Postal Reform/Exigent Increase: Is the Mail Still Profitable?

In the past two years, when the U.S. Postal Service (USPS) has headlined the news, it either has to do with a missed retiree health benefits prepayment or a quarterly/annual report containing loss figures that would make any ongoing concern (save, perhaps, the federal government) blush. Mr. ZIP must be a distant relative to the Kardashians, because he's been getting a lot of negative and unwanted attention, making the American public probably wish that he'd go away.

The USPS is broken, and there are so many selfish motives permeating the committee rooms that have been tasked with devising a going-forward blueprint. Although the last postal reform effort is only seven years old, it already seems antiquated and unsustainable (the understatement of the century). And the odds of Congress enacting an encore during 2014 are not favorable.

Take one of the more recent bills that is being pushed around Capitol Hill. The Senate bill is S. 1486, the Postal Reform Act of 2013, and it currently enables the USPS to a) keep the exigent rate increase, instead of the current two-year schedule, and "bake" it into future mailing costs; b) increase the annual cap on prices from inflation (CPI) to inflation plus 1 percent; and c) wield power, via its governing board, by having the authority to veto rulings by regulators on rate increases. In other words, Mr. ZIP transforms into Mr. Monopoly...just without all the money of Rich Uncle Pennybags.

According to the Washington Post, S. 1486 also allows the USPS to restructure its aforementioned retiree health benefits payment plan and created a postal-only health plan within the Federal Employees Health Benefits program. Sen. Tammy Baldwin (D-WI) tried to come to the rescue of the printing and mailing interests in late January by introducing a plan to put the kibosh on higher postal rates, but ultimately failed. The bill passed out of committee, but still faces a long road and—given its current makeup—stiff opposition from the printing and mailing industries.

In the meantime, the hotly-contested surcharge on the CPI rate is still slated to last at least two years and will reportedly rake in $2.8 billion, money the USPS says it lost during the recession. Michael Murphy, president of St. Louis Park, MN-based Japs-Olson, notes the exigent rate increase represents a 6 percent increase in postage costs for direct mailers.

"I doubt there will be a corresponding increase in their direct mail marketing budgets," Murphy says of direct mailers. "This rate hike is a major increase in the total cost of direct marketing for our customers. They will not accept this increase as the cost of doing business. As we have seen in the past, our customers will respond by challenging the costs and effectiveness of direct mail as compared to their other options.

"We should assume that their mail lists are being further analyzed and optimized to account for the increase in delivery costs. This usually results in smaller mail lists. My fear for the industry is that mail volume will continue to decrease each time the USPS increases postage costs."

In fact, agrees Ken Garner—chief operating officer of the recently merged Association of Marketing Service Providers (AMSP)/National Association for Printing Leadership (NAPL)—any rate increase only accelerates the flight by marketers from the direct mail channel in search of another delivery vehicle, primarily a digital/Internet solution. What upsets Garner most is the widening gulf between the postal service and U.S. industry; he notes that a "bunker mentality" by USPS is preventing industry partners from providing input into solutions that can help maintain its viability.

Rather than reform, we have legal briefs being filed. "So you have the PRC (Postal Regulatory Commission) cutting the baby in half, trying to satisfy the postal service and postal customers, and not doing a good job on either side," Garner says.

"Now, you have the postal service heading to the appeals court in D.C., and you've got the mailing industry doing the same. Two partners are spending precious resources—money, time and energy—on something that, from my perspective, is ridiculous and represents resources that neither partner has to waste. We're engaged in litigation and it's very unfortunate."

Thus, the subject of maximizing postal discounts takes on even greater importance. The exigent rate increase approved by the PRC will have the toxic effect of reducing mail volume in 2014 and beyond. Joe Schick, director of postal affairs for Sussex, WI-based Quad/Graphics, has been told by a majority of the company's direct mail clients that they will be scaling back their 2014 programs, either through a reduction in the number of mailings, the quantity of pieces in each mailing, or via shifting volumes to other channels.

Unfortunately, Schick points out that the only new work share opportunity proposed in the 2014 price increase is for DFSS—FSS mail drop shipped at the FSS processing location. Not surprisingly, the proposed discounts are not nearly large enough to cover the costs incurred. That leaves service providers to milk the most that they can out of co-mailing, commingling and drop shipping. That feeds into Quad/Graphics' wheelhouse; the industry's No. 2 printer by sales co-mailed approximately five billion magazines, catalogs and direct marketing pieces, earning significant discounts from the USPS on behalf of its clients.

