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Thursday, July 22, 2010

The Post Office is Insolvent

The Post Office is Insolvent 

Government monopolies are always a disaster.  The United States Postal Service is one of the best examples.  The following article, written by my good friend, Craig Huey, spells out the problem and the solution.  It’s worth reading.

The biggest threat to direct mail: The U.S. Postal Service
Want to make direct mail more profitable? Start with postal reform

by Craig A. Huey

Direct mail’s greatest danger is not the advent of email, websites, paid search or banner ads. Because direct mail in an online world works—and it works well. In fact, integrating other media helps ensure direct mail response.

No, direct mail’s greatest danger is the government-protected monopoly status of the United States Postal Service (USPS). This creates bureaucratic inefficiencies and the ever-increasing price hikes.
    This has resulted in a $3.8 billion net operating loss which includes massive reductions in hours and other cuts. And according to the USPS itself, it expects a $7 billion loss in 2011.

Still, despite this failed business model, the U.S. Postal Service Governors on July 6, 2010 announced that they will again INCREASE postal rates. First-Class stamps increasing 2 cents to 46 cents. Postcards increasing 2 cents to 30 cents. And most important of all is the 23.3% average increase for standard parcels and non-flat machineable pieces. 

Each time USPS invokes a rate hike, marginal mailers—in other words, small businesses—are forced to find alternative marketing methods and larger mailers have to cut back.

That in turn adds to the death spiral that USPS has been caught in…and it also means a grim future for thousands of companies and millions of jobs for marketers, retailers and business owners.

Here’s the problem: Although it is not funded by taxpayer dollars, USPS is subject to congressional oversight. Unlike other businesses that constantly adapt to the changing marketplace, USPS is not free to make changes to its business model at will. It must have congressional approval. And, its monopoly protection has prevented competition that would drive down prices and create incentives for good service and cost containment.

Let’s take a look at the recent history of the beleaguered USPS…and what its regulation means for the future of direct mail.

GAO: “Not a viable business model”

An April 2010 report from the U. S. Government Accountability Office (GAO) declared: “USPS’s business model is not viable due to USPS’s inability to reduce costs sufficiently in response to continuing mail volume and revenue declines.”

That echoed what we’ve already known for decades—or at least since the release of the stern 1988 CATO Institute report, The Slow Death of the U.S. Postal Service. Even then it was clear that mail service is “getting slower, more expensive and less reliable,” with First Class Mail® moving 15% slower than it did in 1969. 1

1U.S. Postal Service, Origin-Destination Quarterly Statistical Report, FY 1988, Quarter 1, p. 7.

That slow death has hastened over the last 3 fiscal years, as mail volume declined 36 billion pieces from 2007–2009. For the fiscal year 2008–2009, the postal service reported a crushing $3.8 billion net operating loss. The 6 months that followed ended in a $1.9 billion net loss.

In total, USPS has a $13.2 billion debt—and it’s on track to lose another $7 billion this fiscal year.

Some of the mail decline is due to the recession, the advent of online banking and other electronic forms of communication. But that’s only part of the story…

Crushing for business: Repeated postage hikes

Facing dire deficits and drops in mail volume, postage rates climbed an average of across all classes of mail of 5.4% in 2006, 7.6% in 2007, 2.9% in 2008 and most recently 3.8% in May 2009. This has been one blow after another to small businesses and direct marketers. Catalogers saw a 2.3% increase in 2009. But those who ship small parcels were the hardest hit with a whopping 16% rate increase.

You see, 150 billion pieces of mail delivered by USPS in 2009 were from businesses. So instead of treating these mailers like loyal customers, the USPS punishes them with higher prices…as though they were at fault for the post office’s debts.

The rate hikes kept coming despite the post office’s hit-or-miss customer service and its unreliable delivery. You just never know whether your letter or package is going to arrive in one piece—or if it will arrive at all. The fact is, that for standard class mail 5% to 15% of your mailing never reaches its intended destination!

An outrageously expensive workforce

The GAO report also reveals that labor makes up a full 80% of USPS’s cost structure. Nearly 85% of its workforce is covered by collective bargaining agreements. The average postal employee earns an impressive $83,000 a year in total compensation—and many are protected by “no layoff” agreements. And, that does not take into account health and pension benefits

In addition, USPS covers a higher proportion of employee healthcare premiums and life insurance than other federal agencies do. But right now, USPS is about $90 billion short on its required retiree health benefit payments.

Not to mention that it expects to pay out some 5.8 billion in pension benefits between 2007 and 2016.

Despite these exceptional compensation packages, the reputation of the USPS workforce leaves much to be desired.

There are countless tales of mail delivered to the wrong address and mail lost en route. I have friends in Pennsylvania who once pulled a mangled magazine out of their box and found a letter tucked inside that was intended for someone in Arizona. But the letter had never even made it through the stamp-cancelling machine before it was lost between the pages of the torn magazine. 

To make matters worse, mail distribution centers and individual carriers have been caught destroying mail. For example...

“Mailman Steve” sparks an anti-mail movement

Friendly and personable “Mailman Steve” is a favorite postal worker among residents of Apex, North Carolina, just outside of Raleigh—but direct marketers don’t share the sentiment.

The letter carrier had taken it upon himself to censor out advertising mail because he reportedly was having trouble carrying and delivering it all. Over the span of 7 years, 58-year-old Steve Padgett of the U.S. Postal Service (USPS) failed to deliver hundreds of thousands of direct mail pieces.

Many citizens have spoken out in defense of Mailman Steve, commending his actions. But tampering with the mail is a federal offense that can result in a $250,000 fine and 5 years of jail time. However, Padgett received only a $3,000 fine and 500 hours of community service.

Mailman Steve not only wasted millions of dollars of direct marketers’ money, he also skewed response rates for all of the affected marketers…and further jeopardized the postal service’s reputation.

That’s not too smart for an organization that counts on direct marketers for the lion’s share of its revenue.

Another story surfaced in Connecticut, where efforts to cut costs was redirecting a deluge of mail from one post office to another. Overwhelmed postal workers decided to hide mail in closets and unused rooms at their facility. A rep for the postal workers’ union told the press that they were just pushing the mail aside for the next day, but who can really be sure.

We need reform…and we need it now

The only solution is to free the postal service from government control and allow competition. Because when private carriers compete, everybody wins. Services will improve, costs will go down and the postal service will find a way to survive in a competitive economy…or it will suffer the consequences of failure.

The reality is, monopolies always do the same thing when the going gets rough: They cut services instead of improving them—because there’s no incentive to earn more business.

To start, the Postal Regulatory Commission is conducting a 6-month review to examine the impact of cutting mail delivery to 5 days a week—potentially eliminating Saturday home delivery. Studies estimate that a 5-day schedule could save from $1.9 billion to $3.5 billion a year.

Maybe that solution will work without resulting in an outraged public. But the USPS should turn their attention to where the fat really is. Shockingly enough, there are 36,000 post offices across this grand nation—more locations than Walmart, Starbucks and McDonald’s combined. There is just no need for this many locations, but the USPS doesn’t have the freedom to adjust to the market.

And the government isn’t the only roadblock: Voters and politicians raise a fuss every time U.S. Post Office closures are proposed…but that doesn’t change the fact that there’s no money to fund these unnecessary locations.

President Obama said it himself: “UPS and FedEx are doing just fine…it’s the post office that’s always having problems.”

It’s time to end the monopoly. Deregulation and privatization will greatly benefit all mail customers and ensure a bright future for direct mail—targeted, accountable advertising that really works.

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