Lost in the Mail

The U.S. Postal Service is on track to lose $23 billion a year for the next decade. Can reducing delivery to five days a week really save the system?

 

By Matthew Philips | Newsweek Web Exclusive
Mar 30, 2010

 

This year, the U.S. Postal Service will turn 235 years old. For most of its history, the USPS has not only delivered mail, but profits, too. Though not any more. In 2008, the agency began losing money. By the end of this fiscal year, it will have lost another $7 billion and will owe the government $13.8 billion. By 2020, the USPS will have lost an eye-popping $238 billion.

Today, the Postal Service went hat in hand to its regulator with a plan to save itself. It's a plan the agency spent nearly $5 billion developing. And the solution it has reached, to stop delivering mail on Saturday, is so simple, it's almost stupid. The Postal Service claims that by only delivering mail five days a week, it will save $3.5 billion a year. Its regulator, the Postal Regulatory Commission, thinks it'll be more like $1.9 billion. Either way, its peanuts considering the agency is projected to lose an average of $23 billion a year for the next decade.

The PRC will likely take six to nine months to crunch the numbers. If it approves the plan, the issue goes to Congress, which has been circling the growing fiscal crisis of the post office for nine years now, ever since the Government Accountability Office placed it on a "high-risk list." For the last several years, Postmaster General John Potter, who makes $845,000 a year and has struggled to bring the agency into the 21st century in his nine years on the job, has asked Congress for a number of fiscal fixes. In 2003, Congress reduced the Postal Service's pension costs by about $9 billion. In 2006, it relieved the agency of $27 billion in pension obligations to employees with military service. And last year, Congress cut the agency's annual retiree health benefits by $4 billion. With each fix came a promise of "fiscal solvency" from Potter, so to say that Congress is losing patience with the Postal Service is an understatement. Even if the House and Senate do pass the plan to cut Saturday delivery, it'll be a miracle if that happens before the plan is set to go into effect in 2011. In the meantime, the Postal Service will just keep losing money and probably raising postage rates, which it has done eight times since 1999.

 

But what if it doesn't work? The fix is far from a panacea, and there are those who think the plan to cut Saturday delivery will only hasten the agency's demise by reducing even further the amount of mail it handles. In these days of PDFs, instant messaging, and e-mail, there's a part of the snail-mail business that seems hugely outdated. Still, it remains a $900 billion-a-year business. The bulk of that comes through direct mailers and catalog companies.

One hundred twenty years after Sears Roebuck shipped its first catalog in 1888, mail order remains a viable business model. But recent cost increases have companies asking themselves how long they're willing to stick it out before going entirely electronic, or seeking solutions from the private sector. According to Hamilton Davison, president of the American Catalogue Mailers Association, catalog companies were hit with a 20 percent to 40 percent increase in postage rates in 2007. "If [cutting Saturday delivery] slows the cost increase, then we see it as a regrettable but manageable solution," says Davison.

 

The problem is, there's no guarantee doing so will reduce the cost of shipping. Recently, the Postal Service has attempted to manage costs by passing them on to its most direct customers. As a result, there are now 8,000 fewer catalog companies in the U.S. than there were in 2006. The number of catalogs mailed has dropped from 20 billion in 2006 to 13 billion last year. "We are certainly concerned about future viability of the Postal Service," says a spokesperson for L.L. Bean, which ships about 250 million catalogs a year.

 

Direct mailers are poised to get hit, too. They depend on the guaranteed three- to five-day delivery window of standard mail. Without Saturday, that average could get pushed to five to seven. "It will undoubtedly add a degree of unreliability," says Gene Del Polito, president of the Association for Postal Commerce, a trade group representing direct-mail companies. That uncertainty, Del Polito says, "will only make more businesses ask whether the mail is still the best business medium to be in."

 

There will certainly be implications for companies such as Netflix. A recent piece by TheBigMoney.com argues that the move to five-day delivery throws a huge wrench into the company's business model, which depends on speedy turnaround and has conditioned customers to expect DVDs in the mail on Saturday. But five-day delivery could actually speed up Netflix's transition to streaming video, where customers download movies directly from the site rather than getting them in the mail. Half of Netflix's customers already stream movies. Though the company would likely pay more in bandwidth, Netflix could save tons of money by reducing its shipping costs, which are expected to be $600 million this year and $700 million in 2011. Seeing as how the switch to five-day delivery likely wouldn't go into effect for at least a year, Netflix has plenty of time to calibrate its business model.

 

Perhaps the biggest failure of the five-day delivery plan is that it ignores 80 percent of the Postal Service's costs: labor. Postmaster Potter has made headway in reducing work hours and the costs of benefits and pensions, but the average postal employee still makes $83,000 in salary and benefits a year, placing postal workers among the highest-paid government employees. There are more than 34,000 post offices in the country, which is more locations than Walmart, Starbucks, and McDonalds combined. Unless the Postal Service plans on selling burgers and lattes, it's time to downsize its supersized footprint.

 

© 2010

http://www.newsweek.com/id/235661