Standard Mail Flats: Ending the Controversy Without Fixing the Problem

The long-standing controversy over the U.S. Postal Service’s money-losing “Standard Flats” mail is apparently being tamped down in true Washington fashion – not by raising prices, cutting costs, or solving a problem, but by changing a definition.

Flat mail that was sorted on an FSS machine.

By USPS accounting, Standard Flats have been losing money for years, leading to charges that the agency is unfairly subsidizing certain mailers. Last year, the USPS supposedly spent more than 49 cents while earning barely 40 cents on the sub-class’s average mail piece, partly because of a suspiciously large 9% increase in per-piece costs.

But a few days ago, postal officials told the Postal Regulatory Commission that the mail-processing portion of Standard Flats costs will decline by nearly 4 cents because of new requirements regarding mail that is sorted by the Flats Sequencing System.

“Mail destinating in FSS zones . . . that had previously qualified for Standard Mail Carrier Route rates migrated to FSS rates in the Standard Mail Flats product,” the USPS explained. Translation: What had been called Standard Flats hasn’t become more efficient; it’s just that the definition of Standard Flats has been broadened to include lower-cost mail that is sorted on the huge FSS machines.

Because of the FSS change, “roughly 20 percent of Standard Mail Carrier Route flats shifted into the Standard Mail Flats product,” the USPS wrote. “The migrated mail would tend to have different cost causing characteristics than the existing Standard Mail Flats, as the migrated Standard Mail Carrier Route mail tends to come from higher density mailings with more finely presorted containers.”

Undercharging and overcharging
The mail that “migrated” from the highly profitable Standard Mail Carrier Route sub-class, which now constitutes perhaps a quarter of Standard Flats, is also likely to have lower delivery costs than traditional Standard Flats. And, given the Postal Service’s tendency to overcharge for low-cost mail (such as pieces that are sorted into carrier-route bundles) and undercharge for high-cost mail, the FSS pieces are likely to be profitable for the USPS and therefore to help Standard Flats profitability.

Coupled with the USPS-PRC agreement that Standard Flats undergo higher-than-inflation rate increases the next couple of years, Standard Flats could be on its way to breakeven status.

A note of explanation is in order for neophytes who expect postal rates to be logical: You might assume that “Standard Mail Flats” means all advertising or marketing mail that is too large to be an envelope too flat to be a parcel – such as catalogs, flyers, and non-subscriber publications. But it actually is only the portion of such mail that isn’t sorted into carrier-route bundles, which require a minimum of 10 pieces per bundle.

A typical Standard Class mailing of flat pieces contains a mix of both carrier-route and non-carrier-route pieces. So the references to “subsidies” are off base. The real issue is that the same mailers are paying too much for carrier-route mail and not enough for non-carrier-route, non-FSS mail.

Changing the definition of Standard Flats does nothing to solve this fundamental problem. In fact, by bringing Standard Flats closer to breakeven, it will reduce pressure on the Postal Service to make the needed adjustments in postal rates.

Both mailers and the Postal Service would benefit if postal rates provided greater incentives for Standard mailers to shift more flat-shaped mail into carrier-route bundles, which can be accomplished via co-mail, address-list management, add-a-name, and other techniques.

Related articles:

Why Offer 30% Discounts on a Money-Losing Product? 

A Decade of Postal Mismanagement Is Costing Publishers and Catalogs 

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

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.

Acquisitions
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:

• A Transformative Separation: Jim Hamilton of InfoTrends provides details on Donnelley's plan to split into three companies.  
• Rival Print Giants Donnelley and Quad Not Looking To Get Hitched 
• R.R. Donnelley Ready To Deliver When the Postal Service Doesn't