The Board of Governors and Congress requires an Integrated Financial Plan that illustrates the financial course necessary for the Postal Service to be financially self sufficient under both the current business model and regulatory framework as well as alternatives to the existing model. The 2011 Integrated Financial Plan does not meet this requirement.
Alternative plans are needed reflecting what could be accomplished under different business models and regulatory frameworks. These plans have to look beyond marginal changes in the business model that the Postal Service proposed last March in its Action Plan. Those changes all assumed maintenance of the current business model and a regulatory framework that is not much different than the one that currently exists. These plans should include financial plans that would allow the Postal Service to shrink to its "public service" obligations as well as financial plans that would allow the Postal Service to prepare for corporatization or privatization.
A second failing of the plan for examining what is needed to ensure that a vibrant postal market exists in 2020 is its time frame. The plan is a one-year plan, a time frame that is sufficient for budgeting purposes, but insufficient for either the Board of Governors of Congress to understand the best course for the future of the Postal Service. For instance, a one year plan is insufficient for illustrating the financial and operating and rate changes necessary to ensure a self sufficient Postal Service. At a minimum, the financial plan should illustrate financial forecasts for three to five years in order to illustrate the impact of management decisions that take more than a single year to complete.
A third failing of the plan relates to Capital Plan included on pages 5 and 6. The Capital Plan suggests that capital spending, with few exceptions is not limited to fixing a deteriorating physical plant, vehicle fleet, and replacing an information infrastructure that cannot meet the needs of the Postal Service or its customers. The Capital Plan clearly suggests that the Board of Governors and Congress need an independent evaluation of the physical plant, vehicle fleet and information infrastructure in order to see if the plans in place are sufficient for the transition to the infrastructure required to ensure that a viable delivery network exists for 150 billion pieces of mail and parcel that the Postal Service will still be delivering in 2020 including the expectations of postal customers in regards to the information that the Postal Service provides about the real-time progress of mail delivery.
A multi-year capital plan is critical as without it a key question in fixing the Postal Service's business model and regulatory framework. Does the current business model and regulatory framework allow the Postal Service to generate sufficient cash from operations and debt to cover the capital needs required to serve the needs of the postal market? If the answer is no, then there are four choices, raise rates, cut labor costs even further, reduce service, or restructure the Postal Service's retiree obligations as part of a process of transitioning the Postal Service towards a business model that would allow it to attract private capital.
Finally, a multi-year financial plan must include elements of an operating and business plan that is focused on providing a cost-effective service to commercial mailers and ensures that single-piece mail prices remain reasonable at the same time that they cover the costs of reducing the workforce and infrastructure that now exists to handle this mail which are not currently estimated as part of regulatory cost models. The Postal Service's action plan illustrated operating and business plan changes that could be included in such a plan but as the rate increase in the plan was rejected, and the 5-day delivery proposal appears unlikely to be approved before FY 2012 if at all, the operating and business plan should illustrate options that would be available to a market-focused unregulated firms, railroads that are subject to limited regulation, European Post offices, as well as market-focused U.S.-based regulated utilities.
Tuesday, November 23, 2010
New Integrated Financial Plan Needed
Why would the Postal Service need a new Integrated Financial Plan less than a month after it was presented to the Postal Regulatory Commission? A new plan is needed to reflect changes in economic trends and costs of key inputs and operating plans.
The problem of changing economic trends, input trends and operating plan changes exists because by the time a plan is produced approved by the board of governors nearly all of the economic and cost assumptions used in the plan are out of date. The older economic forecasts most likely underestimate both revenue and costs
Revenue - Revenue estimates are driven by forecasts of GDP, retail sales, and other economic indicates. The revision announced today of third quarter GDP growth upward to 2.5% combined with data already published early this year indicates that the 2010 data used in the Postal Service's revenue and volume forecast most likely underestimates the health of the economy and mail volume. The underestimation of mail volume has a bigger impact on the most economically sensitive products used to deliver advertising (Standard Mail and Periodicals) and to a lesser extent the Postal Service's parcel product. The revision of economic factors as a lesser effect on bulk First Class mail and a minimal impact on single piece mail volumes and revenue. The resultant shift in mix toward lower margin mail products will boost the Postal Service's total revenue at a rate somewhat below the increase in total mail volume. A revised Integrated Financial Plan will show that.
Cost - The impact of the economic changes on costs relate to the resources the Postal Service requires to provide its retail, processing, transportation and delivery portions of its service as well as the cost of major inputs to its service. A more rapid growth in advertising mail increases demands on delivery networks at a somewhat higher rate than processing networks. However, given that much of the delivery network costs are fixed, the resulting increase in volumes should not have as large of an impact on costs as the increase in advertising-oriented mail volume.
