Ready for the July Postal Hike?

For the second time this year, the U.S. Postal Service is increasing its rates. On May 8, the USPS Board of Governors (BOG) voted unanimously to raise rates effective July 1. And catalogers, who are still reeling from the Jan. 7 increase, are scratching their heads over what, if anything, they can do to try to maintain profits.

Breaking out the numbers

Although some categories of postage, such as the first class stamp, will remain as is, the overall increase averages out to 1.6% across all classes.

Among some of the Standard A mail used by catalogers, the rate for basic presorted flats will rise from $0.319 a piece to $0.322, an increase of less than 1%. The cost of mailing basic automated flats is increasing 1%, from $0.275 a piece to $0.278. The per-piece mailing cost for automated 3/5 flats will rise 1.2%, from $0.236 to $0.239. And the basic enhanced carrier route rate for flats is increasing 1.1%, from $0.176 to $0.178.

The new increase is an addendum of sorts to the January rate hike, which hit catalogers with increases of up to 16%. Last November, the Postal Rate Commission (PRC) cut the USPS’s initial increase proposal more than 20%. After implementing the increase as recommended by the PRC in January, the USPS twice appealed the decision, and was twice rejected by the PRC.

By law, however, the Postal Service BOG has the right to overrule the PRC, which it did for the second time in the 30-year history of the USPS as a quasi-governmental agency.

“The governors reluctantly decided to adjust rates to make up for a $975 million shortfall,” BOG chairman Robert Rider said in announcing the hike. “We found that this increase adds essential revenue — the rates are going to be adjusted only to the extent that costs match revenue.” In other words, the USPS does not stand to make a profit from the rate hike. Rather, the increase will only help to reduce its losses.

Thumbs down from mailers

Not surprisingly, mailers and trade groups had nothing good to say about the decision. “I’m incredibly disappointed,” Bob Wientzen, president/CEO of the Direct Marketing Association, told Catalog Age immediately after the increase was announced. “My reason is twofold: One, this negates a significant amount of effort that we and many others made to carefully present a case for not granting the Postal Service these dollars. Now there’s an arbitrary decision to overturn the PRC’s careful deliberations. But my biggest disappointment is that the Postal Service seems bent on increasing rates as a way of meeting its revenue shortfall rather than cutting costs.”

Jimmy Newland, director of special projects for Bogart, GA-based business-to-business cataloger Flowers, Balloons, echoes Wientzen. “I’m disappointed with the increase,” he says. “It’s not like we’re going to see any increased service.”

Several mailers feel that the USPS is in effect penalizing catalogers and other commercial mailers for a decline in first class mail, especially given that first class postage wasn’t increased. “USPS is designed for first class mail, which is way down with the use of e-mail,” says Steven Baly, manager for food cataloger Hickory Farms’ Bolingbrook, IL, distribution center.

What to do?

In the wake of January’s postage increase, along with rate hikes and/or fuel surcharges from parcel carriers such as United Parcel Service, some mailers had already cut circulation and taken other cost-cutting actions. But while none of the mailers interviewed were caught off-guard by the May 8 announcement — the USPS had been warning of the likelihood of the hike for some weeks — many were scrambling to determine how they should proceed for the rest of the year.

For instance, Justin Rashid, president of Petoskey, MI-based food cataloger American Spoon Foods, is still grappling with a way to minimize the damage to the bottom line, “even though we began this process a couple of months before we got the news,” he says.

Also still pondering what to do is $22 million Calyx & Corolla, a San Francisco-based cataloger of fresh flowers and plants “We’re discussing it now,” says executive vice president of marketing Ann Lee. “We have to look at our circulation planning and make sure that we’re taking a magnifying glass to every segment of every list we mail to.”

Lillian Vernon Corp., a $246.6 million multititle gifts cataloger based in Rye, NY, plans to decrease circulation, but spokesperson David Hochberg can’t say by how much. “We’ll re-evaluate our circulation strategies again,” he says. “Two postal increases in one year is excessive.”

Rather than cut circulation, “we’re looking at the weight of the paper, trim size, and page count,” says Vanessa Allen, director of advertising for San Diego-based Road Runner Sports, a nearly $100 million cataloger of running shoes and athletic apparel. The company had already downgraded its paper at the beginning of the year, from 38 lbs. to 36 lbs. “Now we’ll explore going down to 34 lbs.,” Allen says.

The company has also been testing smaller page counts to certain segments of its mailings. Whereas the typical Road Runner book runs 96 pages plus six pages of gatefold cover for a total of 102, the cataloger tested cutting out 10 pages. “For some segments,” Allen reports, “we were able to reduce our page count without losing sales.”

Like Road Runner, St. Louis-based Knight’s Ltd., whose apparel and home decor titles include Soft Surroundings, City Spirit, and Home Decorators Collection, is considering changing its paper weights, paper grades, and trim sizes to make up for the cost increase. “We’re also looking at [increasing our] shipping and handling charges,” says production manager Scott Garrett, “but there’s only so much you can do because you have to be competitive with everyone else. If shipping charges go too high, customers will go to retail stores instead.” (For more on shipping and handling charges, see “Getting a Handle on Shipping and Handling,” page 5.)

Knight’s may also cut back on prospecting. The July rate hike “is not a huge increase in and of itself,” Garrett says, “but it’s a big impact on top of the January increase, and we’ll have to look more closely at which lists to mail to. It raises the bar for determining what lists work and what lists won’t work.”

The Internet not a panacea

Some mailers may hope to transition catalog customers to the Web to reduce their postage costs. “But the Internet relies on the catalog, and if we shrink our catalog mailing, then we shrink the traffic going to our Website,” says Morlee Griswold, director of direct marketing for Patagonia, a Ventura, CA-based cataloger/retailer of outdoor apparel and sports gear.

Earlier this year Patagonia canceled plans to mail 20% more books than last year. Instead, it’s keeping circulation flat. “We’re reactivating some of our old buyers, first by contacting them with a direct mail postcard and then by catalog, to direct them to our Website. But it still costs money to reactivate those buyers,” Griswold says.

Rob Rogers, vice president of business development for Hanover Park, IL-based School Health, which sells medical supplies to school nurses and coaches, says his company may turn to the Internet in lieu of a physical mailing. Instead of the planned back-to-school mailing, the cataloger may send out a broadcast fax or launch an e-mail campaign. “And we are going to rush a mailing to try to hit schools before they let out for the summer,” Rogers adds.

Maintaining the status quo

A few catalogers say they are forging ahead as planned despite the July 1 increase. S & S Worldwide, a Colchester, CT-based cataloger that sells educational and recreation products to schools and other institutions, had already cut circulation in response to the January postal increase. “So we have no more changes planned,” says creative director Mike Fosso.

But the rate hikes do illustrate the importance of targeted mailing, Fosso adds: “You have to make sure your list hygiene is current and that you have a tightly targeted database.”

As for Lands’ End, a $1.46 billion apparel cataloger based in Dodgeville, WI, “even the [larger January] postal hike had a small impact on us,” says spokesperson Charlotte LaComb. So the company sees no need to make any changes in light of next month’s increase. — Additional research by Moira Cotlier, Mark Del Franco, Ellen Hansen, and Sabrina Horne

Investors Buy Out Specialty Catalog

Several major shareholders of Specialty Catalog Corp. agreed on May 4 to buy out the multititle cataloger and take it private. Guy Naggar, a director of the South Easton, MA-based company who had made a bid for it days earlier, is one of the investors who formed Specialty Acquisition Corp. to buy the mailer. Naggar owned 29% of the cataloger’s shares.

Shareholders, other than members of Specialty Acquisition, will receive $3.75 a share in cash. On April 27, the last trading day before the announcement of Naggar’s bid, the stock closed at $3.05 a share. The deal is expected to close this summer. Specialty Catalog’s titles include the Paula Young and Especially Yours wigs catalogs.

For the first quarter of 2001, Specialty Catalog posted net income of $393,502 on net sales of $16.5 million. That’s a 3% growth in sales from the previous first quarter’s $16.1 million. More impressive was the bottom-line improvement: During the first quarter of 2000, the company had taken a net loss of $39,629.

Another Rate Hike Coming?

Just one month after implementing its January rate hike, the U.S. Postal Service Board of Governors (BOG) ordered postal management to start putting together another rate increase proposal to present to the Postal Rate Commission (PRC) this summer. Despite the additional revenue it expected to gain from the January increase, the Postal Service still projected a loss of up to $2 billion for fiscal 2002, which begins at the end of September 2001, due to rising costs and its own inefficiencies. (Once submitted, a rate case generally takes 10 months before it’s completed. New rates are typically implemented a year after the original filing.)

But could the May 8 announcement that the USPS will raise rates again July 1 mean that the USPS will postpone another rate filing? Most likely not, say sources both inside and outside the Postal Service.

“We’re still projected to be significantly in the hole next year even with this increase,” says USPS spokesperson Greg Frey. He notes that although the new rates will bring in $975 million in extra revenue for fiscal 2002, the USPS could still lose up to $2 billion next year. And even with the July increase, the agency expects to lose $1.6 billion-$2.4 billion in fiscal 2001.

In addition to rapidly rising fuel costs, the USPS has been and will continue to be plagued by the rising consumer price index, which forces the agency to increase its cost-of-living wages to its union workers. In short, Frey says, “There’s been no change from the BOG’s February order on the new rate case.”

But some mailers are hoping that they can persuade the BOG to at least delay filing the new rate case. But even that possibility doesn’t look promising.

Several mailer groups, including the Direct Marketing Association and the Associate for Postal Commerce (PostCom), met two days after the BOG announced the July rate hike. “We’re all almost irrational about the rate increase — we haven’t calmed down yet,” says PostCom vice president Tony Gallo. “Wouldn’t it be logical for the BOG to wait until a later date to file? That would be logical, but I don’t know if they think that way.”

Gallo speculates that the BOG, which won’t comment about the rate hike or a subsequent filing, is getting positive vibes from Capitol Hill about the July increase. “When [the governors] went to the postal Congressional hearings on April 4,” Gallo says, “they thought they’d be killed, but they were treated with kid gloves.” — PM

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