Thursday, July 31, 2014

Frenemies: The Love-Hate Relationship Between UPS and the Postal Service Blossoms

The rise of online purchasing is boosting the partnership between United Parcel Service and the U.S. Postal Service – and fueling their rivalry as well.

Volume for UPS SurePost – lightweight parcels that are typically handed over to the Postal Service for final delivery to residential addresses – were up more than 60% in the past year, UPS announced this week.

UPS also revealed a coup of sorts: “During the quarter, a retail customer upgraded its catalog distribution to UPS Ground from the U.S. mail, contributing to our ground growth,” CFO Kurt Koehn said during the company’s quarterly earnings call. He didn’t name names, but only a large customer could cause meaningful growth in the company’s $6.2 billion quarterly revenue for domestic ground shipments. (Update: Several readers pointed out that the customer was Restoration Hardware, which recently shipped 17-pound multi-catalog bundles via UPS.)

The big shipping company is also wary of the Postal Service trying to steal market share with its recent proposal to slash prices on some commercial parcel shipments. (See FedEx Cries Foul Over Postal Service Price Cuts for more on why USPS's competitors are trying to block the proposal.)

Sharing customers
“We work very closely with the post office,” said D. Scott Davis, UPS’s CEO. “We appreciate their universal service mandate where customers of theirs are customers of ours, but there is some concern as we go forward and how they price competitive products and there is some concern about cross-subsidization.”

Both UPS and FedEx contend the Postal Service has shifted too much of its cost burden to “market-dominant” mail classes like First Class and Standard, which enables it to keep package prices artificially low. The company, Davis said, will continue fighting that battle at the Postal Regulatory Commission, which will rule soon on USPS’s proposal to reduce many parcel rates by 30% and some by 55%.

“At the same time, we’ll go out and compete with the post office,” he added.

But the Post Office is also being urged to be more competitive with UPS.

“The Postal Service’s mix of packages generated a relatively low revenue per piece of $3.37,” the independent USPS Office of Inspector General wrote in a recent study. UPS and FedEx each earn more than $9 per package.

“While the Postal Service has long served low revenue market segments such as lightweight packages very well, customer demand has created opportunities to offer value-added services and enter the higher revenue per piece segments,” the report said.

“The Postal Service cannot afford to be the provider of last-mile delivery only when the revenue is low and the cost is high. Such ‘cream skimming’ will harm the Postal Service’s package revenue and its ability to fund universal service.”

Saturday, July 19, 2014

FedEx Cries Foul Over Postal Service Price Cuts

Poor FedEx.

The market for delivering items purchased on the Web is growing, but the U.S. Postal Service isn’t playing fair, FedEx complained this week. The big delivery company is trying to stop USPS from cutting prices to deliver certain types of packages.

For the record, FedEx stock is worth north of $43 billion. USPS is consistently unprofitable and basically insolvent.

“What USPS is proposing is an aggressive push to gain market share in the fast-growing business of e-commerce distribution services,” FedEx told the Postal Regulatory Commission. “To this end, USPS is proposing reductions of 30 to 55 percent in prices for commercial shippers in the weight categories most used by e-commerce. Price reductions of such magnitude will substantially affect competing service providers and the market as a whole.”

Consumers would pay more, businesses less
The Postal Service wants to restructure Priority Mail rates. Prices would increase for retail customers – individuals who drop off packages at a post office counter – by an average of 1.7%. But some prices for commercial shipments would decrease, a Postal Service attempt to attract more ground shipments weighing 6 to 20 pounds.

Postal regulations are supposed to ensure “that USPS does not derive an unfair advantage from legal or governmental privileges when it competes with private sector companies,” FedEx wrote.

It asked the PRC to make sure “that prices for USPS’s package services correctly reflect costs, so that the ‘playing field’ for e-commerce distribution services remains as a level as possible.”

$2 billion in profit vs. a $5 billion loss
“Packages delivered by USPS benefit from an exclusive right of access to mailboxes and clusterboxes, a postal operator privilege that does not exist anywhere else in the world,” FedEx wrote. The postal monopoly also gives USPS “economies of scope” that bear some of the costs of package delivery.

Translation: Because USPS has to deliver to every home six days a week, it can deliver a package to that home cheaper than FedEx, which only delivers to that home when it receives enough profit to do so. Maybe that’s why FedEx earned more than $2 billion in profit last year while USPS lost nearly $5 billion.

Like UPS, FedEx complained that secrecy surrounding USPS’s “Competitive Products” makes it impossible to prove that USPS’s proposal is contrary to law.

“One-time price cuts of as much as 55% raise serious questions that the mailers in the mid-weight categories are getting subsidized by someone – what FedEx cannot tell the Commission for sure is, by whom,” FedEx wrote. “Largely left behind in this price-cutting frenzy is the ordinary retail customer who brings his package to the local counter.”

UPS and FedEx also agree that USPS’s Competitive Products should bear more than 5.5% of the agency’s institutional costs now that they represent nearly one-fifth of the agency’s revenue.

Related articles:

Thursday, July 17, 2014

National Geographic Comes Full Circle on Recycled Paper

In a victory for the environment, or maybe for marketing, two environmental groups announced today that the National Geographic Society will begin using recycled paper in its magazines.

More than two years after the society began discussions with an environmental group that targeted it with a "Practice What You Print" campaign, it has committed to using paper containing a whopping 5% post-recycled consumer content. Some magazine papers contain more than 90% recycled content.

The switch by the society's National Geographic magazine a few years ago from coated freesheet to coated ground paper probably had more impact on "saving trees" because groundwood paper uses trees more efficiently.

But no one except an obscure blog called Dead Tree Edition paid any attention to that move. It's hard to rally the masses with a move that only a few paper geeks  understand. Everyone knows what "recycled" means.

The 5% may be just a first step, the announcement indicated. And it could have greater reverberations if it inspires -- or pressures -- other magazine publishers to try recycled paper. Only about 3% of U.S. magazines use recycled on a regular basis, according to the Green America Better Paper Project.

Here's a look at the events leading up to today's announcement, followed by today's press release from Green America and the National Resources Defense Council:
Here is today's press release:

Washington, DC – July 17, 2014 –In a major step forward for the use of recycled paper in the magazine industry, the National Geographic Society (NGS) has begun incorporating recycled fiber in all the pages of National Geographic Magazine, National Geographic Kids, and National Geographic Little Kids. The shift clearly demonstrates the viability of using recycled paper for high quality photographic reproduction. This expanded use of recycled paper comes as a result of close collaboration with Green America and the Natural Resources Defense Council (NRDC). 

For large publishers that have been slow to adopt recycled fiber for their publications, the latest move by National Geographic—one of the most widely read and admired publications in the world—sends an important signal to the industry. 

“The magazine that has showcased the natural wonders of the world for generations is now helping to preserve them in its very pages,” said Darby Hoover, NRDC senior resource specialist. “National Geographic’s world-renowned photography is unparalleled—if they can continue to captivate their audience in print by using recycled content, anyone can. By adding recycled fiber into their magazines, National Geographic is joining a growing movement that can help ensure the world’s forests can live on the pages of their magazine—instead of in them—for years to come.” 

“National Geographic’s recycled paper use is a tipping point for recycled paper in the magazine industry,” Green America Better Paper Project Director Frank Locantore said. “National Geographic takes its environmental responsibility seriously and their recent commitment to using recycled paper helps further lower their greenhouse gas emissions and energy use. If National Geographic Magazine, with over four million print copies each month, can take this important step to use recycled paper, all magazines can follow their example.” 

National Geographic is initially piloting magazine paper containing five percent postconsumer recycled fiber, and intends to continue testing the viability of papers with increased recycled content. This is an important first step, and the environmental groups have committed to working with National Geographic to increase recycled content in their magazines over time. 

“For National Geographic, our goal – and our challenge – is to balance our desires to utilize as high a percentage of recycled fiber as possible, maintain the highest quality and aesthetic standards, produce affordable products and minimize our impact on the environment,” said Stephen Hughes, National Geographic’s vice president for global sourcing. 

Environmental groups Green America and Natural Resources Defense Council have worked closely with NGS since 2011 to assess the impacts of NGS’ paper use and identify opportunities to reduce its environmental footprint. In 2013, Green America and NRDC joined with NGS on the most rigorous study to date of the benefits of using recycled fiber versus virgin fiber in magazine publications. Conducted by an independent third-party for NGS, the study found that recycled fiber is superior to virgin fiber in 14 out of 14 environmental categories, such as energy use and greenhouse gas emissions. Since then, the groups have been working together to develop a plan to incorporate recycled content into the pages of the NGS magazines. 

There are over 15,000 magazine titles in the United States, with only about three percent regularly using recycled paper, according to the Green America Better Paper Project. 

“The paper manufacturing playing field is dominated by the virgin fiber paper industry,” says Locantore. “That’s why National Geographic’s initial step to use postconsumer recycled content should help other publications understand that they can also begin using recycled paper while simultaneously building momentum to make recycled paper use the paradigm rather than the exception.”

Wednesday, July 9, 2014

Can USPS Deliver on the Promise of 3D Printing?

The imminent 3D printing revolution “might be a huge opportunity for the [U.S.] Postal Service," an in-depth study says. But, as usual with the USPS, where there are opportunities there are also caveats and hurdles.

First, let's dig through the study, which was released this week by the USPS Office of Inspector, to answer some basic questions about 3D printing and what it might mean for the Postal Service. Then we'll examine some of the challenges.

What is 3D printing? “At a very basic level, 3D printing is the production of physical objects from virtual representations,” the study notes. “This technology allows people to create physical objects out of digital designs — often building them one razor-thin layer at a time — and has the potential to democratize the means of production. Theoretically, anyone with a 3D printer can make virtually any object they can imagine and design, subject to some basic limitations.”