The shift in the mix of mail continues to put pressure on mail processing and transportation costs as the need for labor and transportation resources needed to handle single-piece and minimally pre-sorted First Class mail continues to shrink at the same time resources needed to handle sortation of mail to carrier route and walk sequence increases. This shift makes its easier for the Postal Service to shrink its processing network without reducing service quality and should result in management doing everything in its power to accelerate consolidation proposal that have already been announced and announcing additional ones to be investigated for implementation in the first half of fiscal year 2012. The shift may justify more extensive use of early-retirement incentives to deal with the reduced workload in mail prep, manual sortation, and automated originating sortation in order to accelerate work-hour reductions in fiscal year 2011.
Finally, changes in the value in the dollar and the improving economy puts pressure on the price of diesel fuel. As the Postal Service notes in the risk section of its 10-K, "a 1% increase in fuel costs would result in a $23 million increase in expense." According to the Department of Energy, the retail price of diesel fuel at the beginning of fiscal year 2011 is up by $0.418 or 16.19% above the level from the beginning of fiscal year 2010. The increase in diesel prices increases the Postal Service's transportation costs by $372 million dollars. As diesel prices have risen an additional 0.6% since then, transportation and other costs liked to the cost of oil are likely to be higher than what was projected in the 2011 Integrated Financial Plan.
Integrated Plan(s) for Financial Self Sufficiency
The plan illustrates the best estimate the Postal Service's finances based on the assumptions employed when the plan was developed including assuming no change in the current business model or regulatory framework. Alternative plans are needed reflecting what could be accomplished under different business models and regulatory frameworks. These plans have to look beyond marginal changes in the business model that the Postal Service proposed last March in its Action Plan. Those changes all assumed maintenance of the current business model and a regulatory framework that is not much different than the one that currently exists. These plans should include financial plans that would allow the Postal Service to shrink to its "public service" obligations as well as financial plans that would allow the Postal Service to prepare for corporatization or privatization.
A second failing of the plan for examining what is needed to ensure that a vibrant postal market exists in 2020 is its time frame. The plan is a one-year plan, a time frame that is sufficient for budgeting purposes, but insufficient for either the Board of Governors of Congress to understand the best course for the future of the Postal Service. For instance, a one year plan is insufficient for illustrating the financial and operating changes necessary to ensure a self sufficient Postal Service. At a minimum, the financial plan should illustrate financial forecasts for three to five years in order to illustrate the impact of management decisions that take more than a single year to complete.
A third failing of the plan relates to Capital Plan included on pages 5 and 6. The Capital Plan suggests that capital spending, with few exceptions is not limited to fixing a deteriorating physical plant, vehicle fleet, and replacing an information infrastructure that cannot meet the needs of the Postal Service or its customers. The Capital Plan clearly suggests that the Board of Governors and Congress need an independent evaluation of the physical plant, vehicle fleet and information infrastructure in order to see if the plans in place are sufficient for the transition to the infrastructure required to ensure that a viable delivery network exists for 150 billion pieces of mail and parcel that the Postal Service will still be delivering in 2020 including the expectations of postal customers in regards to the information that the Postal Service provides about the real-time progress of mail delivery.
A multi-year capital plan is critical as without it a key question in fixing the Postal Service's business model and regulatory framework. Does the current business model and regulatory framework allow the Postal Service to generate sufficient cash from operations and debt to cover the capital needs required to serve the needs of the postal market? If the answer is no, then there are four choices, raise rates, cut labor costs even further, reduce service, or restructure the Postal Service's retiree obligations as part of a process of transitioning the Postal Service towards a business model that would allow it to attract private capital.
The problem of changing economic trends, input trends and operating plan changes exists because by the time a plan is produced approved by the board of governors nearly all of the economic and cost assumptions used in the plan are out of date. The older economic forecasts most likely underestimate both revenue and costs
Revenue - Revenue estimates are driven by forecasts of GDP, retail sales, and other economic indicates. The revision announced today of third quarter GDP growth upward to 2.5% combined with data already published early this year indicates that the 2010 data used in the Postal Service's revenue and volume forecast most likely underestimates the health of the economy and mail volume. The underestimation of mail volume has a bigger impact on the most economically sensitive products used to deliver advertising (Standard Mail and Periodicals) and to a lesser extent the Postal Service's parcel product. The revision of economic factors as a lesser effect on bulk First Class mail and a minimal impact on single piece mail volumes and revenue. The resultant shift in mix toward lower margin mail products will boost the Postal Service's total revenue at a rate somewhat below the increase in total mail volume. A revised Integrated Financial Plan will show that.
