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?

The Future of Print: Oxford English Dictionary

Anyone who has been to a public or college library, has seen the Oxford English Dictionary right in the middle of the reference section.   Often, the dictionary was displayed on its own stand that almost looked liked a preacher's lectern thereby suggesting some form of reverence for the English Language.  What is usually displayed is the one-volume edition, a mere subset of the multi-volume Oxford English Dictionary.

This weekend, the publisher of Oxford English Dictionary announced that the next edition will be published in digital format only.   Until now the Oxford English Dictionary had been available in both the bound and digital format.   The one volume edition will remain in print.

Facts about the Oxford English Dictionary (Source: OED.com)

• Last printed version (2nd edition) published in 1989.
• Second edition had 22 volumes and 21,730 pages.
• Number of entries in Second edition was 291,500  

Publication Dates (Source: Wikipedia and )

• 1884 - First published  under the title A New English Dictionary on Historical Principles; Founded Mainly on the Materials Collected by The Philological Society
• 1895 - First published under the title Oxford English Dictionary
• 1933 - republished as a 12 volume set with a one volume supplement
• 1972 - supplement added for the letter A
• 1976- supplement added for the letter H
• 1982- supplement added for the letter O
• 1986- supplement added for the letter Sea
• 1989 - Second edition published
• 1992 - Version 1 of the CD ROM edition published
• 1993 - Supplement published as Oxford English Dictionary Additions Series
• 1997 - Supplement published as part of Oxford English Dictionary Additions Series
• 1999 - Version 2 of the CD ROM edition published 
• 2000 - Oxford English Dictionary Online edition published as a subscription.  The online edition has been updated quarterly
• 2002 - Version 3 of the CD ROM edition published
• 2007 - Version 3.1.1 of the CD ROM edition published as the first version that could be copied to the user's computer hard drive
• 2009 - Version 4 of the CD ROM edition published as the first version compatible with both Windows 7 and Mac OS operating systems

The Recovery and the Post

The GDP numbers released last week were disappointing.   Yet, the numbers for the Postal Service and advertising in general were not that bad.  Why is that?    It is simply that sales to domestic purchasers -- which include consumers, businesses and the government -- rose 4.3%.    An an industry that depends on its ability to grow the sales of firms that sell products and services to consumers and business, having customers whose business is growing faster than the economy is good news.

So why does the economy seem to be slowing down?   The reason is four fold. 

First, Americans are not purchasing domestically made goods.   Nearly every sale in the shopping mall is either imported directly or includes significant amount of their components imported.  From apparel to electronics, nearly every item is shipped directly from factories overseas to stores and sometimes directly to consumers.   Larger items that are manufactured in the the United States like appliances have key parts like electric motors that are shipped from overseas manufacturers for assembly in factories in the United States. 


Second, companies had cut both retail and production inventory so sharply in 2009 that the increase in business and consumer demand in the first half of 2010 resulted a major inventory rebuilding effort, much of which required purchasing goods from overseas.  Given that no company wants to rely on expensive air shipping of component parts or retail inventory, companies built up inventory to levels required to permit slower ocean transport for forecasted demand levels. 

Third, forecasting consumer demand is difficult.  Even a slight over-estimation of consumer demand results in build-ups in inventory of foreign purchased goods.  So if a company assumes more sales than actually occurred then they will have inventory levels of imported goods greater than their ability to sell at full retail price.  This reduces the GDP as GDP represents the difference between the price paid for the imported goods and the sale price to consumers.

Fourth, during a recovery it is likely that inventory build-ups of both seasonal and non-seasonal goods may occur in quarters prior to the sale.   For example, imported holiday decorations and themed products may arrive in the United States and added to inventory a quarter or more before they are actually sold so the public.   In this case, the import of inventory  reduces GDP in the quarter that it is imported and will increase GDP in the quarter that it is sold.   The effect of the temporal difference between inventory build-up and actual sales has the impact of lowering reported GDP in quarters experiencing the inventory build-up and raising it when it is sold.   So it would not be surprising to see much faster growth later on when there is a small adjustment for imported inventories.   The build-up in inventories may have worsened this effect over normal seasonal patterns.

So trying to estimate the real change in GDP is a lot more difficult than before.   It is unlikely that this will be picked up by the nightly news, political commentators, or politicians as it is difficult to explain in a soundbite.   The only place where this might be understood is among investors, and the market's positive reaction to the GDP revision  suggests that large investors clearly saw that the decline in the GDP numbers may have exaggerated the economies slowdown.

This is not to say that the economy is strong.    Unemployment remains quite high, the value of the assets of most consumers are down, and their need to save and not spend is greater than at any time since the 1930's. In addition, both residential and consumer real estate has significant excess inventory that will put a major damper on construction spending for a number of years to come.

In the next few months both Republicans and Democrats will be making proposal for fixing the economy, grow jobs and improve GDP growth.    The problems that imports create in measuring GDP growth suggest that businesses, like those that use the mail for advertising, should start asking serious questions to these politicians and their advisers about how their proposals increase net domestic spending (domestic spending minus imports) as opposed to that of their opponents.   They should not accept arguments that said that one approach or another worked in the past as these approaches were applied in an economy where imported goods represented a smaller share of domestic spending.  They should instead ask:  How does this approach when a significant share of all domestic spending involved imported goods and services?

