcel volume declined by 2.9%.   Clearly the ability of FedEx Ground to continue to grow its business and more than likely United Parcel Service find a way to stop the slide in market share will depend on the continuing existence of a reliable and competitively priced parcel delivery service that the Postal Service now offers.

Leaving the Mailstream - Consumer Periodicals

The iPad, and other devices coming to market in the next 12 months are about to revolutionize how consumer magazines are designed, printed, and sold.

The Associated Press has reported that "the Audit Bureau of Circulations said Tuesday that it has changed its definition of a digital magazine to accommodate the new class of tablet-style devices. The new rules allow publishers to count paid digital subscriptions as part of a magazine's overall circulation as long as all the same editorial and advertising material is included.  That means publishers can custom design their articles and photo spreads for Apple Inc.'s iPad, which goes on sale April 3. Without the rule change, they could only count digital editions that appear exactly the way they do in print."

Initially, publications sold to tech-savvy consumers like Conde Nast's Wired magazine will become available.  Conde Nast will follow the June launch of Wired with launches of its titles directed toward a more general set of readers including GQ, The New Yorker, Vanity Fair and Glamour. 

The action of Conde Nast and other magazine publishers to fully develop tablet versions of their titles in the consumer market reflect an understanding that the new technology may attract both newsstand and subscription buyers at prices that generate real revenue and more importantly auditable circulation.

If Conde Nast is successful, it will be able to retain much of its business model.  This compares to business-to business or trade publications that are rapidly shifting to an all digital model as declining print advertising made publishing a mailed journal unprofitable.   Now trade publications look mostly like a collection of blogs posts with advertising. (Direct, dmNews, Trailer/Body Builders) The alternative is what Document has done and provides a glimpse of what consumers may see on digital versions of consumer publications.  (I hope the consumer magazines do not have the annoying page turning sound.)

 Now the question is when will the new technology have market impact?  It could not come too soon for publishers who are seeing print sales dropping at double digit rates.  For the Postal Service the new technology could increase the already rapid decline in Periodical mail so that it is possible that by 2020 Periodicals could be as common in the mail stream as parcels are today.

The Future of Print - Is it on an iPad?

Business Week just reported that the number of e-book applications in the Apple app store now exceed the number of game applications.   The growth in digital books as a means of gaining access to text-based documents can be seen in the rapid growth in the interest in consumers in just six months.   According Mobclix, a company that tracks iPhone application use, in October of 2009 six times as many games were sold as e-books.   By February of 2010, the ratio dropped to 4 games to every e-book.  This shift occurred even before the more text friendly iPad device even hits the market.  More importantly, a higher share of the e-book applications are purchased creating a profit opportunity for book and magazine publishers that may not exist for game publishers.

What is clear from early adopters of e-books is that they like the new format.  As Kelly Gallagher, a vice-president at R.R. Bowker, which provides analysis of the publishing industry tells Business Week, "once a person buys an e-book, there's a 50% chance that they will buy most of their books in electronic form."

While e-books may not be advertising friendly, publishers of magazines and newspaper will have subscription and free iPad designed apps out when it hits the market in the next few weeks.  More than likely the competitive tablet devices sold by HP, Dell and other computer manufacturers will handle these or similar applications as well.   Amazon will eventually have to update its Kindle device to handle the broader range of content that readers want or switch its business model to strictly a distributor of books and other content on iPads and other tablets. 

How soon will the iPad, dedicated e-book readers and other tablets make a difference in the print market?   Clearly, not everyone will have electronic readers for quite a while.  In 2009, only 2.5 million were sold.  While this is expected to double in 2010 with the introduction of the iPad, the growth rate is expected to slow down once the market settles out in 2011.  For publishers of books and magazines, the question is not how many e-readers there are but how many are owned by heavy buyers of books and magazines.  It is these consumers that will drive the shift of publishers to e-formats and not those members of the public that rarely buy books and magazines and these customers are clearly moving to digital.

A Switch in Advertising Modes that Does Not Hurt the Mail Yet

Advertising Age has reported that CBS just announced that it has sold $37 million in on-line ad sales for its on-line streaming of the NCAA basketball tournament. (Go Temple and Maryland!)  This is nearly as many ads as they sold on broadcast television.  

CBS' success in selling ads on-line suggests that a model combining broadcast television and free ad-supported streaming on-line can compete successfully with the cable/satellite model that have made ESPN the juggernaut in sports.   More importantly, CBS's success suggests that NBC's decision to restrict online access to the Olympics to only cable/satellite customers may lose out to the advertising revenue that on-line streaming offers.

For mail, the emergence of an advertising market for high-interest streaming media should cause no immediate problems.   However, the addition of another viable means of delivering advertising will over time increase the pressure on prices charged by all "traditional" advertising modes including mail.    advertising modes

Teamsters Bowing to Reality in the LTL market

In a bulletin to its members on Friday, the Teamsters Union announced that it is starting the process of reopening the contract with ABF Freight System.  ABF is the only nationwide carrier still operating under the National Master Freight Agreement, an agreement that for well over 40 years was negotiated between the Teamsters and less-than-truckload carriers as a group.  In the bulletin, the union stated:

While we have heard ABF’s requests to fully understand its position, we have not entered or begun discussions. However, based on our current understanding of the industry, the company’s financial position, and from concerns raised by many of you, we now believe it is in our best long-term interest to fully engage ABF through formal discussions to determine if and what type of contractual relief may be necessary.