Cost - The impact of the economic changes on costs relate to the resources the Postal Service requires to provide its retail, processing, transportation and delivery portions of its service as well as the cost of major inputs to its service. A more rapid growth in advertising mail increases demands on delivery networks at a somewhat higher rate than processing networks. However, given that much of the delivery network costs are fixed, the resulting increase in volumes should not have as large of an impact on costs as the increase in advertising-oriented mail volume.
The shift in the mix of mail continues to put pressure on mail processing and transportation costs as the need for labor and transportation resources needed to handle single-piece and minimally pre-sorted First Class mail continues to shrink at the same time resources needed to handle sortation of mail to carrier route and walk sequence increases. This shift makes its easier for the Postal Service to shrink its processing network without reducing service quality and should result in management doing everything in its power to accelerate consolidation proposal that have already been announced and announcing additional ones to be investigated for implementation in the first half of fiscal year 2012. The shift may justify more extensive use of early-retirement incentives to deal with the reduced workload in mail prep, manual sortation, and automated originating sortation in order to accelerate work-hour reductions in fiscal year 2011.
Finally, changes in the value in the dollar and the improving economy puts pressure on the price of diesel fuel. As the Postal Service notes in the risk section of its 10-K, "a 1% increase in fuel costs would result in a $23 million increase in expense." According to the Department of Energy, the retail price of diesel fuel at the beginning of fiscal year 2011 is up by $0.418 or 16.19% above the level from the beginning of fiscal year 2010. The increase in diesel prices increases the Postal Service's transportation costs by $372 million dollars. As diesel prices have risen an additional 0.6% since then, transportation and other costs liked to the cost of oil are likely to be higher than what was projected in the 2011 Integrated Financial Plan.
Integrated Plan(s) for Financial Self Sufficiency
The plan illustrates the best estimate the Postal Service's finances based on the assumptions employed when the plan was developed including assuming no change in the current business model or regulatory framework. Alternative plans are needed reflecting what could be accomplished under different business models and regulatory frameworks. These plans have to look beyond marginal changes in the business model that the Postal Service proposed last March in its Action Plan. Those changes all assumed maintenance of the current business model and a regulatory framework that is not much different than the one that currently exists. These plans should include financial plans that would allow the Postal Service to shrink to its "public service" obligations as well as financial plans that would allow the Postal Service to prepare for corporatization or privatization.
A second failing of the plan for examining what is needed to ensure that a vibrant postal market exists in 2020 is its time frame. The plan is a one-year plan, a time frame that is sufficient for budgeting purposes, but insufficient for either the Board of Governors of Congress to understand the best course for the future of the Postal Service. For instance, a one year plan is insufficient for illustrating the financial and operating changes necessary to ensure a self sufficient Postal Service. At a minimum, the financial plan should illustrate financial forecasts for three to five years in order to illustrate the impact of management decisions that take more than a single year to complete.
A third failing of the plan relates to Capital Plan included on pages 5 and 6. The Capital Plan suggests that capital spending, with few exceptions is not limited to fixing a deteriorating physical plant, vehicle fleet, and replacing an information infrastructure that cannot meet the needs of the Postal Service or its customers. The Capital Plan clearly suggests that the Board of Governors and Congress need an independent evaluation of the physical plant, vehicle fleet and information infrastructure in order to see if the plans in place are sufficient for the transition to the infrastructure required to ensure that a viable delivery network exists for 150 billion pieces of mail and parcel that the Postal Service will still be delivering in 2020 including the expectations of postal customers in regards to the information that the Postal Service provides about the real-time progress of mail delivery.
A multi-year capital plan is critical as without it a key question in fixing the Postal Service's business model and regulatory framework. Does the current business model and regulatory framework allow the Postal Service to generate sufficient cash from operations and debt to cover the capital needs required to serve the needs of the postal market? If the answer is no, then there are four choices, raise rates, cut labor costs even further, reduce service, or restructure the Postal Service's retiree obligations as part of a process of transitioning the Postal Service towards a business model that would allow it to attract private capital.
Is Deputy PMG Pat Donohue moonlighting as a letter carrier?
Is it just me or does the letter carrier photographed on the upper right corner of the cover of the Fiscal Year 2011 Integrated Financial Plan look like Pat Donohue? If true, I wonder what provision of the NALC contract allows the DPMG to deliver mail? Or is this an indication that the Postal Service may be used in an episode of undercover boss?
Sunday, November 21, 2010
APWU Contract: Facing a Tradeoff
Recent statements from APWU President Cliff Guffey clearly indicate that union leadership realizes that the next contract will result in a trade-off of job security and wages. In announcing the extension of negotiations for an additional three days, he stated “Every proposal we have made to preserve jobs for our members. Restoring work that has been outsourced or assigned to managerial personnel will bring stability to APWU members who have suffered extensive excessing and reassignments."
