Sunday, August 9, 2015

Why RR Donnelley Is Splitting Into 3 Companies

After hearing the U.S.’s largest printing company talk for years about the synergies among its various divisions and acquisitions, securities analysts were dumbfounded last week when the company announced it would split into three.

 “So I thought part of the reason that the conglomerate made sense was that you could share a lot in terms of back office and operations and transportation and that kind of stuff,” Doug Wooden of Fort Warren Capital said to RR Donnelley’s executives during the company's quarterly earnings call. “Is it going to be difficult to separate into these three businesses given sort of integration that I thought was in the business?”

His fellow analysts (and some of my publishing colleagues) seemed especially surprised that RRD’s logistics arm would not end up in the same company as the publication-printing plants. They understand that, when everyone has basically the same presses, dropshipping and other logistics services are a major competitive battleground and point of differentiation for printers of catalogs and magazines.

Like Tuesday’s press release announcing the break-up, the explanations of Donnelley executives were barely intelligible except to native speakers of Corporatese. But amidst such happy-talk phrases as “more focused brand strategy” and “greater flexibility to execute tailored business strategies,” a few important clues to the break-up emerged:

Stock Price
Do you think of Donnelley as a high-tech company? No? Well neither does anyone else, including Wall Street. That’s why RRD wants to spin its “financial communications” ventures off into a separate firm that for now is being referred to as FinancialCo.

FinancialCo brings in about $1 billion annually from managing data, generating complex financial reports, translating documents, and providing similar services to the financial sector. But Wall Street still associates it with the dying business of printing prospectuses, quarterly reports, and other ink-on-paper reports than with its services like Edgar, a popular online repository of corporate financial filings.

“You look at FinancialCo and you think about what some of their trading comps might be,” said CEO Thomas Quinlan. “I mean some of those comps are trading at two plus times where we trade today as one entity.”

Translation: Though it represents less than 10% of Donnelley’s annual revenue, the equity value of a spun-off FinancialCo might exceed the value of all current RRD’s.

Today, FinancialCo venture is locked up inside what Wall Street views as a print-centric manufacturing company where “successful year” means “no decrease in revenues.” But as a separate company, FinancialCo would be able to attract money from investors willing to make risky bets on high-tech companies with strong growth prospects.

Besides FinancialCo, the other company that will be spun off has the sexy temporary moniker of PRSCo, for Publishing and Retail-Centric Print Services Company, which will print and distribute “periodicals, catalogs, inserts, books, office products and directories.”

“PRSCo is going to grow through making the supply chain more efficient for publishers, merchandisers and retailers and through acquisitions,” said CFO Daniel Leib.

Consolidation is a textbook strategy for gradually shrinking industries, but Donnelley has a problem: As by the continent’s largest printing company, acquisitions of other printers are likely to face increasing scrutiny from and interference by federal regulators.

But though it would still have a sizable presence in certain corners of the publication-printing industry, a spun-off PRSCo would be less of a target for the antitrust police, who don’t necessarily understand that there are a wide variety of printing markets rather than a single market.

Debt and Pensions
Donnelley has more than $3 billion in debt and estimates its pension and other retiree benefits are underfunded to the tune of $677 million. Those obligations will stay with the company that will remain after FinancialCo and PRSCo are spun off, which will be known as CMCo (Customized Multichannel Communications Management Company).

That means that, like its high-tech peers, FinancialCo won’t be weighed down by debt or defined-benefit pension obligations. And PRSCo will be able to take on a lot of new debt to pursue acquisitions.

Strange bedfellows
Through aggressive acquisitions, Donnelley has brought a wide array of printing ventures into its tent. It prides itself on providing a one-stop shop that can – and does -- meet diverse printing needs of the most complex organizations.

But like many other producers of direct mail and short-run commercial printing, the “CMCo” part of Donnelley has branched out into offering email marketing, website management, and other services that don’t involve ink on paper. Some of CMCo’s competitors in the commercial printing arena have even dropped the “printer” moniker and call themselves "marketing service providers."

FinancialCo has morphed even more radically from its printing roots. It’s not even clear whether what’s left of Donnelley’s financial-printing plants will be part of FinancialCo or will instead go with one of the more print-oriented sister companies.