This language reflects the significant challenge that the Teamsters Union has in preparing its members for the changes to come.   The Teamsters have had some experience in this regard, having had to prepare its members for changes in the United Parcel Service contract in regard to the pensions offered UPS employees working in most states east of the great plains not including states on the East Coast from Virginia to Maine, and major changes in wages and benefits needed to keep Yellow Roadway Corporation in business.

Missing from the Postal Service's Action Plan

In the upcoming months, Congress, stakeholders, and Obama administration officials will complete a comprehensive evaluation of the package of changes that the Postal Service proposed in its action plan.   While many stakeholders will focus on what the changes mean for them, Congress and the Obama administration need to focus on what the plan means for the United States postal market and the impact of a financially failing Postal Service on the pace of the economic recovery.

In that regard, Congress and the Obama administration will likely go beyond examination of what is in the plan.  They will quickly identify gaps that need to be addressed.   This process will force the Postal Service to transform the documents designed to mold public opinion into a presentation that is at least as detailed as what creditors would require before re-capitalizing a money-losing firm.   In these documents, the money-losing firm has to detail the changes that will be made in detail, the financial consequences of all changes, the financial result when changes are complete, and most importantly why supporting the transformation will increase the creditor's returns over liquidation of the money-losing firm today.

In that light, here are three gaps in the Postal Service proposal that could affect its successful implementation:

• No financial target associated with a self sufficient Postal Service.  The only financial target presented was a return to break-even in 2020.   A break-even target is same target that all government departments have, the only difference for the Postal Service is that revenue comes from ratepayers and not taxpayers.
  
  Without a return based financial target, it is impossible to know what levels of revenues and costs are required to generate sufficient cash to cover needed investments for the next generation of automation and information systems, transition costs of reducing and restructuring the workforce (including retirement incentives, transfer and training costs, and severance costs), modernizing the retail network, replacing the vehicle fleet, ending deferred maintenance and optimizing the sortation network. 
  
  The lack of a realistic financial target allows mailers and employees to underestimate the scale of the changes that are required for the Postal Service to be a self sustaining enterprise in 2020.   Mailers, employees and stakeholders will find it much easier to argue that changes that hurt them should be eliminated.  This makes Congressional passage of required changes more difficult.
  
  Finally, and more importantly for most stakeholders, the lack of a realistic financial target reduces the probability that Congress will take the necessary and prudent decision to adjust the retiree health payments.    As is clear to most stakeholders, retiree health payments are an issue that must be addressed in order for a sustainable Postal Service to emerge.   A break-even target allows members of Congress and others to argue that no change is needed and forces the Postal Service to operate like Washington DC's Metro and defer maintenance and other capital investments, raise rates, and reduce service in order to balance a budget.   (Similar strategies to balance budgets can be found in the commuter rail operations of METRA in Chicago and the MTA in New York.)
  
  
• No Capital Spending Plan - In response to a question at the forum presenting its action plan, Pat Donohue laid out the Postal Service's approach to capital spending going forward.  In this approach the Postal Service will focus on 1) improving processes using existing capital assets first; 2) increasing the utilization of existing capital assets with a focus on labor contract changes that allow that to happen; 3) reducing emphasis on big purchases; and 4) continuing a parsimonious approach to capital spending due to limited cash flows.  
  
  This approach reflects an organization in survival mode and makes sense right now.   However, there are limits to extending the replacement cycle on existing equipment even as lower volume reduces the wear and tear on existing production equipment and vehicles.   Furthermore, lower volume, and more importantly shorter runs may change the type of capital equipment required in a manner similar to how shorter runs have changed the equipment deployed in the printing industry.
  
  Modernizing the retail network will also have capital expenses.  The Postal Service needs to purchase additional current and next generation automated kiosks.   An expanded contract retail network will require spending to develop and train the new management structure for contract locations, improved information systems designed for managing a larger contract operation, and other start-up costs that will exist to create the more contractor-friendly approach necessary to open the number of locations necessary to make this approach work.
  
  The biggest risk to the survival mode approach to capital spending relates to dealing with adjusting the network to handle single piece mail and flats.  By 2020, the Postal Service may handle only 30% of single piece mail that it does today.   At that level of volume the Postal Service could meet today's service standards at a cost lower than current levels in no more than half of the facilities that sort originating mail today.  The declining volume will require a continuing process of moving equipment, retrofitting existing facilities, and in some cases building new faculties in more optimal locations will involve significant capital spending starting now so that implementation can proceed on a timely basis 
  
  The problem with flats is similar with one difference.  Most flats are sent by large volume mailers.    By 2020, it may make sense to have a flat sortation network, including sortation to delivery route sequences in fewer than one-third of the facilities that sort flats today
  
  Finally, while not exactly capital spending, the speed at which the Postal Service manages the changes that it proposes depends upon the availability of cash needed to handle the impact of the transition on postal employees.   The lowest cost and slowest method is to allow attrition to reduce the workforce. By using only attrition, the Postal Service drives the changes to its sortation and retail networks to the rate that employees leave the Postal Service.  A more efficient but more expensive approach uses retirement incentives and lay-offs that generate severance and unemployment costs to match the speed that it can manage the changes in its operations and therefore the size of its workforce.
   