USPS July Preliminary Financials: Oh the Questions They Raise

The Postal Service filed their July 2010 preliminary financials with the Postal Regulatory Commission and the results raise more questions about its financial viability and its ability to develop realistic financial plans.

• What should the financial target be to ensure financial self sufficiency? 
• If accounting break-even is not sufficient, then what operating margin is required?
• Why is the workers compensation expense greater than plan for two years in a row?  It required a $718 adjustment in 2009 and is $1,593 million greater than plan this year.  
• Is the problem with the Postal Service's forecasting approach or is it because properly forecasting workers compensation would require presenting non-GAAP financials prior to the official calculation of its actual liability?
• How is the shift in the mix of mail affecting the demand for resources under the current operating model?
• How does the mix of mail differ from what either the Boston Consulting Group forecast projected or what the Postal Service projected in the exigent rate case?
• Does the decline in the average revenue per piece for both Standard Mail and Mailing Services overall reflect a faster or slower decline than what the Postal Service previously anticipated?
• Does the Postal Service need a more radical or more rapid operating overhaul to bring costs in line with potential revenue than it has proposed to date?  
• Is this rapid or radical operating overhaul required regardless of what happens with the exigent rate case?
• Is this rapid or radical operating overhaul required regardless of what happens in the disputes over the Postal Service's retiree liabilities and expenses?
• Does the Postal Service have the capital necessary to complete the operating overall at a pace required to make it self sufficient by 2015 or 2020?
• How long will it take for Congress and the administration take to realize that fixing the Postal Service's financial problems cannot be solved without major adjustments in its retiree obligations?
• What price will stakeholders have to pay to have the retiree expense problems fixed?
• Can the retiree expense problems be fixed without a major restructuring of the Postal Service's business model, operating model, and regulatory framework?
• Will this restructuring look anything like what the Postal Service proposed in its action plan?
• How will the 2010 election and more conservative Congress affect the political process for fixing the Postal Service as well as potential outcomes?

Are the Postal Service's Earnings Forecast Too Optimistic?

Readers that are expecting an answer to the question in the title will be disappointed.   The truth is I do not know.   However, I do know that the most recent forecasts, or at least those contained in the exigent rate case are woefully out of date even though they are at worst 6 months old.

The problem with the financial projections does not lie with the Postal Service or those that are responsible for their development.   At the time the forecast, they represented the best understanding as to the near term (under 2 year) prospects for Postal Service revenues and costs given the economic data and management plans at the time they were made.   The problem exists because 1) the regulatory lag associated with preparing and litigating any proceeding before the Postal Rate Commission; 2) the lack of shareholders and investment analysts that are developing independent forecasts that force enterprises to announce how changing economic conditions affect future earnings at least quarterly and in the cases of many companies monthly; and 3) the risk that the Postal Service faces that the time frame for litigating proceedings before the Commission could lengthen if it would regularly suggest that the numbers that it presented were better or worse than they now are.

Now why would I be concerned that finances may be too optimistic?

The primary reason is that the general understanding of economic growth is worse today than it was 6 months ago.  Why?

1. The consumer has become significantly more risk adverse than ever seen before.   This affects the economy in a number of ways.   Consumers are investing their savings in the most secure investments possible (e.g. CD's and Treasury Bonds) and no longer see either real estate (i.e. their home) or stocks as reasonable ways to save for retirement or children's college tuition.  Consumers are stopped borrowing as they realize that the cost of loans now is greater than the change in the value of the goods they plan to purchase, whether that is a major appliance, car, or home.   If one believes that prices are not going to rise, it may be cheaper to save rather than borrow.   That explains why lay-a-way programs are starting to make a comeback.   Finally,  consumers are changing views on what they believe are necessities.  Whether this reflects the state of the economy or changing demographics does not matter.   Items such as electric dryers, microwave ovens, and air conditioners are considered to be necessities by fewer consumers tan prior to the recession with the shift occurring before the recession began.
   
2. Companies focused on selling everything from appliances to shoes to consumers realize that their projections for consumer spending during the back-to-school and Christmas seasons were overly optimistic.   To the extent that these companies can, they are scaling back purchases to get their inventory more closely aligned with consumer demand.   Companies selling to consumers realize that managing overhead, selling, and inventory costs are critical if they are going to meet profit goals.  Those that were late to this realization will likely force higher levels of promotions during the upcoming selling seasons pressuring corporate profits.
   
3. The way we use computers, telecommunications, and energy have shifted both businesses and consumers toward technologies that require less labor to produce and maintain.  In addition, service and manufacturing companies have used these changes to reduce the use of labor intensive processes that take advantage these technologies.  The shift has resulted in the double digit unemployment among blue-collar workers which may not improve in the lifetime of the employees affected.

The slowdown in the economy should affect mail volume and revenue as much of the Postal Service's business is economically sensitive.  However, not all is bad news. 

• The Postal Service is likely to have a good 1st quarter in FY 2011 as political and retail advertising max out available broadcast advertising capacity and look to mail as the only advertising media that has the capacity to reach voters or customers. The increase in demand may have a negative impact on costs as the bump in volume may result in a bump in overtime to deal with peak volumes in October, 2010.  Also, this is a one time bump in revenue and volume and should not be mistaken for a longer term trend as the volume gained this fall will not come back again until the 2012 election.
  
• Costs for energy and labor will likely not rise much.   Lower energy prices will hold down transportation and facility costs.  Depending on the energy price assumptions used in the forecast, costs may be lower than now projected.

