UPS Comments On Postal Service's Financial Troubles

During its 2nd Quarter, 2011, United Parcel executives responded to two questions about how proposed changes in operations at the Postal Service would affect UPS's business.  Here are the questions and answers from the transcript provided by Seeking Alpha.

Question on Ending Saturday Delivery

John Barnes - RBC Capital Markets, LLC

Okay, all right. That makes sense. And then lastly, given how public the postal service's problems have become and with all the rhetoric anywhere from getting rid of Saturday delivery to 15 years from now going to 3-day delivery, whatever it may end up being. Have you seen -- is that uncertainty around their service creating any further opportunities on the parcel side now? Or do you think that, that bears fruit 2 or 3 years from now?

Kurt Kuehn - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Treasurer
I don't think it's a big issue in the short term. Most of the very deep integrated B2B business is not with the post office, and those are the ones where a long lead time would make a big difference in the supply chain. So they're focusing on finding their strengths and working on the last mile. We are collaborating with them and competing with them. Clearly, the post office have to make dramatic changes to improve their financials, but I don't see that as a big issue for day-to-day customers decisions.

Scott Davis - Chairman, Chief Executive Officer and Chairman of Executive Committee
Yes, John, I think the Saturday delivery is probably the most imminent issue right now for customers. And there are some looking for different solutions, so that could have a more immediate impact on us. If they do go eventually down the road from 5 days to 3 days, that changes the game pretty dramatically, but that's down the road.

Question on Closing Post Offices

Jeffrey Kauffman - Sterne Agee & Leach Inc.

I want to follow up on the question John asked with respect to the post office. There is an announcement just yesterday that the post office was going to close about 3,600 locations. On one hand, you compete with them on a number of services. On the other hand, you utilize parts of their delivery network. If the post office were to close 3,600 locations, is this a net opportunity for you? Would it be kind of a net push with some offset? How do you think about that?

Kurt Kuehn - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Treasurer
I think anytime a competitor pulls back capacity and access, it's an opportunity. So clearly, we will look at the gaps that are there, and we've got a wonderful footprint with the UPS Store and offering consumers and small businesses good access. So we'll look for opportunities where it makes sense. As Scott mentioned, the more dramatic their network changes, then the more opportunity. At the same time, we'll look for collaboration alternatives as the post office looks to outsource some parts of their network, maybe where they're not best-in-class, so it's a balancing of competing and cooperating.

**************

These comments clearly show that operating changes that will come to improve the Postal Service's finances have business risks.  Finding ways to minimize these risks will be critical for the Postal Services survival

On-line Sales Share of Retail Sales Hits New High

The U.S. Census Bureau retail sales data released today showed that in April, the share of retail sales that are sold on-line or via a catalog rose to 20.3% of retail sales from merchants selling products that are sold both in brick and mortar stores, on-line or through a catalog.  This means that 20.3% of all retail sales that could be delivered by FedEx, United Parcel Service or the United States Postal Service, are being delivered by these firms. (Details on how the proportion is calculated is at the bottom of this post.)

April represents the fifth month in a row that on-line/catalog merchant sales were more than 20% of sales of items that could be delivered to a consumer were delivered to the consumer rather than purchased at a retail store  A year ago 18.5% of sales of items that could be delivered to a consumer were delivered.  The following chart shows retail sales data dating back to 1992 as provided by the Census Bureau.  

The chart also includes an exponential trend, and for the statistical geeks, the trend equation and R-squared.   The trend line illustrates that the shift to on-line retailing has grown exponentially since data was available with deviations occurring only around the two recessions in the period graphed.

The shift to retail sales from on-line and catalog merchants  may partially explain the decisions of American Eagle, Gap, Lowe's and other brick and mortar retailers to close stores or stop expansion as the total dollar sales at brick and mortar outlets stagnates as on-line and catalog sales grow.  

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

Explanation of Chart Data

The proportion illustrate in the chart represents the proportion of catalog and on-line sales estimated by the Census Bureau as a portion of sales at furniture & home furnishings (442), electronics & appliances (443), clothing & accessories (448), sporting goods, hobby, book, and music (451), general merchandise (452), office supply, stationery, and gift stores (4532) stores as well as on-line and catalog merchants (4541). [The numbers in parentheses are the NAICS codes used by the Census Bureau to classify businesses.]

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

Canada Post Strike: a Lose - Lose Proposition for CUPW

For over a week, the Canadian Union of Postal Workers (CUPW)have struck Canada Post in a series of rotating strikes that affects Canadian cities on nearly a random basis.    The impact of the strike is clear and it is not good for either CUPW members or Canada Post customers. 

According to Canada Post, daily mail volume is down 50%.   In response Canada Post has cut delivery to three days per week in urban areas. CUPW employees not on strike find their work hours curtailed to match the lower mail volume and reduced delivery schedule.

In authorizing a strike, CUPW members clearly believed that Canada Post's offer was a losing proposition for them.   Like postal workers in many countries, they saw that long standing benefits and regular pay increases were threatened with new approaches to benefits and less certain pay increases.  They also saw major changes in their work environment and Canada Post introduces sortation to carrier route sequence as well as other changes designed to reduce costs, with cost reductions not going to wages and benefits but going to earnings and lower or stable rates for customers.  

Unfortunately for CUPW employees, the result of authorizing the strike is also a lose proposition.   Following the strike, CUPW members will likely work for a greatly weakened Canada Post.  Mail volume that switched to electronic alternatives will not likely return to a printed form that CUPW members sort and deliver.    Parcels shipments that were handled by CUPW members that switched to Canpar, DHL/Loomis, FedEx, Purolator, or UPS will be tough to get back as shippers in the important B-2-C market find that other carriers can do the job as well as Canada Post.  

Without a return to pre-strike volume levels, Canada Post will likely accelerate its modernization efforts, and combined with its regular efforts to optimize staffing levels and delivery routes, will likely employ fewer employees than it planned if a strike had not occurred.

Right now it is unclear, how the current impasse can end.   The longer it goes on, the weaker Canada Post becomes, but it is unclear whether a weaker Canada Post will be more willing to agree to union demands.   In fact, an argument could be made that a weaker Canada Post could become even more reluctant to change its position and may even request even greater changes in wages, benefits, and working conditions than was in its original offer.