• No specifics relating to changes required to most effectively and efficiently use non-union employees.  Non-union employees represent less than 10% of the Postal Service workforce.   The transformation envisioned will change the nature of the work that managers and sales, general and administrative staff do.   Just as the Postal Service cannot afford excess craft employees, it cannot afford excess non-union employees, and for that matter contractors who in many cases have staff responsibility that in the private sector employees would have.
  
  More important than the number of non-union employees, the new environment will likely require a different mix in the skills and management abilities than the Postal Service now has.   While many of its non-union employees are nearing retirement, it is unlikely that either their rate of retirement will match the rate that the mix of employee skills required changes or that retirements will occur first in positions that can be eliminated as the position is no longer needed in the new environment in positions requiring skills that are easily found internally or externally.  
  
  The current civil-service like employment rules severely restrict the Postal Service from adjusting its workforce at a rate anywhere near the rate that its skills need changes.  Civil-service like employment rules and pay schedules also encourage the use of contractors who have more flexibility to develop career paths for employees that reflect the changing skill mix required by the Postal Service.   For example, contractors can have large number of employees who meet the needs of the Postal Service for a number of years and then when the Postal Service's needs change, replace those employees with a different set with skills attuned to more current needs.  Of the original group, only a few remain with the firm in management roles and the rest are let go.  In information technology, finance, accounting, economics, engineering and other knowledge based fields, consultants can adjust pay levels for existing employees and new hires more rapidly to reflect changing market conditions than the Postal Service can.  (In fact in some technical fields, competitive pay levels may exceed the salary of postal executives.)
  
  Finally, compensation schedules for non-union employees need to be reviewed at all levels.   An increased focus on growing sales and creating new mail products requires an incentive and possibly a commission based compensation scheme to properly find the best sales and marketing people who compete in an employment market where most compensation is primarily incentive or commission based.  Introducing such a pay structure would require a significant change in compensation policy that may require changes in law.

The three items listed in this post are not likely all inclusive.   However, they identify three gaps that need a serious examination by those responsible for deciding the Postal Service's future.

The Importance of a Viable Competitive Postal Sector

In its report "Economic Policy Reforms: Going for Growth 2010," the Organization for Economic Co-operation  and Development (OECD) suggested that Canada could enhance its economic prospects if Canada liberalized its "postal services by eliminating legislated monopoly protections and privatising Canada Post."  Canada's minister for transportation Rob Merrifield in response restated the Harper government's policy that Canada Post will retain its monopoly.

The OECD concern for the post reflects its position that a vibrant and competitive postal sector can promote sustainable economic growth.   The OECD's first developed its position over a decade ago, in a report entitled "Promoting Competition in the Postal Sector."  At that time, the OECD began raising the concern that member nations were not paying sufficient attention to updating the ownership, business objectives and corporate governance of national postal operators and regulation of the postal sector.  The OECD's work implied that retaining outmoded business models and regulatory structures hindered economic growth and the development of those sectors of a nation's economy that rely on the mail to expand their business or deliver the products that they sell.

The challenges that the Postal Service faces today were the challenges that most national posts faced at the end of the prior century.  These challenges included:

• First, meeting the growing competitive threat from electronic communication, on the one hand, and express and parcel carriers, on the other
• Second, internal reform and restructuring to improve efficiency and customer responsiveness and to reduce losses.

While in 2000, the "growing competitive threat from electronic communications," appeared to be far in the future, that is no longer the case. Today, no party is likely to make arguments similar to those presented to Presidential Commission on the Postal Service that implied that concerns about digital diversion were overblown.  Many of these presentations compared those that warned about digital diversion to the boy who cried wolf who had previous opined the end of the Postal Service as the telegraph, telephone, and facsimile machine became ubiquitous. 

OECD countries that prepared their national posts by advancing reforms and restructuring have weathered the combined impact of a severe economic downturn and a rapid shift in consumer preferences for digital delivery of documents.   While profits are down, most posts in these countries remained profitable in 2009.   These posts are successfully adjusting to the new competitive environment that in addition to digital competition, now may include a viable physical delivery competitor.

As Congress and the Obama look for ways to more rapidly grow the economy and create private sector jobs, it is time to take a serious look at how reforming the postal sector of the economy could speed economic growth and private sector job formation.

2010 Financial Performance

I know many people are not into reading footnotes but the footnote on page 2 of the McKinsey & Co. "Future Business Model" presentation dated March 2, 2010 is worth noting.

It states that the January year-to-date results are better than the 7.8 billion loss projected loss for 2010.

I have taken a quick look at the January year-to-date results and they suggest that the Postal Service will have a bad year but not a disastrous year.  Specifically:

• Through January losses are 1.8 billion less than plan.   Results have been better than plan every month so far this year.  Improvements from plan will not produce an operating profit but will likely generate an operating no more than half of what the Postal Service originally projected.
• Results are beating plan because both revenue is above and costs below plan.
• Revenue better than plan reflects improvement over a "worst-case-scenario" plan not growing mail volumes.   My current projection for year-to-year change in mail volume from 2009 are as follows:
  
  
  
  • Single piece First Class:   -7.9% (This rate of decline is double the pre-recession rate and is worse than the rate of decline in 2009.)
  • Bulk First Class:    -4.2%
  • Periodicals:   -10.6%
  • Standard Mail:  -3.5% (Part of the decline reflects the fact that FY 2009 had substantial election year mailings that will not repeat in FY 2010.)

• Better results do not make a self sufficient Postal Service.  As I have noted earlier, break-even is not sufficient for self sufficiency.  Self sufficiency will require an EBITDA ratio of around 15%. (EBITDA ratio is the ratio of Earnings before interest, taxes, depreciation, and amortization and revenue.)
  
