October 12, 2015

Saving the U.S. Postal Service

Devin Leonard, a reporter for Bloomberg Business Week wrote a great article diagnosing the issues facing the U.S. Postal Service, entitled “The U.S. Postal Service Nears Collapse.” He delivers a number of great insights, among them:

  • The near-term insolvency of the Postal Service was created by a Congressional action in the 2006 Postal Reform legislation which required the Postal Service to prefund all its retiree benefit obligations over the first 10 years after the legislation passed. Why? Since the Postal Service is off-budget, and it was getting its overpayments into the federal pension system returned to it, the artificially fast prepayment was a budget-balancing gimmick. The Congress should have made the Postal Service prefund the retiree benefit obligations the way any private sector company would do so: over the expected 30-40 year life of the obligations.
  • The longer-term problems of the Postal Service are driven by rapid and deep declines in mail volumes. The Postal Service needs to reduce its cost structure much faster. There are many good ideas that have been proposed for years, but that have not been adopted, such as the relocation of retail postal functions into convenience stores and supermarkets. However, the Congress and the White House have to step aside and let the Postal Service take some of these steps.
  • The Postal Service wants to reduce mail deliveries from 6 to 5 days. I am not convinced that this step can be taken without damaging the growth potential of certain categories of mail. What the Postal Service needs to consider is whether it needs to do 6-day-a-week to every address. Sweden has variable frequency delivery, with 5 days in urban areas, three days in remote mainland rural areas, and two days to remote islands. The Postal Services needs to begin delineating differences between profitable urban delivery routes and unprofitable rural delivery routes.
  • On the flip side, the Congress and the Postal Service need to consider whether pricing for mail originating or being delivered to remote areas should be priced the same as mail traveling a few city blocks. Uniform pricing has always been seen as a core feature of a communication system on which Americans have depended for political discourse, educational content management, charitable purposes, and other important social causes. The broad penetration of the Internet makes many of the needs for uniform pricing less compelling. However, to the degree that we continue uniform pricing, it can be for certain categories of mail, with others starting to move toward distance and cost based pricing.

There are some opportunities for cost reduction or revenue enhancement Leonard did not discuss. Also, his comments about European and other international postal services reflect a lack of understanding of the degree to which governments supported unprofitable non-core services undertaken by their national postal services. DuetschePost, for example, entered many non-core businesses and lost money in most of them, including disastrous acquisitions of DHL and Airborne. The U.S. government cannot afford to bail out the Postal Service as it dabbles in non-core businesses, loses money, and exits those businesses.

There are still many revenue opportunities in the core business which, although no one of them will address the insolvency issue, collectively can help the Postal Service dig out of the deep hole in which it finds itself:

  • The Postal Service has failed to educate its huge small business base on the e-Commerce opportunities available from marketing over a longer distance provides it. Businesses often miss opportunities to market their services directly to consumers far removed from their local catchment area, simply because they do not know how to market their products and services remotely.
  • The Postal Services has also failed to help businesses that normally do not use the mail start to grow their business through highly targeted direct mail marketing. At Pitney Bowes, we showcased a New York Japanese restaurant in an annual report several years ago that used direct mail, instead of delivery of flyers by its delivery personnel, to reach out to occasional customers and to potential new customers to grow its business. The restaurant not only grew its own business, but also became a direct marketer for other restaurants.
  • The Postal Service and the mailing industry should be advocating a movement from face-to-face retail for both government services and voting to the delivery of services by mail. Passports, licenses, and vital records should arrive by mail, so that labor-intensive and highly inconvenient retail operations can be shut down or scaled back.
  • The Postal Service should promote voting by mail, rather than face-to-face voting. Oregon does all its voting by mail, and Washington, California, and several other states do a majority of voting by mail. In these states, ballots are sent in the mail and returned by the voters. The Northeastern and Southeastern states are still laggards in allowing voting by mail, but this can add several hundred million dollars a year to mail revenues.
  • Finally, the biggest need for product manufacturers is to build direct relationships with the people who use their products. The retailer typically “owns” the customer and knows how the customer is. However, there is nothing to stop manufacturers from building a parallel relationship with those who buy or use their products. Kraft did these extremely effectively through a combination of Internet and mail-based systems years ago.

Crises can be disasters, or they can give rise to innovation that strengthens an organization. For the sake of the American people, it is my fondest wish that the U.S. Postal Service not let this crisis go to waste, and that Congressional and White House decision makers give the Postal Service the support it needs to innovate.