Subtle Violations of Postal Regulations Can Cost Mailers Millions

Sept. 30, 2015 update: So much for turning fines into a new source of postal revenue. A federal judge marked the Southern California Edison fine "Return to Sender" yesterday, ruling that the Postal Service did not use "reasoned decisionmaking." 

"USPS's position appears to be that even if a mailer complies with 99 percent of the requirements and incurs substantial workshare expenses to bring its mail pieces into compliance, a single form of noncompliance - even accidental, even inconsequential - is sufficient to render a revenue-deficiency assessment for 100 percent of a mailer's discounted rates," wrote U.S. District Court Judge James Boasberg, according to Courthouse News, which has details of the ruling.

Violating postal regulations, even in subtle and unintentional ways, can cost business mailers millions of dollars, two recent lawsuits reveal.

The U.S. Postal Service assessed Southern California Edison $7.6 million in penalties for not keeping its address lists up to date and Sears $1.1 million for allegedly violating the rules governing how folded self-mailers should be sealed, according to the lawsuits.

The two companies filed appeals of the USPS decisions on June 18 with the U.S. District Court in Washington. Both are represented by Venable LLP, a major Washington, DC law firm.

SCE was dinged because of a “suspiciously high increase” in the amount of undeliverable and return-to-sender First Class Mail it sent between 2006 and 2008. The big utility acknowledges two minor errors in its address-correction procedures – regarding missing suite or apartment numbers and the handling of fractional-number street addresses (such as 29 ½ Elm Street) – but contends those did not cause an appreciable increase in bad addresses.

“A more plausible explanation is the upsurge of unemployment, bankruptcies, foreclosures and mortgage defaults that occurred in SCE's service area during that period,” the appeal states. USPS also objected to SCE manually overriding the Postal Service’s address-correction database – even though those overrides were based on customer communications indicating that the USPS data were out of date, the company contends.

“The Postal Service ordered SCE to refund to the Postal Service the entire $7.6 million in discounts that SCE earned for its mail preparation work on the 82 million pieces of presorted First-Class Mail that SCE mailed between May 14, 2007 and November 26, 2008.”

Loss of all discounts
Sears, like SCE, notes that its postal penalties exceed by many times the Postal Service’s estimated costs resulting from the alleged violations. (Generally speaking, the penalty for violating mailing standards is indeed the loss of discounts on the entire mailing and not based on USPS’s actual costs or on the portion of the mailing that was problematic.)

Sears ran into trouble with the USPS over the placement and type of seals on 6.3 million folded Standard Class self-mailers it sent for two 2009 promotions. Such mailers are sometimes called “fletters” because they have the dimensions of flat (e.g. catalog) mail but are folded and sealed so they can go through USPS’s letter-sorting equipment and mail at the lower letter rates.

Sears contends the mailings met postal regulations or were specifically approved by postal officials because they were designed not to jam letter-sorting machinery. But USPS ended up determining that the pieces needed an additional adhesive tab and that some were improperly sealed with glue instead of tabs.

“The Postal Service, after extensive empirical testing and analysis of alternative seal designs, soon afterwards adopted rule changes that explicitly authorized the same design features soon after the mailings occurred,” the Sears lawsuit contends.

Discussions and arguments over fletter mail were frequent a few years ago, partly because mailers and postal employees struggled to understand the regulations. That was complicated by frequent tweaks to the rules when USPS discovered that some mail pieces that met the standards were still gumming up the works.

Related articles:

• Intelisent's insightful commentary on this article includes this gem: "I am sure this gives companies like SCE and Sears a lot to think about – as far as how they can fast track diverting their communications out of  the mail stream – permanently."
• New Postal Hires Mean More 'Return To Sender' Mail 
• It's curtains for the window envelope 
• The Scoop on Droop: Bad News for Mailers

 

Bare Shelves in the Magazine Aisle

There's nothing "OK!" about these magazine racks.

Here’s how a store’s checkout racks and magazine aisle look after going weeks without delivery of magazines.

Magazines strike out at checkout.

While most grocery and book stores this week were sporting July issues, this CVS store on the East Coast was stuck with May and June copies of monthlies and and a few early-May issues of weekly magazines. Thank God for bookazines, which stay on sale at least a couple of months, or else the entire magazine section would have looked even more barren.

CVS had the misfortune (or poor judgment) less than a year ago to go all in on magazine distribution with Source Interlink, which collapsed last month and Monday went Chapter 22 (its second trip through Chapter 11 bankruptcy reorganization).

Bookazines fill the void.

Any solution for Source-tied retailers like CVS will inevitably involve the country’s largest wholesaler, TNG. But it will take weeks for TNG to bulk up its distribution network to handle the majority of Source’s former customers.

Complicating the move is that TNG is demanding that publishers sign off on new terms, which include new fees and a transition to “pay on scan.” Source and TNG both apparently ran into trouble by grabbing market share with agreements to pay retailers based on the number of copies rung up at cash registers, not the number that were distributed but never returned.

Empty slots and out-of-date issues

Without reciprocal agreements from publishers, the two big wholesalers have been squeezed by the “shrink” – copies that are stolen, lost, or damaged. TNG now seems to have the power to impose pay-on-scan for publishers, including compensation to publishers for estimated shrink.

Meanwhile, the magazine racks at many stores, especially in former Source strongholds in the Midwest, are being depleted. Will they remain empty until the industry is ready to deliver its product once again, or will impatient retailers just turn the space over to other products that are probably less profitable but also more reliable?

Related articles:

• A Glimmer of Hope Amidst the Newsstand’s Gloom 
• Publishers Hope Threesome Will Perk Up Newsstand Sales 
• Shootout at the Newsstand

Publishers Hope Threesome Will Perk Up Newsstand Sales

Here’s proof that tough times make for strange bedfellows: Three major magazine publishers are teaming up to peddle newsstand copies of their top fashion magazines.

The unprecedented promotion for Conde Nast’s Vogue, Time Inc.’s InStyle, and Hearst’s Elle will appear this autumn in Target stores during fall fashion season, the publishers revealed at last week’s Retail Marketplace 2014 conference. “The offer: Buy any two of the fashion titles and get a $5 Target gift card as you check out,” according to a write-up from the event.

Along with in-store displays, the promotion will be boosted by 50 fashion bloggers, said Will Michalopoulos, Hearst’s senior director, retail sales.

“This is an example of competing titles coming together to drive sales for some of their biggest brands, and to drive traffic for a retailer,” he said. News of such innovations was welcomed by beleaguered newsstand executives, who are still reeling from the collapse of the country’s second-largest wholesaler, Source Interlink, not to mention continuing declines in newsstand sales.

A Meredith 2-for-1 promotion

Hearst and Meredith are among the publishers who have polybagged pairs of related titles to offer two-for-the-price-of-one deals at retail.

“In almost every case, these have gained incremental distribution, and in one case, we calculate that this program will double the overall retail business in one of the chains in which it’s been introduced," Michalopoulos said.

With publishers talking more than ever about cooperating to bolster retail sales, the three-way Vogue-InStyle-Elle tie-up is a logical next step. There was also talk of other joint ventures at the conference, such as creating an industry-wide mobile app to promote sales of magazines.

“Our competition is not other magazines; it’s all of the things that readers are doing when they’re not looking at magazines,” preached Joe Ripp, Time Inc.’s chairman and CEO.

“There’s no going back, so we’ve got to work together to survive in this brave new world,” agreed British media consultant Jim Bilton.

While the magazine industry’s newsstand leaders were having their Kumbaya moment at the conference, the nation’s largest magazine wholesaler sent them a message demanding that they sign a legal agreement if they wanted to continue selling magazines in Walmart and many other stores. The document, which spells out the terms under which TNG will take over most of the magazine distribution that Source Interlink left hanging, is highlighted by a convoluted 191-word Lawyerspeak sentence covering indemnification.

“I still can’t make heads or tails of that sentence,” commented one magazine executive, “but I think it means that if Source ever sues TNG or anyone who works there, I have to give up my first-born child.”

Related articles:

• A Glimmer of Growth Amidst the Newsstand's Gloom  
• A Renaissance for Print, Or Is Flat Just the New "Up"?
• Shootout at the Newsstand

Old News Is Good News for Businessweek

Bloomberg Businessweek is using five-year-old news to sell subscriptions. The practice isn’t as crazy as it sounds and provides insights into direct-mail marketing and how consumers think about magazines.

“When we recently announced that Bloomberg L.P. had purchased Businessweek the business world was taken by surprise,” begins a flyer headlined “The business magazine, reinvented” that was distributed last month. “NEW: Behind the merger of Bloomberg, L.P. and BusinessWeek” proclaims the flyer’s other side.

“Recent” in this case means October 2009. The piece I saw was inserted into an envelope with a subscription offer, which was polybagged with the May 12-18, 2014 issue of the magazine. Did someone mistakenly use an out-of-date insert? I don’t think so.

Sophisticated, high-volume direct mailers are constantly testing – trying, for example, an additional insert, a different envelope size, new copy, or even revised color schemes. But they always compare the results to those of their “control” – the direct-mail piece that has recently had the best response.

Logic says that “The business magazine, reinvented” piece should be replaced by something more up to date. And in fact some people may have received BBW’s May 12-18 issue polybagged with a different message.

But direct marketers care about data, not logic. As long as the control gets better response than the test packages, you can be sure Bloomberg Businessweek will continue using it, no matter how dated it seems.

Perhaps the piece works because consumers aren’t aware of, or forgot, how long ago Bloomberg bought the magazine. Or perhaps they don’t care. Maybe what really resonates with them is that Bloomberg Businessweek has a deep-pocketed owner with a demonstrated willingness to invest in reviving the once-struggling magazine.

Consumers, after all, have this nasty habit of defying both logic and expectations.

Related articles -- in this case, other Dead Tree Edition attempts to probe the thinking of magazine circulation departments, even though some of my production colleagues claim that any phrase involving “thinking” and “circulation department” is an oxymoron -- include:

• Is Ratebase the Magazine Industry's Crack Cocaine? 
• Why Has Magazine Circulation Declined? Blame Advertising 
• What Magazine Publishers Can Learn From "The Da Vinci Code" Giveaway

It's Time for Postal Unions and Mailers To 'KISS' on USPS Reform

The editorial below from “an anonymous PostCom board member” appeared in this week’s issue of PostCom Bulletin, the organization’s newsletter. I thought the insights about how to get postal reform moving and about the U.S. Postal Service's governing body were worth sharing with a wider audience, so I’m republishing it with the permission of PostCom.

A few explanations are in order: “FERS” and “CSRS” are the pension plans for postal employees. “RHBF” is the U.S. Postal Service’s Retiree Health Benefit Fund, which USPS must “prefund” (actually “overfund”) because of manipulative Congressional accounting. Congress Hears the Truth About Postal Service Finances explains how the federal government is milking USPS dry through prepayments and pension overcharges. "PAEA" is the law governing USPS pricing and other financial matters.

Oh, and for those who don’t know, “KISS” stands for “Keep it simple, stupid.” Always good advice, especially when dealing with Congress. 


Postal Reform: Let's KISS - 'Keep It Simple . . .' 

With all the discussion on desired postal reform, where do things stand, and where do we go from here? Please allow me to start with the conclusion and work backwards from there... let's KISS with real intent! Everyone at the table agrees that (1) any FERS and CSRS overpayment should be refunded and (2) the RHBF payment schedule should be restructured. These two reforms provide the most immediate financial relief, the greatest bang for the buck, and avoid changes that would weaken the value of mail and inhibit growth in the mail. So let's KISS now, execute these changes, and move on with the development of fruitful businesses and a healthy postal infrastructure.

Where things stand in Congress. The talk about the need for postal reform has dragged on for a year with the current Congress, after failed attempt by the prior. Although the House passed H.R.2748 through committee last summer and the Senate passed S.1486 through committee this February, neither have sufficient support in their full chambers. So the possibility of a conference to reconcile differences among the two bills is slim.

Presumably this was the impetus for Representative Issa's surprise tack of peeling off individual elements of postal reform and working them into separate legislative activities. On May 21, he worked into the MAP-21 Reauthorization Transportation Bill (set to expire September 30), the directive to move from door delivery to centralized or curb delivery over 10 years, for an estimated savings of over $2B/year. This delivery mode bill, H.R.4670, passed by strict party line. However, that does not mean it will necessarily survive within the larger Transportation Bill.

Then on May 30, a memo circulated around the House GOP recommending the elimination of Saturday delivery as a budget offset to the cost of a short term fix to the Highway Trust Fund. As others in the Senate and union leadership have expressed, this is a deeply flawed proposal that kicks the can down the road yet again on both meaningful postal reform and a long term fix of the Highway Trust Fund. Hopefully sensible minds will prevail and this will be the last we hear of this "offset" lunacy.

Where things stand in USPS Headquarters. So far, USPS HQ has not offered any compromise, explaining that all requests (5-day delivery, health care program changes, governance changes and rate increases) need to be granted in order to meet inflationary pressures and capital expenditure investments (e.g. replacing delivery vehicles that have already surpassed their life expectancy).

Where things stand with the Unions. The unions recognize the harm that would be done to the value of mail (and thus mail volumes and revenues) should Saturday mail delivery be eliminated and/or current door and curb delivery be moved to cluster boxes. Cluster boxes are simply not as convenient and would not be visited as frequently. Either delivery change would result in more “mailbox clutter” which leads to sales cannibalization and lower response rates and sales, deeming mail a less effective advertising tool. A change in both modes would compound the devaluation.

Where things stand with Consumers. When consumers are asked whether they would be agreeable to eliminating Saturday delivery in order to help the Postal Service get out of the red, they say "sure." However, when you tell them that it's not their tax payer dollars that fund the postal service, they admit "oh, I didn't know that."

Where things stand for the Stakeholders -- the business mailers (aka "customers") who actually pay for the lion's share of postal service. The postal customers appreciate the delivery service improvements realized in the last two years. Mail is a choice for commerce and communication. Predictable pricing, and, predictable and consistent service are what makes mail effective.

However, commercial postal customers:

• are now paying exigent surcharges for these services. And we are living under the threat of the Postal Service and Congress wanting to permanently bake in the exigent surcharge that the Postal Regulatory Commission ruled as temporary, which is consistent with the intent of the 2006 Postal Accountability and Enhancement Act.

• are also dealing with an added day/degradation in Standard Mail service standards for mail inducted into SCFs on Fridays and Saturdays.

• continue to live with the additional threat from the Postal Service and Congress to end Saturday mail delivery.

What happened to the adage "The customer comes first"? Some additional thoughts to chew on while we KISS:

• Isn't it more typical that when a company is struggling financially, they run sales to attract more business, not increase prices?

• For those who say commercial customers need skin in the game and need to compromise to accept something above CPI price cap increases --- hello, the mailing industry has already gone through numerous company mergers, plant closings, reductions in force, and oh yeah, that exigent increase that has caused us to cut volumes and thus revenues which create a negative ripple effect on “mail multiplier” volume generated by advertising mail. Prospect sources shrink, the most profitable First-Class Mail communications shrink, as does parcel volume -- the golden hair child of the Postal Service.

CPI based price increases are the typical starting point in market place negotiations and are often adjusted down, not up.

The CPI price cap has most definitely and effectively driven postal cost reduction initiatives; the cap needs to be retained to continue to do so.

• For those who speculate the exigent price increase hasn't hurt mail volume, have you spoken to customers? The volume and revenue could have been higher absent the increase.

• How is it acceptable that for several years and during such a critical time, the Postal Service Board of Governors who are to “direct and control its expenditures, review its practices, conduct long-range planning and set policies on all postal matters” has had 5 vacant positions out of 9? Of the four positions appointed ~ 8 years ago, the terms of two expire in December of this year. And among this limited group, there is very little experience overseeing the strategy and expenditures of an organization that is of the size and reach of the Postal Service. Yet, the Senate bill gives the Board of Governors more autonomous rate setting authority, so the monopoly would essentially be unregulated, and the Postal Regulatory Commission would be relegated to an advisory and complaint mediator role, stripping it of its “regulatory” designation.

• Since when is it acceptable to blatantly ignore the checks and balances of our judicial system by suggesting that regardless of the outcome of the appeal on the exigent price increase, Congress can trump the decision and bake the surcharge in to postal prices if they see fit?

• Although finances still wouldn't be great, it is highly doubted that we would even be discussing another attempt at postal reform if it wasn't for the $5 billion/year required payment for the Retiree Health Fund that came about in the 11th hour of PAEA negotiations.

I'm sure every CEO of every commercial mail customer would love to have a crystal ball to see whether similar mistakes in last minute or lame duck negotiations will be made again.

The conclusion is worth repeating... let's KISS with real intent! Everyone at the table agrees that (1) any FERS and CSRS overpayment should be refunded and (2) the RHBF payment schedule should be restructured. These two reforms provide the most immediate financial relief, the greatest bang for the buck, and avoid changes that would weaken the value of mail and inhibit growth in the mail. So can we KISS now, by making these changes in order to move on with the development of fruitful businesses and a healthy postal infrastructure, rather than continuing to go to bed angry and worrying about what the future holds?

The Monopoly That Haunts the U.S. Paper Market: USPS

When it comes to protecting buyers of coated paper from price-gouging, monopolistic suppliers, the federal government has its eye on the wrong targets, an industry analyst says.

The U.S. Department of Justice seems likely to force NewPage and/or Verso Paper to divest at least one paper mill, Verle Sutton wrote this week in his subscription newsletter The Reel Time Report. DOJ is concerned that combining North America’s two largest makers of coated paper would give the new company the power to drive up prices.

History says otherwise, Sutton wrote: “Publication paper prices have been nearly flat (cyclically) for more than thirty years,” he wrote.

“On the other hand, out-of-control postage costs have been an almost insurmountable problem for print advertising customers and, in fact, have led to many bankruptcies, catalog/magazine closures, and paper demand losses to electronic competition,” Sutton added.

Antitrust irony
“Postage costs have escalated sharply for decades, but particularly in the last decade. It is ironic that one government agency (the DOJ) is chartered to make sure there is no possibility of 'unilateral reductions' or 'coordinated effects' in the coated paper business, when the vastly more serious cost problem for print customers is an incredibly inefficient government-sponsored monopoly.”

The bulk of coated paper purchased in the U.S. ends up in the U.S. Postal System in the form of catalogs, magazines, direct-mail pieces, etc. But Sutton is only half right: Yes, rising postage rates are suppressing demand for such items.

But what really hurts is that customers are making strategic decisions knowing that USPS’s future is in the hands of a deadlocked Congress for which "postal-reform legislation" means trying to repeal the laws of supply and demand.

Related articles:

• Verso-NewPage Deal Will Face Antitrust Hurdles, Analyst Predicts 
• UPS Praises Postal Service’s Improvements, But Not Its Rate Hike 
• Affordable Postage A Key To Printing Industry’s Future, Quadracci Says

USPS May Delay Next Price Increase

The U.S. Postal Service is thinking about forgoing its usual January price increase next year.

It’s not that postal officials have suddenly been afflicted with a case of generosity after jacking up most postal rates by more than 5% earlier this year. They’re merely preparing for what happens when (or, rather, if) the temporary 4.3% “exigent” portion of the recent rate increase expires.

USPS has gone to court in hopes of making the exigent increase permanent. But if that effort fails, the surcharge will expire after bringing additional postal revenue of $3.2 billion, which will take an estimated 18 months. Postal officials apparently want to avoid across-the-board rate cuts when the exigent increase expires.

“The Postal Service could delay the next rate adjustment so as to coincide with the rescission of the exigent surcharge,” USPS noted in a filing yesterday with the Postal Regulatory Commission.

“If the available percentage of rate authority attributable to inflation were 4.3 percent or greater, then the surcharge could simply be absorbed as part of the scheduled rate change." In other words, USPS could remove the exigent rate increase without actually changing the rates, by simultaneously imposing a normal (inflation-capped) rate increase.

At current inflation rates, the Postal Service’s authority to implement a normal rate increase would be capped not much above 2% when the exigent increase is slated to expire in mid-2015.

“Even if inflation were less than 4.3 percent, the Postal Service could . . . fold in the exigent surcharge into the basic rate structure of some products, while adjusting the prices of other products so as to come out at the cap.” In other words, some products could see no change in rates while others would get a decrease.

USPS’s Board of Governors could pursue other scenarios as well, the filing noted.

“The Governors of the Postal Service could decide to proceed with a January price adjustment for one class of mail — say, Periodicals — while delaying it for other classes.” USPS has been eager to impose additional price increases on magazines and newspapers because it claims to be losing money on the Periodicals class. Apparently, the recent unprecedented quarterly decrease of 8% in Periodicals volume wasn’t big enough for postal officials.

Related articles:

• Why the Exigent Postal Rate Increase Will Backfire
• How USPS Is Like an Airline, and Why That Matters
• Are Printed Magazines Growing or Shrinking? Yes
• Postal Service Dragging Its Feet on Fixing Periodicals