Given these trends it is clear that forecasting the Postal Service's finances need a second look.  In addition, it would seem that if the Postal Service wants to make any major effort to reduce its overhead and capacity, it may make sense to begin planning for changes that will begin after the January 1, 2011.   Once the election and shopping seasons are over, demand will be back down to normal seasonal levels reflecting only the general state of the economy and the technological shifts away from mail.

Leaving the Mailstream: Verizon

Today, Verizon launched a campaign to convince more residential phone customers to both receive their bills electronically and pay electronically.   The press release combined by an analysis of Verizon's most recent financial statements provides some useful details that explain why transaction mail volumes are decline so fast.

• The number of Verizon's wireline (traditional) phone residential customers are declining rapidly.  In the 2nd quarter of 2010 Verizon had 17.4 million residential customers, 11.4% fewer than a year earlier.  Some of this decline reflects shift toward phone service provided by the cable company or on-line services like Vonage but most of the decline reflects residential customers unplugging from the traditional phone network.
  
• The number of business customers is also declining but nearly as quickly.  In the 2nd quarter of 2010 Verizon had 13.6. million business customers, 5.9% fewer than a year earlier.
  
• In June of 2009, 8 million residential customers paid their bills electronically or 46% of all Verizon residential customers are paying their wireline bill electronically.  
  
• Currently 2.4 million Verizon customers receive their wireline bill on line or 14% of residential customers receive their bills electronically.  
  
• Verizon expects the promotion will increase electronic bill presentment to rise by 250,000.  Following the promotion, Verizon will have around 16% of its customers both receiving bills electronically and paying electronically.

Verizon's effort is designed to reach web-connected wireline customers.   Given that the cost of prize money and advertising expense are modest, the potential return for Verizon is significant.   In all likelihood, Verizon will develop similar promotions in the future as it tries to shrink its paper billing and payment operations.

Why Extending the Tax Cuts for High Earners Makes Little Sense for Mailers

Currently there is a major argument over whether the Bush tax cuts should be extended for those  earning high incomes.  The argument is being fought on traditional left-right, Democratic-Republican lines. 

While some argue that raising rates on the highest earners will hurt job creation, I am not persuaded by that argument for three reasons.   First, it is not clear that the increase in marginal rates will affect the willingness high-income earners to work especially when individuals face real concerns about the risks they face in order to generate income now until they retire.   Second, the deleveraging of America means that marginal increase or decrease in income has a lower impact on spending than in times when consumers were willing to borrow heavily to expand their ability to spend.  Third, the increase in savings rates has not seen growing investments in the private sector but growing investments in Treasury bills and other government securities.   In essence, by continuing the tax cuts we are giving individuals money that they lend to the Federal Goverment to pay for the tax cut.   What is missing is the expected gains in output, spending, and private investment that tax cuts normally are expected to produce.

But whether you agree with my argument on the economic impact of extending the tax cuts or not it is clear that extending the tax cuts is bad for the mailing industry.   Why?  Because extending the tax cuts increase the projected deficit.  The higher the projected deficit, the stronger the headwinds against fixing the Postal Service's retiree cost issues are. The mailing industry can ill afford any additional budget related challenges now as the ones they now face are more than sufficient.

The Definition of the Postal Market

In its most recent post, Hellmail announced an upcoming shift in its direction.  Until now, Hellmail has focused on providing news and commentary on Royal Mail and its competitors in Great Britain and to a lesser extent postal operators and technology throughout Europe.  In early 2011, Hellmail "will see the expansion of what it does and the areas it covers.   ... Whilst 'post' will remain a central theme, this blurring of communications will be reflected in its output with a broader coverage on EU regulation, World communications, new markets and products."

What does this change mean for how postal markets are defined?

• The market includes both national posts and competitors that offer only collection and sortation services, and others that offer full origin to destination services.
• Postal markets include a range of physical and digital delivery services for documents as well as parcel delivery, and possibly financial services sold at what were primarily offices that sold only mail and parcel delivery services.   

In terms of regulation, the new definition of postal markets shifts has tended to shift regulatory power  from industry specific regulators to regulators that cover both digital and physical delivery.   In many cases, the shift to a multi-modal postal market has had the effect of reducing regulation as the broader definition of the market reduces the justification of market regulation.  Regulation of postal markets is also losing favor as the regulatory process is perceived to reducing innovative business practices and economic growth.

Finally, the broader definition of the postal market has increased the importance of capitalization for both national postal operators and their competitors. Strong capitalization is critical for making adjustments in mail processing operations, modernizing retail operations including expanding the use of self-service kiosks, and entry into hybrid mail, digital delivery of documents and a range of financial services.     Smaller national operators are seeking mergers as looser alliances are no longer deemed sufficient to compete.  Mergers have occurred between the Danish and Swedish Post Offices as a means to reduce duplicate back-office operations which allows the enterprise to reduce overhead and improve both profitability and working capital.  Proposals to privatize posts that remain owned by the government are continuing to develop as government ministers and postal managers realize that capital needs exceed what can be generated from postage in an environment where government investments are unavailable. 

The United States postal market will not be immune from these trends.   The question before stakeholders and policy makers is will Congress make the necessary changes to ensure that the United States Postal Service makes the necessary adjustments in order to compete in both the world today and the one that will exist a decade from now.

Why the Exigent Rate Case Should Not be Approved

I have tried to avoid commenting on the exigent rate case up till now.   I have long held that the Postal Service can no longer hold accounting break-even as the standard for financial self-sufficiency.  Over a year ago I wrote that financial self sufficiency requires an operating margin of 10 to 15 percent and until the Postal Service manages its business with that goal in mind it will be in a continuing state of crisis.

In addition, I have written that the decline in First Class mail, and in particular single-piece First Class mail will impose significant costs on the Postal Service for shrinking its workforce and network that should be borne by current users of this product today as otherwise the Postal Service will not have sufficient cash to cover those costs when they incur in the future.   Then these costs will be mostly born by advertising and parcel mailers in the future as there will not be enough single piece First Class mailers left to handle the brunt of these costs. However, the current costing approach does not recognize this need so the Postal Service is less likely to take steps that cost money to quickly reduce its workforce and network as demand declines.

So if I believe that the Postal Service needs to have a significant operating margin and higher prices on products to cover transition costs, why do I believe that the exigent rate increase should not be approved?

1. Approving the exigent rate case reduces the pressure on Congress to fix the retiree benefit over-payments for pensions and miscalculations of these obligations.   No solution to the Postal Service's problems exists without this fix.   This is true regardless of whether one believes that the Postal Service should be privatized or should continue operating using a business model similar to the one it now has.   The exigent rate case reduces the level of adjustments that Congress must make to prevent an annual liquidity crisis, let alone solve this problem.
   
   
2.  The timing of the exigent rate case weakens the Postal Service's political position as it attempts to streamline its network.   The Postal Service has always faced pressure from Congress that often derailed efforts to streamline its network and modernize its retail operations.    Without the exigent rate case the Congress is more clearly faced with the choice between allowing the Postal Service to streamline its operations and subsidizing postal operations.   Given budget politics, subsidizing postal operations is clearly off the table.
   
   
3. The exigent rate case weakens the Postal Service's argument before Congress that it needs greater commercial freedom and ability to offer "non-postal" products.   The long term health of the mailing industry requires the Postal Service to have significantly greater commercial freedom to expand the value of its products to customers and to identify additional means of earning a profit off of its physical, intellectual, and human capital assets.  A change in law to expand this ability puts the Postal Service in direct competition with a number of powerful interests that benefit from these restrictions.    These restrictions weaken the U.S. economy as they limit competition in both the delivery of parcels and more importantly in the production and the delivery of advertising used to identify new customers and expand private sector businesses.
   
   
4. The exigent rate case makes little sense for an enterprise whose customers require that what they pay for postage generates a positive return.  Increasingly postal revenue is driven by advertising and parcel delivery.    These are highly competitive markets where spending on services provided by the Postal Service require that its service provide a higher return than those offered by competitive delivery modes, as well as a higher return than not advertising at all.   Higher prices reduce the number of customers that find that mail generates the positive return on their advertising spending necessary to use the mail.
   
   
5. The exigent rate case comes at the wrong time relative to the Postal Service's labor negotiations.   The Postal Service is likely to demand some significant, necessary and unpopular changes in its labor contracts within the next two years.    These changes reflect the fact that the total demand for labor, the mix of full-time and part-time employees, and a number of other contract provisions no longer make sense when few postal customers use retail outlets and most mail does not require originating sortation.    It makes little sense for Postal management to raise rates prior to beginning the negotiations and more importantly arbitration where its ability to raise rates could be a significant factor in the arbitrator's decision.   Postal labor unions recognize this fact and have been among the strongest supporters of the exigent rate case.
   
   
6. The exigent rate case does not introduce realistic financial goals for the enterprise.   It makes little sense to raise rates without changing the primary financial goal of the organization from whether there is enough money at the end of the year to pay the bills.    Before the Postal Regulatory Commission even considers raising rates, it should develop a position as to what financial goals are needed to ensure self sufficiency.  This is also critical for Congress to understand why fixing the retiree expense issues cannot be avoided but also why it is the first step and not the last step necessary if the Postal Service is to have a long-term future.
   
   
7. The exigent rate case maintains the cost plus approach dating back to regulation under the Postal Reorganization Act.   Postal rates eventually have to reflect a better understanding of demand for its products and the costs of an efficient operator.   Costing approaches, rate relationships, and worksharing discounts all take the focus away from the value of the service to the customer in determining prices.   Worksharing increased volumes of mail, not just because the private sector could sort mail cheaper because many of the automation related discounts could be received by mailers that did not have to incur any costs to sort the mail they tendered to the Postal Service at all.   Instead, the discounts put the price of the delivery service below the value of the delivery for more customers allowing advertising agencies and printers to sell their services to customers that would not have considered the use of mail previously.  Worrying about the level of cost pass-through prevents the Postal Service from asking two even more important questions.  1) What is the value of mail to the sender and how do postal prices compare with the value that senders perceive that mail has?  2) How can the Postal Service provide its services at costs below the customer's understanding of the value of the service?
     
8. The exigent rate case illustrates that a piece-meal approach to fixing the Postal Service's business model and regulatory framework does not work.  The exigent rate case, just like all other proposals made by the Postal Service is being handled independently of all other changes that may be needed to restore financial self sufficiency to the Postal Service.   As such, it is never clear if rate increases do little more than reduce the pressure on taking other steps neccesary to make the Postal Service self sufficient.