One idea that is not on the table that could help resolve the impasse, would be some form or employee ownership of Canada Post in return for the changes that Canada Post management wants.   This ownership, whether in the form of voting or non-voting shares would give employees a share of the benefits of the contract changes as owners that Canada would be highly reluctant to grant them as employees.   This would be a major change in Canada Post's governance but one that the CUPW and Canada Post should think about if they want to ensure a vibrant Canada Post in 2020 and beyond.

Historical Analogy:   In 1997, the Teamsters went on strike against UPS for 15 days.   At the end of the strike, UPS acceded to many of the Teamsters demands as the long-term impact of business was clear.   (A PBS interviews with representatives from the Teamsters and UPS provides a perspective on each side's position following the strike's end.)

The strike showed UPS customers, which at that time represented nearly 90% of all parcel shippers, that a quality alternative existed, RPS (now FedEx Ground).   Customers who during the strike were able to switch, stayed with RPS.  Nearly every quarter since the strike,  RPS/FedEx Ground has taken market share away.  

In subsequent agreements, the Teamsters did agree with most of the changes UPS wanted including withdrawal from the Central States multiemployer pension plan, and lower wages for new part-time workers. 

The Teamsters now face the challenge of negotiating with UPS that is no longer a near monopolist in the parcel market.  These negotiations require that contract terms recognize implicitly the impact of competition from a non-union FedEx, the Postal Service, and numerous non-union smaller regional parcel carriers.

Note for American Readers:  One wonders how the agreements between the Postal Service and APWU and other unions would differ under labor law similar to what Canada Post operates under.   (This is law somewhat similar to the Railway Labor Act.)   Also given that single-piece mail is declining at around 10% year-to-year, how would a strike increase that decline especially since a large percentage of single-piece mail is bill payments?

Comparing Labor Cost Proportions at the USPS, UPS, and FedEx

Update: this chart in this post has been replaced to correct a silly error.  The USPS delivers to residential addresses 6 days a week.  I know that and I know that all readers of this blog know this as well.  I would like to thank the reader who posted the comment that force me to fix this error. 

In a discussion today on his Facebook page, Representative Dennis Ross fell into a common trap in comparing the labor's portion of costs by the USPS, UPS and FedEx.  He states that:

UPS (Union) - about 66% of their total operating costs are labor. FedEx (non-union) - about 45% of their total operating costs are labor. USPS - 80-82%.

The differences in the proportion of labor costs can come from one of six factors:

1. Compensation levels - what each company pays per hour worked
2. Work rules - affects how efficiently each company uses employees
3. Contracting - companies use different models regarding the use of contractors to handle the collection to delivery process, and in particular the labor-intensive delivery function
4. Network differences - Differences in the network affects the amount of labor involved in delivery, sortation, transportation and retail portions of an end-to-end movement.
5. Capital intensity -  The companies have very different capital requirements that affect the amount of non-labor costs needed to provide the services that they offer.
6. Congressional requirements - Congressional requirements focus on the aspects of the Postal Service that add significantly more labor costs while making minimal impact on capital spending.

Compensation Levels

I have already presented a comparison of compensation levels between the Postal Service, UPS, and FedEx.   The comparison showed that total compensation of Postal Service employees in a delivery function clearly fall in between the compensation of UPS and FedEx.  

Employees who work inside processing facilities at the Postal Service on average are paid more than FedEx and UPS employees.  However, the new APWU contract will result in Postal Service compensation falling in line with what compensation of UPS and FedEx.   (It should be noted that UPS also offers significant college scholarships as a benefit to parcel sorting employees that are not included in these comparisons.)  The compensation levels of the new class of APWU members that could include 20% of APWU employees are very competitive with compensation of individuals with similar experience at UPS and FedEx.

Employees that provide retail services at the Postal Service have no real comparison with employees at FedEx and UPS.  Comparisons are usually made here with other retail occupations and bank tellers.  I have not looked at this comparison but the data is available to make this comparison is available from both private and public sources.
Finally, compensation of UPS and FedEx executives are significantly higher than Postal Service executives.   The compensation levels of managers and technical staff at UPS and FedEx are likely also higher.

On balance, it is unclear how much a compensation premium affects labor compensation's proportion of total costs.

Work Rules

Another factor that increases USPS compensation expenses are work rules used for mail processing, local transportation and retail services.  The new APWU contract, and in particular the new method of defining a full time schedule should go far to eliminate work rules that requires the Postal Service to overstaff its processing and retail facilities.   The new method of defining full time will likely result in employee schedules that are close to the part time schedules that FedEx and UPS use for its sortation centers.

Contracting

The following table illustrates how the Postal Service, UPS and FedEx use contractors.  

Comparison of Contracting at the USPS, UPS, and FedEx

The three carriers have very different operating models that significantly affect the portion of costs that show up in expenses as "compensation and benefits" and "contracted transportation" This makes comparisons particularly difficult as both UPS and FedEx use contractors extensively for retail services and FedEx Ground uses contractors to deliver all parcels.

An accurate comparison would identify the labor component of contracted retail, transportation, and delivery services. This is nearly impossible and is the primary reason that I have never presented a comparison of the proportion of labor costs in my previously published analyses of the parcel industry.

Network Differences

The following chart looks at differences in the networks employed by the USPS, UPS and FedEx. 

 Comparison of USPS, UPS, and FedEx Networks

The Postal Service's delivery network is significantly more extensive than either UPS or FedEx and primarily delivers to residential addresses that are more expense to serve than business address due to volume of deliveries per delivery point.  Delivering 6-days to residential addresses increases the proportion of labor costs as capital expenses for buildings and vehicles are the same whether the Postal Service delivered 5 or 6 days per week, and some operating costs (heating fuel and electricity) do not change as much as labor costs. [added 5/23/2011 3:15 pm along with corrected chart] 

The Postal Service network has significant overcapacity.   To the extent that there is overcapacity in either UPS or FedEx's network it would affect short-term economic impacts or changes in population and economic growth across the United States.   Also both UPS and FedEx are face the prospects of growing volumes so they face some challenges of having sufficient capacity while the Postal Service faces shrinking volumes so its network faces the prospect of increasing levels of overcapacity and the prospect that over time existing facilities will be in sub-optimal locations.

The Postal Service's retail network focuses on less knowledgeable buyers of the services that it offers.  Also, the Postal Service's network faces regulatory and legislated constraints that neither UPS nor FedEx face.