In agreeing to extend negotiations, APWU President Cliff Guffey clearly understands that the union faces the question: "Is the risk that the trade-off between jobs and wages could provide less job security if consummated as part of arbitration without providing any relief form the wage and benefit proposal that the Postal Service made in its economic proposal to the union?"
In its economic proposal, the Postal Service proposed a two-tiered wage structure with new-hires earning less than existing employees. Two-tiered wage proposal have recently been implemented in union agreements at Caterpillar, Chrysler, General Motors, Harley Davidson, and other U.S. manufacturing firms facing challenges relating to the recession and increased competition from manufacturing plants overseas. A recent New York Times article noted that two-tiered wage agreements in contracts signed recently differ from similar arrangements that were introduced two decades ago in that wages no longer snap back to the higher level at the end of the economic difficulty. Instead, the new lower wage structure becomes the new wage structure of the company and only existing workers remain grandfathered into the higher wage structure.
In arbitration, the Postal Service could present the results of union agreements at these firms as well many others to support its economic proposal. Given the Postal Service's financial condition, and a clear indication that the number of plants and retail facilities where APWU members work will be declining over the term of the next contract to support both the economic proposal and a relatively weak proposal preserving jobs of existing APWU members.
APWU President Cliff Guffey and his leadership team have a difficult job in these negotiations as the cards that the APWU has going into arbitration are weak. Possibly even more difficult is trying to sell to the rank and file a negotiated contract that introduces wages and benefits for new employees at lower levels that those that existing employees now receive while existing employees receive relatively limited assurances of job security given an expected increase in the pace of plant consolidation.
The Postal Service and APWU could help ease this process by including a number of provisions in their agreement that could ease the mind of employees whether they are asked to ratify a negotiated agreement or required to live with the results of one consummated via arbitration. These should include:
In agreeing to extend negotiations, APWU President Cliff Guffey clearly understands that the union faces the question: "Is the risk that the trade-off between jobs and wages could provide less job security if consummated as part of arbitration without providing any relief form the wage and benefit proposal that the Postal Service made in its economic proposal to the union?"
In its economic proposal, the Postal Service proposed a two-tiered wage structure with new-hires earning less than existing employees. Two-tiered wage proposal have recently been implemented in union agreements at Caterpillar, Chrysler, General Motors, Harley Davidson, and other U.S. manufacturing firms facing challenges relating to the recession and increased competition from manufacturing plants overseas. A recent New York Times article noted that two-tiered wage agreements in contracts signed recently differ from similar arrangements that were introduced two decades ago in that wages no longer snap back to the higher level at the end of the economic difficulty. Instead, the new lower wage structure becomes the new wage structure of the company and only existing workers remain grandfathered into the higher wage structure.
In arbitration, the Postal Service could present the results of union agreements at these firms as well many others to support its economic proposal. Given the Postal Service's financial condition, and a clear indication that the number of plants and retail facilities where APWU members work will be declining over the term of the next contract to support both the economic proposal and a relatively weak proposal preserving jobs of existing APWU members.
APWU President Cliff Guffey and his leadership team have a difficult job in these negotiations as the cards that the APWU has going into arbitration are weak. Possibly even more difficult is trying to sell to the rank and file a negotiated contract that introduces wages and benefits for new employees at lower levels that those that existing employees now receive while existing employees receive relatively limited assurances of job security given an expected increase in the pace of plant consolidation.
The Postal Service and APWU could help ease this process by including a number of provisions in their agreement that could ease the mind of employees whether they are asked to ratify a negotiated agreement or required to live with the results of one consummated via arbitration. These should include:
- A streamlined process for implementing incentive-based early retirement programs with the focus on allowing the Postal Service to implement early retirement programs on a facility by facility basis. This would give employees faced with the possibility of a long distance transfer, when a plant is consolidated or volume drops faster than anticipated the a real option to retire rather than accept the transfer. Both the APWU and the Postal Service would need to jointly work with Congress to show why not fixing the retiree cost issues may prevent the Postal Service from reducing its costs quickly by preventing it from offering realistic early retirement incentives.
- A joint task-force of APWU and postal executives to examine how the two-tiered wage structure could be used to compete with Pitney Bowes and other pre-sorters for sorting mail with type-written addresses. Given that both pre-sorters and the Postal Service use similar machines to handle sortation, and this mail is significantly less likely to require manual sortation than single-piece mail, a lower wage structure could allow the Postal Service to effectively compete on price for origination sortation. The primary challenge here is the continued linkage of single-piece mail rates and presorted rates that could prevent the Postal Service from effectively competing for this business.
