10 Ways E-Commerce Is Reshaping the USPS

The E-commerce Revolution is reverberating throughout the U.S. Postal Service, but not in the destructive manner of other digital disruptions like email, online news, and electronic bill payment.

Largely, if not solely, because of online merchants, the agency’s “Shipping and Package” revenue is growing at a 10%-plus annual rate – no doubt a surprise to the digerati who for years have been predicting that the USPS would wither away into obsolescence.

One expert estimates Amazon now turns to the USPS to ship 40% of its U.S. sales, and that doesn’t even include packages that are handled by FedEx and UPS and then turned over to the Postal Service for final delivery.

The rapid growth and favorable prospects for such products as Priority Mail and Parcel Select are bringing about extensive changes to the agency’s operations, plans, and even how it thinks about itself.

Here are some of the ways the E-Commerce Revolution has already changed the U.S. Postal Service:

1) Endangered no more: “Postal worker” still appears near the top of nearly everyone’s list of occupations most likely to go the way of buggy-whip makers, but the lists are out of date. In response to declining mail volumes, the Postal Service endured year after year of downsizing, including 155,000 workers from 2007 to 2012. But the surge in e-commerce deliveries has derailed plans for further cuts, keeping employment levels steady the past three years.

2) Newbies: During the downsizing years, new hires were a rarity, but these days a retiring worker usually has to be replaced, typically by a non-career worker. The USPS’s hiring rate has tripled and its workhours devoted to training have doubled in the past four years. The agency has struggled to recruit new workers and bring them up to speed, acknowledging that the newbies are leading to more mis-delivered mail and on-the-job injuries.

3) Parcel-only routes: I haven’t seen any official statistics on the subject, but anecdotes indicate the USPS is delivering more parcels-only routes rather than the usual approach of having the same letter carrier deliver parcels, letters, and flat mail to the same addresses. One reason is that the agency’s aging fleet of LLV delivery vehicles is not designed for today’s heavy mix of parcels.

4) Renting vehicles: Another sign that the postal delivery fleet is overloaded: The Postal Service is in the process of lining up minivans and cargo vans that are “up to 2 tons capacity for delivery of packages and to fill in for vehicles out of service.” Exact numbers apparently have not been determined, but “during the holiday season one can anticipate that a single location may have a demand level of 50 to 100 vehicles.”

Concept for wifi-enabled cluster mailbox

5) Mailboxes: The USPS recently revised its standards for new residential mailboxes, shifting to a larger size that can accommodate more packages. It’s also trying out new designs for cluster boxes that can handle package deliveries, including ones that are wifi enabled. (In the near future, maybe your mailbox will send you a text saying “You’ve got mail – and a package too!”)

6) Financial strength: The headlines still say the Postal Service is losing money. But take away the Congressional accounting gimmicks and the agency has gone from the verge of insolvency to better-than-breakeven status in recent quarters, with growth in the Parcel Select and Priority Mail products playing a major role.

7) New delivery vehicles: With its stronger cash flow, the Postal Service has been able to accelerate the much-needed replacement of its aging delivery fleet. The new vehicles will have more space devoted to the growing flood of packages from Amazon, eBay, and other online sellers.

8) Non-mail: In the past year or so, letter carriers have been delivering an increasing variety of items that bypassed the usual postal network – such as groceries, cut flowers, fresh seafood, and bottled water. The volumes are generally small and limited to a few test markets, but the trend is toward letter carriers delivering more items that don’t have a stamp, meter mark, or postage label. 

9) Less focus on letters and flat mail: Mailers grumble that postal executives talk and think about nothing but packages these days, even though letters and other boring-ass traditional mail still bring in three-fourths of the USPS’s revenue. They say it’s no coincidence that First-Class Mail delivery has suffered – or that the most recent USPS annual report shows 14 photos of packages and only one that (barely) shows letters. 