In closing, rates for Postal Services eventually need to reflect market realities and the costs of an efficient operator both capable of and working toward managing operations to cost levels that market realities can support.  This requires a better understanding of the value of mail to customers, the elimination of unwarranted retiree expenses, the streamlining of management and contract resources, the speedy restructuring of the network to minimize delivery, processing and transportation costs while still meeting universal service requirements, and elimination of restrictions that prevent the most effective use of human capital, physical and intellectual property assets.  The exigent rate case conducted in a vacuum brings us no closer to producing rates based on market realities and may hinder fixing a number of the serious flaws in the business model and regulatory framework that must be changed.

Is This Blog the Postal Service's Source of Information on its Customers?

I am honored that this blog has sufficient credibility to allow the Postal Service to quote it to support the Postal Service's proposal to move Commercial Standard Mail Parcels to the Competitive Products list.  On page 10 of Appendix B of its filing, the Postal Service referenced the post, "Why the Postal Service Matters, FedEx needs it."

In that post, I noted that a significant share of Standard Mail Parcels were used to deliver parcel delivery services sold by FedEx and United Parcel Service.  My post was based on an analysis of public information gleaned from the Postal Service's and FedEx's website which showed that the total volume of Parcel Select was less than the volume FedEx shipped using its SmartPost service.  

My analysis was limited as I could only use public data.  I presume that the Postal Service has better information on the use of the Standard Mail Parcel product by FedEx and United Parcel Service and the proportion of the volume and revenue from this product that is generated by United Parcel Service and FedEx.   That information would be far more credible than anything that I could generate and post in this blog.   

More importantly, this information will be critical in trying to price the product once it is placed on the competitive products list.    The Postal Service needs to know not only the total volume tendered by FedEx and United Parcel Service for specific products but also the volume and revenue by facility where the parcels are dropped.  This will allow it to identify differences in the portions of the Postal Service's processing and delivery networks used by parcels tendered by FedEx and United Parcel Service as individual customers.  For example, United Parcel Service and FedEx may use the Postal Service for different mixes of parcels destined to urban, suburban, exurban, rural, and remote addresses which affect the cost of handling their parcels.  With this information the Postal Service could maximize its return for serving United Parcel Service and FedEx by matching prices (or discounts from published rates) based on the differences in how the two companies use the Postal Service's delivery services.  This is exactly how United Parcel Service and FedEx set rates within contracts with their largest customers and how the Postal Service should estimate its costs prior to negotiating contracts for competitive products.

What does Warren Buffett know about the future of the USPS?

In his quarterly filing of investment holdings, Warren Buffett announced a new investment by Berkshire Hathaway in a competitor to the Postal Service.  That competitor is Fiserv. (FISV)   With this investment, Berkshire Hathaway becomes the 6th largest investor in the company.

Fiserv is not a household name . However, many of the services that it now offers were originally developed by a company called Checkfree that it purchased a number of years ago.   Fiserv has expanded those services and has continued to see its volume and revenue grow as consumers shift away from payments by mail.   Fiserv's clients include a full range of companies that send bills and receive payments including banks, other financial institutions, retailers, health clubs, and utilities.   Fiserv's services that compete with the Postal Service can be found on its page describing its biller solutions.  These solutions include:

• On-demand bill pay – agent, Web and IVR
• E-lockbox and remittance processing
• Walk-in bill pay – more than 20,000 locations nationwide
• Electronic bill pay (EBP) at your site
• Electronic bill pay (EBP) beyond your site
• Bill delivery – print and mail
• Bill delivery – paperless billing
• Targeted messaging – transpromotional, direct mail, e-mail or in-statement

Fiserv actually markets its services as solutions for what it calls the postal sector.   Its website touts its postal sector service as follows:

As e-mail and e-documents continue to flourish, they challenge the amount of physical mail being delivered. Fiserv can help you bridge the gap between physical mail and the electronic world. Whether you offer purely physical mail services, run a hybrid mail center and are looking to add electronic functionality to your existing service or are seeking to enhance your postal banking service, Fiserv has the solution for you.

With Fiserv, you can extend electronic delivery and payment capabilities to your customers, enhance your trusted client relationship, provide a centralized e-document repository and strengthen your brand and the value of your e-post portal.

The Postal Service is not culturally relevant to college students.

Every year Beloit College issues a Mindset List which identifies the cultural touchstones that shape the lives of students entering college this fall.   The list was originally created to keep professors from using dated references.  So how relevant is the Postal Service to the those born in 1992 and now entering college as Freshman?

As the website notes:

The class of 2014 has never found Korean-made cars unusual on the Interstate and five hundred cable channels, of which they will watch a handful, have always been the norm. Since "digital" has always been in the cultural DNA, they've never written in cursive and with cell phones to tell them the time, there is no need for a wrist watch. Dirty Harry (who’s that?) is to them a great Hollywood director. The America they have inherited is one of soaring American trade and budget deficits; Russia has presumably never aimed nukes at the United States and China has always posed an economic threat. 


Nonetheless, they plan to enjoy college. The males among them are likely to be a minority. They will be armed with iPhones and BlackBerries, on which making a phone call will be only one of many, many functions they will perform. They will now be awash with a computerized technology that will not distinguish information and knowledge.


Specific Items Relating to Mail and Competitive Technologies

1. Few in the class know how to write in cursive.


2. Email is just too slow, and they seldom if ever use snail mail.

19. They never twisted the coiled handset wire aimlessly around their wrists while chatting on the phone.

31. The first computer they probably touched was an Apple II; it is now in a museum.

44. The dominance of television news by the three networks passed while they were still in their cribs.

62. Having hundreds of cable channels but nothing to watch has always been routine.

69. The Post Office has always been going broke.

It would not be hard to add some more to this list that are specific to mail.  Here are some ideas.