  
  
  
  • EBITDA to sales ratio for the first four months is -0.1%.
  • EBITDA to sales ratio excluding the retiree health care payment is 11.8%.
  • Both of these ratios will decline as losses grow over the remainder of the year although it is possible that the EBITDA ratio excluding retiree health care payments could remain positive.

These financial results suggest that the Postal Service's assessment that neither just fixing the retiree health care payment schedule or changing its operating processes, services, cost structure and rates within the framework of existing law and regulations will be enough to make it self sufficient.

USPS: Known Knowns, Known Unknowns Unknown Unknowns

There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know. 

Donald Rumsfeld

After nearly a year of study, the Postal Service has presented its proposal for modifying its business model and regulatory framework.   The Postal Service's proposal reflects the gravity of the business challenges it faces now and will face in the remainder of the decade. The tone of the Postal Service's presentation also reflected the gravity of the challenge as it lacked both the sentimental imagery and boosterism that had the Postal Service and others previously used to justify minimizing changes from the status quo.

Anyone who has read the comments on the proposal written by editorial writers, or spoken by members of Congress, representatives of the labor unions and management associations and representatives of mailer trade associations will immediately see that there is no consensus yet on how to proceed on the Postal Service's proposal.

This creates a significant challenge if a solution is to be found for the Postal Service's current difficulties.   Donald Rumsfeld's silly sounding framework of known knowns, known unknowns and unknown unknowns may provide a way to develop a common knowledge base and language for parties to discuss possible solutions that will actually ensure the viability of the postal industry and create as secure a future as possible for current and future Postal Service employees.

Known Knowns

1. Total Postal Service mail volumes in 2020 will not be greater than volumes handled today.
2. The mix of mail handled in 2020 will include a higher proportion of advertising mail than is handled today.
3. The mix of mail handled in 2020 will include a lower proportion of single piece mail than is handled today. 
4. The revenue associated with projected volumes cannot support the Postal Service's payments on legislated long-term obligations and debt or the current operating model. 
5. Expanding revenue through diversification is not an option now for covering the revenue shortfall of  declining volumes.  
6. Privatization is off the table for now.  
7.  The Federal budget deficit and tight state and local budgets remove taxpayer subsidies as a solution.     
8. The Postal Service's proposal to change its business model and regulatory framework has diffuse benefits and specific costs.

Known Unknowns

1. The amount that actual volume and revenue will differ from the forecast.
2. The amount that economic activity and inflation will differ from statistics used in revenue and cost forecasts and how much they will differ from tend on a year-to-year and quarter-to-quarter basis from the long-run average.
3. The difference in the rate of penetration of high-speed digital and mobile technology from the current forecast.
4. When new communication technology just entering or not yet on the market will find wide acceptance as an alternative to existing print, digital, and mobile alternatives.
5. The time it will take for the Postal Regulatory Commission to review the 5-day delivery proposal.
6. How the Postal Regulatory Commission will rule on an exigent rate case that does not produce break-even results in a test year or changes precedent regarding rate relationships and relative mark-ups on classes and sub classes.
7. The outcome of negotiations between the Postal Service and its labor unions.
8. The time frame for any action required by Congress and whether there is time in this Congress to move legislation forward.

Unknown Unknowns

As these are unknown, none are listed.  


The lists of known knowns and known and unknowns are not exhaustive.   Comments are requested on others that should be added.    A latter post will detail some of the implications of these known knowns and known unknowns.

Lobbying the Congress - for Digestive Diseases

For the past two days, I have immersed myself in research and legislative issues of interest to members of the Digestive Disease National Coalition (DDNC) at its 20th annual public policy forum.     The DDNC is a coalition of professional and patient groups who have an interest in what are generally difficult to diagnose, difficult to treat and often disabling digestive diseases.  Among the patient groups that got together yesterday were:

• American Liver Foundation
• American Pancreatic Association
• Association of Gastrointestinal Motility Disorders
• Ciliac Sprue Association
• Colorectal Cancer Coalition
• Chron's & Colitis Foundation
• Gastroparesis Patient Association for Cures and Treatments
• Hepatitis Foundation
• International Foundation for Functional Gastrointestinal Disorders
• National Pancreatic Foundation
• Oley Foundation

All of the participants have a common interest in pushing changes in law that 1) promote research and early detection programs that could help patients diagnosed in the future; 2) change medicare, medicaid and social security disability rules that would allow them to get the care and financial support that they need without entering a skilled nursing facility. 

Nearly 150 people formed 17 teams that completed over 70 meetings with the staff of Senators and Representatives.   These meeting were informal and provided an opportunity for Congress to hear from patients that usually face challenges trying to find a way to make their digestive track work well enough for them to survive.

In the process,  I learned that a few of the concerns of the coalition are addressed in the the health care reform proposal before congress, especially those relating to medicare and medicaid and insuring individuals with pre-existing conditions. However, the expense of infustion therapy, enteral or parenteral nutrition is so high that current methods of scoring the costs prevented significant changes from current law from being included in the health reform bill.  Most of the others, including those that request increases in NIH funding are on hold until the health care bill passes or fails.   It is my impression, that many of the more popular proposals have their best chances of passing as part of a larger reconciliation bill or as a rider to some "must pass" legislation.

After my meetings, I believe that they provide value but are unlikely to be sufficient to advance the cause of the coalition.  Not all staff members that we met with work for Representatives or Senators on the right committees to change the health research and delivery budgets that are concerns of the DDNC.  Others staff members are knowledgeable but it is not clear from a single visit where the concerns of the DDNC fit relative to concerns on health and non-health related issues of that staff member's boss.   Finally, some meetings were with staff members that may not have the primary responsibility for health issues, or are newly assigned to the issue so that follow up meetings are needed to reach the right person or further educate the staff member.

Clearly, the coalition's paid lobbyists will follow up on the visits.  What could be more important is 1) follow up by both those that came to the policy forum and those who could not; and 2) a stronger web presence that the sponsoring organizations can share to track relevant legislation, the impact of prior efforts of the DDNC, and provide guidance on how individuals can support the DDNC's legislative efforts in a coordinated manner between now and the end of this Congress.  Otherwise, the value of the public policy forum will be lost as time passes.

P.S.   If anyone who reads this blog has information on high-risk pools that are open to new patients, regardless of pre-conditions in states other than Maryland, please contact me via e-mail so that I can get that information to people who are losing their group insurance.

 

The U.S. Postal Service is Officially in a Panic

In the lead sentence of his article on the Postal Service's proposed changes, Federal Times reporter Gregg Carstrom summarized the tenor of the Postal Service's presentation.   "The U.S. Postal Service is officially in a panic."

Having the core of the postal industry in a panic about how they are going to survive should unnerve every stakeholder regardless of whether they are a customer, supplier, or employee of the Postal Service. 

Customers with a panicky supplier have real incentive to seek alternatives.  Uncertainty about the future makes effort to seek alternatives to Postal Service delivered mail more attractive.  Even digital and mobile alternative appear less risky as a predictable future for the "known" delivery mode becomes less certain.

Suppliers with a panicky customer may choose to the cease being suppliers.  Working with a panicked customer is expensive as purchasing decisions become less certain and predictable.  Suppliers will shift their sales efforts to postal operators with a more clear vision of the future, a future that allows them to plan their sales and marketing efforts more easily than it would be if they tried to sell to the Postal Service.

Employees with a panicky employer may choose to seek employment in calmer environments.  A panicked employer finds it more difficult to have employees that are satisfied with their current job and career prospects.   The Postal Service will find it increasingly difficult to hold on to its best employees and find the most qualified people to replace them.

As the above brief paragraphs show, a panic has significant consequences.   The question now is who will calm the panic?

Preview of the New Postal Journal Logo

The Postal Journal is in the midst of a major redesign that will create a user friendly website for information about the Postal industry and a forum for sharing research and opinions that will advance the entire industry's understanding of the issues that will shape the industry.

Below is our new logo.  If you want to know more about how the redesign is progressing, write me at alan.robinson@directcomgroup.com.

Economy Can Handle Fewer Postal Workers

One of the arguments that postal labor unions will make to try to stop some of the changes that the Postal Service wants to introduce will be the impact on employment.  The employment argument resonated while the economy was shedding jobs.  In a weak job market, excess postal employees would have difficulty finding jobs.

This appears to no longer be the case.   The February figure reported today by the Bureau of Labor Statistics showed positive signs for jobs that reinforced reports of the previous two months. Sector by Sector data shows that almost all of the decline came from construction employment that is  easily explained by the snow storms that occurred during the week when the data was collected. Manufacturing employment rose.   Government employment declined with most of the decline occurred at the local level at public schools and at the national level at the Postal Service. Other good signs were the results of surveys that indicated that people are no longer settling for part time jobs because they cannot find full time jobs and a spike in temporary jobs which usually is precursor of growth in full time jobs.

This reports suggests that the Postal Service could shed jobs at a rate faster than attrition over the next 10 years and current employees who are asked to retire early or take severance should be able to find jobs in the private sector in the near term and public sector in one or two years when tax revenue begins to rise again.  Most encouraging for Postal employees are growth in sectors that could use employees with the strong work ethic of postal production employees and the management skills that postal supervisors, postmasters and higher level managers have.

As the economy can handle a decline in Postal Service employment, it may be time to begin thinking about accelerating the proposed changes in the operating and retail networks that will both cut costs and improve service.  In doing so, the Postal Service may help preserve its market position with those business-to-consumer correspondence, advertising and parcel delivery customers that are critical for its survival over the next decade.   While the Postal Service cannot stop the impact of broadband access and increased preference for digital receipt of documents by businesses and households, focusing on these two items first reduces the risk of accelerating the shift to digital delivery that exists with switching to 5-day delivery or annual exigent rate cases raising rates by 2-4% above the rate of inflation would have.

Accelerating these changes has major obstacles due to the effect that they will have on members of the American Postal Workers and Mailhandlers unions and among supervisor and Postmaster management associations.   These changes will reduce their membership and require changes in work rules to increase the share of part time employees to reflect the nature of work in an operating network that will work to minimize the time that any piece of mail spends inside a plant.  The shift in retail to contract stations will reduce the need for traditional postmasters as the number of corporate retail outlets shrink.

To overcome these obstacles the unions and management associations as well as the Postal Service need to think creatively as the changes give employees the best long-term prospects for secure jobs and customers a clearer path forward to plan their continued use of mail.   No industry undergoing competitive changes similar to what the Postal Service now experiences did so simply through reducing workforce and changing work rules through attrition.  In all industries, employees bearing the pain of transformation were given significant financial incentives that allowed change to occur at a rate faster than what attrition would allow.

