Postal Service as Editorial Fodder

A recent editorial by the Washington Times and a columnist in the Los Angeles Times provide illustrations as to how ideological predilections and reporting on a deadline produce more heat and less light about how to solve the problems facing the Postal Service.   These commentaries reflect the seasonal interest in the Postal Service use it to ship packages and send correspondence that they rarely send in the other 11 months of the year.

Readers of this blog are more familiar with the problems that the Postal Service faces these writers.   They will have no problems identifying how the writers of the two pieces illustrated their minimal knowledge of the postal market or the USPS.

Common to both pieces is a misunderstanding of how limited the competition between the Postal Service and United Parcel Service and FedEx really is.   The Postal Service is in the business of delivering documents, small parcels (those under 10 pounds) shipped by all senders, and larger parcels shipped by households and others that ship parcels infrequently.  FedEx and UPS focus on business-to-business shipments and household deliveries of larger parcels.   FedEx and UPS use the Postal Service to deliver small parcels to households as the revenue generated to drop one small parcel at a household is not equal to the cost of delivery for those two carriers.   More of the Postal Service's volumes compete with newspapers like The Los Angeles Times and Washington Times, than with UPS and FedEx.

So why does what is printed now in two newspapers matter to postal stakeholders?  They are important because they provide some hint as to what the debate over the future business models will look like.   Right now, postal policy is most likely a low level priority of both the Obama Administration and Congress.  Postal Policy is not a hot button issue in the blogosphere, talk radio, cable news except when used to illustrate why the financial health of the Postal Service suggests that public option is a bad idea.

This will change when the Government Accounting Office issues its report on potential business models in March or April of 2010 and the issue of postal operating losses and retiree healthcare payment schedules raise the threat of default on payroll next fall, and the risk that debt limit will be hit in 2011.    Postal policy will bubble to the top of public discourse in the spring and summer of 2010 because the blogosphere, talk radio, and infotainment programs on the cable news networks will see postal policy as an issue that their readers and listeners can easily understand, or more importantly understand an ideological position relative to future postal business models.  

The rise of postal policy in public discourse will be helped by the fact that the "hot button" issues of 2009 will have mostly be dealt with.   This includes health care, financial industry reforms, and possibly even energy policy and global warning.  At that time, there will be few other "hot button" issues on the plate of Congress that the blogosphere, talk radio, cable news  can talk about that every reader, listener, or viewer will easily understand and writers, hosts, or panelists can easily frame the problems of the Postal Service around their ideological perspective.

The Washington Times editorial uses the Postal Service to present a polemic against government provided services.   It links together a series of anecdotal stories about poor customer service at retail outlets and the inability of the Postal Service to meet its Priority Mail commitment with references to news stories illustrating evidence that its operating process are breaking down.  In conclusion, the Washington Times does not present solution, instead it concludes with a remark suggesting that households abandon the Postal Service for parcel delivery.

The Los Angeles Times piece (reprinted in the Allentown Morning Call) is more thoughtfully written but David Lazarus but illustrates the types of conclusions that are drawn when based on misinformation provided by the Postal Service employees who have a real interest in maintaining the status quo, limited understanding of customers of and competition within the document and parcel delivery markets that results, and limited time to assess the information collected in interviews.

The remainder of this post reflects comments that I sent to Mr. Lazarus and represent my initial reaction to a number of the points that he raised.

Can this system be saved?

 The answer is yes. However, it cannot survive as it does now. It is also clear from other countries that a postal service can provide universal service, even places as remote as the Australian outback and the Arctic areas of Canada at a uniform price. Put another way, is it time we privatized the postal service?I think the answer here is yes as well but not in the manner that you are thinking. By 2020, The Postal Service and mail in general will primarily be a means of delivering advertising. (It is close to that now.) What should the US Government's responsibility for advertising delivery be? Personal Correspondence is less 4% of all mail volume and bill payments by check will likely disappear by around 2030. (There is already no check clearinghouse in Great Britain or Sweden.)

