Sunday, March 11, 2018

Game Over: Postage Rate Hikes Would Shut Down ESPN Magazine

A plan to increase publishers' postage rates drastically over the next five years would cause ESPN The Magazine to cease publication, an ESPN official indicated Friday.

If the Postal Regulatory Commission follows through with its plan "to increase our postage rates 40% over the next 5 years then ESPN will not produce a paper Periodical mailed through the USPS," Dennis Farley, the magazine's distribution director, said in a statement filed with the PRC.

"The content will be delivered via the many other means we now use to deliver our content," Farley added, in emphasizing that ESPN would continue as a popular cable network and web site.

In theory, Farley's statement left open the possibility of using other means to deliver the magazine to its 2 million paying subscribers. But that "other means" doesn't exist for a printed magazine, and digital magazines have mostly failed to catch on with consumers.

The PRC, claiming it has the power to override the inflation-based cap on most postage rates, put forth a plan in December to bail out the U.S. Postal Service with a series of rate increases. The Periodicals class, on which the USPS supposedly loses money, would be hit especially hard.

More than 100 organizations have filed comments with the PRC opposing the plan. Among those was the nation's largest magazine publisher, Meredith Corporation, which recently projected that the rate hikes would force it to stop publishing some titles and reduce the number of magazines it mails by 32%.

Ironically, even under the Postal Service's questionable accounting, ESPN The Magazine is probably a profitable customer for the USPS. The fortnightly is dropshipped entirely on pallets to 175 postal facilities, Farley said, with 83% of the copies in carrier-route bundles.

The Postal Service does well with such efficient mailers while tending to undercharge inefficient Periodicals mailers.

Friday, March 2, 2018

Meredith Warns PRC of Massive Magazine Cutbacks

A plan to jack up postal rates over the next five years would force the nation’s largest magazine publisher to slash its print offerings, according to the company’s CEO.

Meredith Corporation would “pursue magazine closures, circulation cuts, issue frequency reductions, conversions to digital only formats and alternative delivery for some magazine subscription copies,” Tom Harty, the company’s president and Chief Executive Officer, wrote in comments filed Wednesday with the Postal Regulatory Commission.

32% fewer magazines
“We conservatively estimate that the PRC’s proposed rate structure will result in a 32% reduction in the number of periodical pieces mailed by Meredith (a loss of approximately 310 million pieces annually),” Harty wrote. “At this level of volume decline, the Postal Service will receive less revenue, not more, from Meredith than it does under the current CPI [Consumer Price Index] cap system.”

He said the company spent nearly $322 million on postage last year. (He didn’t clarify whether that number included last year’s postage bill for Time Inc., which Meredith purchased a month ago.)

The PRC acknowledges that its package of proposals could raise Periodicals postage rates by more than 40% over the next five years. And that's assuming the inflation rate remains at 2%.

Meredith's corporate headquarters
Meredith is among more than 150 organizations that have submitted comments, mostly unfavorable, about the proposal. A variety of mail-dependent businesses and non-profits are challenging the PRC’s claim that it can enact the rate hikes without Congressional approval.

And the move to bail out the Postal Service with rate hikes is also unnecessary, some have noted. The billions of dollars the agency is supposedly losing every year are a figment of inept government accounting procedures. A recent analysis noted that the USPS closed out Fiscal Year 2017 with “$10.5 billion in cash and cash equivalents, more than it has possessed in the last 15 years.”

Of each dollar Meredith spends on producing and distributing magazines, 40 cents goes to the USPS – up from 24 cents in 2006, Harty said. And that’s “despite ongoing presort and drop ship optimization by Meredith” that should have reduced the costs of delivering those magazines.

Shooting itself in the foot
Harty also pointed out that Postal Service mismanagement has hampered efforts to make Periodicals mail more efficient. The USPS, for example, keeps decreasing the incentive to place copies into carrier-route bundles even though doing so significantly reduces the agency’s mail-handling costs. With better incentives, he said, publishers would do more to reduce the Postal Service’s costs via co-mailing and other measures.

He also noted that the Flats Sequencing System, which was supposed to reduce the Postal Service’s costs of delivering flat mail, has been an abject failure – and is getting worse.

“The total cost processing and delivery cost for an FSS flat exceeded that of a Carrier Route flat by 14.7 cents/piece in FY2015, 16.8 cents/piece in FY2016, and 19.9 cents/piece in FY2017,” Harty said. “The PRC’s proposal . . . will do nothing to incent the Postal Service to fix (or abandon) the FSS debacle.”

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Sunday, February 18, 2018

Boondoggle: The FSS Goes from Bad to Worse

The USPS's recently released annual FSS Scorecard

The U.S. Postal Service’s money-losing Flats Sequencing System is becoming even less productive and more problematic, according to the USPS’s own statistics.

In the past two years, the average number of mail pieces processed per machine hour has decreased by 8%, and the proportion of “mail pieces at risk” (such as copies that are jammed in the machinery) has risen by 8%, according to information the USPS file recently. (See pages 2-4 of this PDF containing responses to Postal Regulatory Commission questions.)

Meanwhile, the proportion of FSS-zone flats that get fully sorted by the football-field-sized machines has declined nearly 10%. That means that nearly half of FSS flats end up being processed on an automated flat sorting machine (AFSM) and/or sorted manually.

The USPS spends 40% more to deliver flat mail that is addressed to FSS zones than to non-FSS zones (which use less automated methods), an expert’s study concluded last year. That indicates that the system wastes several hundred million dollars annually – not counting the initial $1.3 billion purchase price of the 100 machines.

But postal officials have resisted calls to scrap or rethink the FSS. A year ago, the USPS said it is still learning how to optimize the machines, stating that the technology “is in its relative infancy.” But, clearly, this baby is failing to thrive.

Instead of developing a Plan B for flat mail, postal officials and the PRC are pushing for Postal Service bailouts that in essence would force mailers of catalogs, magazines, and other flat mail to cover the FSS’s added costs. Dead Tree Edition has dubbed that the Stupidity Tax -- making mailers pay, in the form of higher postal rates, for the USPS's stupidity and stubbornness in moving forward with its FSS investment despite numerous red flags.

The PRC’s tentative plan, for example, would punish Periodicals and non-carrier-route Standard flats – because the USPS allegedly loses money on them – with five years of required rate hikes that could easily total more than 40%.

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Monday, January 1, 2018

Trump Is Wrong, Mostly, About Amazon and USPS

Low rates don't mean unfair rates. But do Amazon deliveries create hidden costs for the USPS?

President Trump was off base Friday when he implied that Amazon has a sweetheart deal with the U.S. Postal Service.

But for reasons unrelated to Trump's' charges, it may be time for the USPS to rethink the prices it charges Amazon and perhaps for all package deliveries. In fact, there’s evidence the Postal Service is already doing that.

While containing no outright falsehoods, Trump’s tweet is a mix of truth and debatable claims.

Let’s take apart his claims:

• The USPS is “losing many billions of dollars a year”: Officially, that’s true, but only because the Postal Service is indirectly subsidizing the federal government via prepaid retiree health benefits and by paying more than its share of combined federal/USPS pension costs. Absent those accounting gimmicks, the Postal Service has operated at about breakeven the past few years.

• The USPS “is charging Amazon and others so little to deliver their packages”: True, but it's a non-issue. The USPS is generally able to charges the lowest rates for residential parcel deliveries it's the low-cost provider.

• “Making Amazon richer”: The Postal Service’s moves to gain a larger share of the residential package market have definitely benefited Amazon – and plenty of others who ship packages. Competition tends to do that. It's called capitalism.

• The Amazon deal is making the USPS “dumber.” Not likely. The USPS can learn from Amazon’s sophisticated approach to logistics.

• The Amazon deal is making the USPS “poorer.” Not according to the Postal Regulatory Commission, which vets package-delivery rates, including those negotiated privately by the likes of Amazon, to ensure they are profitable for the Postal Service.

Trump isn’t the first to question the low postage rates Amazon pays. Various commentators, special-interest groups, and others have raised the issue from time to time.

Challenges to the Amazon deal fall into three categories: the “sweetheart deal” argument, the “unfair competition” argument, and our own Dead Tree Edition observations.

The “sweetheart deal” argument
Those who claim Amazon negotiated too sweet a deal with the Postal Service naively point to estimates that its postage rates are well below those paid by mom-and-pop shippers. A Wall Street Journal op-ed written by the head of “a money-management firm that owns FedEx common stock” (Hmm, any bias there?) typifies the muddled thinking:

“The U.S. Postal Service delivers the company’s boxes well below its own costs,” wrote Josh Sandbulte, who estimated that the USPS handles about two-thirds of Amazon’s U.S. deliveries. “Select high-volume shippers are able to drop off presorted packages at the local Postal Service depot for “last mile” delivery at cut-rate prices. With high volumes and warehouses near the local depots, Amazon enjoys low rates unavailable to its competitors.”

In other words, Amazon goes to great expense to minimize the USPS’s costs of delivering Amazon packages; in return, Amazon pays lower postage rates. Such “worksharing” discounts are a standard, and quite logical, part of most postage rates: The more you do to reduce the Postal Service’s costs – via sorting, dropshipping, efficient packaging, etc. – the lower your postage bill.

Amazon presented the chart below to the PRC early this year in defense of its low rates, saying it “has established a transportation and distribution network of more than 25 sort centers and more than 70 fulfillment center warehouses. This network enables Amazon to inject parcels at Postal Service Destination Delivery Units (“DDUs”) already presorted for delivery to the customer.”

“This arrangement," Amazon says, benefits the Postal Service by letting it make more efficient use of its delivery facilities, equipment and personnel while avoiding the costs of building additional capacity in the Postal Service’s upstream network.”

The “unfair competition” argument

FedEx itself, along with fellow USPS competitor United Parcel Service, has a more sophisticated argument – that parcel shippers aren’t paying their fair share of the Postal Service’s costs.

Imagine that a letter carrier delivers four pieces of mail and one Amazon package to a particular address. The “fair-share” camp says that at least 20% of the labor, fuel, and other costs required to make that delivery should be assigned to the package.

But the USPS only looks at the incremental costs of delivering packages and other “competitive” products. For example, the labor and fuel required to drive to the mailbox are not factored into the cost of (or price for) delivering the package because those costs would exist even if the carrier were only delivering the letters.

The result, say USPS’s competitors, is that the Postal Service undercharges package shippers while overcharging those who send letters and other traditional mail. But the PRC sides with the USPS.

Dead Tree Edition's observations
The USPS-PRC approach to pricing isn’t just consistent with the law, it's good business practice.When evaluating a product, the question is whether the organization would be more profitable without the product than with it. That means ignoring any costs that would remain if the product were discontinued.

But the USPS-PRC approach has a couple of shortcomings.

Because its tiny 30-year-old delivery vehicles were designed primarily with letters in mind, the Postal Service is increasingly relying on parcels-only delivery routes to cope with the e-commerce boom. That’s driving up the average cost of delivering a parcel.

But setting postal rates is a bit like driving while looking in a rear-view mirror: Projections are based on elaborate analyses of historical data – in this case of a time when most parcel deliveries could easily be piggybacked onto regular mail routes. It’s also unlikely that the Postal Service’s current cost models fully reflect the increasing amount of real estate devoted to sorting and handling parcels.

And it’s well-nigh impossible for those models to factor in opportunity costs.

The USPS’s deals with Amazon have been based on the premise that most of the additional deliveries would be done by city carrier assistants (CCAs), whose compensation is less than half that of career letter carriers. The labor contract with the National Association of Letter Carriers caps the number of CCAs the USPS can hire, while allowing additional ones to be brought on for non-traditional ventures like the Amazon deals.

But, contrary to its expectations, the Postal Service has struggled to hire, train, and retain the full complement of CCAs. The parcel boom has also meant plenty of work – and overtime -- for CCAs and career carriers alike.

Under these conditions, the Amazon deal is sucking up a limited resource: inexpensive (about $17/hour) CCA labor. That deprives the Postal Service of the cost-reducing opportunity to use more straight-time CCA hours on non-Amazon deliveries.

Here’s a hint that the Postal Service may be wising up to such hidden costs: A small experimental venture that had CCAs delivering groceries for Amazon Fresh apparently collapsed recently. One reason, Recode reports, is that “Amazon balked at new delivery rates USPS was going to charge the company.”
"The bottom line is whether the USPS would be better off without Amazon than with it."
Still, Amazon pays the U.S. Postal Service billions of dollars annually – probably well over 10% of the agency’s total revenue. The bottom-line question is whether the Postal Service would be better off without the current Amazon deal than with it. The answer is neither the clear "no" that Trump and other critics would have us believe, nor the clear "yes" indicated by the PRC’s rulings.

In fact, I doubt anyone can provide a definitive answer.

Related Dead Tree Edition articles include: