The news last month that the U.S. Postal Service may be increasing rates sharply for the so-called “underwater” classes/subclasses of Standard Mail flats raised plenty of questions.
Most pressing is the amount of the increase and how soon catalogs will see it, says Hamilton Davison, president and executive director of the American Catalog Mailers Association. Other questions: “Do catalogs need this magnitude of increase at all? Are the USPS and the PRC using proper costing methodology?”
The Postal Regulatory Commission’s Annual Compliance Determination for fiscal 2010 found that rates for Standard Mail flats are not in compliance with the 2006 Postal Accountability and Enhancement Act when it comes to “a fair and equitable apportionment of the cost of postal operations.”
The PRC wants the USPS to fix the problem, pronto, and many fear that the quickest “fix” is a hasty and hefty rate hike for catalogers. By some estimates, it would take a rate increase of 22.3% to bring flats to full cost coverage.
Davison compares the current situation to four years ago—just before the massive 2007 postal rate hike. Two things in catalogers’ favor this time around, he notes, are the existence of the ACMA, and the history of the significant volume declines the USPS saw after the big rate increase four years ago.
Then again, Davison says, “there are also strong forces of letter mailers who are pressuring this issue.” In fact, the PRC’s recent ACD may have given the letter mailers “ammunition to file a complaint case and try to force the PRC to increase catalogs 22% next year in a single step,” he adds.
The letter mailers are being aggressive attacking catalogs, Davison says. “They also have a lot of credibility with the PRC.” And the PRC prefers to base its decision on the written record submitted to it, “and that record is not flattering for catalogs.”
Policymakers need to know the tradeoffs, says Jerry Cerasale, senior vice president of government affairs for the Direct Marketing Association.
“If you took the amount of loss for standard mail flats and tried to bring it to 0, it would be a 22% increase in [rates],” Cerasale says. “The PRC said it now demands that the USPS take steps to eliminate the shortfall over time. It did not order an immediate change in postage to eliminate the deficit.”
At a recent PRC meeting, vice chairman Mark Acton stated that the PRC ACD does not require a 22% increase, and that the USPS should consider other options to eliminate the shortfall.
What other options? First, Cerasale says, would be to phase in the rate increase over time to avoid rate shock. Second, eliminate hand sorting of flats. “Get rid of that and costs for flats should drop.”
What’s more, Cerasale says the USPS should seek greater flats volume and take advantage of flat sorting machines, which should improve productivity and lower costs. “The USPS should look at catalogs as a product, and then look at all the volume which includes carrier route and standard flats,” he adds. “Taken together, they cover costs.”
The USPS costing methodology is “flawed, outdated and inaccurate,” says Joe Schick, director of postal affairs for printer Quad/Graphics. The majority of Standard Mail flats mailings are not made up of just one subclass, but a combination of regular and carrier route, he says. Standard Mail flats are presented to the USPS in a combined subclass format (for instance, pallets containing both).
“When looking at the overall cost coverage for the majority of Standard Mail flat mailings containing both subclasses, the average should be close to or more than 100%,” Schick explains. “Carrier route is a separate subclass in Standard Mail and has been since reclassification in the mid-‘90s. This subclass does have cost coverage above 100%, he adds.
The issue of cost coverage has evolved in the past few years, but it’s not because mail has become more expensive for the USPS to handle, says Tony Conway, executive director for the Alliance of Nonprofit Mailers.“It’s a result of a growing problem with excessive Postal Service costs,” he says.
Rather than focus on cost coverage, the USPS and the PRC should focus on necessary cost control, Conway says. A business with excessively high costs does not increase prices to cover those costs, he notes. “Doing so drives customers away and exacerbates the financial problem.”
Conway believes the Postal Service’s infrastructure is about twice as big as it should be, and that infrastructure is manned by postal employees who comprise 80% of total USPS costs. “Consolidating and closing unneeded postal facilities, and substantially downsizing the workforce are initiatives that address the cost control problem.”
Now is the time to get to the bottom of these issues, says the ACMA’s Davison, “otherwise catalogs will be on a perpetual death spiral of declining volumes and increasing prices.” But only about 2% of the industry supports one or more of ACMA, the DMA or the Association for Postal Commerce, he notes.
“Addressing the high costs of flats requires expensive experts,” Davison adds. “If the industry decides it will respond, I believe it is possible to resolve this situation in a way that works for all.”
One thing most agree on: “We cannot count on the USPS doing the most logical thing,” says Don Landis, vice president of postal affairs for catalog printer Arandell Corp. “We must stay united and work with the USPS to resolve this underwater issue without destroying the industry.”
If the flawed costing methodology is not corrected, Landis says, “things will only get worse for all classes.”