10) Sunday: Just five years ago, postal officials were clamoring to shut down all weekend deliveries, though they eventually amended the proposal so that Saturday delivery of parcels would continue. But now Postal Service LLVs are a common site on Sunday in scores of cities, as 7-days-a-week delivery for Amazon has swept across the country since a market test early last year. And postal officials are talking about providing Sunday service for other merchants as well.

Related articles: 

• USPS Struggles With Wave of New Hires   
• Yo, Mailman, Bring Me a Flounder and a Dozen Roses
• New Postal Hires Mean More 'Return To Sender' Mail
• USPS Employment Levels Have Stabilized

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

Is the Postal Service Primed for Amazon Prime Day?

Next Wednesday is Amazon Prime Day, a huge promotion that one postal expert predicts will overwhelm the U.S. Postal Service.

Amazon is celebrating its 20th anniversary on July 15 with a one-day online shopping event that will offer “more deals than Black Friday” to members of Amazon Prime, including those who sign up for a free 30-day trial membership.

“It will be interesting to see how USPS handles what is sure to be a major onslaught of Amazon package deliveries, with Amazon Prime two day shipping after the one day sale,” writes Lisa Bowes of Intelisent, a company that advises direct mailers. “Will Prime Day impact delivery for other classes of mail? My guess is – probably so…”

A look at the numbers indicates she is correct – that the Postal Service will struggle to handle the surge of Amazon packages without hurting delivery of other types of mail, even with massive overtime.

In a filing this week with the Postal Regulatory Commission, Amazon said it had 15 sortation centers at the end of 2014, with more on the way, that each prepare “tens of thousands” of packages per day to be handed off to the USPS for final delivery. That indicates that USPS delivers several hundred thousand “Parcel Select” packages to Amazon customers on a typical day. 

The e-commerce giant uses a variety of package-delivery services, but clearly the Postal Service is the favorite because of its ability to deliver to residential customers seven days a week at relatively low cost. Amazon has built an extensive logistics network that bypasses most of the Postal Service’s own network and delivers packages early every morning directly to the USPS’s destination delivery units (DDUs), where letter carriers pick up mail to be delivered later that day.

Membership: 30 million-plus and growing
An RBC Capital analyst estimated 10 months ago that Amazon had 30 to 40 million Prime members in the U.S. The numbers have probably been growing since then, and Prime Day seems likely to boost the membership roster.

Suppose that about 20% of existing U.S. Prime members take advantage of Prime Day and are joined by another 5 million who get a trial membership to take advantage of the deals. And suppose each Prime Day participant orders an average of two items, with half of them destined for “last-mile delivery” by the Postal Service.

That would mean letter carriers would handle 12 million packages, roughly 20 times their normal Amazon volume and more than double their normal daily volume for all Parcel Select packages. (That 12 million number is what we statistical experts call a SWAG, a Sophisticated Wild-Ass Guess. The actual numbers may be much higher or much lower, but with some reasonable – to me – assumptions, you can get a ballpark ideal of how Prime Day might affect postal operations.)

Amazon will have its own logistical challenges but also has opportunities to ease the pain. If the items likely to be hot sellers are spread throughout its network of distribution centers, it can probably hand off many of them to the Postal Service on Thursday, the day after Prime Day, rather than hitting the agency with one big wave on Friday the 17th.

It can also pull other levers, such as making exceptions to the two-day guarantee for certain items, especially those ordered late on Prime Day. And it can highlight deals on digital downloads (e.g. movies, music, e-books) instead of those requiring physical delivery.

The Postal Service has limited ability to handle a huge one-day surge, especially at what is usually a slow time of year when many career employees are on vacation and there are fewer temporary and part-time workers than during the Christmas rush.

Amazon Prime Day and its aftermath may be a challenging test of the Postal Service’s efforts to play in the e-commerce big leagues while still providing traditional mail delivery.

Related articles:

• Why Letter Carriers Are Not an Endangered Species
• Third Bush on the Right, Please: USPS Grocery Deliveries Would Need Lots of TLC from Carriers
• Frenemies: The Love-Hate Relationship Between UPS and the Postal Service Blossoms