Postal Prognosis: Positive

Jun 01, 1998 9:30 PM  By

By 2001, the U.S. Postal Service’s most important customer group will likely be catalogers and other advertising mailers. While the once-dominant first class mail sector is expected to shrink from 54% of all mail in 1998 to 50% in 2001-primarily as a result of growth in electronic mail-the USPS is projecting that ad mail volume will grow from 76.71 billion pieces, or 40% of mail, in ’98 to 90.57 billion pieces-or 43% of all mail volume-by 2001. “We see the Postal Service depending more and more” on catalogs and other ad mail, says Jerry Cerasale, the Direct Marketing Association’s senior vice president, government affairs.

“Growth in areas such as standard A mail,” says Malcolm Harris, the USPS’s manager of economic analysis, “will contribute to reducing our costs associated with handling first class mail.” As he explains it, the USPS has enormous economies of scale, so as standard A mail delivery increases, “it’s going to increase the number of stops you’ll have on a particular carrier route. That makes it easier and more efficient to deliver all types of mail at those same stops.”

At the same time, spurred by the introduction of a delivery confirmation system expected to be up and running by early next year, parcel volume-including Priority Mail and standard B (parcel post)-is expected to increase 10% a year to nearly 3 billion packages by 2001, a majority of which will be catalog parcels.

With this in mind, catalogers should gain more leverage with the USPS in the future, some say, in terms of their ability to affect rates and demand service improvements.

More sway on rates? “From the point of view of rates, we’re going to be in pretty good shape” for the next three to five years, Cerasale says. “In the worst-case scenario, catalogers should just figure on rates going up with the cost of inflation-that will be the maximum they’re going to pay. And that’s good news, compared with where things have been in the past.”

Throughout the Postal Service’s history, and particularly since it was reorganized in 1970 to become the quasi-governmental agency it is today, USPS rate makers have almost always favored first class mail when setting rates. For instance, even when the USPS promised to raise rates by the same percentage across the board in 1995, it upped the first class stamp 10.3% and catalog rates 14.3%. And in the recently concluded rate case, the USPS sought to raise the price of a first class stamp 3.1% and catalog rates an average of 4.3%.

Although his predecessors at times referred to catalogs as “junk mail,” former postmaster general Marvin Runyon, undoubtedly realizing catalogs’ growing importance to the postal revenue mix, repeatedly spoke highly of the vitality of catalogs. But although catalog volume is expected to grow 4% over the next three years, compared to just 1.5% for first class mail, postal officials and observers alike can’t predict whether the agency will finally “even up the score” regarding rate increases for the two categories.

Nonetheless, postal economist and catalog consultant Walter Bernheimer, president of Wellesley, MA-based Bernheimer Associates, agrees with the DMA’s Cerasale regarding future rate hikes. Catalogers “are not going to be hit with a sudden big jump in rates,” Bernheimer says. “They can confidently plan to increase volume and count on stable rates through even 2001.”

This good news, however, stems from the USPS’s financial situation, not from any increased political clout on the part of advertising mailers. Coming off three straight years of $1 billion-plus profits, the USPS should continue to see nothing but black ink straight through 2001, Bernheimer forecasts. In even his slowest-growth scenario (see chart on p. 193), Bernheimer believes that, assuming the USPS implements a rate increase by this October, the agency will post profits of $1.45 billion in 1998, $2.72 billion in 1999, $2.01 billion in 2000, and $1.26 billion in 2001.

As long as the USPS continues to make a profit, “there will be nothing from the prior year to recover,” Bernheimer says. And if the agency chooses to raise its rates again over the next few years, it should be able to retire its accumulated deficit. A decade ago this deficit was as high as $9 billion; it currently stands at $4.3 billion, the Postal Service’s Harris says.

The service issue As for the quality of the USPS’s service, catalogers will be making more demands on the agency, particularly in light of 1997′s experience.

When the USPS filled in for the shuttered United Parcel Service last August during the two-week Teamsters strike, most catalogers that had been UPS customers were pleased with the parcel delivery service they received from the Postal Service. But many ended up paying for it in September and October, when the emergency parcel work performed by the USPS backed up catalog delivery during the crucial fall/holiday season.

“The industry is extremely concerned because of the bad experience we had during and after the August 1997 UPS strike,” says postal consultant Lee Epstein, president of New York-based lettershop Mailmen Inc. With the sudden influx of parcels filling up all the bulk mail centers (BMCs) last summer, “the Postal Service essentially told us, ‘Okay, you bulk mailers wait.’ It was pretty bad, with catalogs arriving much too late and general sporadic delivery.” According to Hauser List Services, catalog delivery was 2.5 days slower on average nationwide in September and October ’97 than the norm.

The USPS, Epstein points out, “is not geared up for heavy volume of both standard A mail and parcels. The parcel business is, to a degree, seasonal, and that’s where we’ll run into trouble-at peak season. I hope the USPS has learned its lesson from the UPS strike and will prepare properly for an influx of parcels.”

In fact, Sydney Klevatt, president of the Rohnert Park, CA-based Children’s Group division of multititle cataloger Foster & Gallagher, believes the additional cash the USPS expects to make from the projected increase in parcel volume, coupled with the likelihood that many of those parcels will come from catalogers, might lead the agency to upgrade catalog delivery processes. “All those additional catalog packages the Postal Service handled during the UPS strike hopefully started postal executives thinking that we mailers can be the driving force in the future,” he says.

Some catalogers hope to drive USPS management to take considerably greater care in delivering catalogs in the near future-to the point of ensuring better delivery windows. “In the Postal Reform Act [see "The reform question," p. 194], we’ve suggested to Rep. McHugh that the USPS offer service agreements,” Cerasale says.

Such agreements with the USPS would allow catalogers to negotiate volume discounts in exchange for guarantees of specific quantities of mail. In such a scenario, Cerasale says, “mailers could arrange for specific times of day to bring in mail to BMCs; they could even merge with other mailers to get larger volumes and better densities. The hope here is that such agreements could bring forth some good improvements in service while cutting down postal costs.”

Bernheimer believes the USPS could improve standard A and other mail categories’service “if we, as an industry, demand that the Postal Service measure service performance through some independent body.” Catalogers, he says, should also press for service improvements “by meeting with their postal reps regularly and letting the Postal Service know what they plan to mail and the level of service they expect. Furthermore, catalogers need to share information with the Postal Service about deficient catalog deliveries; they should not just complain but have real hands-on meetings with postal reps.”

In a perfect world, such a scenario would already be in place. But even in the extremely imperfect world of the U.S. Postal Service, as catalog shopping continues to grow while the USPS struggles to increase most of its other mail categories, the agency will be forced to make a bigger effort to win over catalogers in order to secure its own future.

Former postmaster general Marvin Runyon had long been concerned about the USPS losing market share in most of its mail categories-particularly as more people chose electronic communications options over the mail. Spurred by Runyon’s concerns, Rep. John McHugh (R-NY) introduced his Postal Reform Act in 1996, then reintroduced it last year. The bill rewrites the rules of the quasi-governmental agency, giving it greater flexibility in setting rates in order to survive and compete in the 21st century.

“The dramatically changing way in which Americans communicate today-faxes, e-mail, electronic bill payments-were all exclusively provided through the mails in the past,” says McHugh, who, despite a lack of interest among Congress, believes his bill might be passed by 2001. “We’re trying to create a Postal Service so that whatever happens in 2000 or 2010 or beyond, it can change, compete, and function.”

McHugh, Runyon, and other supporters of the bill don’t believe the agency can continue operating as it does without falling prey to private-industry competitors. Commenting on the Postal Service’s loss in market share in first class, Priority Mail, periodicals, expedited mail, parcels, and international mail (with advertising mail, including catalogs, being the only market it is gaining in), McHugh says, “We’re looking at a crisis.” Without postal reform, he adds, “at some point, we’re going to have to make a more dramatic decision of possibly privatizing the Postal Service, or we’ll have to direct tens of millions of taxpayer dollars to subsidize it as was done in the past. And because I don’t think the political environment will support the latter option, I worry about this crisis.”

McHugh fears that eventually, the USPS will be unable to afford to deliver to every mailing address or P.O. box in the country. “The bill’s primary objective is to simply ensure that the Postal Service of today is able in the future to provide its core service in an affordable and universal manner,” McHugh says. He notes, for instance, that the USPS is severely limited in the speed with which it can offer new services. Currently, most initiatives and rate changes must go through a 10-month Postal Rate Commission review.

And while he agrees that an expected increase in bulk mail volume will help offset any first class slowdown, McHugh questions whether it’s sufficient enough volume “to cause us to be unconcerned. I haven’t seen any data that suggests that standard mail volume growth and slowing first class volume growth will be a one-for-one offset,” he says. “If you look at the universe of markets the Postal Service is now competing in, I don’t think such an offset can be exactly forecast.”

But the numbers for the near future don’t support McHugh’s fears much. First class mail currently makes up 54% of total USPS volume and, more notably, 65.5% of total revenue contribution (revenue minus costs). It will still represent 50% of the mail mix in 2001 as well as at least a 60% contribution, according to a March USPS forecast. The USPS also expects first class mail volume to grow 1%-2% a year through 2005, much as it has throughout most of the ’90s. Few postal observers doubt this forecast; despite the growth of e-communications, they don’t foresee any sudden drastic falloff in first class volume.

The electronic competitor And what about first class’s alleged “archrival”? Electronic commerce and communications have increased and will continue to do so. In fact, the number of U.S. e-commerce transactions and communications, including bill payments, will increase from 35.9 billion in 1995 to 60 billion in 2000, representing about 25% of the 237 billion bill payments that year, according to Palo Alto, CA-based research firm Killen & Associates. But such growth doesn’t necessarily mean the end of first class mail-at least not in the next five to 10 years.

“Increased competition from electronic alternatives won’t have much impact on the Postal Service over the next few years,” forecasts postal economist and catalog consultant Walter Bernheimer, president of Bernheimer Associates. “By 2010, first class volume might start declining, but for the next few years, I see no drastic change downward.”

Other factors, such as the economy, population growth, and new home construction, “are all going to be fairly positive and will help first class growth,” he adds. “Furthermore, I’ve seen all kinds of recent surveys conducted by big corporations-most notably one by John Hancock Insurance-showing that about 80% of people are still going to want some sort of hard-copy communications.”