- A joint task-force of APWU and Postal Service executives to examine the retail infrastructure with a particular focus on looking at 1) how the Australian model of retail services could improve the financial viability of existing outlets, and 2) developing a new job-category for APWU employees to support a retail infrastructure that includes a combination of corporate owned, franchised, and self-service outlets. For example, APWU members could provide the staff necessary to run and maintain a network of off-site self service outlets similar to current automated postal centers (APC's).
Wednesday, November 17, 2010
Social Value of Mail
Last week the Postal Regulatory Commission announced on its website that it has funded six studies examining the social value of mail. The Commission's studies provide a couple of snapshots as to the impact of the Postal Service on the markets and communities that it serves. The summary of the studies are as follows:
The studies that the Postal Regulatory Commission funded are examples of studies that are necessary in order to fully develop a postal market policy and the business model that the Postal Service should follow and the regulatory structure under which the Postal Service should operate. Many of these studies could help clarify questions about whether the Postal Service could continue to provide the benefits that it provides the nation if it operated as a private sector corporation, a government corporation operating under standard business law, the current model, or as government department. Similar questions need to be asked about the impact of regulatory policy on the social benefits and economic impact of the Postal Service and private sector participants in the postal market.
Beyond the broad questions of business models and regulatory frameworks, these studies can help Congress understand more fully the impact of changes in the operating model, including changes in how retiree obligations are calculated, the network of sortation facilities and sortation plans for single piece and bulk-tendered mail, and the retail strategy including the types of products and services that a Postal Service retail outlet can offer, and the mix of contracted and corporate facilities used to provide service that will be necessary to ensure that the Postal Service finally becomes financially self sufficient and the risks to the economy and the nation's communities if it does not.
- SJ Consulting will quantify the benefit of the Postal Service’s rural services by measuring the percent of population affected by Delivery Area Surcharges and determine if there is a cost basis for the Delivery Area Surcharges by the two major parcel carriers and the benefits from the Postal Service having a more frequent delivery network in rural areas.
- Urban Institute will measure the Economic Effects of Post Offices by researching available data and providing an impact analysis of the presence of post offices on real estate values, business activity, and employment through sampling the impact of about 125 closed post offices.
- Urban Institute will research the role and benefits of Price Leadership of the Postal Service from lower priced postal products such as parcels or expedited services, money orders and post office boxes to determine the competitive advantages the Postal Service offers with these products compared to its competitors.
- Urban Institute will quantify the benefits of the Postal Service to Community Security and Public Safety by researching Postal Service and NALC data, and Metropolitan Police Department crime data to measure the impact on crime in the District of Columbia by changing retail service hours and postal carrier routes, considering neighborhood characteristics, and Postal Service personnel training regarding community security and public safety reporting.
- Leong Consulting will quantify the benefits of the Postal Service’s Disaster Response, Emergency Preparedness, and Safety including its role in neighborhood safety, as a first responder and as a communications network in an area devastated by natural disaster by estimating the “savings” to government agencies from Postal Service performance of these duties and assess the Postal Service’s role in the Nation’s preparation for bioterrorism, including neighborhood safety, and the Cities Readiness Initiative (CRI), the Bio-Detection System, and the Custom-Trade Partnership Against Terrorism (C-TPAT).
- Leong Consulting will also quantify the Essential Services for the Unbanked Population provided by the Postal Service using publicly available data from banking industry organizations and consumer advocacy groups and assess the value of Postal Service products provided to the unbanked population and identify other areas where the Postal Service could offer useful financial-type services, particularly to those receiving hard-copy checks.
The studies that the Postal Regulatory Commission funded are examples of studies that are necessary in order to fully develop a postal market policy and the business model that the Postal Service should follow and the regulatory structure under which the Postal Service should operate. Many of these studies could help clarify questions about whether the Postal Service could continue to provide the benefits that it provides the nation if it operated as a private sector corporation, a government corporation operating under standard business law, the current model, or as government department. Similar questions need to be asked about the impact of regulatory policy on the social benefits and economic impact of the Postal Service and private sector participants in the postal market.
Beyond the broad questions of business models and regulatory frameworks, these studies can help Congress understand more fully the impact of changes in the operating model, including changes in how retiree obligations are calculated, the network of sortation facilities and sortation plans for single piece and bulk-tendered mail, and the retail strategy including the types of products and services that a Postal Service retail outlet can offer, and the mix of contracted and corporate facilities used to provide service that will be necessary to ensure that the Postal Service finally becomes financially self sufficient and the risks to the economy and the nation's communities if it does not.
Thursday, November 11, 2010
How Does Walmart Offer Free Shipping?