The question of privatization is often tied to the question of the monopoly.  A privatized Postal Service does not require eliminating the monopoly.   Examples of privately owned, legal monopolies exist among regulated utilities serving large territories and unregulated rural retail monopolies selling everything from gasoline to groceries.

"The postal service is asking for a national dialogue on this," Richard Maher, a Postal Service spokesman in Los Angeles said. "What is our role going to be in the future? We need to have a conversation about that."
The dialogue was mandated by Congress and GAO will have a report on the subject that the USPS is trying to influence at the end of March. They wrote a paper on the topic and hired 4 independent thinkers, including myself to look at the question. For more information go to www.postaljournal.com for links to all papers an links to presentations made on the topic at a recent conference in DC.

Who wants the take over the Postal Service's business?
The interviews with FedEx and UPS are reflective of their view. They do not want to get in the “mail” business because it is not a growth business like parcel shipping in Asia. They are being a little disingenuous as FedEx is the USPS’s largest transportation supplier.  UPS is a significant supplier.  Both use the USPS to deliver parcels under 5 pounds to households and to addresses that FedEx and UPS call “remote” For them, remote means many zip codes in outer suburbs of big cities. They also like having a competitor who is undercapitalized and a bit inefficient as it allows them to charge more for services in the US and use those profits to invest in faster growing markets abroad. They will be major players in policy debate to come.

If not UPS or FedEx who?
The only other US private sector firm who would be a logical buyer would be Pitney Bowes but the USPS might be too big for them to swallow. Similar problems would exist for foreign buyers, including Canada Post, Deutsche Post, and TNT Post Group. Buying the USPS, especially given its current financial position, business model, and restrictions on operations, customer relationships, etc would be not viewed as a viable proposition. Also, these companies, as well as UPS and FedEx have better uses of capital than in investing in the USPS.   TNT has specifically indicated it is exiting the mail business outside of the Netherlands.

The big private shippers probably would be happy to cherry-pick profitable urban routes but would want nothing to do with having to schlep mail up and down unprofitable rural roads.
FedEx and UPS already do that with their pricing structure. The private carriers (they are carriers and not shippers; those that send stuff are shippers) have substantial surcharges on home delivery and “remote” delivery, and retail services, (e.g. anyone who does not have a corporate account) All of these surcharges makes the USPS cheaper for individual shippers of parcels and commercial shippers of light weight parcels to homes and remote areas. So they already cherry pick in the parcel business. There is some indication in Europe that entry into the mail delivery market even into the most high-volume high-income neighborhoods is difficult to do profitably  Furthermore not all urban carrier routes are profitable as routes in low income urban neighborhoods have much less mail per stop than those in high income neighborhoods and "cream skimmers" may find that the number of routes that could be served profitably are too few to justify investment in a start-up delivery business. 

It seems to me that the only privatization scheme that stands even a remote chance of working would be to break the postal service network into hundreds of regions and territories, and then have local companies compete for mail-delivery rights in each area. But you'd still have to wonder how any such private-sector players would be more successful at the game than a long-established heavyweight like the Postal Service.
Breaking up the Postal Service has been suggested before. The problem with this solution is that almost all buyers of mail service want the company that collects / accepts the mail to have the ability to seamlessly deliver to any address in the US.   Mailers, and in particular larger mailers, want to maximize their purchasing leverage by buying from one or two transportation sources not 50. That is why both FedEx and UPS have national parcel, express and freight networks and ATT, Sprint, T-mobile, and Verizon all offer nationwide wireless service.  The privatization scheme that would have the best chance of working would be an IPO with a significant employee ownership. It could come only after the USPS could show it could operate profitably under private sector business and employment law. This is what happened with Conrail in the 1980’s.

