The harsh new postal rates imposed in May are three months old. Mailers should be used to them, right? Think again. Many are still reeling — and figuring out how to cope.
Take library supplies cataloger Demco. “Do we cut circulation and risk reducing our sales, or do we raise prices and risk upsetting customers and losing sales?” asks director of customer marketing Stephanie Mueller.
Postage accounts for 28% of Demco’s catalog production costs. Do the arithmetic: The mailer’s postal bill will increase 20% on average, with individual books seeing anywhere from 9% to 35% increases, Mueller adds. “So the impact to our rise 20% on average, with individual titles seeing increases from 9% to 35%. “The impact to our bottom line will not be insignificant,” Mueller says.
That may be the understatement of the year. As most are painfully aware, rates for Standard Mail flats — the category affecting most catalogers — have gone up as much as 40% for some. And the smaller companies are bearing the brunt.
For example, plus-size apparel cataloger Making It Big has taken a plus-size hit — a 38% hike for its fall mailing costs, says general manager Tracy Amiral. “I have a worldwide buyer file of 30,000, and I’m not a mass marketer that is prospecting to hundreds of thousands,” she says. “I’ll prospect to 50,000 to 100,000, but that’s not enough to help me qualify for any bulk discounts.”
Gifts and home decor marketer Wisteria is getting off relatively easy with a 15% rise in postage. But the hike couldn’t have come at a worse time, says Byron Neuhoff, vice president of strategic development. “We are only six years old and are just starting to realize some of the fruits of our hard labor.” Getting socked just before the fall has Wisteria “very nervous,” he says.
Even the big guys are feeling the pinch. Gifts and stationery cataloger Miles Kimball, which mails more than 120 million pieces a year, is looking at a 20% annual increase in postage costs.
“That’s a hit of monumental proportions,” says CEO Stan Krangel.
But Miles Kimball, which is owned by the $1.22 billion Blyth, isn’t likely to go under because of the hikes. A lot of smaller mailers are. “If their margins are tight to begin with, this dramatic of a price increase could be the straw that breaks the camel’s back,” says Demco’s Mueller.
Is the situation really so dire? It is for marginal catalog players in the $25 million to $50 million range, says Craig Battle, managing director for investment bank Tucker Alexander. “A lot of those mailers are either going to shut their doors, or be acquired by a catalog aggregator.”
Mounting woes
The rate hike isn’t the only problem facing catalogers. Another is that the U.S. Postal Service, in its push toward automation, is basing rates more on the shape of a mail piece than on its weight. Some firms alter their trim sizes to be eligible for postal discounts, which could harm their brands and merchandise presentations going into a crucial season.
The weight of a catalog is still a factor, though: Books that weigh more than 3.3 oz. will be charged by weight. That’s in part what pushed Making It Big’s postage so high, as the mailer prints on heavy 60-lb. stock. Amiral says she did not have time to implement any changes for her fall catalog, and thus had to absorb the increase. “Apparently I hit the perfect storm” of higher postage and paper, she adds.
Yes, paper has gone up too. Prices for coated freesheet paper have increased about 7% during the past year. “Not since 1995 and 1996 when paper and postage had a double-whammy have we seen this kind of material impact on the financials,” says Coy Clement, president of the consultancy Clementdirect.
It also doesn’t help that higher fuel prices have upped the cost of getting goods into the warehouse and out to customers. Could things get worse?
They could, considering that there could be another postal hike as soon as next year. Language written into postal reform allows the Postal Rate Commission to file one last rate case, and some say it could equal or surpass the current increase.
Survival of the fittest
But for now, many mailers are trying to stay afloat and doing whatever they can to improve their positions going into the all-important fourth quarter. Wisteria started by cutting better deals with suppliers. “We have renegotiated our outbound shipping contract with UPS, as well as our printing contract with Quad,”Neuhoff says. “We have also moved to a lighter weight paper.”
But the firm isn’t cutting its catalog circulation. It was scheduled to mail 7.8 million books, “and we are not planning on reducing that for the fall/holiday season,” Neuhoff adds. “That part of the year is too important for us to cut back on.” But it hopes to be smarter about who it mails to, he notes. “We will be looking at past results and cutting out names and lists that have not performed, while using more of the names that have been working for us.”
Eckler’s, a marketer of car restoration supplies and parts, has changed its trim size from 7-1/2″ × 10-1/2″ to 7-1/2″ × 10-1/8″ to offset postal costs, says Charis Gaines, director of marketing. The company, which mails 2.5 million catalogs a year, also reduced the basis weight of its paper from 40-lb. #5 stock last year to 34-lb. #5 this year, Gaines says. Eckler’s has for the past two years worked with co-op database Abacus to model its buyer file against requesters and non-responders so that ultimately it will mail fewer — but more responsive — catalogs.
Business-to-business cataloger Action Bag has reduced its trim size slightly, from 8-3/8″ × 10-7/8″ to 8″ × 10-1/2″. The mailer is also dropping the weight of its #10 cover paper from a 70-lb. stock to a 60 lb. “But we will not be changing our contact strategy,” says president/CEO Nancy Cwynar. “We will be using other lower cost prospecting pieces to supplement our main catalog,” she says.
Some of those low-cost prospecting pieces are 11″ × 17″ tri-fold mailers and oversized postcards. “We are also cleaning up our database with first-class business reply postcards,” Cwynar adds. Action Bag, which increased its circulation 30% in 2007 over last year, is also looking at comailing options, she says.
Miles Kimball has already been comailing, Krangel says. But for smaller catalogs, “it’s even more difficult. It forces us to pull back on some of our small titles that we’re trying to grow.” The cataloger is also taking a serious look at circulation. “We’re looking at everything right now in controllable expenses to put us in a better position,” Krangel says.
Demco, too, plans to leverage comailing whenever possible, Mueller says. “We’re implementing a more sophisticated name-selection process to help us be more targeted in our mailings.” In addition to its annual catalog, Demco publishes the Library Basics, Inviting Environments, Demco School, and Learning Materials titles.
The company is likely to reduce its annual catalog circulation to save on postage, but Mueller did not yet know by how much. “We’re testing the replacement of some catalogs with e-mail and other less expensive direct mail media,” she says.
Upscale food cataloger Mackenzie Ltd. will mail more than 1 million catalogs this fall. “We do not plan to alter that number due to the postage rates,” says president Laura McManus. While comailing was of interest in the past, “now it is paramount to our fall mail plans, and we are pushing for as many comail opportunities as our printer can identify. We believe this will be critical now and in the years to come.”
The Guild, a purveyor of artworks and artisan decor and jewelry, has gradually reduced trim size of its Artful Home catalog during the past few months, says president Michael Baum. “The size reduction also enabled us to take advantage of some comailing opportunities through our printer, R.R. Donnelley, and those have helped cushion postage costs.”
And it’s no surprise that marketers are looking to the Internet to offset the rate hike. Mackenzie Ltd., which also tightened its density slightly so as not to increase page count, plans to try to drive more customers to the Web, McManus says.
Demco is “testing the replacement of some catalogs with e-mail and other less expensive direct mail media,” Mueller says. She suspects the higher postage will cause mailers to have “a greater reliance on other integrated channels.”
Making It Big plans to ramp up its online efforts, including doing more SEO and e-mail marketing, Amiral says. “Quite honestly, I think if an increase like this hit us 10 years ago, it would have put us — and more businesses — under,” she notes. “Catalogs are the driver of everything, but there is a lot more online, affiliate, and e-mail marketing now that can help more of us survive.”
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Still, there’s only so much a mailer can do. Just For Redheads, a niche catalog that targets the 4% of the U.S. population with red hair, is biting the bullet and absorbing the postal increase, says CEO Duane Abbajay. Other mailers may not be so lucky, he notes. “What we’re going to see is a pretty good thinning out of catalogers. Instead of mailing 12 times a year they may be able to mail only six times. Who knows, we may have to change that criteria, too.”
But while catalogers are doing what they have to to survive the higher postage costs, fall/holiday is not the time for taking risks.
“Many people are making changes to their catalogs that they haven’t tested sufficiently and are hoping and praying that the changes work,” consultant Clement notes. “But there’s a danger there because it’s a lot to have to work. You can’t make big changes without testing your way to success.”
Most industry observers agree. “The worst thing for catalogers is that they did not have any time to test catalog mailings at a different trim size, different weight, or different quality,” says Geoff Batrouney, executive vice president of list firm Estee Marketing Group.
When customers are used to getting, for instance, an L.L. Bean catalog and it looks and feels a certain way, “how will they react to changes?” Batrouney asks. “No one had a chance to test into them — they were just told to change their trim sizes or face a [postage] penalty.”
The Guild, for one, is wary of reducing its catalog trim size too much. “But we started with an oversized book so the net effect has been just to bring our book in line with most of the other luxury decor and gift books in the market — and we’re still larger than some,” says Baum. “We believe that further reductions could hurt our portrayal of our brand.”
The companies that are taking inordinate risks and have a weak balance sheet are in jeopardy, Clement says. “Some people don’t have the luxury of trying things out and basically are betting on their businesses in the fourth quarter.” And if it’s not a good quarter, “they’ll be forced to sell or close their doors.”
Some mailers already gearing up for a sale, though none would speak on the record. “We are seeing a great number of small catalogs that are deciding that now is a good time to exit the business in some manner,” says Stuart Rose, managing director for investment bank Tully & Holland.
And many mailers have not even considered the possibility of a rate hike in 2008. But there is some hope on that front. If the Postal Rate Commission implements its rate changes for postal reform, as is PRC chairman Dan G. Blair’s stated wish, the Direct Marketing Association’s senior vice president of government affairs Jerry Cerasale believes another massive increase could be forestalled.
By law, the PRC has until Dec. 19 to pass its rates under the new postal guidelines. For his part, Cerasale says the industry will have a clearer view of where the PRC is headed in October or November.
“If nothing happens by December 20, then you have to go under the old fashioned rate case rules,” explains Gene Del Polito, president of mailing group PostComm. This would take time to go into effect, most likely May 2008. “We’ll probably know something concrete by the end of October, however.”
So a lot could happen before the start of next year, most of which is out of mailers’ control. Just getting through the holiday is going to be challenging enough.
Wisteria, for one, is thinking about some tough questions. “Will the changes we implemented be enough to offset the postal increases, and will they be enough to allow us to continue to compete into the future?” Neuhoff asks. “Unfortunately, we’ll have to wait until January for the answers.”