Today, Walmart announced that purchases on its website will ship for free. Walmart is not alone in offering free shipping as Amazon.com, JC Penney, LL Bean and Target all offer free shipping, although Amazon, JC Penney, and Target currently have minimum purchase amounts for their free shipping offers.
How do these companies justify free shipping?
How do these companies justify free shipping?
- The New York Times article cites the Distribution Management Group which has reported air shipping prices for big retailers are about 70 percent less than for a small company. For large shippers to get discounts this large, they have to negotiate sharp discounts in surcharges for home delivery and rural delivery. While discounts of 70% may be unusual, it is clear that those shippers spending more than $1 million annually on parcel shipping pay significantly lower rates than smaller shippers. The reason that they pay less is that they take the time to negotiate carefully and carriers are willing to make the effort to compete on price as well as service.
- Larger retailers have more warehouses which allow them to ship more of their items in zones 2 and 3 which has lower air and ground shipping rates. This is a variation on zone skipping that shippers have tried to do for decades. The difference now is that retail items manufactured abroad are now shipped to regional warehouses directly so the "zone skipping" involves both domestic and international transportation.
- Larger shippers pack shipments to minimize costs. Larger shippers have found that it can save money by choosing the right sized box and finding the lowest cost way to ship a multiple item shipment, whether by combining shipments to one delivery address to finding the cheapest way to ship the item based on whether it means packing the items in one box or multiple boxes.
- Larger shippers have made significant information technology investments. Significant improvements in software have allowed carriers to do real time price comparison among carriers and among offerings of carriers. The software also improves inventory management and allows direct shipment of inventory to the warehouse closest to where demand for a product is or to stock different sizes or colors based on the popularity of the particular sizes or colors. Software has also allowed shippers to check addresses and telephone numbers customers enter on line before the order is completed to ensure that both the address and telephone number is correct which eliminate charges for bad addresses and upcharges for home delivery when no telephone number is provided by the shipper.
- Retailers are learning to compare the "cost of sale" from a brick and mortar location and on line sale. Delivery costs to the store as well as the cost of employees, and facility costs that are born in the price of item sold in a retail store can be compared to shipping and other distribution costs of an on-line sale. Free shipping makes sense when the shipping and distribution costs are comparable to the costs of selling through a retail outlet.
- Retailers are starting to see opportunities for low cost delivery of larger and high value items using services of FedEx and the Postal Service that involve delivery to a retail location. These services allow Walmart and other retailers the opportunity to ship these items reasonably and know that the customer will be able to pick it up when needed.
Wednesday, November 3, 2010
Hits and Misses in Parcel Pricing
Most analyses of the Postal Service's proposed parcel rates and service initiatives will come from the shipper perspective. However, given the Postal Service's financial condition, they need to be viewed from the same perspective that investment analysts look at pricing decisions of FedEx and United Parcel Service. From this perspective, the changes look like a mix of hits and misses.
Hits
Hits
- Expansion of the number of flat rate boxes and envelopes is a hit for consumers and small businesses - It allows the Postal Service to sell pre-posted boxes at nearly any retailer in a manner similar to its arrangement with Office Depot.
- Expansion of Hold for Pick-up Service - This should be a big hit with one major caveat. Items that are either bulky (i.e. comforters, pillows, fragile items), large (i.e. High Definition televisions and microwave ovens), or valuable now have a USPS delivery option. This should be most valuable for shipments to rural areas. The caveat is the number of hours that Post Offices are open. For this service to be truly effective, Post Offices need evening hours.
- Increases in rates to DDU for light weight parcels - The volumes that FedEx SmartPost, UPS Mail Innovations and other consolidators are generating are sufficient to justify raising rates significantly on the lightest weight shipments that they now tender to the Postal Service. These weight cells must be as profitable as all others.
- Timing of announcement - The Postal Service should have waited at least another week to allow its rate increase to come after both United Parcel Service and FedEx. Given its market share, the timing of its announcement should reflect its position as a price follower.
- Uniform national drop shipment rates - The Postal Service is creating significant opportunities for cream skimming by charging the same drop-shipment rates to DDU's and SCF's regardless of where they are in the United States. The market for last mile service is very different in Montgomery County, Maryland (DC Suburbs) and Garrett County, Maryland (far western Maryland). The cost of serving these two markets is different as well. By charging the same rate for both locations, the Postal Service is under-pricing the service to Garrett County encouraging carriers to drop-ship items that may not be profitable for the Postal Service to handle. The opposite is true in Montgomery County Maryland. With differential prices the Postal Service could increase the fuel allowance for rural carriers that will be delivering the parcels in rural areas that UPS and FedEx do not want to deliver. (Royal Mail's destination entry pricing are geographically based and it has worked well for both Royal Mail and mailers.)
- Average rate increase - The Postal Service's average rate increase of 3.5 percent for Priority Mail and all 3.6 percent for all Shipping Services is below the rate increases that UPS and FedEx have announced and most likely below the rate increases that they will be able to get from their commercial customers. In particular, retail Priority Mail rates should rise at the same rate FedEx Ground and UPS for Zones 1-3 and 2nd day air for longer distance zones. Commercial Priority Mail rates should increase a bit less to reflect the competitive of commercial markets.
- Impact of pricing on positioning Shipping Services in the marketplace. The Postal Service's pricing moves should significantly differentiate USPS prices from that of its competitors. The lower prices fit the perception in the commercial marketplace that the USPS offers a lower cost, lower quality service. The Postal Service is forced to be the low-cost, low-quality provider until its transit times for Priority Mail meet those of FedEx Ground and UPS for shorter distance shipments.
- The impact of flat SCF drop-shipment rates on the use of the Postal Service for last mile delivery. The Postal Service faces a risk that its last mile delivery service will be less profitable than it should be given the lack of geographic-specific drop-off rates.
- Whether the Postal Service's cautious view of the pricing power of parcel carrier's is correct. Both FedEx and United Parcel Service are beginning to see that its price increases are sticking in contracts that they are signing this fall. The Postal Service's approach requires an economic forecast that is less robust than what United Parcel Service and FedEx now project.
- Missed Flat-rate opportunities. While the Postal Service introduced a new padded envelope, it could have also created multiple sizes for padded or even un-padded envelopes. The larger envelopes would serve the needs of shippers of clothing that now ship in large envelopes that can hold two to four pairs of jeans. Why not have a flat rate product for every size padded envelope that is generally sold in the local office supply store.
Tuesday, November 2, 2010
Postal Service Prices Last Mile Aggressively in 2011
The Postal Service has just released its 2011 rates for Express Mail, Priority Mail and Unregulated Parcels. Going through the entire proposal will take some time. However, a quick review of Parcel Select rates indicates that the Postal Service has not chosen to follow the rate increases of United Parcel Service and FedEx in its pricing of the last mile. Instead, its pricing for 2011 suggests an aggressive effort to gain market share over the last mile while focusing on ensuring that delivering parcels under 1 pound are profitable. The Postal Service's rate increases for Priority Mail also suggest an aggressive effort to gain market share on end to end shipments.
- The Postal Service has proposed no rate increase in parcel select shipments regardless of weight dropped at the destination SCF.
- The Postal Service has significantly raised rates on shipments not dropped at the destination SCF that weigh less than a pound. These rates rose between 4 and 30% depending upon zone and machinability. Rates for shipments to zones 3, 4 and 5 are all up double digits.
- Rate increases for heavier shipments are below increases announced by UPS and FedEx. These rates are between zero and 3% with the largest increases found among heavier shipments traveling long distances. The rate increases proposed are more than likely lower than the cost increases of United Parcel Service and FedEx and should expand their effort to selling the services that they provide jointly with the Postal Service.
- Priority Mail Commercial Plus rates are rising only 2% on shipments over 2 pounds. Shipments under 1 pound are rising by larger single-digit percentage increases with 1 to 2 pound shipment rate increases depending upon distance.
Is Advertising Mail Dying or Are New Uses Replacing Old?
This week Direct Marketing News presented two contradictory headlines on the same day. Are advertisers "Abandoning the mail" or is it true that "direct mail gains new potency as online marketing evolves?" After reading both articles, what is a person to believe?
David Hay, VP of marketing at Plow & Hearth, which has catalog, bricks-and-mortar retail and Internet sales arms. They began reducing its marketing dependence on USPS three years ago, after significant rate increases. The move was also driven by customers migrating to online retail. In the interview, Direct Marketing News published, he stated: “We are reappraising our reliance on catalogs as our main marketing vehicle, and we are developing a multi-year plan to reduce our spending on catalogs in relation to other media. We see catalogs as still having relevance to our business, but being a smaller part of the mix than they are now. There are instances where catalogs will continue to be effective, but that proportion is growing smaller and smaller and every day, and that's a big driver for our move. But we have no active plans to phase them out.”
Taking the opposing position is Andy Cutler, Chief strategy officer, Mercury121. He notes that the rush to "the Web has had a significant effect on direct mail: volumes have dropped dramatically over the last decade. This has been painful for those of us on the service side of the business − not to mention for the US Postal Service − but it has created an opportunity for our clients. Because each mail piece is not competing with as many other pieces in the mailbox, response rates are climbing. At the same time, e-mail response rates are declining due to overuse."