Unions and management will need to determine the incentives that will be required for full time employees to leave employment that could be applied on a location-by-location basis as the new networks are implemented as well as the incentives that may be needed nationwide to raise the share of part-time employees to 30% or more.   These incentives are the plan B that unions need as soon as they realize that stonewalling change is not a viable negotiating or political strategy.


In addition to similar incentives, management associations need to think about working with management to transform job descriptions  For examples postmasters could incorporate management and financial responsibility for contract retail outlets. Having two competing management silos for corporate and non-corporate retail outlets do not seem to be a sensible way to improve the competitiveness of the Postal Service's retail products in communities that have both types of outlets.  The addition of this new responsibility could require upgrading the salaries of postmasters and some supervisors to reflect the increased responsibility.

Neither the Postal Service nor unions are discussing their negotiating strategy publicly and management associations are concerned about the road ahead.   Neither side can afford to allow the negotiations and /or arbitration process to drag out as the long term prospects of postal jobs and Postal Service requires quick resolution of the difficult issues at hand.

Failure in Postal Commentary

Some of the funniest things on the web are pictures of signs that mean not exactly what the sign writer anticipated.

Here is a prime example:

The Most Ridiculous Caution Signs

Now Chistopher Prandoni, writing for Americans for Tax Reform, in his piece "US Postal Service Plagued with Union Inefficiency, Faces Saturday Cancellations" has an example of political rhetoric about the Postal Service that is almost as funny as those ridiculous signs because of the number of factual errors that it contains.  I urge readers of this blog to read the text and try to find all of the errors of fact that undermine the writers argument and list them in comments to this post. Even though the authors argument is an anathema to many readers of this blog, I do not want comments on the substance of the argument which is consistent with the viewpoint of the organization's anti-government, anti-tax, anti-union views, just how badly it is presented.  So for your reading pleasure here is the text of my nominee this week for failure in postal commentary.

With Post Office officials running around the Hill this week looking for ways to return USPS to solvency, Americans for Tax Reform sent out the following press release explaining the Post Office’s current condition, and why it, unfortunately, it is unlikely to change.

Facing projected losses of $238 billion over the next ten years, U.S. Postal Service (USPS) officials pushed to end Saturday delivery services during Congressional hearings this week. With more people switching to electronic mail, the USPS saw a 13 percent drop in volume last year, more than double any previous single year decline. Apart from cutting Saturday deliveries, the Postal Service is considering raising prices and amending delivery schedules.

As part of the Executive Branch and therefore protected from all private competition, the USPS is plagued with inefficiencies and unionization rates only a government agency could endure. The problems include:

• USPS currently employs 800,000, only 516,000 of which actually deliver or process mail
• In order to stay afloat the USPS will cut 100 million work hours, or 57,000 positions, close 6 district offices, and implement a hiring freeze
• Even with the drastic cuts described the USPS will still be $1 billion in debt
• The average USPS worker earns $83,000 per year due to bloated union contracts
• The USPS is highly unionized with over 660,000 employee’s members of various unions
• Members of American Postal Workers Union, the largest postal union, can begin collecting retirement checks at age 55 if they worked there for 30 years
• The USPS wastes resources: There are about 400 major mail processing facilities, far more than the USPS needs given that it has 50% excess capacity for processing first-class mail alone
• People no longer find the USPS as useful: First Class mail volume (which is protected by legal monopoly) has declined 22% from 1998 to 2007
• Americans are weary of subsidizing the broke USPS with 50% saying they would rather cut services (only deliver mail five days a week) than bail them out

Will Difficult Decisions Wait Until 2011?

Gerson Lehrman Group has published a well reasoned commentary entitled "Transformation is Essential to Save the Postal Service" Gerson Lehrman Group's interest in the USPS is due to the impact on thousands of privately held and publicly traded companies "from Wells Fargo, Time Inc., and Williams  Sonoma to small businesses and the public, competitors such as UPS and FedEx, and suppliers like Pitney Bowes."

The following paragraphs may be foretelling comments relating to Postal Service's troubles that investment analysts will add to opinions of companies of competitors, customers or suppliers of the Postal Service.

There are two important factors overlaying the changes the PMG feels compelled to propose:  1) many of the proposed changes will require either outright approval or at least non-opposition by Congress; and 2) how will various stakeholders react -- will there be outsized or unintended consequences?

Congress must approve the elimination of Saturday delivery (technically by lifting a ban against reducing days of delivery), mandate any changes to retiree health prefunding or flexibility in pricing, and not oppose the restucturing likely to be at the heart of USPS' cost-cutting measures.  Whether Congress will be willing to make any of these changes, other than the minimum to keep the institution solvent, as it did in 2009, is an open question.  On the one hand, Congress cannot permit the system to become insolvent, but on the other ending Saturday delivery may prove more unpopular than many think.  Neither is a palatable option in an election year.  So, 2011 looks to be likely the year for the more difficult decisions.

For companies that rely on the mail and face financial challenges themselves, the 5% emergency increase offered as a possibility by the PMG, would be problematic.  With unprecedented opportunities to move mail out of the system, it may prove far more economic to spend the difference on more servers, software, training, and incentives to customers.  Losing Saturday delivery would also be troubling to marketers who want their promotions to land on doorsteps on Saturday mornings, charities, political organizations and financial institutions losing "float" through delayed statements and remittances, insurance companies with statutory notice and other mailed requirements in all 50 states, small newspapers which deliver through the mail on Saturdays, and the list goes on.  How much will that cause them to turn to the Internet or elsewhere?