Capital Intensity

Capital intensity affects the proportion of costs that are labor costs.  Companies that are more capital intense have a lower portion of labor compensation costs and vise versa.   For example, an electric utility is a more capital intense business than a nationwide retail chain.   The following chart illustrates differences in capital intensity between the delivery services offered by the USPS, UPS, and FedEx. 

Comparison of Capital Intensity of USPS, UPS and FedEx

FedEx has the most transportation capital needs as they operate the largest fleet of freighter airplanes in the United States. UPS has the second largest fleet of freighter airplanes. Both FedEx and UPS use their aircraft to fly Postal Service mail and parcels, relieving the Postal Service from making substantial capital investments.  The Postal Service's transportation needs focus on its delivery fleet.   However, it has not had the capital needed to replace its aging fleet, so its capital spending on transportation assets are below what may be required for cost-efficient operations.

Both FedEx and UPS are among the leaders in information technology spending among transportation companies.    They both look at their IT investments as a competitive advantage.   The Postal Service, on the other hand, has tended to underspend on information technology resulting in long implementation schedules for needed infrastructure, management information systems, customer information and transaction systems, and track and trace systems for mail and parcels.

Finally, both UPS and FedEx have managed their processing network using network models for years without constraints set by Congress on closing or moving operations.    When additional facilities are needed, or upgraded to ensure proper maintenance and worker safety, they have the resources to make these investments.   The Postal Service is limited to use the facilities that it now has and faces significant backlogs in facility maintenance.   To the extent that facilities are located in the wrong location, or too small to handle sortation of a larger geographic territory, the Postal Service does not have the capital to make those investments. 

Congressional Requirements

The Postal Service face two requirements from Congress that increase the labor cost's proportion of total costs.

1. Restrictions on how retail services are provided -  Both regulatory and legal restrictions on the Postal Service's retail network increase the proportion of total costs that are labor costs.  These costs come from both operating a retail network and managing the process to implement changes in the network.     In addition, Congressional efforts to slow changes to the retail networks add additional labor costs to managing the network to handle questions and concerns of members of Congress.
2. Restrictions on delivery frequency - Requiring the Postal Service to provide delivery services 6 days a week has a larger marginal impact on labor costs  than it does on all other expenses.   The proportion of labor costs would be lower if the Postal Service only delivered mail 5 days per week.

Conclusion

Comparing the proportion of labor costs at the Postal Service with the proportion of labor costs at FedEx and UPS is a nonsensical exercise.   It tells one little about what the appropriate proportion would be for an efficient or properly capitalized Postal Service. 

Focusing on unionized labor costs may be an easy political target for a Republican member of Congress. However, Congressman Dennis Ross would find his time better served if he now focused his time on examining, the Postal Service's financial goals, its capital structure and its real annual capital needs to replace the delivery fleet, optimize the network, modernize retail, upgrade the IT infrastructure and customer interfaces, and cover the transition costs of downsizing the workforce.   By making this shift, Congressman Ross would make a real contribution to postal reform.  His efforts would for the first time address one of the key failures of both the Postal Reorganization Act and the Postal Accountability and Enhancement Act, the failure to adequately recognize that "accounting break-even" is not an appropriate fiancial goal and that an under-capitalized Postal Service is an inefficient Postal Service.

Why Mail Matters: Newegg

Newegg, one of the largest sellers of computer and electronic parts and products is a Postal Service customer.  How do I know?  I just purchased some memory for my laptop and just got the notice that the shipment is on its way.    Here is the e-mail message, minus information describing the purchase.


Dear Alan M Robinson,


Thank you for shopping at Newegg.com. We're glad we had what you're looking for!

Your tracking number has been generated via Egg Saver. Please see below for your order information and tracking number. It may take up to 1 business day for your tracking information to become available.

Egg Saver shipments are picked up from our warehouse at the close of each business day by DHL Global Mail, who handles shipping from Newegg to your nearest USPS facility. USPS then delivers the package to your ship-to address with your regular mail delivery within 4-7 business days. [Words are bold in the original email.]

Now, the graphic is nice but isn't it a bit too complicated for Newegg customers who don't know what a DDU, SCF, BMC, or an AMF are?   But it does make it clear that the shipment will arrive in the mail after being transported much of the way by DHL. (DHL should develop a new graphic for inclusion in e-mails like this designed for non-mailing industry customers of Newegg.)
 
The description of the service clearly illustrates a marketing and operations problem that the Postal Service has to fix if it wants to take a larger share of the Newegg's delivery business.   Doesn't the sentence, "USPS then delivers the package to your ship-to address with your regular mail delivery within 4-7 business days," encourage customers to pay to upgrade to faster service the next time they make an order?  Doesn't this sentence make signing up for either Amazon Prime or Shoprunner to get 2-day service at no charge if one shops online frequently?
 
Even with much slower service commitments, the Postal Service has been able to grow its last mile delivery business. In the First quarter of FY 2011 parcel select volume was up 26%, allowing its first-mile partners to cost-effectively drop shipments nearer to the delivery point. 
 
The Postal Service's last mile, parcel delivery service could grow faster if it had tighter delivery standards so DHL would no longer say the "USPS then delivers the package to your ship-to address with your regular mail delivery within 4-7 business days."  For example, the USPS needs to find a way to deliver shipments dropped at a DDU or SCF the next delivery day, and shipments dropped at a National Distribution Center (NDC) in two or three days.   Then its service would nearly service competitive with ground delivery offerings of FedEx and UPS to merchants trying to satisfy demanding customers, while still offering the low-cost delivery option that makes on-line purchases attractive.
 
 

Why Mail Matters: Macy's

Macy's today announced its First Quarter 2011 earnings this morning and provided another clear indication that the courier, express and postal industry provide the an increasingly important role by delivering web based sales to consumer's homes. 

The description of Macy's sales in the press release provides an indication as to how important web-sold and home-delivered sales are to Macy's

Sales in the first quarter of 2011 totaled $5.889 billion, an increase of 5.7 percent, compared with sales of $5.574 billion in the same period last year. On a same-store basis, Macy’s, Inc.’s first quarter sales were up 5.4 percent. Online sales (macys.com and bloomingdale's.com combined) were up 38.3 percent in the first quarter. Online sales positively affected the company’s same-store sales by 1.3 percentage points in the first quarter. Online sales are included in the same-store sales calculation for Macy's, Inc.

