Thursday, January 24, 2019

USPS Proposal Could Spread Pain to Catalogs

Comail is working. But in Postal Land, no good deed goes unpunished.

Like lashing two water-tight boats to a sinking vessel.
The good news — for mailers, printers, and the U.S. Postal Service — is that flat Standard Mail is being sorted far more efficiently than it was just two years ago. 

The bad news is that the trend is prompting postal officials to consider a proposal that would almost certainly lead to higher-than-normal rate increases for efficiently mailed catalogs and other Standard flat mail.

Some postal experts fear the proposal would lead to reduced incentives for co-mailing, which even postal officials admit is the main reason that highly efficient – and profitable – “High Density Flats” volume has grown by 45% in the past two years.

More bad news: Postal officials can’t explain -- and don’t seem to be trying very hard to understand — why the Postal Service’s costs of handling most types of Standard flat mail have skyrocketed in the past year. That trend also threatens to cause higher rate increases even for efficient mailers.

Although the Postal Service is supposed to act like a business, this is a case of it operating like a bureaucracy where CYA trumps ROI.

Hall of mirrors

Let me walk you through the strange hall of mirrors where postal officials are ready to shoot themselves in the foot rather than celebrating, and building on, a successful tactic.

The Postal Regulatory Commission and legal challenges have pressured the Postal Service for years to do something about what is essentially a subsidy for the least-efficient flat Standard mail – the mail that does not meet the 10-piece minimum to create a carrier-route bundle. (Note: The USPS refers to such mail by the misleading moniker “Flats,” but for the sake of clarity Dead Tree Edition calls it “Non-Carrier-Route Flats.”)

The USPS has responded by imposing slightly higher rate increases for such mail than for most other Standard classifications. In Fiscal Year 2018, for example, revenue per piece rose less than 1% for the Standard class as a whole but was up 5.1% for Non-Carrier-Route Flats mail. But the cost per piece rose 13.4%, putting the category further into the red, with revenue covering only 68.65% of costs.

Got no explanation

In a recent report, postal officials speculated that, because of economies of scale, a 17.5% drop in volume for Non-Carrier-Route Flats during FY2018 caused the category’s costs to spike. (See pages 17-18 of this PDF.) But that simplistic theory doesn’t explain why the cost per piece for Standard Carrier-Route Flats rose even more, to 15.2%, when volume for that category dropped only 1.4%.

(Don't blame postal workers: The agency's average cost per labor hour has recently been increasing less than 4% annually.)

These unexplained cost increases have caused the cost coverage for Carrier-Route Flats to decline from 137.53% to 108.49% in just two years. Postal officials have not explained that dramatic trend, which could soon turn what was a highly profitable category for the USPS into a money loser.

“Based on feedback from industry representatives, which is supported by volume trends, flats volume has migrated from the Flats and Carrier Route products into High Density Flats because of comailing,” the USPS report said.

True. Better incentives have encouraged more comailing, a process that sorts a variety of mail pieces -- mostly catalogs and magazines -- into a single mailstream to take advantage of postal discounts. The work is typically done by printers, which are rewarded with a share of their customers' resulting postal savings.

High Density Flats are like Carrier-Route Flats on steroids, with a minimum of 125 pieces per carrier route. Achieving a significant proportion of such mega-bundles typically requires a mailing list – or a comailing run – with at least several million addresses.

It's working. Now let's screw it up.

The rapid growth of High Density Flats is good news for the Postal Service because of the category’s 131.20% cost coverage. That’s the kind of trend rate incentives are supposed to produce.

But postal officials are focusing on the phantom “problem” that the move to High Density Flats is allegedly causing: the reduced efficiency of Non-Carrier-Route Flats. The “solution” they are considering, they revealed recently, is to combine Non-Carrier-Route Flats, Carrier-Route Flats, and High Density Flats into a single category known as Non-Saturation Flats. (See pages 20-22 of this PDF.)

“In a way, the USPS is suggesting that if it lashes two water-tight boats to a sinking vessel it will save the sinking ship,” the Mailers Hub newsletter quipped this week.

No longer would postal officials be pressured to get Non-Carrier-Route Flats “above water,” which would require either massive (and, in some circles, unpopular) rate increases or massive cost reductions. This poorly sorted mail would become part of a larger category with more palatable cost coverage of 88%.

But two profitable categories – High Density Flats and Carrier-Route Flats – would also join that slightly unprofitable new category. Based on the Postal Service’s history, we know what will come next: Postal officials will spread the pain around, jacking up prices across the category, even on the types of mail that would be considered highly profitable if not for this bureaucratic finagling.

(That already happens in the Periodicals class, where efficient and inefficient mail are in a single category in which efficiently mailed publications subsidize the inefficient ones.)

Increasing the price spread between efficient and inefficient mail has prodded more mailers to participate in comail and more investment by printers in enhancing the process. By the same token, freezing or shrinking the price spread by having efficient mail subsidize inefficient will curb the favorable trend.

Iceberg off the starboard bow

What really galls the postal experts I’ve spoken with recently is that the Non-Saturation Flats proposal looks like an attempt to paper over some very real problems – what one postal expert called “re-arranging the chairs on the Titanic deck” -- instead of understanding and addressing them.

Postal officials don’t understand the cost trends with flat Standard mail, don’t know whether their various efforts to improve the handling of flat mail are working, and can’t even say when they will know.

Their explanation of the cost increases for Non-Carrier-Route Flats are simplistic and probably off base. (Note to the USPS: Here’s a hint in your own data: The proportion of Non-Carrier-Route Flats dropshipped to the SCF level has declined from 64.1% to 51.7% in just two years. If you actually dig into the category’s data, I’ll bet you’ll find much less relatively inexpensive mail, such as dropshipped 5-digit bundles, and a higher proportion of poorly sorted, non-dropship mail.)

Postal officials’ explanation of the even larger cost spike for Carrier-Route Flats is non-existent. Here’s why: A big culprit is probably the money-eating Flats Sequencing System, but postal officials won’t admit that or even discuss trying to unwind the FSS fiasco. Doing so would force them to shoulder the blame for rushing into the multi-billion-dollar investment before it was proven to be workable. The unofficial motto at L’Enfant Plaza is “Never recalibrate, just obfuscate.”

(Another note to postal officials: I dare you to publish a clear analysis showing the cost-per-piece of handling and delivering FSS mail – including the stuff the machines aren’t able to sort – with the costs of carrier-route and 5-digit-bundle mail. No, I take that back. I double-dare you.)

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