For competitors, much will depend on whether the Postal Service also raises prices on its "competitive" classes, such as Priority Mail or parcels.  Will loss of Saturday delivery or charging a premium for it for certain services open an opportunity for market share growth to competitors?

For the labor unions, what concessions will be asked on compensation, benefits and work rules?  Can they afford them -- can they afford not to? [emphasis added]

The author of the Gerson Lehrman Group asks good questions.   Now is the time for answers.

Postal Service as Political Football

A tweet from Fred Thompson

Postal Service to lose $238B. How about Obama makes Post Office "deficit neutral" before we let him take a shot at health care?

This is just the beginning.

Is the Postal Service Destined to Fail?

Minyanville has a fresh observation of the risks that a failing Postal Service would have for the American economy and the companies that rely on it today in the column, "Why the USPS is destined to Fail". 

The article describes how the use of mail has changed base on a quote from the Seinfield character, Newman

 “Because the mail never stops. It just keeps coming and coming and coming. There's never a letup, it's relentless. Every day it piles up more and more, but the more you get out, the more it keeps coming. And then the bar code reader breaks. And then it's Publisher's Clearinghouse day!” 

This quote fairly describes the nature of the demand for mail when Seinfeld was on television between 1989 and 1998.  The nature of competition for document and parcel delivery is not longer the same as it was in the 1990's.  The forecast completed by Boston Consulting Group suggests this quote will be even less descriptive of the Postal Service in 2020.


The Minyanville article identifies some surprising losers if there is not a successful transformation of the USPS.Losers if there is not a successful transformation of the Postal Service into a viable enterprise,   The losers the article identifies include:

•  FedEx and UPS who transport mail by air and rely on the USPS for delivery of parcels under 5 pounds
• Amazon,  NetFlix and Ebay that rely on the Postal Service for handling deliveries

The article just touches the surface of the economic impact of the failure of the Postal Service.   Numerous business both large and small that focus on serving limited geographic areas (e.g. pizza delivery, dentists, furniture retailers, opticians, and home repair firms) use mail as their primary means of advertising.   Replacing the USPS with alternative delivery would be difficult for either the losers that Minyanville identified or those that were not.  

The Minyanville column suggests that the Postal Service will Fail because the legislative and regulatory process will not move fast enough to allow the Postal Service to handle a wave of change that is similar to what has already devastated newspapers and magazines.  This viewpoint is not without merit as the Postal Service's proposal is similar to other proposed policy changes designed to transform an industry in that the benefits are diffuse (i.e. all businesses and households that would use a universal mail delivery network in 2020), and the costs are concentrated (i.e. job cuts, higher postage rates, changed retail presence).   Those who will bear the costs will find it easy to raise the funds necessary to argue why change is not necessary or harmful to the nation's interests.    Those who receive the benefits most likely will not even realize the value of the change to themselves or their business and will likely be silent.

Change will require champions in Congress and the White House, and a significant independent record available for those champions to use.   While the studies prepared by the Accenture, Boston Consulting Group, and McKinsey and Co. provide some of that record, more work needs to be done confirming their findings in order for change advocates to prevail.

News Hour Report on the USPS

The News Hour on PBS has a nearly 9 minute story and discussion on the Postal Service's proposal.  The discussents are:

• Ed O'Keefe - Washington Post reporter who covers the Federal Government in an online column Federal Eye

• Frank Wolack - a Stanford economist who has testified on postal regulation and conducted research on the changes in consumer demand for mail service.

 The discussion is quite informative and like other stories presented in the News Hour provides information and does not include posturing by politicians or the Washington chattering class.

I urge readers of this blog to take the time to view this report. by following this link:

Video: PBS Newshour Report: Postal Service May Nix Saturday Delivery To Cut Costs

Previewing the Postal Service's Proposal

The Washington Post has a preview of the Postal Service's proposal for changes in its business model that it is announcing tomorrow.   According to the Post, the Postal Service spent $4.8 million with three high end consulting firms, Accenture, Boston Consulting Group and McKinsey and Company.  These companies reviewed the Postal Service's finances and developed 50 ideas for cuts and new services. 

The article suggests that these consultants will confirm, the severity of the Postal Service's financial problems and detail how those financial challenges limit the Postal Service's options.  Basted on the Post's reporting we know that the consultants concluded:

• The Postal Service's culture, business processes, finances and other characteristics of its business model are so dysfunctional that privatizing the business is untenable. 
• The Postal Service does not have the financial wherewithal to handle the start up-costs and initial losses that would be incurred if it were to expand its retail offerings to include banking, insurance, cell phone services at its corporate owned retail centers.

The first conclusion argues that even if privatization is the preferred option for the postal business, it cannot be considered until the Postal Service's finances, business processes and corporate culture improve significantly.  The second conclusion suggests that most ideas that postal commentators, stakeholders, and policymakers have had for expanding retail services to save corporate post offices are not financially viable. 

Armed with these reports, the the Post reports that the Postal Service will propose:

• Eliminating Saturday delivery;
• Introducing hybrid-mail products that include e-mail delivery;
• Modifying union agreements for greater work-rule flexibility and reduced levels of USPS contributions for health insurance;
• Requesting Congress to reverse the requirement that it prepay retiree health care liability; and
• Replacing corporate retail outlets with franchises and contract stations in office supply stores, supermarkets, and retail outlets.

