Are You Ready for the $10 Postage Stamp?

By Ron Wiener, CEO & Postmaster General, Earth Class Mail

[Editor’s Note: This special feature article is longer than a blog article would normally be. It is part of the upcoming online publication entitled Earth Class Mail – The White Paper, Volume II. If you’ve never read Volume I, you can download it here.]

Might we see the USPS issue a $10 postage stamp in our lifetime?

It may not be such a ludicrous prospect. Given its scale economics the USPS is the most productive post in the world, processing about 212 billion pieces of mail per annum (48% of the world’s total volume of mail) with less than 800,000 employees. It delivers more mail per-household and per-business than any other nation, and it does so with the lowest ratio of letter carriers to mail volume.

Of course its capital equipment investment is also the greatest in the world, and its overall carbon footprint dwarfs that of any other national postal operator. Last year it spent $6.5 billion on energy, including the fuel to keep 220,000 trucks — the largest vehicle fleet in the world -– rolling from door to door throughout a vast geographical territory from the wilds of Alaska to the dense concrete jungle of Manhattan.

It is a truism that as technological improvements increase the efficiency of a certain resource (e.g., fuel, paper), total consumption of that resource tends to increase, rather than decrease. Known as Jevon’s Paradox, this principle isn’t always intuitive to consumers, business managers and politicians. The phenomenon is well understood in modern economics, and is evident in everything from the automotive industry to computing. Improved efficiency lowers the relative cost of using a resource -– which in turn increases demand. As a practical example everyone can relate to, the more efficient our computers become, the more we use them… the net effect being that we increase our usage of computing annually (and therefore consume more power running data centers, communications infrastructure and PCs) at a faster rate than the manufacturers of computing equipment can improve the power efficiencies of their devices. (See the fascinating article by Christian Belady, Microsoft’s principal power and cooling architect, here.)

In the 1970’s a perfect storm brewed that instigated a huge ramping up of postal mail volumes in the US: 1) postal delivery costs went down through the implementation of automated sorting equipment, barcodes, ZIP codes, etc.; 2) women joined the workforce in ever-increasing numbers, leaving them less time to shop in retail stores and predisposed to shopping by catalog instead; and 3) marketers developed direct-marketing science along with support from printing companies, list-rental bureaus and graphic-design shops who all jumped on the new advertising mail bandwagon.

Thanks to increased efficiencies in production and delivery of mail, mailed advertising became cheap and ever more bountiful, which led to even greater scale economics for the USPS, which in turn allowed it to keep postage costs low, which in turn drove yet dramatically more use of mail as an advertising medium.

Because the U.S. enjoys such low energy costs compared to the nations of most other posts of the world, and the USPS enjoys such vastly greater scale economics than other national posts do, we Americans take for granted just how good we have it here. The USPS has also had it good since the 70’s, being able to winnow its staff every year –- by an average of 16,000 employees per year just since 2,000 -– as automation investments improved its productivity, while raising its stamp prices more or less to cover the rate of inflation.

Then along came the next perfect storm -– the Internet -– causing a fundamental shift in how companies routinely communicate with their customers and prospects. The ongoing improvements in USPS’s cost efficiencies simply paled in comparison to the drastic cost efficiencies introduced by electronic transactions and online marketing. The impact has been felt by every post in the world as First-Class mail volume started to decline on a slow but steady pace since around 2000, and advertising dollars started shifting to Google and other online media.

Soon, the annual revenues of Google –- a company that has been around for little over a decade –- will alone exceed the USPS’s $20B annual intake of advertising mail postage. Talk about a tectonic shift… the USPS is the largest single recipient of advertising dollars in the world, about to be upstaged by a relative startup!

There are more economic, social and technological trends pushing against USPS than ever before, and so even in a year in which the Postal Regulatory Commission (PRC) approved a postage rate increase, the USPS still managed to lose $700 million off its bottom line last quarter. You can bet on another stamp increase next year, and another every year for the foreseeable future. Annual postage increases were made possible by the Postal Accountability Act passed by Congress in 2006, which in exchange for a $30B pension bail-out and relaxation on the pricing of competitive products (among other things), allowed the USPS to petition for annual rate hikes, instead of every three years, as was the norm.

However, the hikes now have to be capped to the rate of inflation. With the USPS spending $6.5 billion per year on energy costs -– which are rising much faster than the rate of inflation -– the permitted postage increases will not alone be able to make up the difference in their fuel tab, let alone rising health care, pension and other operating costs. This hard-fought concession may have seemed at the time a salvation for USPS, but in hindsight it may have been the linchpin to the unraveling of the Postmaster General’s master plan for financial stabilization.

Let’s look at some key trends that profoundly affect the economics of the USPS and other major posts worldwide:

  • First-Class mail volume continues to decline, and will continue to decline, due to electronic substitution. Traditionally this is where a Post makes the bulk of its profit.
  • Standard Class (advertising) mail volume has suddenly begun to decline, and looks like it may continue to do so more precipitously than First-Class mail did due to environmental and economic pressures on mailers to shift more and more of their ad dollars to electronic advertising media. This discounted postage doesn’t contribute much to the USPS’s operating expenses, but it does lift the base of their scale economics, and so without it our First-Class postage would be much higher. (The argument for discounting bulk-mail postage becomes more dubious now that Standard Mail volume exceeds First-Class volume, begging the question of whether First-Class is still the “core” economic component or now the “incremental” component.)
  • Employee costs are rising, including health care costs and pension obligations. The postal-worker unions are collectively the largest union in the world, making it difficult for the USPS to reduce headcount outside of natural attrition rates as it has done for more than two decades. (Current head count is already under 800,000, making Wal-mart the largest employer in the U.S. now.) Indeed, USPS just recently announced that it is offering an early retirement package to shed 20,000 additional workers by September 2008.
  • Energy costs continue to rise. For every penny of increase at the pump the USPS spends $8M more to gas up its trucks, and it’s already buying on deep-discount contracts. The USPS’s total energy bill is a gigantic $6.5 billion per year. Mind you, this does not include the fuel and other energy resources used by the airlines that run the air transport contracts for the USPS, or by the forest-products companies to produce the paper that is mailed (15% of all paper is ultimately mailed), or by the graphics-arts industry in printing and then delivering all that paper to the USPS. Nor does this figure include the fuel consumed by 800,000 employees and millions of customers driving to the USPS facilities every day. According to the U.S. government the USPS is the third largest federal consumer of energy after the DOE and DOD –- again, not including the rest of the ecosystem that produces and transports the mail, and the commutes of the workers who make it all happen. A back-of-the-envelope calculation puts the energy consumed in the U.S. to create and distribute all this mail at roughly 1% of the nation’s entire energy budget. There are few isolatable targets of this magnitude that are exposed to proponents of radical evolutionary change for the sake of the planet.
  • The number of mail pieces delivered per carrier stop has been on a downward trend since the turn of the century. Even though most Americans perceive that the volume of “junk” advertising mail appears to increase every year, the fact is that there are 1.8 million more stops for USPS carriers to make each year, and the rate of growth of mail volume has been slower than its rate of growth in delivery stops. In fact mail-volume growth has been negative for the past two quarters and is likely to remain that way. Therefore each delivery stop is less profitable to the USPS than it was the year before (although if you exist in the right demographic you may very well continue to receive more advertising mail, in absolute and percentage terms, than the year before).

For decades the USPS has been on a continuous campaign to extract efficiencies from its physical distribution network — attrition of labor and purchase of automation equipment being two of the largest levers it pulls on annually to keep the postage increases from getting any larger. The aggregate trends lines, however, are overwhelming its ability to trim the obvious fat. The 2006 Postal Act gave the USPS a new lease on life with a $30B shifting of pension burden to the federal pension plan, but it also placed plastic handcuffs on the Service’s ability to raise postage on its monopoly services -– tying the annual postage-increase maximum cap to the rate of inflation -– while not anticipating that fuel costs would go up so dramatically faster than overall inflation. So while Canada Post contemplates raising its postage prices to compensate for increased fuel costs, USPS is unable to do the same -– it has made its deal with the Devil for a massive one-time financial bail-out and must now stick to its bargain.

So what options does USPS have to keep itself financially viable? Offering early retirement to 20,000 workers is one thing it can do, but not that often. The 2006 Act did have an “In Case of Emergency, Break Glass” exigency clause that would allow the USPS to raise postage rates at faster than the rate of inflation if its financial viability is at sufficient risk. Doing so only two or three years after passage of the Act might be politically suicidal, but it may prove necessary.

If the USPS were a traditional private corporation it would have likely found new revenue sources to supplement its retreating revenue streams years earlier, but as long as USPS continues its death grip on the mailbox monopoly, it will continue to be greatly limited in the number of new services it could be allowed to bring to market.

There are dozens of examples of national posts throughout the world that have, in fact, given away their monopoly powers in order to be allowed to introduce new services that are now ensuring their long-term sustainability, and to force themselves to behave more fiscally rational. Many of these posts are routinely racking up $1B+ annual profits from traditional as well as innovative new services, especially electronic services such as document management, since they were privatized or liberalized. The majority of the Universal Postal Union’s 191 member countries have already liberalized their posts, not wishing to continue to prop themselves up through taxpayer subsidization or by burdening the ratepayer with unsustainable postage increases. This is all well documented in the staff reports you can find at www.prc.gov or by reading the annual reports of liberalized players such as Swiss Post, La Poste (France), Deutsche Post (Germany) or TNT (Netherlands).

What if Congress does not privatize the USPS?

If you add these trend lines together what they predict is that the cost of delivering postal mail while maintaining the Universal Service Obligation will lead to untenable economics for the USPS in the not-too-distant future. There are few alternative moves they can theoretically make under current monopoly-operator restrictions in order to maintain their viability, such as the following:

  • Going to the U.S. taxpayer for another bail-out. As part of the 2006 Act the USPS received over $30 billion in pension relief. Congress wants USPS to be self-sustaining, not to be a continuous drain on the general fund, so don’t expect too many more blank checks to be written by the feds.
  • Going to the U.S. ratepayer for higher postage. While the 2006 Act enabled the USPS to request annual increases, it also capped the increases to the rate of inflation, so this isn’t going to help USPS compensate for other cost increases like fuel and reduced scale economies as mail volumes continue to decline.
  • Reduce service levels, such as by cutting out Saturday delivery. Many posts have floated this idea past their recipients and experienced massive protests from the general public and advertisers. Americans aren’t likely to be any more enthusiastic.
  • Close unprofitable branches. The posts in many European countries have been doing so for a while, but their densities were much greater to begin with since post offices are also their national bank’s retail branch network in these countries. USPS has less leeway here, and a great deal of local political pressure to contend with, so they avoid this otherwise rational measure that a traditional corporation would logically pursue. Every PO branch falls in the Congressional district of a politician who doesn’t want to lose the political support of postal union and related-industry workers in his or her constituency, which in some cases can amount to a percentage point or more in the polls.
  • Increasing operating efficiencies by improving automation. The USPS is already the leading buyer of postal automation technology in the world. A big challenge here is facing the labor unions whose contracts prevent them from laying-off workers just because automation solutions are available. The ever-aging fleet of sorters, trucks and other infrastructural capital equipment requires ever-increasing investment, which becomes increasingly challenging in an environment where mail volumes are on the decline.
  • Outsourcing more of its operations. USPS already outsources mail barcoding and sortation work (using so-called “worksharing discounts”) to mail presort bureaus and printing companies, and to FedEx for air transport of its Priority Mail, to give but two examples. It now has an RFP out to outsource its entire inter-facility trucking network. Each outsourcing move causes a major rift with its labor unions. Recently the GAO (Government Accounting Office) challenged the USPS on every one of its outsourcing deals, pointing out that the economics pre- and post-outsourcing have never been tracked by the USPS and therefore the cost advantage of each outsourcing deal has never been proven.

So what is to happen to our beloved U.S. Postal Service? After years of being able to compensate for negative trends by slow and steady labor attrition, increasing volume economics and regular postage stamp increases, the USPS is now capped on postage rate increases, received its last bail-out fix from the feds, and is up against environmental pressure and energy cost inflation like never before. Given the postage rate increase cap the USPS would not be able to issue a $10 First-Class stamp for many years — by which time, on current trend lines, they will have exhausted their capability for reducing labor costs by attrition, and volumes would be down starkly as mailers would find the cost of delivering by mail to be too great and would be forced to find electronic substitutions. An economist could have some fun with the theoretical exercise of determining the postage cost for the last letter ever delivered physically.

We routinely scour the web for research by experts on postal economics and regulation and have yet to find one who says the USPS is entirely expendable. It’s simply not an option to let the system collapse, so other means of keeping it alive are going to have to be permitted by Congress sooner or later. Privatization is the patently obvious solution, as many other countries have already proven by example, and the PRC is certainly open to this option perhaps much more than USPS management and the labor union have traditionally been. The regulator is in fact preparing a study on USPS privatization for presentation to Congress by the end of this year. There is no more wiggle room for ignorance or denial to rule the day. The time has come for serious, proactive postal reform.

Clearly the only way out of this predicament while preserving the standards of Universal Service that Americans have come to expect is to allow the USPS to behave like a real corporation, which means loosening its grip on the mailbox monopoly and accepting the realities of free-market competition. Once the postal labor unions realize that the only way to create more postal jobs rather than helplessly watch them shrivel away is through the introduction of new services, they will realize that they must become ardent supporters of USPS privatization. Only when this occurs will USPS management and Congress feel free to make the only rational decision here, to allow our country to join every other industrialized nation in liberalizing its national post so that it may survive, and THRIVE, in the new age of electronic messaging.

If you’d rather see your beloved U.S. Postal Service grow its revenues and payroll while reducing its carbon footprint than collapsing under the strain of multiple adverse trends, then please write to your political representatives now (be a champ, use a stamp — don’t just send an email) demanding that USPS privatization become a mandate issue in the next election, just as postal privatization became the #1 political issue in Koizumi’s bid for the Prime Minister office of Japan’s 2005 general election.

And if we’ve kept your attention this long you might as well learn about the kinds of new services that liberalized posts around the world are starting to employ successfully. If you haven’t read Cameron Powell’s May 21, 2008, testimony to the Postal Regulatory Commission hearing on USPS privatization then you can check it out here.

August 3, 2008 | Filed Under Earth Class Mail, The Postal Future 

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