To illustrate, he provides an example of one of his retail clients that compared the performance of direct mail, e-mail and in-store promotions. The study showed that direct mail was the best performer with response rates up 150% vs. the previous year with no significant changes in strategy. In this example direct mail outperformed the cheaper in-store and on line options.
While the two headlines that prompted this post suggest two distinct scenarios for advertising mail, the strategies that Plow & Hearth and Mercury 121's client's are now pursuing in their use of mail are most likely quite similar. Mail will be used where it is most effective. Mass distribution of full-line catalogs to a company's full customer base may no longer make sense. However, targeting advertising and "mini-catalogs directing customers to buy on the web will remain with improved ROI's as the limited clutter in the mailbox allows an advertisement to stand out and create web-based sales.
A recent article in Advertising Age, highlighted this point. While electronic alternatives, may be free or nearly so, the clutter in the e-mail box causes most to be deleted or shunted to the dreaded (for advertisers) junk-mail box. Even worse are banner ads which compete with the content that recipients came to a website in the first place. The issue of on-line clutter and the limited efficacy of on-line advertisements explains why most of the $4 billion spent on political advertisements this fall was spent on broadcast and mail advertisements, with mail dominating spending in "political markets" where broadcast media could not target effectively the particular market.
In terms of a long term strategy, the Postal Service, and for that matter, all companies in the mail supply chain, need to track the value of mail as well as the value of competing advertising media in order to fully understand the ROI's advertisers expect. It is this value of mail, and not any measure based on economic theory that should determine both the prices that printers and the Postal Service can charge and the costs of operations necessary to ensure profitable operations. Without this information, these companies (and regulators when they are involved) are operating blindly. When suppliers are blind, companies like Plow and Hearth will speed their effort to find alternatives to mail. Opening up the pricing eyes to the importance of sender ROI could slow and possibly even reverse this trend.
David Hay, VP of marketing at Plow & Hearth, which has catalog, bricks-and-mortar retail and Internet sales arms. They began reducing its marketing dependence on USPS three years ago, after significant rate increases. The move was also driven by customers migrating to online retail. In the interview, Direct Marketing News published, he stated: “We are reappraising our reliance on catalogs as our main marketing vehicle, and we are developing a multi-year plan to reduce our spending on catalogs in relation to other media. We see catalogs as still having relevance to our business, but being a smaller part of the mix than they are now. There are instances where catalogs will continue to be effective, but that proportion is growing smaller and smaller and every day, and that's a big driver for our move. But we have no active plans to phase them out.”
Taking the opposing position is Andy Cutler, Chief strategy officer, Mercury121. He notes that the rush to "the Web has had a significant effect on direct mail: volumes have dropped dramatically over the last decade. This has been painful for those of us on the service side of the business − not to mention for the US Postal Service − but it has created an opportunity for our clients. Because each mail piece is not competing with as many other pieces in the mailbox, response rates are climbing. At the same time, e-mail response rates are declining due to overuse."
To illustrate, he provides an example of one of his retail clients that compared the performance of direct mail, e-mail and in-store promotions. The study showed that direct mail was the best performer with response rates up 150% vs. the previous year with no significant changes in strategy. In this example direct mail outperformed the cheaper in-store and on line options.
While the two headlines that prompted this post suggest two distinct scenarios for advertising mail, the strategies that Plow & Hearth and Mercury 121's client's are now pursuing in their use of mail are most likely quite similar. Mail will be used where it is most effective. Mass distribution of full-line catalogs to a company's full customer base may no longer make sense. However, targeting advertising and "mini-catalogs directing customers to buy on the web will remain with improved ROI's as the limited clutter in the mailbox allows an advertisement to stand out and create web-based sales.
A recent article in Advertising Age, highlighted this point. While electronic alternatives, may be free or nearly so, the clutter in the e-mail box causes most to be deleted or shunted to the dreaded (for advertisers) junk-mail box. Even worse are banner ads which compete with the content that recipients came to a website in the first place. The issue of on-line clutter and the limited efficacy of on-line advertisements explains why most of the $4 billion spent on political advertisements this fall was spent on broadcast and mail advertisements, with mail dominating spending in "political markets" where broadcast media could not target effectively the particular market.
In terms of a long term strategy, the Postal Service, and for that matter, all companies in the mail supply chain, need to track the value of mail as well as the value of competing advertising media in order to fully understand the ROI's advertisers expect. It is this value of mail, and not any measure based on economic theory that should determine both the prices that printers and the Postal Service can charge and the costs of operations necessary to ensure profitable operations. Without this information, these companies (and regulators when they are involved) are operating blindly. When suppliers are blind, companies like Plow and Hearth will speed their effort to find alternatives to mail. Opening up the pricing eyes to the importance of sender ROI could slow and possibly even reverse this trend.
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