How is it being used? Best known for creating rapid prototypes and personalized knick-knacks, 3D printing is also producing replacement parts for jet engines, industrial tools, orthodontic devices, and even prosthetic limbs, says the report. It’s best suited for small, lightweight items that need to be customized or produced relatively quickly in small quantities.

So what's the big deal about 3DP? “A sweeping 3D printing revolution could radically change how some industries function, potentially transforming the notion of warehousing, removing some of the need for long-haul shipments, and bringing more manufacturing jobs back to the United States. In such a world, consumers might come to demand the customization enabled by 3D printing that they cannot get from today’s mass production techniques.” And even more important, for those of you who follow the latest business buzzwords, is that “3D printing has the potential to be amazingly disruptive.”

How big will 3D printing be? Despite some “unrealistic hype” about 3DP, the report cites a credible study projecting the industry will grow from $2.5 billion in 2013 revenue to more than $16 billion by 2018. And that may be just the beginning.

What does this mean for the USPS? “The Postal Service’s ubiquitous delivery network and its strength in handling lightweight goods” position it to benefit from the growth in purchases of 3D-printed products. “Other delivery firms often use the Postal Service for last-mile delivery. In fact, nearly two thirds of lightweight, commercial packages are delivered to their final destination by the Postal Service.” The most likely scenario is that 3DP will increase USPS’s commercial package volume by 18%, which would translate to $485 million annually based on FY2013 volumes, according to a consulting firm hired by the IG’s office.

Are there other revenue opportunities? The report envisions several. “The Postal Service could market itself as a logistics partner for 3D printing businesses located near Postal facilities, giving them a streamlined way to ship products quickly.” With “more than 60 million square feet of excess space nationwide, much of which is in mail processing centers,” the agency could lease space to such 3DP businesses as well. USPS could play a major role in the storing, shipping, and recycling of equipment and supplies for 3D printing. “The Postal Service could also help protect copyrighted or sensitive digital design files by providing a trusted online marketplace for transmission of designs.”

Could 3D printing help the Postal Service’s operations? USPS “could use 3D printers to create replacement parts for its vast fleet of aging delivery vehicles or its wide array of mail processing equipment. In some cases, the companies that originally designed the machines are no longer in business and are therefore unavailable to provide spare parts. This makes it costly and time-intensive for the Postal Service to fix the machines and it is likely that these repairs could be faster and cheaper with 3D printing.”

7 3D Printing Challenges for USPS
And now for the stumbling blocks that could stand in the way of a postal 3DP paradise:
  1. Delivery network: “The Postal Service’s benefit from 3D printing will be tied to the strength of its network. Weakening of the network — through reductions in important features like service frequency, number of delivery points, tracking and tracing services, or pick-up options — could result in the Postal Service forgoing new opportunities in 3D printing.” Pressed by declining demand and Congressional accounting gimmicks, USPS may be forced to cut back on the frequency and speed of delivery before 3D printing’s benefits can start kicking in.
  2. Delivery vehicles: “A 3D printing revolution could greatly exacerbate the need for redesigned, more parcel-ready vehicles,” the report says. But USPS’s aging fleet is hardly up to the task of handling current volumes. The agency is past due for replacing the majority of its 180,000-plus delivery vehicles, but cannot even start the process of doing that because it is basically insolvent.
  3. Sensitive materials: 3D printing typically involves spraying heated resins or powders through a nozzle, making it ill suited to producing some items, the report notes. “For example, a dashboard GPS mount printed with plastic can become soft or melt down entirely in a vehicle left in the hot sun.” So what will happen to 3D-printed items sitting for hours in a postal delivery vehicle with no air conditioning in 110-degree weather?
  4. In-home 3D: “Much of the buzz around 3D printing is based on the idea that people could one day use affordable, high quality in-home printers to make many, if not most, of the items they now purchase from retailers.” Though “improbable,” the report says, such a scenario “would be massively disruptive to the retail supply chain. It could lead to big cuts in brick-and-mortar and e-commerce sales, and a corresponding drop in the number of commercial packages shipped.”
  5. Mindset: Can a government agency that runs on rules, regulations and adversarial labor-management relations be nimble enough to thrive in a growing, unpredictable industry? After living hand-to-mouth for several years, can the Postal Service think in terms of investing, long-range planning, taking risks, and being willing to make mistakes? Can an agency that sees “penalties as a revenue stream” build the kind of business partnerships that may be necessary to carry out the Inspector General’s vision?
  6. Lobbying: If there’s profit to be made from providing real estate and logistics services to 3D printing, you can bet that private businesses will try to block “unfair” competition from the Postal Service.
  7. More lobbying: Perhaps USPS can make money from 3D printing in ways that private enterprise cannot – such as from deliveries to residential areas and acting as a trusted intermediary. But if 3D printing really starts disrupting major industries, you can bet that the likes of Walmart and ToysRUs will not sit by idly while a government agency aids and abets that disruption.
Other examples of regulators proposing new ventures for the U.S. Postal Service include: