Thursday, February 26, 2015

Rival Print Giants Donnelley and Quad Not Looking To Get Hitched

R.R. Donnelley and Quad/Graphics, the USA's two largest printing companies, apparently have their sights set on gobbling up more competitors -- but not each other.

Quad's CEO, Joel Quadracci, was caught off guard on Tuesday by a question from a Goldman Sachs analyst at the end of Quad's quarterly earnings conference call.

"I’d kind of love to hear your thoughts on potential regulatory pushback or maybe lack thereof on a tie-up between your company and your biggest competitor," said Fred Krom. Quadracci at first thought the question was about Courier Corp., which Quad recently planned to acquire until Donnelley stepped in with a higher offer.

Krom clarified: "I was actually referring to you and/or Donnelley but . . ."

"Oh, so me acquiring Donnelley?" Quadracci asked.

"You or vice-versa."

"We haven’t done any work on that and that’s not in our plans," Quadracci responded.

Donnelley officials were not asked the same question at their conference call Wednesday. But it's clear they have their hands full with Courier and several other acquisitions.

Though the U.S. printing industry is highly fragmented, certain segments are a true duopoly of only Donnelley and Quad. For example, they have North America's only rotogravure publication presses, making them the only real players that can compete for catalogs and magazines that have print orders in the millions.

So it's understandable that Quadracci wouldn't even dream of a linkup with his arch rival getting the approval of antitrust authorities.

But Goldman Sachs isn't known for asking idle questions.

Perhaps Goldman has noted that antitrust decisions involving print-media industries aren't necessarily logical: For example, the government took a full year to approve the merger of almost-bankrupt Verso Paper and just-out-of-bankruptcy NewPage, forcing a reshuffling of the industry that did little to preserve competitive markets for coated paper. But it didn't issue a peep last year when Quad bought Brown Printing, the duopoly's biggest competitor in the large-publication market.


Thursday, February 19, 2015

USPS Goof Gives Publishers a Break on Postal Rates

Because of a calculation error, the average postal rate increase for magazines in April will be less than originally announced.

The Postal Regulatory Commission, which spotted the error last week, calculates that the average increase for “Outside-County” Periodicals (primarily magazines, with some newspapers and newsletters) will be only 1.34%, not the originally announced 1.965%. USPS acknowledged the error on Wednesday.

The slip-up came in creating an apples-to-apples comparison of the current rules and rates to the new ones. The PRC noted that the USPS calculations failed to account for new rules that will result in fewer carrier-route bundles and more Flats Sequencing System-optimized bundles.

Given that the Postal Service allegedly loses money on Periodicals Class mail, the PRC questioned why the class’s rate increase was so low -- by far the lowest of the "market-dominant" classes.

“The Postal Service’s intention was to increase Periodicals prices by 1.965 percent,” USPS wrote in its response to PRC questioning. But with the correction noted by the PRC, the proposed rates “unintentionally reflect a percent price increase for Periodicals that is below the goal of 1.965 percent.”

USPS’s response did not indicate it would try adjusting the proposed Periodicals rates, which may not even be possible at this late date. But publishers won’t get off scot-free: In the next round of inflation-based rate increases, the “unused rate authority” is likely to be applied to levying a higher rate hike for Periodicals.

Sunday, February 15, 2015

USPS Struggles With Wave of New Hires

The U.S. Postal Service’s shift to a lower-paid workforce comes with a steep price. By the agency’s own admission, the hiring of more non-career employees has led to lower productivity, worse service, higher injury and turnover rates, and increased investment in new training programs.

USPS has historically been staffed by long-serving employees, but currently 103,000-plus employees -- one of every six active postal workers -- has been with the agency less than a year. That's triple the newbie rate of just four years ago.

In those same four years, despite cost-of-living adjustments and other pay raises for most employees, average base pay for the Postal Service has actually declined 4%.

Eat your young
The lower average pay rate was made possible by what some have called “eat your young” labor contracts – where current union members are well taken care of in exchange for concessions regarding future hires.

For example, USPS has more than 37,000 city carrier assistants, a non-career position that emerged from a 2013 labor contract. Their duties are similar to those of career letter carriers – but without most of the benefits and at barely half the pay.

“We hired over 80,000 non-career employees in FY2014 including PSEs [Postal Support Employees], CCAs [City Carriers Assistants] and MHAs [Mail Handler Assistants],” says the Postal Service's Annual Report to Congress. “In addition to trying to hire up to our contractual limits of non-careers, we also experienced a high turnover rate (in excess of 40 percent) for CCAs.”

With savings come new costs
“The non-career employees are generating significant rate savings, but are costing additional hours in hiring and training them, as well as in developing needed delivery experience.”

A major reason the Flats Sequencing System’s productivity dropped during FY2014, according to a recent USPS filing, was high turnover among supervisors and front-line employees. USPS recently responded with stepped-up training for supervisors in FSS operations.

Across the agency last year, other new training programs were rolled out, and the amount of time employees spent in e-learning programs nearly doubled. Now the Postal Service is scaling up its new-employee orientation program, with plans to “engage employees before their first day of work.”

A 12% increase in work-related injuries last year is causing USPS to “increase focus on at-risk employees and those who are new to the organization and less familiar with safe work practices,” says the Report to Congress.

The report also cites “the hiring, training and replacement (due to turnover) of many new employees” as a major reason it has missed its service (day-of-delivery) targets for First-Class Mail several years in a row.

In general, recent USPS communications indicate the agency was caught off guard by, but is now trying to come to grips with, the challenges of relying more heavily on non-career employees.

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Monday, February 9, 2015

USPS Cost Cutting Ain't Cuttin' It, Mailers Group Says

From Flats Sequencing to Network Rationalization, many of the U.S. Postal Service’s recent cost-cutting programs have not been living up to the agency’s projections, a multi-industry mailers group says.

Worse, the programs have shifted costs to mailers without apparently benefiting USPS, the Association for Postal Commerce (PostCom) wrote in a recent filing with the Postal Regulatory Commission.

“While PostCom applauds the Postal Service’s attention to reducing costs, the information presented [in a recent USPS report] suggests that these efforts have not been as effective as the Postal Service projected,” PostCom wrote. Judging by some questions the PRC has posed to USPS the past couple of weeks, the regulatory body seems inclined to agree with PostCom’s assessment.

PostCom pointed out that USPS recently estimated only about $900 million annual savings, versus its projected $1.2 billion, from Phase I of its Network Rationalization plan that closed scores of mail-processing centers.

It also noted that, in 2013, increases in mail-processing costs caused by the new Flats Sequencing System were offset by lower delivery costs. Yet in 2014, both PostCom and the PRC pointed out, delivery costs for Standard-class flat mail (the main type of mail sorted with FSS machines) increased 8% while processing costs increased 9%.

“As mailers have incurred additional costs to prepare mail to meet FSS standards, the Postal Service has not seen a reduction in either processing or delivery costs from the implementation of this initiative,” PostCom wrote.

FSS productivity down
USPS acknowledged on Friday that FSS productivity declined last year, because of lower mail volumes and some operational issues.

“A high turnover rate was experienced in the operations for both the Supervisors and employees, resulting in a lack of understanding of the approved methods and metrics needed to drive the performance during the declines,” USPS wrote in a response to pointed questions from the PRC about FSS costs.

 “To address these deficiencies, the Postal Service provided on-site training at 5 Select FSS locations during August and September 2014. A minimum of two Supervisors from every FSS site nationally attended these training sessions. The sessions provided the supervisors with information regarding accepted methods and metrics used in the FSS operation to use and train others in their home sites.”

PostCom also questioned whether USPS’s Load Leveling Initiative is paying off.

Load Leveling is supposed to reduce the agency’s cost for handling Standard mail by spreading the workload more evenly throughout the week, resulting in slower delivery of some mail. But USPS has released no analysis of the program’s financial impact, and Standard costs keep rising.

“Without better data, . . . it is impossible to tell whether the Load Leveling strategy has limited these increases or furthered them,” PostCom said. In fact, the organization indicated, USPS's lack of analysis or transparency about it costs makes it difficult to assess the success of any of its cost-cutting measures.

More accountability needed
The Postal Service, PostCom wrote, needs to be “more accountable to the industry in reporting how its strategies are reducing costs, how the cost reductions will support a more effective and efficient USPS, and how these reductions will benefit the overall mailing industry.”

“In general, PostCom supports the Postal Service’s efforts to reduce costs. But the Postal Service, and the Commission, must understand that much of what is described as ‘cost cutting’is really ‘cost shifting.’”

“When additional costs are placed on mailers, and the Postal Service does not experience concurrent reductions in its costs, something is amiss.”

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Tuesday, February 3, 2015

Seven Mysteries of the New Postal Rates

It sounds like a small price increase, but the new rates could have large implications for publishers, marketers, printers, and even paper mills.

Nearly three weeks after the U.S. Postal Service proposed hiking most postal rates, mailing experts and regulators can’t figure out what the proposal means.

Agreeing with a coalition of mailers’ groups that USPS’s filing was incomplete for all but First-Class Mail, the Postal Regulatory Commission on Monday extended the discussion period on the proposed April 26 rate increases for “market-dominant” mail classes.

Some mailers are skeptical of USPS’s calculation that the price increases, especially for the Standard and Periodicals classes, are just shy of 2%. But until USPS answers an extensive list of questions about the new rate structures and the new rules that will accompany them, no one can evaluate whether the proposed rate hikes are legal, the PRC said.

A pallet of magazines in FSS-optimized bundles
Even after the rates are fully explained, divining their implications for individual mailers, for USPS, and for others will be no simple matter. Here are seven important but mostly unanswered questions about the rates:

1) How much will my rates change? If you’re assuming the answer is less than 2%, you may be in for a rude awakening. These are is not across-the-board increases. Forever Stamps aren’t going up at all, enabling USPS to stick First-Class business mailers with increases that exceed 2%. The new rules may whack mailers that have mostly carrier-route or high-density mail but result in lower postage for some other mailers. Folio: magazine notes that some rates will double while others will decrease more than 20%; most mailings, however, involve multiple types and levels of rates. Many mailers won’t really know what the new rates will mean until their printer or other service provider can run an elaborate presort analysis, which can’t happen until the new rules and rates are clarified.

2) Will the rates alter how paper is priced and sold in the United States? The new rates would continue and extend the Postal Service’s efforts to de-emphasize weight in calculating rates. USPS acknowledges that it overcharges for weight, in the past using it as a proxy for some of its costs that are not directly weight related. The result is that paper mills tend to charge higher premiums for lightweight paper in the U.S. than they do in other markets, knowing that American postal rates give buyers a strong incentive to use lighter paper. (That’s especially true for magazine-quality papers, which in many other countries are used primarily for products distributed through stores rather than the mail.) But with Standard letters no longer having “pound” rates and with weight charges for some other mail declining, some mailers may switch to heavier paper.

3) For flats mailers, will the new mail-preparation standards be must-do, ought-to-do, or nice-to-do? This is an especially big question for flats mailers, and their printers, because of new preparation standards for mail going to ZIP codes served by the Flats Sequencing System (FSS) and new incentives to create pallets of carrier-route bundles in non-FSS areas. It’s still not clear what mailers will actually be required to do on April 26 and what will be optional but important – for example, valuable enough to overhaul how mail is prepared and shipped. And sometimes USPS incentives are duds, not worth the additional expenses or investment required to take advantage of them.

4) Will the rates and regulations create new competitive advantages for some printers – and disadvantages for others? For many types of printing, a major differentiator is the ability to minimize customers’ mail costs through mail consolidation, in-line customization, dropshipping, etc. Postal officials talk a good game about wanting to encourage co-mailing, selective binding, and other forms of mail consolidation, but that isn’t always reflected in new rates. Conversely, incentives to consolidate and dropship mail can hurt small printing plants that don’t prepare enough mail to obtain the best rates for their clients.

5) Will printers, other service providers, and USPS itself be ready for April 26? The proposed rate structure will have some new charges and apparently lots of new rules and incentives. But software providers can’t redo their coding or printers their mail-preparation procedures or equipment until they know what the new rules will be. And then there’s the question of whether the Postal Service will be ready for the resulting changes in how mail is prepared and delivered.

6) Will the new rules and rates finally make FSS start paying off? USPS’s multibillion-dollar investment in the huge machines was supposed to reduce dramatically its costs of carrying flat mail. But so far, higher handling costs have eaten up the resulting delivery savings, which has increased pressure on USPS to jack up rates for Standard and Periodicals flats. New FSS preparation standards are supposed to address that by changing how mail is packaged for ZIP codes served by the FSS machines, such as by eliminating carrier-route bundles.

7) Will the new rules cause more lightweight pallets and other “tail of the mail” problems? Printers and mailers note that recent changes in postal regulations have forced a lot of flat mail to be placed on extremely light pallets, which tend to cause such problems as reducing the amount of mail that fits into a truck. The new rates include incentives (or requirements; it's not clear yet what's optional) for creating 5-digit carrier-route pallets and FSS scheme pallets. But will that have the perverse effect of causing other mail to be packaged and shipped less efficiently?

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Tuesday, January 27, 2015

Hurts So Good: Is International Paper Hoping To Be Punished?

Now we know why International Paper isn't joining with other North American paper companies in their recently filed anti-dumping complaint: It is supposedly one of the perpetrators.

Four paper makers and the industry's main union announced last week they were seeking tariffs against uncoated freesheet paper imported into the U.S. from five countries. The announcement listed the countries, but not the manufacturers, from which the "unfairly priced imports" were allegedly coming from.

But the complaint itself lists the alleged perpetrators, which include International Paper's Brazilian operation. IP would probably welcome the tariffs -- and not because it's been afflicted with a case of corporate masochism.

By discouraging imports, such tariffs would be likely to drive up U.S. prices for copy paper and other uncoated freesheets. With roughly one-fourth of the country's UFS market, IP would gain far more from the higher prices than its Brazilian mill would lose from reduced sales into the U.S.

Editor's note: According to a comment about this article in a LinkedIn group, IP's Brazilian operation brings some paper through the port of Miami for subsequent shipment to other countries but does not actually sell paper into the U.S. market. 

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