Sunday, April 13, 2014

Lower Pay Rates Are Boosting USPS's Finances

Partly because of a shift to lower-paid employees, the U.S. Postal Service experienced a rare improvement in its business last year, according to a Postal Regulatory Commission analysis. But the PRC warned that USPS is still on shaky ground – losing money for the seventh year in a row, short on cash, and unable to borrow money or invest in new equipment.

In other words, the good ship Postal Service is still sinking, but it’s not taking on quite as much water as it used to.

The PRC calculates that USPS’s financial loss from operations was “only” $1 billion in FY2013, down from nearly $2.5 billion the previous year. The PRC’s calculation excludes prepaid retiree health benefits (a budgeting gimmick created by Congress that USPS has stopped paying) and one-time accounting adjustments.

“The Postal Service reduced expenses in FY 2013” despite a minuscule decline in mail volume, says the PRC’s analysis of the Postal Service’s annual 10K financial report, released a few days ago. “Workhours and the average hourly compensation and benefits rate were both lower than last year. This indicates that the Postal Service’s finances may be improving.”

“Personnel expenses, including compensation and benefits expenses and systemwide benefit expenses, account for 78 percent of total expenses. The Postal Service reduced compensation and benefits almost $1 billion by increased use of non-career workforce and voluntary retirement incentives.”

Lower average pay rates
With the help of early-retirement incentives, the number of career employees declined by 37,000, all from attrition. In many cases, they were replaced by lower-paid non-career employees, especially because of a union contract allowing more hiring of non-career postal clerks. As a result, in most segments of the Postal Service the “productive hourly rate” of pay actually declined during FY2013.

On the negative side, fuel costs were higher, and USPS had to spend an additional $137 million on supplies when Express Mail was re-branded as Priority Mail Express.

Growth in packages and Standard Mail almost made up for the ongoing decline in First Class Mail. Boosted by price increases, revenue rose by $700 million (1.2%) during the year.

USPS’s strength in residential delivery could enable it to continue prospering from the growth of e-commerce, but the agency is not prepared for such growth, the PRC warned.

“For the burgeoning e-commerce market to become a viable option, the Postal Service needs to replace and improve its existing aging vehicles to accommodate the shift in mail mix toward a higher fraction of packages and to invest in new and efficient mail processing technologies and equipment. The Postal Service’s ability to make these investments is affected by the lack of available working capital.”

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Thursday, April 10, 2014

What the Quad/Graphics-Brown Deal Tells Us About U.S. Printing, Publishing, and Postal Services

Although Wall Street mostly yawned when Quad/Graphics announced this week it is acquiring Brown Printing, the pending transaction is a big deal for many major publishers. And it provides some interesting insights into the U.S. printing and publishing industries and even into the U.S. Postal Service.

For publishers of major magazines and catalogs – those with a print order of at least, say, 200,000 copies – the country’s third largest magazine printer has been the chief supplier of Duopoly Insurance. When Quad acquired its larger rival Worldcolor in 2010, Brown’s business reportedly surged as the big publishers worried about being at the mercy of printing giants Quad and R.R. Donnelley.

“Brown prints titles like Elle, Esquire, Family Circle and glossy catalogs for Macy's, Lord and Taylor and Saks Fifth Avenue,” noted the Milwaukee Journal Sentinel’s John Schmid (the only mainstream U.S. reporter who regularly covers the printing and paper industries, as far as I can tell).

Few other U.S. printers have the equipment or capacity to handle such large print runs of publications. And as part of Gruner + Jahr, a huge German printing and publishing firm, there was little concern about Brown’s financial strength or its ability to stay current with technology.

An underdog run by German engineers
Brown seems to have performed admirably. I don’t recall hearing anything really negative about the company, perhaps reflecting Americans’ natural tendency to root for the underdog. German engineers have been in key management roles at Brown, and it shows – in precise procedures and practices as well as in a nearly obsessive focus on plant loading (that is, smooth, predictable workloads rather than peaks and valleys).

Rather than trying to squeeze more years out of ancient equipment, as some Worldcolor plants used to do, Brown kept pace with Quad and RRD when it came to investing in new presses and bindery lines. But it wasn’t enough.

Installing the latest 64-page offset press was just table stakes when it came to competing with the Big Boys for prestigious publications. Brown’s investments kept it in the game but gave it no “sustainable source of competitive advantage,” as the MBA-types would say.

Brown may have had a true competitive advantage for awhile in the tabloid magazine market that was dominated by trade publications. Colleagues describe an unusual configuration of its press folders (there’s that German engineering at work) that enabled Brown to run magazine-formatted and tabloid-formatted pages on the same press.

Combined with Brown’s expertise in producing small-circulation weekly magazines (many of the tabloid trade magazines were weeklies) and its infrastructure for delivering them, Brown seemed to have a sizable market share in the niche.

A drooping niche
Then came the droop test. (See Viagra to the Rescue? Postal Regulations Are Taking the Life Out of Tabloid Magazines.) USPS instituted regulations in 2010 penalizing flat mail that wasn’t stiff enough to be handled efficiently by sorting machines. In advances of the new regulations, B2B publishers rushed to transform their tabloids to the shorter, less droop-prone magazine format.

Rising postage rates, a challenging advertising market, and improvements in browser-based magazine formats have meant continuing declines in B2B print orders. (Despite all the hype about iPads and fancy e-magazines, I suspect fewer Americans read magazine apps than read the more pedestrian browser-based page-flip magazines.)

Brown also has another distribution challenge: scale. “In every printing-contract negotiation I’ve witnessed, distribution has been the tie breaker,” a publishing colleague tells me.

When every printer in a market has the same or similar presses and bindery lines, the ability to provide co-mailing, dropshipping, and other distribution options tends to become the chief differentiator. In fact, much of Quad’s growth in its early days came from focusing more on distribution than the competition did.

Brown has plenty of equipment and expertise devoted to distribution. But without the volume that Quad and RRD have, it struggles to provide the same kinds of postage discounts and shipping efficiencies that they offer.

Brown's spokesperson acknowledged the issue in a statement to the Waseca County News that "Customers will have a lot of opportunity to benefit from this acquisition" because of Quad's "robust distribution service."

Ultimately, what may have caused Brown to be labeled “non-core” by Gruner + Jahr and sold for “only” $100 million was the realization that the U.S. isn’t Europe.

Schmid notes that, as a printing company owned by a publishing firm, Brown is “an anomaly” in the U.S. But that’s standard practice in Germany, where G+J is both the largest publishing company and the largest printer. (I don't pretend to understand why vertical integration of printing and magazine publishing is so common in Europe but virtually non-existent in the U.S.)

G+J was once a major player in the U.S. magazine market as well, with titles like Family Circle and Fast Company, and did much of its printing at Brown. But after several big deals turned into disasters, it turned tail and exited the U.S. publishing market in 2005.

You would think Wall Street would view the removal of a competitor as a favorable event for Quad, but the company’s stock is actually down a bit since Monday’s announcement. Standard & Poor's downgraded Quad, focusing not on competitive gains from the Brown acquisition but rather on Quad’s increased indebtedness amid “lower industry capacity utilization and aggressive pricing tactics by market participants that have eroded profitability.”

Related articles:
 

Tuesday, April 1, 2014

Postal Service Dragging Its Feet on Fixing Periodicals

Postal officials, who frequently complain about losing money on Periodicals mail, bear much of the blame for that loss, according to the Postal Regulatory Commission.

“The Commission is increasingly concerned that the Postal Service’s Periodicals pricing strategy is leading to inefficient mailer preparation,” the commission wrote recently in its review of 2013 postal rates, echoing a complaint that magazines have been making for the past decade.

“The inefficient pricing signals being sent by the Postal Service’s prices prevent the Postal Service from maximizing contribution from Periodicals. Further, the inefficient price signals are increasingly creating winners and losers within the Periodicals class.”