"If the system was privatized, it might cost 44 cents to get a letter across Los Angeles but $5 to get it to Connecticut," said Richard Maher, the postal service spokesman. "When you think about a network that delivers to all homes every day -- it's huge," he said. "Would a private company be able to do that? I don't think so. I think we would lose universal service."
These are canards. Every country uses a uniform rate for single-piece mail and in many cases for Parcels. (look at the rate structure for parcel in Germany where you can send a parcel anyplace in the world and only have to choose among some 20 or so rates based on the size of the box and the destination country.) Business mailers (LL Bean, Bank of America, etc, may see rates that are not uniform. In fact, those advertising mailers that drop their mail at local post offices rather than anyplace in the country already have the distance based rates that Mr. Maher says would be so terrible. If distance based rates are introduced to First Class for commercial mailers, percentage differences between local and distant rate will likely be much less than 100% rather than the 1,136% that the Postal Service spokesman describes.

The percentage difference between local parcels and those shipped cross-country vary with weight.  The percentage does not exceed 100% until the parcel exceeds 17 pounds.  This suggests that the impact of transportation on rates for items that are sorted at origin and destination would be quite small.

The Universal Service Obligation (USO) argument has been gone over many times.   The driver of the USO is commercial mailers, who must mail to every possible address.   The rates charged these mailers can be set to cover the total cost of delivering to every address printed on their mail using either a uniform or distance-based rate.   The acceptance of remote surcharges by customers or FedEx and UPS illustrate that private sector carriers can devise non-uniform rates that allow them to deliver to all addresses in all 50 states. UPS and FedEx have a common carrier obligation which creates a common law requirement to actually deliver to all points that they say they reach according to advertised service commitments.   Similar obligations exist for other trucking, rail, air and telecommunication carriers and are enforced by regulators and courts.  In addition, there are lots of publicly traded utilities that provide “universal service” as it is within their charter to offer the service to every potential customer. With a common carrier obligation, the only financial problem for the Postal Service would be developing rates that cover the costs of single-piece mail sent or received by single piece mailers in the nation's most rural areas as defined by the Department of Agriculture.

Moreover, why limit the system's network of post offices to stamps and boxes? Why not have the post office deal in all manner of communications, from book and cell phone sales to DVD rentals? Heck, why not sofas, lattes and Wi-Fi access?
I agree with you that the USPS should be able to do more beyond what it does now. I also believe that just as private health insurers did not want a public option to compete with them, Starbucks, ATT, Amazon, Banes and Nobel, Citibank, and all kinds of other firms in the private sector do not want a government entity competing with them. In the United States we do not have a tradition of having a government entity actively competing with the private sector. Also the employment laws and business laws that apply to the government do not work really well for an entity like the USPS that gets 70% of its revenue now from customers that mail more than 500 pieces at a time. If the Postal Service must expand outside traditional mail business, then the only choice is a corporate private-sector model for the Postal Service. 

This brief post illustrates the massive education effort that lies ahead for stakeholders in the mail industry. Editorial writers and business journalists have influence far beyond the few people who buy their papers and contacting them individually or in groups will be critical for stakeholders. But stakeholders can not stop there as the primary source of news and opinion on the future of mail will come from the web, talk radio and cable news.   The tea-party movement shows how the internet, talk radio and cable news could drive and amplify a public policy issue that every voter uses, has a personal connection to, and can develop a vision for its future based on their political ideology and personal interests.   With the Government Accounting Office report coming out this spring, it is time for stakeholders to begin this effort.  Without it, Congressional reaction to the report will be driven by influences whose livelihoods and businesses do not depend on the future of mail.

The Cost of Reducing the Workforce

The postal industry is in the midst of efforts worldwide to reduce its workforce.   The combination of automation, more efficient operating networks and declining demand all require reductions in production employees far greater than attrition allows.

The Detroit News reported that Ford has just announced new incentives for employees to retire or seek new employment.  The incentives that Ford announced yesterday came about 6 months after they were previously offered.  Ford's incentives are more generous than anything the Postal Service has offered.  Ford is offering a retirement package of $20,000 for unskilled workers and $40,000 for skilled workers plus an additional $20,000 or $25,000 toward the purchase of a new car.   Employees not eligible for the retirement incentives were offered a $50,000 buyout offer plus additional $20,000 or $25,000 toward the purchase of a new car.  While these incentives are large compared to what the Postal Service has offered, in July, only 1,000 Ford employees took similar incentives to leave the Ford payroll.