With both shopping-mall-sized printing operations that produce millions of copies and living-room-sized pressrooms with print orders of 1, having such a wide variety of printing operations in one company has always been a bit of a stretch.

And now that they are they becoming less about printing and more about “omnichannel,” the various parts of RR Donnelley are finding they have even less in common – and fewer benefits from being under the big Donnelley tent.

“Printing conglomerate” is no longer a logical organizing principle for a multichannel communications company.

Other articles about R.R. Donnelley:

Saturday, July 11, 2015

Is the Postal Service Primed for Amazon Prime Day?

Next Wednesday is Amazon Prime Day, a huge promotion that one postal expert predicts will overwhelm the U.S. Postal Service.

Amazon is celebrating its 20th anniversary on July 15 with a one-day online shopping event that will offer “more deals than Black Friday” to members of Amazon Prime, including those who sign up for a free 30-day trial membership.

“It will be interesting to see how USPS handles what is sure to be a major onslaught of Amazon package deliveries, with Amazon Prime two day shipping after the one day sale,” writes Lisa Bowes of Intelisent, a company that advises direct mailers. “Will Prime Day impact delivery for other classes of mail? My guess is – probably so…”

A look at the numbers indicates she is correct – that the Postal Service will struggle to handle the surge of Amazon packages without hurting delivery of other types of mail, even with massive overtime.

In a filing this week with the Postal Regulatory Commission, Amazon said it had 15 sortation centers at the end of 2014, with more on the way, that each prepare “tens of thousands” of packages per day to be handed off to the USPS for final delivery. That indicates that USPS delivers several hundred thousand “Parcel Select” packages to Amazon customers on a typical day. 

The e-commerce giant uses a variety of package-delivery services, but clearly the Postal Service is the favorite because of its ability to deliver to residential customers seven days a week at relatively low cost. Amazon has built an extensive logistics network that bypasses most of the Postal Service’s own network and delivers packages early every morning directly to the USPS’s destination delivery units (DDUs), where letter carriers pick up mail to be delivered later that day.

Membership: 30 million-plus and growing
An RBC Capital analyst estimated 10 months ago that Amazon had 30 to 40 million Prime members in the U.S. The numbers have probably been growing since then, and Prime Day seems likely to boost the membership roster.

Suppose that about 20% of existing U.S. Prime members take advantage of Prime Day and are joined by another 5 million who get a trial membership to take advantage of the deals. And suppose each Prime Day participant orders an average of two items, with half of them destined for “last-mile delivery” by the Postal Service.

That would mean letter carriers would handle 12 million packages, roughly 20 times their normal Amazon volume and more than double their normal daily volume for all Parcel Select packages. (That 12 million number is what we statistical experts call a SWAG, a Sophisticated Wild-Ass Guess. The actual numbers may be much higher or much lower, but with some reasonable – to me – assumptions, you can get a ballpark ideal of how Prime Day might affect postal operations.)

Amazon will have its own logistical challenges but also has opportunities to ease the pain. If the items likely to be hot sellers are spread throughout its network of distribution centers, it can probably hand off many of them to the Postal Service on Thursday, the day after Prime Day, rather than hitting the agency with one big wave on Friday the 17th.

It can also pull other levers, such as making exceptions to the two-day guarantee for certain items, especially those ordered late on Prime Day. And it can highlight deals on digital downloads (e.g. movies, music, e-books) instead of those requiring physical delivery.

The Postal Service has limited ability to handle a huge one-day surge, especially at what is usually a slow time of year when many career employees are on vacation and there are fewer temporary and part-time workers than during the Christmas rush.

Amazon Prime Day and its aftermath may be a challenging test of the Postal Service’s efforts to play in the e-commerce big leagues while still providing traditional mail delivery.

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Saturday, June 20, 2015

USPS Grocery Delivery Coming to the Big Apple

Postal workers may begin early-morning delivery of groceries for Amazon in the New York metropolitan area by the end of this month.

Amazon grocery totes awaiting USPS delivery
The U.S. Postal Service filed a statement with the Postal Regulatory Commission on Thursday saying it “intends to expand the Customized Delivery market test to the New York City metropolitan area, on or shortly after June 29, 2015.” The USPS market test of grocery delivery on behalf of Amazon started last fall in the San Francisco area and spread to San Diego early this year.

Amazon’s “AmazonFresh” delivery service is already available in parts of New York City, with a fast-delivery promise: “Place your order by 10am and have it by dinner, or by 10pm and have it by breakfast.” And it already has an apparent pricing advantage in the Big Apple, undercharging three rival grocery-delivery ventures by at least 17%, according to a Nomura Securities International study.

The Postal Service will presumably take on some of those early-morning deliveries. It has told the PRC that its market test involves having non-career city carrier assistants deliver to a customer-designated location between 3 a.m. and 7 a.m. “without disturbing the recipient.”

The agency is already testing or about to test other rapid-delivery services in New York involving fresh fish, bottled water, and cut flowers.

Despite some objections about unfair competition with private enterprise, the PRC in October authorized a two-year test of Customized Delivery. But it has not acted on the Postal Service’s request to remove a $10 million annual revenue cap on the program.

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    Monday, June 8, 2015

    USPS's Court Victory Could Cost Mailers Billions

    July 30, 2015 update: The PRC went with the Postal Service's minimum -- $1.2 billion (or $1.191 billion, to be exact). The USPS will collect that amount from mailers via an extension of the exigent surcharge. That means the surcharge is slated to expire somewhere around April 2016 instead of August 2015. But remember that, in Washington, "temporary" taxes tend to become permanent.

    Despite news reports to the contrary, the only thing clear about Friday’s appeals court decision on postal rates is that the U.S. Postal Service won and mail-dependent industries lost.

    Worth 49 cents -- or 47?
    Sure, the Postal Service didn’t get everything it asked for – namely, making the 4.3% exigent surcharge permanent. But a ruling that is likely to bring in more than a billion dollars, at the expense of mailers, can hardly be called a loss for the USPS.

    As detailed in an article I wrote today for Publishing Executive (See Get Ready for Roller-Coaster Postage Rates.), the one thing the federal judges didn’t like about the current surcharge is the “count once” rule for determining how much the recent recession cost the Postal Service.

    They court sent the Postal Regulatory Commission back to the drawing board to come up with what could be called a “count multiple times” rule.

    Minimum cost: $1.2 billion
    If the count-once rule is transferring “only” $2.8 billion from mailers to the Postal Service via the surcharge, we can only imagine what the “count many times” rule will do given that the recession lasted several years.

    The Postal Service said today the additional amount is a minimum of $1.2 billion. That's the equivalent of about 8 months of the current 4.3% surcharge. And postal officials will argue for a much larger amount.

    Some writers assume that, instead of allowing the surcharge to expire this summer, the PRC will just leave it in place until it brings in enough money to satisfy the “count many times” rule. Or that, as the Postal Service requested today, the PRC will at least leave the surcharge in place until the new revenue target and surcharge are approved.

    But it’s not necessarily so simple. Unlike the appeals court judges, the PRC commissioners are no doubt aware that canceling the surcharge and then reinstating it weeks later would be disruptive for both the Postal Service and for mailers. (Just think of the public’s confusion if the price of Forever Stamps drops to 47 cents and then bounces back to 49 cents only a few weeks later.)

    But the commissioners have to proceed cautiously and allow for due process, especially given the propensity of both postal officials and mailers groups to appeal PRC decisions regarding exigent rate hikes. They will have to wade through reams of mind-numbing econometric analyses before arriving at a revenue target for the new surcharge.

    They may not be able to finish their work before the current surcharge expires. And even a perfectly reasonable assumption – that the USPS will not be overcompensated if the current surcharge is left in place until the details of “count many times” are worked out – may be open to legal challenges.

    Nothing, by the way, says that the new “count many times” surcharge has to be 4.3%: The PRC could decide to make it higher so that the Postal Service is fully compensated for its recession losses in a timely manner.

    And when the new “temporary” surcharge is supposed to expire, Congress might decide to make it permanent as a way of dodging real postal reform. I’m reminded that, back in January, my fortune-telling friend Madame Marie predicted that the surcharge would not disappear this year, adding this gem of political science: “What, you think I have crystal ball or something? All I know is, don’t ever bet on government getting rid of a temporary tax or fee.”