1. Balancing a checkbook is done online.
2. Checking accounts do not necessarily have printed checks.
3. DVD's could always be received by mail
4. Paychecks and government checks are only direct deposited.
5. Taxes are filed online.
6. FedEx has always offered both express and ground parcel delivery.
7. Letter mail always had a barcode on it

 Add your own as a comment to this post.

Privatizing the Post

In the United States, the policy debate is over how the Postal Service will survive past the end of the fiscal year.   In Great Britain and Canada the debate is now respectfully when and if the Post should be privatized.

Royal Mail clearly is on a path toward privatization.

In July, Sky News reported the government hired advisers on a potential Royal Mail sale.

More recently, Royal Mail hired Moya Green, former CEO of Canada Post who the Times (London) steered the "organization to a trebling of its net profit to C$281 million (£183 million), despite a 5.1 per cent drop in revenue."  Ms. Greene also served as "Assistant Deputy Minister of Policy in the Department of Transportation, Canada from 1991 to 1996 and was responsible for broad reform of the over-burdened transportation system; the privatization of CN; the deregulation of the Canadian airline industry; and the commercialization of the Canadian port system." (Biography from Business Week) With this hire, Royal Mail has hired both an executive who has experience cutting costs in a postal enterprise in a period of declining revenue as well as one who understands the privatization process from the government's (owner's) side of the sale.

Hellmail has reported that Richard Hooper, who is engaged in his second evaluation of the future of Royal Mail, "argues that the recent hiring of former Canada Post CEO Moya Greene and the swap from Allan Leighton to Donald Brydon as Chairman will have increased the value of Royal Mail."


The departure of Moya Greene has raised the privatization issue in regards to Canada Post as it is clear that the key difference between her position at Canada Post and the one at Royal Mail is the challenge of taking a government enterprise through the privatization process.   The issue of privatization of Canada Post was first raised by the Organization for Economic Co-operation and Development (OECD) last spring and received a tepid response from the Harper government at the time.    The departure of Moya Green has generated a number of articles and letters to the editor on the subject which include those by Michael Warren, former CEO Canada Post, Denis Lemelin, National President, Canadian Union of Postal Workers (CUPW), and Kevin Gaudet, federal director of the Canadian Taxpayers Federation.

The expected privatization of Royal Mail and the discussion of privatization of Canada Post illustrate that the decision to privatize is a decision of the government and not the postal operator.   While the operator may have the data necessary required to determine whether privatization is possible, and its management may have opinions on the advisability of privatization for the long term viability of the enterprise, the decision is that of the owner of the enterprise, the government involved.

Any examination of privatization of the United States Postal Service would have to be approved by Congress and most likely have the support of the Administration with the lead most likely taken by the Department of Treasury with the support of Departments of Transportation and Commerce and the Federal Trade Commission and the Federal Communications Communication.  Even if privatization is not on the table, it may be time for Congress to begin demanding that administration recognize its position as owner of the Postal Service and designate a point person for examining potential business models and a regulatory framework that would ensure the Postal Service's survival as a self sufficient enterprise in 2020 and beyond.

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.  

Would fixing the retiree health issue "solve" the liquidity problem?

A number of comments on my piece highlighting the problem of Postal Service liquidity suggested that fixing the retiree health issue would solve the liquidity problem.   This is easily evaluated by asking the following question. 

If one assumes that the Postal Service no longer had retiree health care payments, would its liquidity improve sufficiently to move it away from a range commonly found among firms that face bankruptcy in the private sector?

The following table answers this question.   It updates the liquidity measure contained in the previous post by eliminating retiree health care expenses as a current liability.

Removing the retiree health care expense improves the current ratio from 0.13 to 0.17.   It still is far below the ratios of firms that either went through bankruptcy proceedings or had the equivalent of a bankruptcy proceeding.

The current ratio is not the only way to measure liquidity.    Another way is to look at cash the Postal Service has already received for services not yet rendered and its available cash.   Given that the Postal Service is operating at a loss with retiree health expenses and break even without this expense, one can assume that the cost of providing the service in the future will equal or exceed the revenue already collected.   Here are the figures:

• $4.909 billion -- Revenue collected for services to be rendered   
  
• $1.014 billion -- Cash on hand
  
• $3.894 billion -- Cash shortfall to be born by future Postal Service customers

The decline in mail volume, and in particular high-margin First Class mail, exacerbates the problem of not having sufficient cash to provide the services already paid for.   As time passes, the Postal Service will need either even greater cost cuts or rate increases to build up its cash reserves to the point that it has the cash to cover the costs of services that it has already promised to deliver.

The liquidity problem should be a concern to all stakeholders.    The future of viable self-sufficient means of delivering the 150 billion pieces of hard copy communications and parcels expected to be sent in 2020 depend on solving this problem.  

Is the Postal Service facing "bankruptcy?"

In a recent article D. Volt highlights Postal Service Chief Financial Officer's near term and long term liquidity problems.   Mr. Volt's analysis is correct that the Postal Service's inability to cover its near and long term cash obligations is a serious problem. He is incorrect in his analysis that the Postal Service's liquidity situation does not put it at risk of being "bankrupt."

In order to understand why " may be appropriate for describing the Postal Service's current financial situation, one need only compare the liquidity of two other firms that have gone through major restructuring processes recently These are General Motors and YRC Corporation, a large unionized less-than-truckload trucking firm.    The following table compares the Postal Service's liquidity problem to that of General Motors and YRC Corporation at points prior to restructuring efforts that wiped out all or nearly all of the value of the equity held by shareholders prior to the restructuring.

If the Postal Service was a private sector firm, its current liquidity position would force its financial and legal officers to investigate bankruptcy as a means of restructuring its obligations to ensure it could cover them with projected cash flows.   The bankruptcy proceeding would allow it to restructure its loans, leases, unpaid bills, and contracts with suppliers of real estate, materials, services, and labor subject to the approval of a bankruptcy judge.  Bankruptcy could result in an orderly restructuring of these items if all creditors agree to the modification prior to filing.   Otherwise, bankruptcy could result in litigation among secured creditors over whether liquidation, sale, or restructuring of the enterprise is the best way for them to recover what is owed to them.   The structured bankruptcy of General Motors, supported by finances from the U.S. and Canadian governments allowed the company to restructure its operations under fairly strict guidelines set by the government as the provider of financing while General Motors adjusts its assets, operations, labor contracts and internal processes to fit what would allow it to be a profitable enterprise going forward. As part of the restructuring GM shareholders were wiped out and the restructured enterprise was owned by the major creditors prior to the bankruptcy filing.  Following over a year of restructuring, GM has emerged as a viable enterprise which will attract significant interest in the public offering of stock in the next few months.  

Bankruptcy is not the only option.    The threat of bankruptcy alone may be sufficient reduce the financial burdens of a financially troubled firm, especially if bankruptcy might mean liquidation of the enterprise in cases where the liquidation value is minimal.   In such cases the threat of bankruptcy  causes the creditors and holders of material, service and labor contracts to renegotiate terms of their agreements rather than face the prospects of restructuring within a bankruptcy proceeding.  This is what happened in the case of YRC Worldwide.  YRC Worldwide has been in serious financial difficulties dating to at least the fall of 2008.  In order to survive YRC converted a significant portion of its debt to equity and restructured its union agreements.  Creditors agreed to swap their loans for common stock and the Teamsters employees agreed to contract changes that included a freeze in pensions due to the company's stopping its contributions to its pension plans and multiple cuts in wages.  All of these are actions could occur in bankruptcy but the parties involved concluded that restructuring the enterprise outside of bankruptcy gave them a better prospect than what would have occurred if YRC Worldwide had filed for bankruptcy. 

It should be noted that shareholders of YRCW fared not much differently than they would have under bankruptcy.   YRCW shares that were worth $40.16 at the end of March in 2007 are worth only $0.34 today.  That is not much different than the results in a bankruptcy where existing shareholders could have the total value of their investment wiped out to pay creditors. 

Mr. Volt correctly notes that the Postal Service cannot file for bankruptcy.   In addition, the Postal Service cannot not just stop service and liquidate its assets in order to pay its obligations.   Therefore, it has less leverage over creditors and holders of contracts to renegotiate their agreements in order to ensure payment of at least a portion of what they are due.  The Postal Service also less leverage over unionized employees who face neither the prospect of major job losses that would occur in liquidation, nor new less favorable contracts, if there were contracts at all which would happen if the Postal Service went into bankruptcy.

So what options does the Postal Service have?

1. Raise rates - This is what it has chosen to do with the exigent rate increase.   Raising rates provides some short-term increase in cash.  However, it is not clear whether increases, as proposed in the exigent rate increase, are justified under current market conditions especially in regards to those products that are most sensitive to the economic cycle.   For private firms in the Postal Service's position, raising rates is not an option for most products that they offer as prices are set in competitive markets and the firm facing financial difficulties is a price taker not a price setter.
   
   
2. Reduce service - The Postal Service has proposed two options for reducing service, closing post offices and eliminating Saturday delivery.   It appears that legal restrictions make it nearly impossible for it to close the tens of thousands of money losing retail facilities or eliminate a day of delivery.   
   
   However, it still can reduce service in ways that limit regulatory or legislative blow back.   It can reduce the hours that existing post offices are open.    For example, there is no requirement that retail facilities be open a particular number of hours per day.    So it could reduce the losses from money losing offices by restricting opening hours to the bare minimum.  If it were possible, it could try to reduce its opening hours to one or two days per week rotating clerks among multiple retail facilities, the way some optometrists rotate between multiple offices.  (Check the hours that a Sears or J.C. Penney's optical department has an optometrist available for illustration.)
   
   It could also reduce the reliability and speed of service for its customers.    Reducing reliability  could cause it to violate its "modern service standards" but it is unclear how the Postal Regulatory Commission could compel the Postal Service to improve service quality.    While this reduction in service quality would generate complaints, regulatory proceedings and possibly even Congressional hearings, it represents a cost cutting strategy that has been used by firms like Conrail, Greyhound, and Trailways during periods when they no longer had the financial resources to meet service obligations under required under their common carrier obligation to customers.   This is the equivalent of the Postal Service no longer having the financial resources to meet service related characteristics of its universal service obligation.  The deterioration in service was a prime mover behind deregulation and the eventual restructuring of the rail and bus industry in the United States.   
   