In the past year, the USPS has implemented two early retirement incentive programs that in total cut the workforce by less than 25,000 employees.   Given potential volume losses of 4-6% of years, these incentive programs could become a bi-annual process.    The Postal Service may find greater success in convincing employees to retire with its incentive programs in the future as the economy improves.    It will still face challenges as incentives will not be equally attractive in all regions with the differences reflecting the strength of the local economy and the strength of ties employees have to their local community. 

The size of the incentives that Ford offers suggests that getting employees to leave in communities currently experiencing high levels of unemployment may be even larger than what has been previously offered to reduce the workforce at a rate equal to reductions in the demand for labor.  The financial position of the Postal Service, and in particular its lack of cash reserves, make larger incentives unlikely even if they would save money in the long run.


In developing long range business plans, the Postal Service and entities evaluating the future of the Postal Service will need to include the costs of retirement incentives and severance payments in estimating potential profits and losses going forward.  These long-range business plans should include provisions for extraordinary costs so that stakeholders reviewing these plans have an honest assessment of the transition costs of matching the postal workforce to mail demand.

Becoming a Multi-modal Postal Company

Today, RR Donnelley announced a new mobile application for broker/dealers and financial advisors.  This application is part of a suite of digital products and services that RR Donnelly offers to the financial services industry.

RR Donnelley's significant presence in digital documents may be a surprise to many readers of this blog who only know of the company as the largest printer of documents that are delivered by mail in the United States.   Illustrative of this change is how RR Donnelley describes its business.

RR Donnelley is a global provider of integrated communications. Founded more than 145 years ago, the company works collaboratively with more than 60,000 customers worldwide to develop custom communications solutions that reduce costs, enhance ROI and ensure compliance. Drawing on a range of proprietary and commercially available digital and conventional technologies deployed across four continents, the company employs a suite of leading Internet based capabilities and other resources to provide premedia, printing, logistics and business process outsourcing services to leading clients in virtually every private and public sector. (Emphasis added)

In this entire description, the word "printing" appears only once.   Instead, RR Donnelley sees itself as a communications company and "printing" is only one modality to deliver communication.    RR Donnelley clearly envisions a world in which it is multi-modal provider of document delivery, whether by print, the Internet or through a mobile smart-phone.

RR Donnelley is clearly still primarily a printing company.  Most of the services described on its website relate to the process of taking communication concepts and turning them into printed documents.   In a similar fashion, RR Donnelley does not break out the revenue of its digital document business separately in its quarterly financial statements, suggesting that the revenue in that business is still not large enough to note separately.

The change in its definition of its business suggest that RR Donnelley understands that to continue to serve its print customer needs, it must be capable of providing solutions that allow the delivery and/or storage of documents digitally to reflect the demands of recipients.   Other firms that serve parts of the postal supply chain, such as Pitney Bowes, Canada Post, Deutsche Post, and Xerox, are making a similar transition.   For all companies in the "postal" business, the changing environment raises three questions:

• Is my company prepared to be a competitive multi-modal postal firm?
• What changes does my company need to make to remain relevant in a multi-modal world including acquisitions, divestitures, partnerships and mergers?
• What strategy does my company have to deal with legacy physical-delivery focused assets and divisions so that they can generate an acceptable financial return for as long as customers exist for that portion of our business?

Closing Post Offices ... in Switzerland

The United States Postal Service has announced that the list of post offices being closed is down to 168.   The process of whittling the number of possible closures from 3,600 to 168 raise real questions about what the Postal Service was doing when it made the original announcement of closures.