"Our company has invested significantly in its mail preparation and distribution capabilities to offset increasing postage costs, and to help clients successfully navigate the ever-changing postal environment," Schick states.

Though there is no silver bullet or panacea to offset the exigent increase, Schick believes now is the time for mailers to make sure they are taking advantage of all available tools to ensure a highly targeted mail list and a customized mailing plan.

"Our proprietary software analyzes all incoming mail files from across the entire network, optimizing mail distribution plans by pairing the right customers together," Schick points out. "We continually search for the precise mix of volume, in-home requirements, and end destinations to build a plan that maximizes postage and dropship savings for every customer, in every co-mail pool. We have spent more than three decades building the technology and the platform to generate every dime of savings possible, and that is what our customers need and expect the most right now."

Another challenge confronts mailers, and that is the USPS request for an advisory opinion on its load-leveling plan. Previously, mailers who qualify for a Destination Sectional Center Facility (DSCF) discounted rate could expect Monday delivery of mail accepted into these facilities by Thursday or Friday. If approved, Standard Mail accepted on Friday won't be delivered until Tuesday; a Saturday drop means a Wednesday delivery.

Forcing the mailers to change their schedules could result in missing out on co-mailing, commingling and drop shipping opportunities. It also hurts in the perception department.

"It also sends a signal to the mailing industry that if the USPS has trouble managing labor on a specific day, they will respond by reducing service," Schick stresses. "It also sends a message to Standard Mail that the USPS would rather not have to deliver it on Mondays...and, oh by the way, would love to eliminate delivering it on Saturdays, as well.

"Quad/Graphics processes and delivers our customers' mail according to their specifications. Our customers deliver mail to their clients on days that they see the highest response levels. Both Quad and its customers have adjusted staff and strategy to execute based on the mail recipients' needs."

In the end, Schick says it is paramount for printers and other service providers to ensure that clients are targeting the right consumer with the right message, and manage delivery at the right time to maximize response. As a media channel integrator, Quad/Graphics works with its clients to integrate print with other marketing channels, including e-mail and social media. All roads lead to the acquisition and retention of clients, along with promoting brand consistency.

Working Harder, Smarter

"It is about making mail work harder and smarter than in the past and, by doing so, increase the response from mail recipients, or the value of the response with targeted, timely and meaningful messaging," he adds. "Our clients not only benefit from our ideas, technology and capabilities, but also our single-source simplicity. We are also working with the postal service to develop a pricing strategy that will benefit the USPS and the mailing industry."

What the lateness of the PRC's decision to accept the exigent increase request by the USPS did was make it extremely difficult for direct marketers to regulate their marketing budgets, notes Mike Buttita, director of postal affairs for SG360º. He expects mail volume will be lighter in the first quarter before budgets are adjusted.

There are upsides. Buttita points out that the exigent portion of the increase (4.3 percent) comes with an expiration date, with recovery of $2.8 billion of financial losses within two years (with reform legislation a wild card variable). He also thinks the increase will fan the flames of urgency when it comes to reform.

"We can only hope that Washington can play nicely together with the USPS this year and produce measures to ensure a healthy postal service for many years to come," Buttita says. "The burden is not strictly on Congress to act. The USPS must continue to increase the value proposition of hard copy mail, like we see with postage discounts from programs for infusing traditional direct mail with technology. Having a more aggressive approach with NSAs (Negotiated Service Agreements) to ensure long-time commitment to mail can also encourage growth."

Buttita feels legislation could be enacted in 2014, but he warns that a "Band-Aid" approach in addressing how the USPS is allowed to operate can be detrimental. Flexibility and the ability to quickly respond to marketplace trends, he notes; taking inefficiency out of the system while maintaining timely universal delivery at a reasonable price makes for a difficult balance.

How does the Wheeling, IL-based direct mail printer enable its customers to leverage the greatest postal discounts from the mail stream? It entails being able to produce and manage impactful marketing programs, from inception through delivery, under one roof.

"This approach affords our customers the ability to eliminate virtually all outsourcing of different processes necessary to complete a direct mail program, thus eliminating the associated accessory charges," he says. "As it relates specifically to postage, it starts with hygenically good data—qualifying a list at the lowest achievable postage rates through advanced software and then re-evaluating the processed list for additional postage savings through in-comingle operations married with a logistics entry optimization program to provide the maximum postage savings. Although postage represents the lion's share of a direct mail budget, our savvy customers know that the execution and increased customer response rates determine the real value of the services provided by SG360º." PI