A back of the envelope calculation provides a rough idea what this growth means to FedEx, UPS and the Postal Service.   

• For on-line sales to have such a large impact on Macy's total same store sales, home web-based and home-delivered sales has grown from 14.5% to 18.4% of Macy's retail revenue.  
• If one assumes that an average shipment has a $200 invoice amount, Macy's first quarter home deliveries grew from just under 4 million in 2010 to 5.4 million.    
• If Macy spends on average $7 per shipment, then it spent nearly $40 million on parcel delivery and express charges in the quarter.

Macy's illustrates how the business of FedEx, UPS and the Postal Service is changing.   Increasingly parcels that would have been delivered directly to stores are shipped less frequently or in fewer boxes.  

Instead, shipments need to be sent from warehouses to homes.   All three carriers are working to adapt to this change.  

One of the results is the growth of the Postal Service's Parcel Select and Parcel Select Return services as these services fit the needs of Macy's for inexpensive and reliable home delivery.   The challenge for the Postal Service is to try to figure out how it can improve its ability to integrate the last mile with the first miles of other carriers to reduce the time from order-to-delivery and make the customer's delivery experience as good as the products Macy's sells.

The US Parcel Market: Hightlights from the UPS Conference Call

In its conference call yesterday, United Parcel Service provided a number of insights on the parcel shipping market and the customers that use UPS, FedEx and the Postal Service.

Revenue Generated Per Shipment is Rising

Kurt Kuehn, the CFO described the improvement in revenue as follows:

Revenue per piece grew 5% with the biggest driver being increases in base rates, as we get our prices back in line with the value we provide.

Higher fuel surcharges and package characteristics also contributed to the yield improvement. We are executing our strategy of focusing on the quality of revenue. The key objective of this strategy is to ensure that we are properly compensated for the value we provide customers. And this is paying off as evidenced by our strong yield gains.

Mr. Kuehn's statement suggests that customers have had limited leverage in resisting the 4.9% rate increases implemented January 3, 2011.  

Scott Davis, in response to a question of Ed Wolfe of Wolfe Trahan & Co. noted that UPS is taking a firm stance in pricing negotiations in order to get prices up to levels that they want.  The impact of this change in negotiating posture impact may be modest as many customers have multi-year contracts.

The shift in package characteristics that Mr. Keuhn mentioned that would yield more revenue per package most likely reflects an increase in the proportion of shipments that are delivered to a homes that which include delivery surcharges.  Mr. Keuhn later commented in questions that weight per package was stable so increasing package weight is less likely to be the source of the increase in revenue per package.  impact yield.  Given the growth in e-commerce, the shift to home delivery shipments is most likely have had a larger impact on package yield.

Package Market and GDP
In response to a question by Garrett Chase of Barclays Capital,  Scott Davis noted a disconnect between industrial production levels and demand for parcel shipping.   Parcel shipping demand did not decline as much as industrial production during the recession and is not rebounding as fast after.   This may be another indication of the importance of the link between parcel shipping and retail markets.

The Impact of Oil Prices on GDP

Scott Davis in response to a question by Nathan Brochmann of William Blair & Company provides the rule of thumb that UPS may be using to estimate the impact of rising oil prices on GDP.

I think the rule of thumb for economists are that if oil prices go up $10 a barrel, it's going to knock down GDP about 0.02% in the year 1, about 0.5% in year 2. We've seen about $30 run in crude oil, so that could certainly have an impact in 2012, knock out about half the growth.

UPS and Labor Costs

UPS delivery drivers are extremely expensive.   Kurt Keuhn states that 90% of  UPS drivers are paid at the maximum contract amount.   Normally, that would be between 80 and 82%.   The increase in drivers at maximum reflects the streamlining of the delivery network and limited delivery volume growth.   UPS has lower cost options for new drivers but hiring new drivers would take significant economic growth for that to happen.

UPS also indicated that its head count was likely to remain steady if economic growth continues at the current forecasted pace.  If it stalls, it could see some reductions as efficiency improvements reduce demand for drivers and parcel sorters.

Large verses Small and Medium Sized Shippers

Both Scott Davis and Kurt Keuhn noted that large global enterprises have recovered faster from the recession than small and medium sized enterprises in response to a question from Jon Langenfeld of Robert W. Baird.   They indicated that the real challenge facing these firms is access to credit which they expect to improve later this year.

Improvement in shipping volumes from smal and medium sized enterprises is important for the parcer and express carriers as these firms are offered smaller discounts off of list rates than larger firms.  Increases in the share of business from this market segment should help improve carrier yields (revenue per package) and profitability.  
B-2-B and B-2-C Markets
 
In a response to a question from Bill Greene of Morgan Stanley, Kurt Keuhn stated that B-2-C now represents one-third of United Parcel Service's volume.   He further stated that B-2-C is growing faster than B-2-B volume.

This response provides a further indication that 1) the increase in yield is driven by home delivery surcharges, and 2) UPS's business success is increasingly tied to the success of e-commerce.
Market Competition

Kurt Keuhn described the parcel and express market as "extremely competitive."  He went on to state:

Customers have multiple choices, and so we're out there competing like crazy. The comparisons to our competitors are a little confusing because some of them are use a different calendar. FedEx, for example had the December in their last quarter, which makes comparisons a little unusual. And we haven't heard yet from the post office, which is another very large player. We suspect they'll show negative results.

UPS clearly is concerned about competition from FedEx.   It looks at the Postal Service as a less significant competitor.   No mention was made regarding competition from regional and local parcel carriers or foreign-owned operators like Purolator International.   

The problems that the Postal Service is having competing in the parcel market are worth studying.   It is unclear whether the Postal Accountability and Enhancement Act provided the Postal Service with sufficient commercial freedom to set rates and negotiate with customers to allow its parcel business to grow at a rate equal to market growth.