• Why did the Postal Service even started the process with such a long list of possible closing Post Offices?
• Why did it not do the due diligence and confidential local market research  that resulted in trimming the list of post offices to be closed prior to announcing possible closings rather than once the closings were placed before the Postal Regulatory Commission?
• Would the Postal Service had had an easier time dealing with the turmoil that announcing post office closings had if it had started with a shorter list of potential post office closings backed by proper due diligence and confidential local market research? 
• How much did the entire process cost the Postal Service in the time of lawyers and other employees and how was that cost affected by starting with such a long list of potential closures?
• How much did the entire process, including the repeated reduction in the number of potential closures, cost the Postal Service in lost credibility before the Postal Regulatory Commission and on Capital Hill?
• Would the Postal Service have had a different result in post office closings if it had a plan in place for each possible closing for replacing the location with a contract or franchised outlet?
  

 The issue of post office closing is not unique to the United States.   The attached video from Swissinfo.com that was posted last April shows that announcing the potential closure of a post office generates the same arguments that are made in the United States.   The one difference is the tag line of the report. The Swiss Post has a plan B, a retail outlet in the local supermarket.   The only change would be the elimination of the Post Office's service of collecting bill payments at a window.

Congress and the Postal Service

The United States Postal Service is unique among publicly-owned postal operators in that no executive department has the "shareholder." responsibility for the enterprise.   By default, this responsibility has fallen on Congress.  Since the passage of the PRA, Congress has tended to downplay its shareholder role which has resulted in Congressional actions that undermine the competitiveness of the Postal Service and the value of the enterprise.

The problem with Congress reflects the inherent conflict between its interest in the Postal Service as shareholder and its institutional interest in reelection.   As such, the Postal Service has frequently become a tool to help balance the Federal Budget, with these actions constantly weakening the financial position of the Postal Service.   (See. USPS-OIG white paper, Federal Budget Treatment of the Postal Service)     Other actions reflect institutional interests in serving constituent groups that could be affected by postal business strategies, many times to the detriment of the enterprise.

The Postal Service has not helped its shareholder see these conflicts as its business strategy has been opaque to even many seasoned observers.   Its current strategy focusing on reducing costs by reducing retail locations and delivery days raise this question again.   As the observer, Rag Content notes:

The potential impact of changing operations is something the Postal Service seems to be doing without much thought to its customer base these days.  As it hides behind the line - matching resources to revenue, it continues to downsize its operations from closing post offices to reducing the remittance mail processing on Sundays in some locations to its AMP consolidation effort. The post office closing is the only docket open before the Postal Regulatory Commission at the moment, yet every change the Postal Service is making operationally affecting its ability to provide uniform service throughout the country.

A similar question is now being raised by shareholders by another troubled enterprise, General Electric.  General Electric, a diversified financial, manufacturing, and entertainment company, has gone through probably the worst year in the company's history.  The company had to take funds from TARP funds to shore up its financial unit and has sold nearly $10 billion in assets and slashed its dividend by two-thirds in order to improve its liquidity.

Now shareholders are looking for a clearer picture of how General Electric will earn a competitive return on investment dollars going forward.  A recent Bloomberg News story covering General Electrics upcoming December 15,2009 shareholders meeting illustrates how involved shareholders think about a company with an unclear business plan.

General Electric Co. Chief Executive Officer Jeffrey Immelt says a financial crisis like the one he faced this past year often demanded action first and explanations later. Later is now, investors say.

“People want them to do a better job explaining what the return hurdles are for the businesses going forward,” said Mark Demos, who helps manage $19.8 billion at Fifth Third Asset Management in Minneapolis. “GE has a mixed track record on putting capital to work over the past five years.”

The shareholder of the Postal Service needs to ask the same types of questions that the shareholders of General Electric are asking GE's management.

• What is your long-term strategy to ensure a commercially viable, and more importantly self sufficient enterprise?
• How do short-term cost cutting efforts affect that long-term strategy?
• What is the long-term business strategy that the changes identified in the Postal Service's business model paper support?
• Is that strategy financially viable and what risks could derail its viability?
• How much capital and cash is needed to execute that strategy?
• If existing capital and cash is not sufficient, what is your strategy to raise more capital?
• What are the risks to the shareholder and the existing holders of Postal Service debt and other unfunded obligations?
  

While these are questions that Congress, as shareholder should ask both now and on a regular basis in the future.   Given Congress's track record on taking their responsibility as shareholder as seriously as General Electric's shareholders do, it may make sense to explicitly give some other government entity that responsibility, especially if solving the current financial crisis will require the Postal Service, like General Electric to seek relief from either unfunded obligations or expansion of its borrowing capabilities. 

Publicly Traded Industry Firms

Direct Communications Group has updated its list of publicly traded firms in the courier, express or postal service industry. The list of firms includes firms that provide:

• Physical Delivery Services
• Printing and Document Preparation
• Mailroom, Sortation, and Mail Preparation Equipment
• Software
• Consulting/Outsourcing
• E-Commerce

The list can be found on the new Direct Communications Group website.

Purolator USA, Canadian in the US Parcel Market

When DHL exited from its United States domestic business, most commentators suggested that shippers would face only the duopoly of UPS and FedEx. The Postal Service was considered a marginal player that could not meet the service quality needs of business to business customers. More importantly, it rarely was price competitive on shipments over 5 pounds.

In a previous post, I noted that Amazon in its drive to shorten the time from order to delivery is expanding the number of competitors that compete in the parcel delivery market as it uses same-day couriers to delivery parcels that UPS or FedEx would have delivered previously. Amazon can expand the list of potential vendors to include same day and regional parcel carriers because its warehouses are close to the customers that it wants to serve but can only be served by carriers that can operate with more flexibility than the two national carriers.

New competition in the United States does not just come from these regional carriers. Purolator USA, a Canada Post subsidiary, is slowly expanding its domestic United States business as a complement to its cross-border business. By expanding its domestic United States business, it can serve more of the North America needs of its customers, making it easier for it to get a larger share of the business of customers with significant cross-border parcel and express traffic.

The growth of Purolator USA can be seen by looking at its web site and some of the older items that Purolator has not updated. Purolator, operating as a subsidiary of the Canadian courier has been in the United States since 1997, and under the Purolator USA name since 2004. For most of its existence, its focas has been on cross border traffic into Canada where it is the largest parcel and express carrier.

In its brochure describing its cross-b0rder service, Purolator describes four (4) United States based consolidation terminals in Seattle, New York, Buffalo and Chicago. It's website now lists the ten (10) gateways listed below. Clicking on any of the gateways will show the service times that Purolator USA promises to customers served by that gateway. The maps are comparable to service times of UPS and FedEx but somewhat narrower than what is offered by some regional carriers.

(Readers using Internet Explore may have some difficulties with some of these downloads as you have to tell IE that you want to download the file and then try a second time. They all work fine in Firefox. If you have a fix send a comment.)

Buffalo, NY
Dallas-Fort Worth, TX
Itasca, IL
Los Angeles, CA
Melville, NY
Newburgh, NY
Philadelphia, PA
Raleigh-Durham, NC
Seattle, WA
Taylor, MI

The growth in gateways, and the service area of each gateway suggests that Purolator USA is growing its cross boarder business and using that growth to organically grow regional and inter-regional traffic within the United States. This is similar to the strategy that Roadway Package Express used to grow the ground network from scratch that is now FedEx Ground. This contrasts with the failed strategy of DHL to buy US market share by buying Airborne, a company that at best was marginally profitable as an independent firm. Purolator USA's strategy in the United States domestic market has a reasonable chance of success if it can offer domestic US service as good as the cross-border service it offers its customers as well as the service offered by UPS and FedEx.

Given the success of numerous regional carriers, Purolator USA may now be enticed to speed the process by buying profitable regional operators. The DHL experience will likely ensure that any mergers are pursued cautiously and will likely focus on regional operators in areas that it does not now have gateways.

Purolator USA's domestic service unlikely provides more than a fraction of 1% of the total US domestic parcel and express market. However, even niche competitors can have an impact on the pricing strategies of UPS and FedEx as they negotiate with US customers that currently use Purolator for Canadian destined shipments.