If these five points are the highlights of the changes that the Postal Service wants to implement, then it is clear that there are few viable options to turn the enterprise around other than changes that modify the nature of postal services as they now exist.  

Coca Cola, PepsiCo and the Postal Service

First PepsiCo and now Coca Cola have decided to buy out their bottlers.   In doing so, both companies have decided that the long term health of the beverage industry requires integrating the syrup producing business (i.e. Coca Cola or Pepsi) with the bottling business (i.e. Coca Cola Enterprises, Pepsi Bottling Group, and Pepsi America).

These two companies have both decided that it does not make sense to separate the "last mile" in the soft drink business (bottling and store distribution) from the "first mile" (syrup production and marketing) of the business.   Why would they do that?   There are four reasons.

1. The customer in the soft drink business is not just the consumer. Retailers, and in particular Walmart, Target, Costco, Supervalu, Safeway, Kroger, and Ahold require attention as customers as they determine the amount of shelf space available for both myriad of new products that Soft Drink makers want to bring to market.  Soft drink manufacturer's profits depend more and more on the relationship between bottlers and the retailer, the producers of the soft drink cannot afford poor execution by bottlers in handling retailer customer service.
   
   
2. Customer preferences now require a wider range of products and product sizes than ever before.  To reach consumers, soft drink companies need bottlers to make substantial investments in many different machines to handle shorter runs that the increase of product variety requires.   As a low growth business, bottlers do not have as ready access to capital as faster growth soft drink manufacturers do slowing the ability of Coca Cola and Pepsi to introduce the products that consumers want and bottle shapes and sizes that marketers dream up.
   
   
3. The shift in consumer preference and the rise of mega-retailers have shattered the model of the bottler as a low-margin, low-growth utility that need not be integrated with the creator of products and designer of packaging.  This model worked as long as the demands on bottlers were within the financing capabilities of an industry with high capital costs and low operating margins and the transaction costs of contracting with bottlers were less than the costs of integration and the heat from investors of having a division with lower financial margins.
   
   
4.  The volumes that bottlers handle on their traditional "soda" production lines are shrinking, reducing already small margins.   Shrinking volumes put the bottlers at financial risk that the syrup providers cannot afford.

The issues that Coca Cola and PepsiCo faced when deciding that a century old "first-mile" only strategy no longer worked apply as well when thinking about the Postal Service and how worksharing has created a "last-mile" culture and postal observers, like Robert Cohen and others suggesting that the Postal Service pursue a "last mile" only strategy. These arguments focus on the savings that can be generated by having each part of the mail supply chain performed by the most efficient provider.   What this argument ignores is the additional transaction costs and complexity that this strategy creates for the mailing industry that may weaken the ability of mailers to get the Postal Service or any combination of suppliers to actually provide the service they require at a price that makes mail a viable communications mode.  

• The last mile strategy separates the Postal Service from direct contact with mailers, the companies and individuals that conceive and design the communication to be sent or process the order for parcel shipping.   Rather than knowing what mailers want and the trends in demand for mail service in industry verticals, the Postal Service knows what the sender wants through their contact with intermediaries.  Given the current financial challenges, the Postal Service can ill afford anything that impedes understanding of customer needs and designing delivery products that meet those needs will impede revenue growth.  
  
  
• The last mile strategy drives a strategy focused on high volume handling of uniform items.   The problem of uniformity is illustrated by the challenges the Postal Service is handling in trying to fit all flat shaped mail into the capabilities of large machines handling large volumes of nearly identical items.   It is not clear that focusing on uniformity and long runs make sense as mailers are looking to expand the bounds of print and shorten print runs in order to ensure that the individual mail piece appeals to the customer, and the volume of mail that fits within the uniform specifications declines.
  
  
• The last mile strategy does not work well in transportation markets with customers requiring national distribution. When the trucking industry eliminated entry restrictions, trucking firms with limited geographic presence expanded nationwide.    This was true firms that handled truckload and less-than-truckload shipments and trucking firms that focused on long-distance and regional transportation needs of shippers for that type of service nationwide.  The Postal Service is similar in that most of the Postal Services' customers are national companies that require distribution of mail to every address in the United States or payments from households in every county of all 50 states and U.S. territories.   While many of these companies have the firms that print their mail transport it to a postal facility, sometimes involving transportation of hundreds or thousands of miles.   Mailers and printers know the coordinating transportation with entry into a postal facility is a challenging proposition. 
  
  
• The last mile strategy ignores the transaction costs associated with negotiating what portion of the rate the first mile and last mile provider should receive, negotiating the physical transfer of the items being delivered, and negotiating the necessary transfer of information that would allow the provider of last mile service to optimize their operations.  The mergers of railroads in the last two decades primarily reflect expansion of scope of service that can be provided without contracts between service providers.

The "last-mile" strategy will remain in place as long as the Postal Service can only differentiate prices between customers on the basis of cost studies that the Postal Regulatory Commission supports and based on the economic theory that the Postal Service promoted to get these prices approved by the PRC decades ago.  It may be time for mailers and the Postal Service to develop the economic arguments for market based and cost plus pricing strategies that would allow the Postal Service to offer innovative services streamlining and coordinating the process from printing to delivery that could reduce the time and cost of taking an idea and transforming it into a delivered mail piece.