United Parcel Service's most recent quarterly results show the increasing linkage between traditional delivery services and e-commerce.   The future of the United Parcel Service, FedEx and the United States Postal Service will increasingly be linked to how well they serve retailers selling services through broadcast, direct marketing, web-based and social media.   Recent reports by the Inspector General of the Postal Service suggests that there may be a digital role within the postal ecosystem that could improve the efficacy of web and and mobile based communications for commerce that could improve the prospects for the parcel delivery industry.   It is for this reason that an upcoming conference, Postal Vision 2020 will be bringing together some of the greatest minds in e-commerce, social media, digital and print communications to discuss the future of print and digital communications. The symposium to be held June 15, 2011 and the Marriott Chrystal Gateway Hotel in Arlington, VA. To learn more check out Postal Vision 2020 .

United Parcel Service Volume Down in First Quarter

United Parcel Service reported that it earned $885 million its first quarter of 2011.  Its earnings were up 66 percent from a year earlier when it earned $533 million.   UPS projected earnings are stronger than previously forecast. It now projects that its earnings will be between 17 to 24% higher in 2011 than 2010.


UPS's earnings growth came in all three of its operating segments, U.S. domestic package, international package, and supply chain and freight.  UPS's increases in revenue reflects both rate increases and increased fuel surcharges.  Its increases in profits reflect margin improvements in its U.S. domestic package and Supply chain and freight businesses.

UPS's parcel volume as illustrated in the following chart was down on a year to year basis.   UPS reported that "Premium product growth outpaced ground as UPS Next Day Air® package volume grew at a mid-single digit rate."  The overall decline in volume most likely reflects a decline in UPS ground volume.  It is unclear how much of the decline was due to weather, which held down total parcel shipping volume and may have shifted some volume to UPS Next Day Air®, how much was due to the continuing shift from domestic to global supply chains, how much was a shift in marketing and pricing strategies to expand sales of sales of higher margin next-day air services, and how much was due to loss of market share due to competition from FedEx Ground, Postal Service joint-line services (including UPS SurePost), and regional carriers.

Logistics Does Not End At The Dock

Here is a video from Great Britain showing the logistics inside of National Health Service Hospital.   Obviously internal logistics, including inventory management create real opportunities for companies like DHL, FedEx, TNT and United Parcel Service that handle logistics to the dock door.  You can see by looking at shirt logos that thos is a DHL contract operations.   So it is possible for DHL to handle the logistics from manufacturer to patient.  

Compensation Comparison Chart

Thanks to my readers I was able to create a chart comparing Postal Service compensation to compensation at FedEx Express and United Parcel Service.  As all readers know FedEx Express is non-union UPS is organized by the Teamsters and the Postal Service is organized by one of four craft unions.  The Postal Service compensation figures are from 2009 and were provided by the Postal Service to reporters prior to beginning of negotiations with APWU and NRLC.

The comparison's are a bit disingenuous for the APWU includes a number of maintenance crafts that are higher paid then the most employees that sort mail.  Therefore a fairer comparison would compare the average compensation of employees that sort mail or work at a retail counter with the wages paid UPS and FedEx inside workers.   

The comparisons illustrates why the compensation levels negotiated with the APWU for new employees and non-career positions have much lower wages.   It is clear that the new wage structure should bring APWU members that sort mail or work a retail counter to an average compensation level that will fall between what FedEx and UPS now pay.   If one assumes that UPS and FedEx employees see increases in compensation in the next few years, either due to contract provisions or increases reflecting improving business at both firms, then it is possible that by the end of the contract, APWU average compensation will likely be closer to what FedEx will pay its employees than what UPS will.

In many ways, Mailhandler union members face a worse comparison that APWU members.   Few of their employees are in maintenance and other positions that generate higher salaries.   Therefore, their average salary is likely further above market rates than APWU members.   Therefore, the contract that they will negotiate next fall will likely have all of the changes in work rules and pay schedules that the APWU just agreed to.  They may find it more difficult to negotiate any protections for current employees that the APWU did.

For members of the NALC and NRLC unions the comparison is a bit more complicated.   Their current compensation falls between UPS and FedEx compensation levels.   However, Postal Service is seeing its volumes decline while UPS and FedEx volumes are growing.  Also determining what is a fair wage for the delivery portion of the service depends on an estimate of the value of the delivery service alone and the division of revenue for all activities other than delivery and delivery.   Only after that is conducted would it be clear whether the compensation paid to Postal Service carriers is at, above, or below market rates. 

The difficulty of doing a comparison with compensation of the NRLC members most likely explained why the NRLC was not willing to continue to negotiate.  They most likely face a lower risk of an adverse ruling in arbitration than APWU members as the economic case of the Postal Service is much more complicated in that negotiation.

Comments and suggested additions to this table are requested.   They will be added to the table and posted when received.

Comparing Benefits to the Private Sector

Most of the comparisons made on health benefits compare what the Postal Service offers to what other Federal Employees receive.  There are two parts of this benefit.   First there are benefits that exist while a person is working for the Postal Service.  The second are benefits that accrued while the person works but are payable when they retire. 

A similar comparison needs to be made on retirement benefits.  While up until the signing of the APWU contract the retirement benefit structure of Postal Service and other federal government employees is the same, it is not clear if the hourly cost per employee is the same as the mix of employees in CSRS and FERS may differ and the contribution rates of Postal Service and Federal Government employees into retirement programs with an employer match may also differ

Postal employees like UPS's teamster employees have both pre- and post-retirement health benefits.   FedEx employees only have health benefits while they are working for FedEx.

United Parcel Service has a defined benefit pension plan for most of its Teamster employees.  (Those teamsters who participate in the Western States Teamster Pension plan have a hybrid between a defined contribution and defined benefit pension plan.)  FedEx offers a retirement plan that includes a defined contribution pension and a 401-K plan which had recently seen its corporate match restored.   The Postal Service retains its defined benefit pension for employees hired before 1975 and has a plan similar to what FedEx offers for employees hired since then.   The new APWU creates a new retirement plan for non-career employees which is a 401-K plan without an employer match.

As I noted in the post displaying the information from the Teamster Union comparing FedEx and UPS wages and compensation, no comparison has been made comparing these wages and benefits to what the Postal Service offers recently.   

One of the biggest complaints about Postal compensation being too high relates to the fact that its share of the health insurance costs is higher than what other Federal agencies pay.   The estimate of FedEx costs for health and pension costs of $3.33 gives a benchmark that can be used to compare costs that the Postal Service offers to employees hired since 1975 1984.  (Given that this is 36 27 years ago it must include most current employees.)   (Correction made 1/21/2011 12:40 p.m.)