   
3. Renegotiate its obligations -   The Postal has begun the process of renegotiating its obligations that are coming due in the next few months through a request for a waiver of its $4 billion payment to cover disputed retiree health care obligations.  While this will allow it to put-off its liquidity crisis another year it would not eliminate the risk that mailers would have that the Postal Service would be forced to look at price increases and service changes degrading quality described above in a subsequent year.

In conclusion, Congress and the Obama administration need to begin looking at the challenge of fixing the business model of the Postal Service through the equivalent of a bankruptcy restructuring.    Only through this lens can the Postal Service make the necessary changes needed to ensure a revenue stream and cost structure that would allow it to thrive as a financially self-sufficient enterprise.   Without a restructuring equivalent to bankruptcy, Congress could find itself dealing with a "postal financial crisis" as frequently as it has to pass a Federal budget.  

Drudge Report picks up the Postal Service Story

Consolidating Delivery Units

The Postal Service has announced that it is considering consolidating delivery operations into fewer locations in the Syracuse area.  The consolidation of delivery operations has received little attention in discussion of streamlining the Postal Service network but may be as important to mailers that drop-ship and the competitiveness of the Postal Service's parcel services.  

Consolidating delivery operations increases the number of delivery points served by a single delivery office.   This reduces the cost of companies drop-shipping mail by reducing the number of stops that they would have to make to serve the delivery points prior to consolidation.   By reducing the number of stops, the consolidation increases the likelihood that dropping to a particular delivery unit would be economically viable for the mailer / parcel consolidator.  Consolidation could make products that are drop shipped to carrier stations even more attractive in periodical, advertising mail, and parcel markets as they reduce the mailer's transportation costs and increase the probability that their mail/parcels will qualify for the lowest drop-shipment rates.

The advantages to the Postal Service of consolidating carrier stations is less clear.   While the Postal Service will save some transportation costs in moving mail from processing centers to delivery units, it will occur additional transportation and labor costs associated with longer drives from carrier stations to carrier routes.   It is possible that there would be some savings associated with in-office labor, supervision, management costs, and facility costs especially if the Postal Service can move the retail operations to a smaller location dedicated to retail services.

Consolidating delivery operations may be under consideration in Syracuse because one or more of the facilities involved is large enough to accommodate more carriers.  Consolidating delivery in other locations might be possible depending on the availability of space. 

Investing in a new network of delivery units should be investigated in locations beyond Syracuse even if the cost savings are minimal because of the potential that consolidation offers for making Postal Service drop shipped products more attractive to mailers. 

Why are the finances worse than expected?

With its announcement of the third quarter results, the Postal Service a net loss of $3.5 billion, compared with a net loss of $2.4 billion for the same quarter last year.  The loss raises four questions.

1. Why are finances worse than last year?
2. Were the poor results unexpected?
3. Could the Postal Service have taken actions to mitigate the financial losses?
4. Will there be consequences for the Board of Governors and senior management?

Why are finances worse than last year? 

Finances are worse for three reasons.  

First, workers compensation liability adjustments required an accounting adjustment of $789.  This has an impact on both the income statement and balance sheet but should have no impact on the Postal Service's cash flow. 

Second, mail volume is declining and the mix is becoming unfavorable.  Mail volume in the quarter was down 1.7% even though Standard mail volume rose by 4.2%.   As such the average revenue per piece of mail (the yield) is more than likely declining more rapidly than volume is.  Evidence to date suggests that the shift toward advertising focused products, which includes periodicals, is occurring at an accelerating rate.   For example, single piece First Class mail is declining at a faster rate than prior to the recession and at a faster rate than the forecast contained in the exigent rate case.

Third, the need for labor and capital resources is declining faster than the decline in mail volume and faster than the decline in available resources through attrition.   The shift toward advertising mail, and other products that are usually entered sorted and near the delivery address, is the primary reason why the demand for labor and other resources are declining. 

Were the poor results unexpected?

The ability of the Postal Service to anticipate the problems in the third quarter depend on whether their planning included scenarios that anticipated the adverse trends that occurred and whether they had in place a system that generates warning flags months prior to end of the quarter that would indicate that financial results were falling below financial goals.   Given that the Postal Service only took actions recently to freeze hiring, it is not clear how early Postal Senior management knew that financial results would be falling behind.  

If the forecasts contained in the exigent rate case are the forecasts that the Postal Service used for planning, then information that indicated that financial results might deteriorate should have been available by the end of the second quarter.  At that time First Class volumes were declining more rapidly than forecast and both senior management and the Board of Governors should have been aware of that trend at that time.

Could the Postal Service have taken actions to mitigate the financial losses?

Clearly the Postal Service could have instituted the hiring freeze a quarter earlier.   It is not clear from information that is publicly available which additional actions should have been taken in the past few months that would have reduced the impact of the adverse trends and workers compensation adjustment.   To the extent that the Board of Governors and management expected that Congressional or regulatory action would mitigate problems in time to reduce losses, then that expectation was mistaken.

Will there be consequences for the Board of Governors and senior management?

Consequences for either the Board of Governors or senior management appear unlikely.  As the Postal Service does not have shareholders, the Board of Governors faces no risk from the poor financial results.  The Postal Service's board does not face the prospect of a disgruntled investor proposing a proxy fight to replace the board.  The Board of Governors all serve fixed terms and the worst that could happen is that they will not be reappointed.   Postal senior management serves at the pleasure of the Board.    However, given that the Board has fully supported the strategic and policy directions suggested by management, there is no indication that the Board has lost confidence in current postal management and would seek their replacement.