A Brilliant DHL Advertisement

Evert carrier is trying to promote their global reach and logistics capabilites.Anyone who has watched the NCAA tournament has seen UPS's campaign,  Here is a humorous take on this theme from DHL,

Macroeconomics and the Mailing Industry

The mailing industry is an industry that depends on strong consumer demand.   Whether we are talking about transactions paid through the mail, advertising, or parcel delivery, mail volume will rise or fall depending on consumer demand.   The industry will likely prosper if consumer demand grows and will face even more challenges than it does now if consumer demand falls.  That is why the current debate regarding fiscal policy and the macroeconomic effects of that debate fiscal policy is so important to the industry. 

A recent article in the National Journal nicely summarizes the opposing viewpoints as expressed by the Joint Economic Committee Republicans and the Federal Reserve Chairman  Benjamin Bernanke and a number of economists including Chad Stone of The Center on Budget and Policy Priorities.  

When I first read the Joint Economic Committee Republican report, I was struck by one prescription that the National Journal summarizes as follows:   "The paper predicts that cutting the number of public employees would send highly skilled workers job hunting in the private sector, which in turn would lead to lower labor costs and increased employment. But “lowering labor costs” is economist-speak for lowering wages." Cutting the wages of college educated Americans did not seem like a good way to increase the demand for the products and services that are advertised or delivered by mail especially as the customers of the mailing industry are facing higher fuel and food costs to begin with.

As the National Journal article concludes, "Ultimately, the argument comes down to what policymakers see as the key problem in the economy. Is growth slow because businesses and consumers fear higher taxes or because businesses don’t have enough demand for their products to expand? Republicans are arguing the former, but many economists — and the bond market — believe the latter is closer to the truth. Moody’s bond-rating agency warned on Thursday that the U.K. is in danger of having its debt downgraded due to worries about slow growth resulting from consolidation."


This is not a debate that the mailing industry would normally get involved in.   However, it may be worth the time of industry firms to spend a little time thinking about a very complex economic issue to make sure that Congress chooses the economic approach that best aligns with the industry's interests.  It is my opinion that the industry would be better served by an economic approach supported by the bond market than one developed by politicians.

Self-sufficiency is a Long Way Away

The Postal Service released its monthly financials for February that showed an operating loss of $230.   For the year to date operating income was $18 million, meaning that February will be the last month that the Postal Service shows an operating profit this year.

While the February numbers look bad, they do not fully explain how difficult the Postal Service's financial situation really is.  For example:

• Financial self-sufficiency would require that the Postal Service earn an operating profit of over $530 million per month.   ( i.e. an operating margin of 12%)    Only with an operating margin of this size would the Postal Service have the capital to invest in its infrastructure, cover the costs of downsizing, and cover its workers compensation expenses, pay its debt.  It is not clear if even an operating margin of that size would allow it to make the contribution for retiree healthcare obligations without cutting spending that would allow it to remain self self sufficent.
• The Postal Service's incentives for early retirement that were announced on March 15th were pushed back into fiscal years 2012 and 2013.  A self-sufficient Postal Service would have offered the $20,000 lump sum incentive for early retirement as payment upon retirement, increasing the value of the incentive to employees and most likely incresing the number of employees taking advantage of early retirement.  The cash squeeze prevented the Postal Service from offering the incentive that would cut the layer of management that it wants to cut quickly.
• Depreciation as an expense is decreasing over last year and plan.   Declining depreciation suggests that the Postal Service is not upgrading or replacing its physical assets.   Right now the Postal Service is falling behind both foreign postal operators and its customers in upgrading the information technology infrastructure, and using the most efficient mail and parcel sortation and material handling equipment.  The lack of capital also makes consolidating the processing network more difficult as the Postal Service is unable to adjust its network by replacing multiple  plants with one in a new location that could more efficiently and effectively provide the service customers demand.
• Vehicle maintenance expenses are up 11.9% over plan and 13.7% over last year.  The Postal Service operates 215,000 delivery vehicles.  Without the cash to replace this fleet, vehicle maintenance expenses will continue to grow at double digit rates.
• Fuel costs are growing much faster than inflation and the rates on products that require significant transportation expenses.  Besides fuel used by its delivery fleet, contract carriers that move mail by air and truck between facilities all have fuel surcharge provisions in contracts that raise Postal Service expenses as fuel prices rise.  Fuel increases of 1 cent raise Postal Service costs by $6.5 million.   Given current prices of gasoline and diesel fuel and expected trends through the summer driving season, the Postal Service will spend between $500 and $600 more on vehicle fuel costs this year than plan nearly wiping out all of the savings from the management restructuring announced this week. 

On April 5th, the House Oversight and Government Reform Committee will be looking at issues relating to the labor relations and employment law that governs the Postal Service.   These issues are important as compensation costs represent 72% of the Postal Service's total costs this year.  Cutting compensation costs will have some effect in lowering this percentage and requires looking at pay schedules, work hours, and the pay schedule that applies to the employee doing needed work, including whether the work is performed by a non-uinion or unionized employee.   To the extent that the APWU contract allows the Postal Service to reduce total compensation costs then it will help improve the Postal Service's bottom line and have some effect on reducing employee compensation's share of total costs.  

However, as the bullet points above show, many of the red flags associated with the long-term prospects of the Postal Service focus on the lack of capital spending.   The lack of cash has the effect of depressing non-compensation expenses artificially inflating the share of total costs related to compensation buth now but more importantly long term as they reduce the ability of the Postal Service to reduce the labor required to handle the mail it will be expected to deliver.

Why Mail Matters: L.L. Bean

On March 24th, L. L. Bean announced that it will offer free shipping on all shipments no matter how small.   L. L. Bean can afford to do this because many of its light weight shipments and delivered through the Postal Service either through a direct contract with the Postal Service or through a consolidator like FedEx's SmartPost or UPS SurePost. 

 L.L. Bean is not alone in offering free shipping.  Firms like Newegg.com use free shipping on specific items to shift customer demand toward certain items and away from others.  Landsend offers free shipping offers to e-mail subscirbers on a regular basis  Other firms require minimum purchases ranging from $25 for Amazon.com to $99 for Macy's.   The Postal Service is critical for these firms when they need to ship small or light-weight items as a means to control the total delived price to consumers.

L. L. Bean move is smart because web based consumers look at the not just the product price but the delivered price when purchasing.  By eliminating the shipping charge, customers know their full price up-front without having to look at their shopping cart or in some cases go through the process of filling out all shipping detail before getting the shipping charges.  

Could Ford provide the next LLV for the USPS?

Norway Post has announced that it will puchase 40 Ford Electric Transit Vans.  With 28 kWh of power to call on, Transit Connect Electric has a top speed of 120 km/h (75 mph) and a range of up to 130 km (80 miles) on a full charge. 

Ford alreadysells the van in the U.S. and makes a right-hand drive version of the Transit Van for the British market where it holds a 25% market share.  So the Postal Service should have no problems finding a willing and able vendor for tens of thousand of vans.

Pitney Bowes Hires VP to Run Secure Digital Mail Business

Pitney Bowes announced yesterday that Chuck Cordray to the new position of president of the Volly™ secure digital delivery service. 

Cordray joins Pitney Bowes from Hearst Corporation, where he served as senior vice president and general manager of Hearst Magazines Digital Media. In this role, he was responsible for the strategic direction and operating management for Hearst’s digital activities, including advertising, editorial, online consumer marketing, partnerships and project management for 24 different websites, including 12 tied to Hearst magazine properties and 12 purely digital sites.

Cordray previously held executive leadership roles for several large consumer brands, including TV Guide Publishing Group, Primedia, Inc., and Meredith Corporation.

“Chuck Cordray knows the consumer digital space and has operated effectively there for years,” said Leslie Abi-Karam, executive vice president and president, mailing solutions management, Pitney Bowes. “He is well-positioned to lead our growing Volly team in the emerging market for secure digital delivery services, and guide the team toward our consumer launch in the second half of the year.”

The Volly™ secure digital delivery service, unveiled in January, is a new cloud-based digital mail communications platform that will empower consumers to receive, view, organize, and manage bills, statements, direct marketing, catalogs, coupons and other content from multiple providers using a single application. This opt-in, consumer-focused consolidation service also includes online bill pay.

“I am very excited to join Pitney Bowes to help shape the fantastic opportunity that Volly represents,” commented Cordray. “The company brings invaluable assets to this emerging market: unsurpassed security technology, deep relationships with mailers, and a 90-year commitment to helping companies manage their customer communications. That is a winning combination.”

When Will the Postal Service Reduce Staff?

The Postal Service has published a detailed schedule of dates that are important for employees whose jobs will be affected by the management restructuring.  Anyone who could be affected should print out, or bookmark this schedule and add the key dates to their smartphone calendar so they are sure act by the required deadlines if they plan to take advantage of early retirement or will need to find a new job within the Postal Service.

For those outside of the Postal Service, only those dates on which current Postal employees will leave employment matter.  These are the dates that the Postal Service begins experiencing cost savings from either early retirements or RIF's.  These dates are:

• May 31, 2011 - effective retirement date for individuals taking VERA or retirement incentives
• September 9, 2011 - last separation date for RIF although some will separate earlier

How much the Postal Service saves this year depends on how many of the 7,500 reductions in management employees take early retirement and how many are laid off in a RIF.  

The Postal Service will save 1/4 of a year's compensation from everyone who retires this fiscal year while the incentive will not show up on the income statement until fiscal years 2012 and 2013.  Savings for those who are RIF'ed is limited to one month of FY 2011 salary.  Some individuals who are RIF'ed may face separation before that date but it is not clear at this point how many.

RIF's have other costs associated with unemployment insurance and possibly severance payments.   I have read the civil service RIF rules but find them confusing so I am not sure how provision for separation payments would apply to Postal Service employees.  With a September 9th separation date, it is likely that most of the costs of a RIF would occur in FY 2012.