The Postal Service’s flawed accounting shows that it receives only 76 cents in Periodicals-class revenue for every dollar it spends delivering magazines and newspapers. That was an improvement of 4 cents over the previous year – the first improvement since 2008 – but it hasn’t eliminated the political and legal pressure to jack up Periodicals rates.

A year ago, in considering whether Periodicals rates are legal, the PRC directed USPS to “leverage its pricing flexibility to improve Periodicals bundle and container pricing to incent more efficient mailer preparation and increase contribution from Periodicals.”

The efficient subsidize the inefficient

Instead, the commission chided, USPS has followed its same old approach to Periodicals pricing – just raising rates by the same percentage across the board. As a result, efficient Periodicals mailers are subsidizing inefficient ones, and USPS is losing out on a change to get publications to mail in ways that reduce its costs.

For example, the PRC wrote, the Postal Service’s own study shows that copies in carrier-route bundles are among the most profitable type of Periodicals mail, yet USPS steadfastly refuses to improve the incentives for carrier-route bundles. [In fact, it’s actually watered down the incentive over the years.]

The PRC noted that the Postal Service has undertaken various initiatives to reduce the cost of Periodicals and other flat mail, but “the Commission is concerned that the Postal Service is not measuring the success of the operational initiatives it has implemented to reduce the costs of Flats.”

It cited a statement from two trade associations urging the PRC “to ‘confront directly the elephant in the living room of Periodicals mail pricing: the Postal Service’s failure to rein in the out-of-control costs of Periodicals Mail despite large investments in automation equipment by the Postal Service, and large increases in worksharing by periodical publishers and their mail service providers.’”

No explanation

Postal officials never have offered a plausible explanation for the USPS's allegedly escalating costs for handling Periodicals.

If the saying that “what gets measured gets done” is true, the Postal Service is shooting itself in the foot by not tracking which of its cost-cutting efforts are working. How can it decide which ones need to be tweaked or scrapped and which ones are worthy of expanding and emulating?

Are postal officials more interested in avoiding the embarrassment that comes with owning up to failures than they are in improving their operations?
  
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Saturday, March 29, 2014

New Postal Hires Mean More 'Return To Sender' Mail

The U.S. Postal Service’s shift to a more flexible workforce is likely to mean more mail pieces will be marked “return to sender,” according to postal officials.

USPS estimates it delivers at least 2.2 billion mail pieces annually that lack complete address information, according to information presented at a session of the recent National Postal Forum.

With intimate knowledge of their routes, letter carriers are often able to deliver mail pieces despite such problems as missing apartment and suite numbers, minor spelling and addressing errors, and changes of address. USPS says such special handling costs it an estimated $160 million annually, according to a recent Post Ops Update (available only to members of the Association for Postal Commerce).

An imperfect process
What carriers learn about problem addresses is supposed to be captured in the Postal Service's address-management database, but it's an imperfect process.

Because of greater use of “transitional” employees instead of career carriers to deliver the mail, it’s becoming increasingly likely that a poorly addressed letter will end up in the hands of a carrier who doesn’t know how to deliver it, a postal official acknowledged. Such recent hires are paid less than career carriers, and their hours can be adjusted more to match the peaks and valleys of mail volume.

Letter carriers point to another reason that “carrier knowledge” often fails to overcome addressing problems: Even career carriers are increasingly delivering mail to unfamiliar addresses, such as when several carriers work overtime to cover a vacant route after their usual deliveries are done.

USPS returned, forwarded, or destroyed nearly 7 billion “UAA” (Undeliverable As Addressed) mail pieces last year at a cost of more than $1.2 billion, not including the cost to mailers. The volume of UAA mail has generally been declining for years, thanks to stricter regulations on business mailers and greater use of address-correction software.

More than three-fourths of that UAA mail results from changes of address. But another surprisingly common issue is that many people don’t know their correct mailing address, especially for office buildings and college campuses.

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Thursday, March 27, 2014

Are Printed Magazines Growing or Shrinking? Yes

Magazine advertising gains market share in the U.S., but the actual number of magazine copies is declining faster than ever: What in this crazy multimedia world is going on?

Two statistics released this week underscore a counter-intuitive trend: U.S. publishers seem to be prospering despite printing fewer copies of actual magazines.

In fact, many “magazine media” companies are doing well precisely because they can get away with printing fewer copies without suffering the consequences that used to accompany reduced circulation. But first the data, and then the interpretation:
  • The volume of Periodicals class mail decreased a stunning 12-plus percent last month versus February 2013, according to preliminary numbers the U.S. Postal Service released Monday. Periodicals mail – which covers distribution of most U.S. magazines, as well as some newspapers – has been gradually declining at a 4%-5% pace the past few years but dropped 7.3% in January and then 12.7% in February. 
  • U.S. ad revenue for printed magazines rose an estimated 1.8% in 2013, Kantar Media reported Tuesday. Magazines actually gained a bit of market share from TV, radio, and newspapers. And many magazine publishers no doubt benefited from the 15.7% rise in Internet display advertising.  
  • With the high-profile web-to-print launches of such titles as Newsweek, AllRecipes, and The Pitchfork Review, print magazines have become so hip that the recent SxSW conference even devoted a session to their resurgence. Anecdotal information suggests that fewer established titles are abandoning print than in previous years and that more new magazines are surviving the critical first two years. 
  • So if magazines are booming but fewer copies are being mailed, other distribution methods must be growing, right? Nope. The newsstand system, which is the second largest distribution channel, had 7.5% fewer copies on sale last year, according to MagNet. And an eyeballing of preliminary Alliance for Audited Media data confirms that the number of printed copies declined for most magazine titles last year. 
A decade or two ago, magazine publishers were in fact magazine publishers and not much else. But when the web started grabbing consumers’ attention and marketers’ dollars, relying on a single product line with declining revenues and rising postage costs became an unsustainable business model for many publishers.

Magazine companies survived by cutting – staff, titles, and circulation -- and by creating new lines of business with web sites, apps, e-newsletters, events, etc. Every week, it seems, we hear about another publisher (or, rather, “magazine media” company) that’s now getting most of its revenue from non-magazine ventures.

Meanwhile, search engines and real people have learned to avoid content farms and keyword stuffers and instead to seek out sources of reliable information. Both seem to be concluding that having a “real” – that is, print – publication correlates with well written, reliable, and objective information. (See How Google Is Becoming the Magazine Industry's New Best Friend for more on this topic.)

No mass
Print is still in the mix, but it serves a different purpose. Advertisers are no longer looking to printed magazines for mass; they have more efficient methods of getting eyeballs. Print ads are now about engagement, about targeting a particular psychographic and mindset, and about demonstrating credibility and stability.

So despite the death-of-print predictions of a couple of years ago, for the foreseeable future the path to publishing profitability seems to include print. But not too much of it. Bloated circulation numbers are less relevant to advertisers. And they’re less sustainable for publishers, especially after the big January hike in postage rates (which may have affected the Periodical numbers in February) proved once again that we have to become less reliant on the Postal Service.

Consider the example of Politico, which a few months ago was a (fairly obscure) web site but can now call itself a "magazine" because it gives away a few thousand printed copies per issue. Its web traffic is up 57% over last year, according to Compete.com’s February unique-visitors statistics.

Or consider Newsweek, which recently was running away so fast from its past and from print that its Internet presence was buried under a mediocre web site. Its recent print-relaunch issue generated massive buzz that helped boost web traffic by 25% last month, all with a print run of only 70,000 copies. At that rate, Newsweek won't even print as many copies in the next 12 months as it did just a few years ago for a single issue.

But that doesn’t matter. For publishers, the important thing is having a presence in print, almost regardless of how many copies they actually print.

Related articles:

 

 

Thursday, March 20, 2014

Dead Tree Edition's Best and Worst of 2013 (It's About Damned Time!)

In honor of the first day of spring, and in solidarity with procrastinators everywhere, we hereby present the Best and Worst of Dead Tree Edition in 2013: