Don't touch my junk: The bulk mail industry says hands off our profits
August 15, 2011
Nobody likes it when the Postal Service raises its postage rates, but maybe it’s time to consider a rate hike. It won't be a popular idea, but it might be better than closing thousands of post offices and laying off over a hundred thousand workers and pushing thousands more out of their jobs.
Not that a small increase in postage would cover the cost of all those workers, but it would go a long way. Let’s look at some numbers.
On July 25, 2011, the Postal Service asked the Postal Regulatory Commission (PRC) to let it implement an “exigent rate increase” averaging more than 4 percent across most classes of mail in order to make up for volume lost during the recession.
An exigent rate increase, if you’re not familiar with the term, is one that goes beyond an increase that just keeps up with inflation, and the PRC can only approve such a request when it is “due to extraordinary or exceptional circumstances.”
Last year the Postal Service asked for an exigent rate increase of about 5.6% due to the recession and revenues lost to the internet, but the PRC denied the request for complicated reasons, some having to do with the meaning of “due to" but mostly because the PRC felt that the Postal Service has systemic problems — like over funding of its benefits programs — that a rate hike won't solve.
In its new request in July, the Postal Service did not specify exactly how rates for each class of mail would change (leaving the door open that first-class mail could get hit harder than bulk). It just asks for a rate increase that would add up to an additional $2.3 billion in revenue. That’s considerably less than the $3.2 billion the original increase would have brought in, but it’s still a significant amount of potential revenue.
What could the Postal Service do with that $2.3 billion? For starters, it could cancel its plans to close 4,400 post offices. The Postal Service says closing 3,600 of those post offices would save $200 million, so figure $240 million for all 4,400. That’s just ten percent of the revenue that would come in with the rate increase.
That leaves over $2 billion. How many jobs is that? The Postal Service payroll is about $49 billion a year, and 120,000 workers represent about 18% of the workforce, so their wages and benefits cost about $9 billion. The $2 billion from a rate increase could thus save over 26,000 jobs.
Now, it seems like a 4% increase in postage — less than two cents for a first-class letter — might be a reasonable alternative to closing 4,400 post offices and putting 26,000 people out of work.
But given how postage rates always seem to go up and up, maybe it's better to hold the line and just say no. This chart dramatizes just how steady the increases have been. On the other hand, those increases just reflect inflation, and the real cost of mailing has actually declined. This is another bogus chart. US rates are among the lowest in the industrialized world. Anyway, a rate increase is clearly debatable, and it would be an interesting conversation for the American people to have.
But that’s not what’s going to happen. There will be a public hearing by the PRC and all sides will be heard, and there will be a serious effort to arrive at a fair decision consistent with all the relevant statutes, but much of the decision making is going to take place in the conference rooms at L'Enfant Plaza and the fancy restaurants of our nation’s capital. And the politicians, lobbyists, and Postal Service management who are eventually going to be calling the shots are not going to be worrying about whether average Americans would prefer low postage rates or jobs and post offices.
The big guns in the room are going to be the bulk mail companies, and they have already made their position clear. They have been fighting against the rate increase since it was initially proposed last year, and they have already come out in favor of the proposed cuts to labor and the post offices. On August 12, within hours of hearing the USPS plan, the Direct Marketing Association— the leading association of businesses using direct marketing (junk mail) — “applauded” the proposed cuts.
Given how powerful the junk mail industry is, you might wonder how the Postal Service could even consider raising rates. In fact, a couple of months ago it looked like the Postal Service would be dropping its request for a rate increase — at least for the bulk mailers.
On June 21, Postmaster General Donahoe told attendees at the National Catalog Forum in Washington June 21-22 that he wouldn’t push for an exigent rate increase for Standard Mail flats – the category affecting most catalogers. Donahoe’s comments “earned high marks in the eyes of attendees.”
“PMG Donahoe is a breath of fresh air,” said one attendee. “I think the USPS has a leader who gets it,’ said another. “Now the only question is if the regulators and legislators will allow him to make the necessary changes.”
“I found PMG Donahoe to be refreshingly open and honest in his willingness to partner with his customers to operate his business in a more efficient manner,” said Chris Smith, vice president of ecommerce/catalog for Jockey International. “If he is successful in moving his agenda forward, it will not only be a win for our industry, but for all mailers, and a win for the U.S. Postal Service.”
A win-win for the bulk-mail industry and the Postal Service, but not for postal workers and rural communities. It’s easy to see where the PMG’s loyalties seem to lie. It looks like he’s more interested in keeping down the cost for delivering an underwear catalog than he is in protecting post offices and the jobs of postal workers.
The story is even more maddening when you realize just how much the Postal Service already subsidizes the bulk mail industry’s profits. It costs 44 cents to mail a letter, but if you want to send a piece of junk mail, it costs as little as 14 cents — even less if you catch one of the USPS “summer sales” when the big mailers enjoy an additional 30% discount.
Okay, naturally there’s a discount when you mail in bulk, it makes sense. Through its “workshare” program, the Postal Service gives a big discount to mailers that have done a lot of the work of sorting before it gets to the post office.
But the discounted rates the industry pays aren’t proportional to how much it costs to deliver their mail. The Postal Service used to employ a “cost-of-service” model in determining rates, but it was deemed too cumbersome, especially when it came time to ask for a rate increase, and it was replaced by the “price-cap” model, tying increases to the cost-of-living. The bulk mail industry was very pleased with the change.
In its Annual Compliance Determination for fiscal 2010, the PRC found that rates for Standard Mail flats were not in compliance with the 2006 Postal Accountability and Enhancement Act when it comes to “a fair and equitable apportionment of the cost of postal operations.” In other words, the discounts may be illegal.
How much of a rate increase would it take for the bulk mailers to cover their share of the costs? From the data published by the USPS and PRC, the American Catalog Mailers Association estimated it would take a 22.3% increase to bring flats to full-cost coverage.
Think about that for a second. The Postal Service has been asking for a rate increase of 4% or 5%, but it would take a 22% increase to bring catalogs up to a rate that covers the cost it takes to deliver them. And the industry is opposed even to a 4% increase. How many jobs could be saved, how many post offices might not need to close, if the industry paid anything near that 22%?
Considering how much people hate getting junk mail, how much more would they hate it if they knew that thanks to these large discounts the Postal Service is basically giving money away? An OIG study issued in December 2010 “concluded that in many cases the Postal Service grants discounts to large mailers at a rate that exceeds the costs the USPS saves when it accepts pre-sorted mail.”
The American Postal Workers Union has been criticizing these discounts for a long time. The union contends that the discounts are excessive and deprive the USPS of hundreds of millions of dollars in much-needed revenue.
“The Postal Service simply cannot afford to give away money,” said Cliff Guffey, president of the APWU. “As we have said many times: Workshare discounts improperly reduce postage costs for big mailers at the expense of the USPS and undermine the Postal Service’s ability to serve citizens and small businesses in every American community.”
Guffey’s remarks couldn’t be any more relevant than they are at this moment. The workforce of the Postal Service is about to be eviscerated, Congress may change the law so that the USPS can violate its union contract provision on layoffs, and thousands of communities are going to be left without a post office. But the junk mail industry will continue to enjoy unnecessary, unfair, and arguably illegal discounts that are costing the country some serious money.
And in the eyes of this industry, the Postmaster General is a “breath of fresh air.”
PS: If you’d like to show support for the post office and postal workers, here’s a suggestion going around: Next time you get a solicitation for something like a new credit card and there’s a postage-paid return envelope, send it back empty. That will generate revenue for the post office, and the company who sent it to you gets to pay the freight. Now that’s what I call a win-win.
(You can read more about the history of the exigent rate increase in the PRC ruling denying the request, the PRC’s announcement re-opening a comment period after the case was sent back by an appeals court, and the USPS position as of August 1.)