Under the current APWU contract the Postal Service pays 81% of the total insurance cost.   With the figures supplied in the APWU PowerPoint, this works out to $517.80 per month average.  If one assumes that an APWU member is employed for 2080 hours in a year then the hourly cost of his health insurance is $2.99.  If this was reduced to the 72% of the insurance premium paid for federal workers, the hourly cost of health insurance would drop $0.33 per hour to $2.66.  The APWU contract reduces the hourly cost to $2.80 or $0.19 per hour by the end of the contract. (This assumes no health inflation, so it is possible that the cost per hour at the end of the contract will be higher even if the Postal Service's share is lower.)

The difference of a few pennies is small but significant.  Reducing health insurance costs by a cent per hour saves the Postal Service $12 million corporate wide annually.   The impact of a similar cut for just APWU members is likely around $4 million annually. 

What this exercise shows though is that while cutting the Postal Service's share of its health care insurance contribution will reduce costs, discussing this issue may have more merit in scoring political points than solving the severe financial problems of the Postal Service.   Even an immediate shift to federal employee levels of insurance contribution would not be enough to get compensation levels down to the point that the Postal Service can be self-sustaining.   It is time for those who focus on this issue to look at additional options, including many contained in the APWU contract to do the job.

Comparable Wages

One of the challenges in trying to figure out whether the Postal Service has signed a financially responsible contract is that there are few good figures available regarding what are market wages for the work that APWU members do.    The Teamsters Union have recently posted in UPS Teamster Update a comparison of UPS and FedEx Express employee wages.   I have pulled out the two categories that are comparable to work that APWU members do.   The figures below only include health and welfare and pension benefits and do not inclde compensation costs for employment and unemployment taxes and workers compensation insurance.

The hourly rates are comparable to information that I have seen elsewhere.   They indicate the wages that efficient operators can offer.   The new contract should move average APWU wages within the range listed here once a significant portion of current APWU members retire.

The benefit costs here include both health care and pension benefits.  UPS has a very generous benefit package for most employees which includes a defined benefit pension and 0% employee contribution for health care benefits for full time employees.   Most part time UPS employees  likely have less generous benefits than the "average" benefit.   Turnover of part-time workers is high so many do not accrue pension benefits and their health care benefits are not as generous as those for full time employees.   UPS offers part-time employees a number of non-traditional benefits as well, most notably tuition assistance in the form of loans and grants.

The average hourly benefits listed in the chart for full time FedEx employees most likely underestimates the benefits full time employees receive.   At $3.33 per hour the benefit listed for full time worker would be the equivalent of a company contribution of $577.22 for health benefits every month.   This would appear to be the figure that FedEx pays as its contribution for single employees.  In addition to health care benefits FedEx offers its employees a defined contribution pension as well as a 401-K plan with a match.   The $3.33 figure appears too low to include the hourly cost of  retirement benefits. 

The wages and benefits listed above are paid by companies that profitably provide parcel delivery services. These companies are both known for the efficiency of their operations and their ability to deploy capital to most efficiently use the labor sorting parcels and transporting parcels between facilities.  These two carriers are also now facing rising demand for their services to the point that they are able to raise prices to both customers that pay list prices and those that negotiate rates at discounts to list rices.  

The Postal Service faces a different operating and competitive landscape.   It has significant production and transportation overcapacity and public notice processes that discourages the elimination of this overcapacity, declining volumes and revenue, limited capital to improve the efficiency of its network, regulatory constraints that prevent rational pricing and competitive constraints that prevent it from extending its product line to generate more revenue per item delivered.  These constraints make it difficult for the Postal Service to pay market rates of compensation that one must assume are within the ranges shown above.   The sooner these constraints are removed, the sooner APWU members can be assured that their compensation will fall within the ranges listed above, otherwise they can expect that compensation levels in future contracts will have their members fall behind wages paid in the private sector.

The APWU Contract and How the Process Compares

One of the problems the Postal Service will have in selling the contract with the American Postal Workers Union is the number of new members of Congress with limited understanding regarding the impact of differences in labor law between the law covering the Postal Service and either the National Labor Relations Act or the Railway Labor Act.   In addition many members of Congress will find it difficult to understand why the Postal Service did not take the approach that Wisconsin Governor Walker took with public employees, or President Reagan took with air traffic controllers.


The Postal Service did not have the option to decertify the union as President Regan did as members of the APWU never stopped working after the contract expired. Nor could the Postal Service unilaterally force cuts in compensation as it is not in a legal position that would allow it to break existing contracts and impose contract terms that it would prefer.  A good summary of the negotiation process has been provided by the Postal Service.

Better comparisons are recent negotiations between the Teamsters and both United Parcel Service and Yellow Roadway working under the Labor Relations Act and Conrail that had to renegotiate under the Railway Labor Act.   The following is a brief review of what happened in each of these three examples.

Over the past two decades, United Parcel Service has faced increased competition from FedEx with underfunded multiemployer pension plans sitting over its head. It took a strike in 1997 over the pension issue but eventually had to concede its demand for pension and other contract changes.  Its concessions came once UPS management recognized that the strike gave FedEx an opportunity to prove that FedEx Ground was a credible competitor to UPS Ground service and that the changed perspective would make maintaining marketshare more difficult than before the strike began.   UPS changed its approach to working with its union over the next decade which resulted in a contract in 2007 that allowed UPS to withdraw from the largest underfunded multiemployer plan and make important changes in work-rules and wages that made its operating costs competitive with that offered by FedEx even though FedEx provided service through non-union employees and contractors.
Yellow-Roadway has faced a combination of expanded competition of non-union competitors and a major decline in the nationwide transportation in less-than-truckload market that forced it to combine the operations of its two largest LTL subsidiaries and shutter others. It had also been near bankruptcy for most of the last five years. During this period it had to renegotiate terms of loans multiple times and its stock value plummited to near zero. Yellow Roadway renegotiated its Teamsters contract in 2008 under pressure from creditors However, the problem worsened for Yellow-Roadway when the recession hit and its continuing operations required a second round of compensation reductions with the alternative being liquidation of the business. A new round of cuts were negotiated and agreed upon in 2010 in an effort to save the company. During this period the company cut the number of Teamster employees from 40,000 to 25,000. Even these cuts may not be sufficient to prevent bankruptcy as on March 14, Yellow Roadway stated that it failed to meet a creditor milestone that would allow its creditors to demand full repayment of all loans due.

Conrail faced a different problem in its negotiations as the Railway Labor Act created an environment that forced it to maintain existing contract provisions until a new agreement could be signed. It could have declared bankruptcy which would have allowed it to impose new contracts as has occurred among passenger airlines, but at that time its creditors would have demanded liquidation and would not have supported continuing rail operations under any labor agreement. In addition, political opposition to liquidation was significant as liquidation would have had a significant impact on economic activity from St. Louis to Boston disrupting the ability of the automotive, electric utility and other industries that depended on rail freight service to conduct their business as well as the economies of cities in the from Boston to Washington DC that depended on Conrail operated commuter rail to transport employees to work. Conrail was then forced into a period of extended negotiation with its unions primarily over the elimination of workrules and positions that no longer made sense in a world of diesel locomotive engines. It took almost 8 years to get the changes needed to make Conrail profitable which eventually allowed it to be sold to the public in a public offering.

In all three cases, getting the changes neccessary for a company to survive only occurred once employees were convinced that they had no other options but concede.   For both UPS and Conrail, it took nearly a decade for the changes to be implemented once they were identified.   For Yellow-Roadway, it took less time but the final concession occurred only after multiple reductions in Yellow-Roadway's Teamster employees and the threat of liquidation and loss of all jobs hung over union members' heads.

The Postal Service is in a financial position similar to Yellow-Roadway and a competitive posistion that is closer to what faced both United Parcel Service and Conrail.   Finally, in terms of labor-management relationships, the agreement process has significant similarities to how the Teamsters worked together with UPS, and Yellow Roadway to convince members to accept and implement contract changes.

While its financial position puts it on the brink of default on its obligations to its creditors, creditors have not threatened liquidation like Yellow-Roadway creditors did. 

By eliminating liquidation as an option, the Postal Service is in a position similar to Conrail and must negotiate a contract without the ultimate threat over negotiators from its unions.   The Postal Service is in a better position than Conrail as the threat of binding arbitration, even under current rules forces a time limit to negotiations and existing contract terms.

The Postal Service's position is similar to United Parcel Service as the Postal Service would be hurt by any shut downs, or even slowdowns due to a work-to-rule environment just like United Parcel Service's competitive position was hurt by taking a hard line accepting a strike in 2007.  

The Postal Service's decision to come to negotiate an agreement rather than having one imposed by an arbitrator makes selling changes that would have been included in an imposed agreement easier as the APWU will act a willing partner in implementation, a position that it would not have taken as willingly if similar contract provisions were imposed.  As a partner in implementation, APWU is acting in a manner similar to the Teamster which worked closely with members to explain why changes were required and why changes were best in the long-term interest of employees at UPS and Yellow-Roadway as well as working with UPS and Yellow Roadway to design and implement changes.

Why the Postal Service Matters: UPS Surepost

FedEx has been offering a branded joint-line service with the Postal Service for some time now.   United Parcel Service will likely soon market its joint line service under a new name "UPS Surepost" rather than previous unappealing name, "UPS Basic."

The name UPS Surepost name was trademarked in 2010.   The name does not appear on UPS's website but based on posts on Able Commerce Shopping Cart Software and Browncafe, it appears that UPS is test marketing the brand and the service.  Information on UPS Surepost is also available on a web page dedicated to UPS Worldship software.

Information available on this servcie from the Worldship help information is as follows:

• The UPS SurePost services combines UPS shipping with USPS-delivery to customers' mailboxes.
• UPS WorldShip determines if UPS or the USPS completes the final mile of delivery of each shipment.
• UPS Surepost allows delivery to any point in all 50 states, APO/FPO/DPO addresses, PO Boxes, and US territory Ship To destinations.
• UPS Surepost shipments are validated and processed like small packages.
• Each shipment must be a single piece forward shipment. The shipment navigation bar becomes inactive.
• Four UPS SurePost services are available:
• SurePost Less than 1 lb,
• SurePost 1 lb or Greater,
• SurePost Bound Printed Matter, and
• SurePost Media
• An Endorsement value is required for USPS-delivery shipments.
• Two sub-classes are available if you have a contract and select SurePost Less than 1 lb in the UPS Service box.
• The total dimension of the package cannot exceed
• 130 inches if you select SurePost Less than 1 lb or SurePost 1 lb or Greater or
• 108 inches if you select SurePost Bound Printed Matter or SurePost Media
• Package dimensions are measured by adding the package length to twice the width and twice the height.   (length + (2 x width) + (2 x  height))
• The total package cannot weigh more than 70 pounds.

The #1 Problem With E-commerce: Shipping Costs

The following is a video promoting a new company, Shipsweet.  The video really lays out the problem facing e-retailers from Amazon.com to the smallest seller on e-bay.  It also explains why regional carriers are growing faster than the overall parcel market and why Purolator, Canada's largest parcel carrier plans to double its presence in the U.S. market.

How Deep Could USPS Regional Management Cuts Be?

In a previous post, I noted that the Postal Service plans to announce a cut around non-union 7,500 employees on March 25.   In all likelihood, a cut of that magnitude would involve a cut in the number of district and area offices along the line of the reductions suggested by the USPS - Office of Inspector General.

It is possible that the USPS - OIG may have underestimated the number of cuts in district and area offices that the Postal Service could cut and still manage the business effectively. Larger cuts would come if the Postal Service was as aggressive as United Parcel Service was in 2010 in cutting levels of management.

In 2010, United Parcel Service closed 26 of its 46 district headquarters offices and two of its five region headquarters offices.    For the Postal Service, similar cuts would eliminate 42 district offices and between two and four area offices beyond the one already eliminated this year,.

As far as job cuts, the reduction in management allowed United Parcel Service to reduce its workforce by2.7% to about 330,600 employees.  This is a cut of over 9,100 employees.  Most of the job cuts were management and non-union employees, as volume growth limited efforts to reduce the number of delivery drivers, package sorters, and over-the-road truck drivers.   A 2.7% cut in Postal Service employees would cut twice as many employees as are expected on March 25.

Prediction for 2011 from Fox Business News

Charles Payne made the following prediction on the Fox Business News website. 

"UPS and FedEx will enter into a bidding war for the Unites States Postal Service. The deal is close, but unions balk."

The prediction provides another illustration of how difficult it will be to fix the Postal Service, when commentators are paid to make statements that have no basis in reality.

So what is wrong with this statement:

• There is no business reason for UPS or FedEx to buy the Postal Service.    The markets that the Postal Service serves best (advertising and document delivery) are markets that do not fit into either FedEx's or United Parcel Service's business of marketing parcel delivery, air express and cargo transportation, truck transportation, and global logistics. 
   
• UPS and FedEx find not owning the Postal Service to be profitable. UPS and FedEx make money providing air and other transportation services to the Postal Service and using the Postal Service to deliver light weight parcels to households.   Buying the Postal Service would add additional management challenges and could put the benefits of the current relationship with the Postal Service at risk.
  
  
• Both FedEx and United Parcel Service have corporate cultural issues that would keep buying the Postal Service off the table.  FedEx has made numerous purchases of existing firms in the past in trucking, logistics, and retail printing services.  None of its purchases have been unionized firms and it would seem unlikely that FedEx would start with the Postal Service.  
  
  United Parcel Service has a close working relationship with its union, the Teamsters and adding the Postal Service could create conflicts between Teamsters and Postal Union leadership.   New labor agreements that the Postal Service will sign in the next year will likely result in wage and benefit structures that are not as generous as what UPS offers its delivery drivers.   Adding the Postal Service could create unwanted pressure to raise wages and benefits to levels offered to Teamsters by UPS.  (The higher compensation levels would likely be linked to strict performance standards and flexibility in the use of part time workers that does not currently exist at the Postal Service.)
  
  
• Both FedEx and United Parcel Service understand that buying the Postal Service requires fixes to retiree benefit issues recommended by the USPS-Office of Inspector General.     Purchase of the Postal Service, or for that matter privatization requires a clean balance sheet  and sufficient cash flow to allow the private owner to use profits to invest in plant, equipment, training, and transition costs.    The current payment schedule does not allow for investments needed to make the Postal Service a financially viable private sector firm.

There are probably other reasons why this idea makes no sense.   Given how bad Mr. Payne's prediction was, clearly business stakeholders in the future of the Postal Service should spend some time working with the commentators, producers and  on-air hosts at Fox Business Channel, CNBC, and other influential business news sources that do not regularly cover the Postal Service in order to reduce the noise that could prevent progress in passing legislative changes necessary to ensure a viable postal industry for then next decade.

Web Sales - Who Delivers?

As we close another holiday season, the increasing importance of web based shopping becomes increasingly evident.  Marstercard Advisers reported that Internet sales rose 15.4%.  This increase is consistent with the results generated by the monthly surveys of retail activity conducted by the Commerce Department.   What the Postal Service, FedEx and United Parcel Service need to do is delve a bit deeper into the data as they begin to make their plans for handling the even larger volumes of parcels that will be delivered next year.

Mastercard Advisers estimated that total web-based sales were $36.4 billion in the fourth quarter of 2010.  However, Mastercard Advisers figures underestimate the total value of electronic and mail order sales that the Census Bureau will likely report early next Spring for both the holiday period.    The following chart illustrates the long term trend in e-commerce and catalog sales from retailers that generate most if not all of their business from catalog and e-commerce sales.  These figures most likely do not include the e-commence sales from some of the largest web retailers including Best Buy, Macy's, J.C. Penney's, Radio Shack, Target, and Walmart and dozens of others that sell most of their merchandise through standard brick and mortar outlets..  

These figures are still small relative to all retail sales other than gasoline, heating oil, and food and beverages sold in restaurants and bars.   In 2010, 7.4% of retail sales that could be purchased via the web or catalog and delivered were purchased in this way.   While a small proportion the share is a significant increase from 5.8% that such sales represented in 2009.  Expanded access to high speed web, shifting demographics, and new mobile-based means of ordering items to be delivered will likely increase the share of deliverable retail sales that are delivered to homes and offices.

The growth in e-commerce while strong across all sectors this season, appears to be strongest for products that are in many ways that create the most challenges for home delivery as they are lighter in weight and bulkier than shipments that the large parcel carriers handle for their business-to-business deliveries.    The Wall Street Journal reported that SpendingPulse reported that Web based sales from apparel specialty stores grew by 25%.   According to Bloomberg, Macy's, a large mid to upper end department store retailer saw its online sales in November grow by 32%.   The mix of products that Macy's needs delivered most likely reflects a large proportion of apparel and domestics (e.g. towels, and sheets) as those categories reflect the largest share of Macy's overall sales.

The private sector carriers have handled the challenge of delivering the increased volume of apparel and domestic items purchased for home delivery through a combination of operating and pricing changes. (The Postal Service handles a very small portion of these shipments without involvement of FedEx Ground, United Parcel Service, or another parcel consolidator.) These include:

• Shifting delivery of parcels under 2 pounds to the Postal Service.    FedEx Ground uses the Postal Service for nearly 30% of all of its deliveries and much of its volume growth reflects Postal Service delivered parcels.
• Increasing prices for home delivery.   Home delivery is more expensive than delivering to businesses due to the lower density of parcels delivered per address or stop and the distance between stops.    Home delivery charges have existed for many years but they have increased at a much faster rate than the base transportation rates that the carriers charge.
• Modification of the factor used to measure dimensional weight.  Both UPS and FedEx reduced the factor that they use to calculate dimensional weight.   This affects bulky shipments of apparel and domestics more than other product categories.  The dimensional weight factor will have the greatest impact on expedited shipments.

 For the Postal Service, the e-commerce trend requires that their delivery network and the tracking software and hardware used can seamlessly work with the sales and transportation networks of its partners.  Ensuring that the Postal Service can do this will require significant capital expenditures for vehicles, hand-held scanners, software and communications infrastructure upgrades.  If the Postal Service cannot raise the capital, then consumers will face higher delivery costs, and may reduce their purchases via all retail modes thereby slowing retail sales and economic growth for many years to come.  

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

• 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.

 Misses

•  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.  

Unclear

•  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.

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.

Overall, consolidators that use Parcel Select service, as well as most of their customers, should be quite pleased with these rate increases.   These rate increases combined with FedEx and United Parcel Service's 10% increases in rural and remote area surcharges will likely expand the geographic area where parcel select is competitive and the low rate increases for shipments over 1 pound may encourage shippers to consider parcel select for more shipments than they have in the past.