Whither the Post Office

Yesterday the US Postal Service put out a press release Postal Service Outlines 10-Year Plan to Address Declining Revenue, Volume: Seeks Flexibility on Operations, Delivery; Possible 2011 Price Increase.

USPS Stamp For fans of the good old USPS (there must be a few out there) it is grim reading. Mail volume is projected to decrease from 177 billion items in 2009 to just 150 billion by 2020. On its present course, the USPS is projected to lose a total of $238 billion over the next decade, a number that makes the shortfalls in Detroit seem relatively manageable.

The AP story on this was headlined Postal Service’s emerging model: Never on Saturday. The media seems to believe that delivery six days a week is a hot button of some kind. Personally, I don’t care very much. Deliver my mail three days a week if you like. Last year Gallup found 66% of Americans favor dropping Saturday to save money.

Of course, the same poll found that only 17% favored laying off postal employees, which is a problem since virtually all the savings from being closed on Saturday would be from reduced payroll. This sentiment, plus ardent lobbying from the postal employees union, means that eliminating Saturday delivery has been periodically rejected for decades. (Canada, by the way, stopped six day service in 1982.)

The USPS release obliquely suggests a list of other drastic actions they can take to narrow the budget gap, most of which will require congressional action. Translating from diplomatic euphemism, they want to close branches, reduce headcount, raise prices, and put off paying for retiree health care.

All this is based on the findings of three top-tier consulting firms paid $4.9 million by the USPS to assess the state of their business and come up with a plan for the future. The results of those studies were also released yesterday. Read them and you realize that as dismal as the picture painted by the USPS press release is, its assumptions are wildly, even implausibly, optimistic.

Going from 177 billion items in 2009 to 150 billion items in 2020 sounds realistically pessimistic until you find out that in 2007 the number was 213 billion. Part of that decline was the Great Recession, but projecting that an 8% annual decline will shrink to a 1.5% one is a bit much. Trends like these do not slow down over time, they accelerate.

BCG, the firm that came up with the volume projections, based the 150 billion number on a survey of “senders” i.e. businesses. They got a somewhat lower number from asking consumers, and a much lower number, 118 billion in 2020, based on actual experience in Europe. And all the projections were based on the rather unlikely assumption of no reduction in service and no increase in prices beyond inflation.

This is where the harsh economics of the Postal Service rears its ugly head. The USPS is a classic example of a business with fixed costs and variable revenue. If you decide to pay a bill on-line rather than mail a check, revenue for the PO is down 44 cents. But they get to save essentially nothing in costs. Even if a billion fewer bills are paid through the mail, the USPS still has to maintain the same number of offices and pay the same number of letter carriers to make the same number of stops during their day.

Granted, there is considerable fat to be trimmed, assuming the government permits it. The post office has 36,500 retail locations, a number that McKinsey deftly compares to that of McDonald’s at 13,900 and Starbucks at 11,100. Each post office serves an average of 600 customers a week. Average. Do the math.

Current law bars the USPS from closing offices “solely for economic reasons.”

It is inevitable that the price of mailing things will increase as the fixed costs of running the Postal Service are spread over fewer and fewer items. And that increase in price will further accelerate the decline in volume, leading to a downward spiral with an obvious final end. No more post office, probably sooner than you think.

If it seems inconceivable that snail mail could go the way of telegrams, imagine what would happen if an extraordinary natural disaster of some kind wiped out the PO tomorrow. The first month would be hard. You would have to sign up for electronic billing from a few places. The guy who plows my driveway would have to call around and get everybody’s email and then sign up for PayPal. We would have to get used to reading magazines on-line.

After six months all would feel normal and the mailman would be just another vanished part of our civic culture, like the iceman and the lamplighter.

Extremely selective meteor showers being rather unlikely, the USPS will not disappear overnight. But it will disappear.

No Comments

  • By Trent McBride, March 3, 2010 @ 1:25 pm

    I would love to see the USPS go away…

    …except my Netflix might take some time to adapt. (Of course, they will likely be all streaming in the not-too-distant-future, anyway.)

  • By Dasha, March 3, 2010 @ 1:47 pm

    If this was business, you would be completely right. But this is politics, which follows an entirely different set of rules.

    The need for physical delivery will not disappear entirely – don’t forget online shopping and wedding invitations. The question is whether USPS will step up and start being more like FedEx/UPS/DHL, or if private carriers will have to pick up the slack (and drop prices for some things). The latter is probably more efficient, depending on how much “slack” is left. But the USPS is a politically created institution and congress will not let it die so easily. Don’t forget that the vast majority of people over 50 would throw a giant fit, not to mention “the jobs.”

  • By Adam, March 3, 2010 @ 1:50 pm

    I get tons of junk mail, but only about 1 bill a month I still have coming to me in paper form. I should probably sign up for paperless biling for that too. I have no need for a postal service, and agree with you Frank that the service will eventually be reduced only to private document couriers when you need physical items delivered; rather than a bloated union-run antiquated government service. Oops, my hatred of unions popped up again.

  • By Neil, March 3, 2010 @ 1:59 pm

    I don’t think the problem is with mail as a service. The problem is with Congress having way too tight of reigns on the USPS. 2009 numbers won’t be out until May, but Canada Post has consistently turned a profit in recent years. Much slimmer profit that a private business would want, but a profit nonetheless. I think the problems that USPS have more to do with the lack of flexibility accorded management, resulting in an outdated model.

    Dropping Saturday service 30 years ago is just one of the ways the Canada Post saves money. They also charge more for deliveries, but not so much as to be prohibitive. But mostly, they just don’t have to pay to keep as many offices open. I think the big reason that they’re turning a profit while USPS loses money hand over fist is that the vast majority of retail postal outlets are franchises. CP gives up a percentage of the cost of each stamp, envelope, box, etc., that is sold and in return they don’t have to pay anyone to man the tills. So a much larger portion of their costs vary with revenue.

    The end result is that mail continues to work well here. As a frequent online consumer, I favour stores that deliver by mail because the post office is far more convenient than couriers who – since I’m not home during business hours – require me to drive to their depot on the outskirts of the city to pick up my parcel. Lower volumes of mail, but larger ticket items…everyone wins.

  • By jim, March 3, 2010 @ 3:12 pm

    I’m actually quite happy with postal service in general. Its highly reliable and a good price. But it will gradually die off and thats OK too. I have no problem with them dropping saturday service. Surely something has to be done long term to keep USPS viable. I wouldn’t miss Sat. delivery at all.

    Unfortunately most of the problems USPS has is due to congressional meddling. THe postal clause of the US Constitution gave congress the authority.

    Prefunding of retiree health benefits is a key reason the USPS is bleeding money right now. Congress passed a law a few years ago requiring them to prefund all of their retiree health benefits. That was a stupid law. No other government or private entity is required to do it. It costs $5-8B extra annually to prefund That alone would have been enough to swing them from loss to profit in 2007 & 2008. Why in the world that law was ever passed in the first place I really can’t understand. It clearly hobbled the USPS like nobody else.

    The USPS also says that its been required to over fund its pension by $75B thus far.

    They should also give them more leeway in closing down branches and raising rates.

    300k of the USPS employees will leave or by 2020 mostly through retirement. So they can easily trim the workforce just by attrition.

  • By Chuck, March 3, 2010 @ 3:30 pm

    I’d be fine with mail once per week.

  • By Steve, March 3, 2010 @ 3:50 pm

    +1 to what Neil said. The USPS has both its prices and its services mandated by law. AND it has a mandate to be profitable (or at least break even.) I’m not sure what they expect to happen.

    I am surprised that the post office has so many offices. Maybe it’s because I live in the greater Seattle area, but I’m only aware of one post office per town, but a typical strip mall has one to four or more starbucks.

  • By Daddy Paul, March 3, 2010 @ 3:58 pm

    “Extremely selective meteor showers being rather unlikely, the USPS will not disappear overnight. But it will disappear.”
    You nailed it! I think next we will see two day a week delivery.

  • By Steve, March 3, 2010 @ 4:09 pm

    Also, I am unconvinced about the prefunding issue. Unless they are getting some kind of really bad deal or required to overfund… NOT prefunding is just pushing costs off into the future. IMHO all pension plans should be required to be fully funded in the year the employee works (and thus, the benefit to the employer is incurred.)

    Of course that change would have to apply to their competitors too.

    Underfunded pensions inevitably get pushed on to the taxpayer anyways. It’s so short sighted that it is 100% inevitable that the company will at some point become so saddled by their pension obligations that they can no longer function.

  • By Kosmo @ The Casual Observer, March 3, 2010 @ 6:02 pm

    I find it odd that you can send a letter from Key West to Point Barrow for less than the cost of a candy bar.

  • By Kosmo @ The Casual Observer, March 3, 2010 @ 6:13 pm

    “The post office has 36,500 retail locations, a number that McKinsey deftly compares to that of McDonald’s at 13,900 and Starbucks at 11,100. Each post office serves an average of 600 customers a week. Average. Do the math.”

    OK, I’ll do the math.

    36,500 * 600 = 21,900,000

    Where does ther other 90% of the population get their mail?

  • By bex, March 3, 2010 @ 10:04 pm

    actually… dropping WEDNESDAY delivery makes more sense than dropping SATURDAY delivery.

    If you drop Saturday delivery, then you need the extra warehouse space to hold 2 days worth of mail before it gets delivered. Even if overall mail delivery declines 20%, you will still need more space.

  • By bex, March 3, 2010 @ 10:10 pm

    Also… why does the post office have to go away? Their package delivery service is profitable. Also, they have one major revenue stream: leasing pubic mail slots.

    Right now, it’s illegal for FedEx or UPS to drop a letter in a mail slot intended for US mail. They could lease that right for a nominal fee, and let FedEx and UPS reduce some of their delivery costs.

    That’s not a long term strategy… but it might work in a pinch.

  • By Adam, March 4, 2010 @ 11:45 am

    “OK, I’ll do the math.

    36,500 * 600 = 21,900,000

    Where does ther other 90% of the population get their mail?”

    WTF? Are you really asking this question?

    Why would every person in the USA go into to the post office every week? I would only go if I needed to send a package not by UPS or Fedex. I don’t think I’ve set foot in a post office in 3 years. Nevermind that only one person per household probably needs to go into the post office any given time.

    Compare how many customers McDonald’s or Starbucks has in a week (hint- more than 600). 600 is a daily lunch rush at the Wendy’s I worked at in highschool.

  • By Kosmo @ The Casual Observer, March 4, 2010 @ 1:28 pm

    @ Adam – OK, I guess I’m considering “served” to include delivery of mail to my home. If it just includes walk-in traffic, that number might be right … but would be somewhat misleading, since it ignore the meat and potatoes of the service the USPS provides.

    “Where” was a poor choice of words. I meant “from whom”.

  • By Adam, March 4, 2010 @ 3:03 pm

    I think they were speaking of closing post office brances where people could walk into a store front, get served for stamps, package pickups, delivery, etc….not # of persons served mail to in the area.

    And yeah, they should close a huge # of those post office brances to save money. Especially if the traffic only averages 600 people a week. This shouldn’t affect mail delivery services, as I see it.

  • By Kathy F, March 4, 2010 @ 3:12 pm

    They should keep the self-service features of post office. Stamps by vending machine, machines where you can weigh package, buy its postage on a label with Credit card, and then deposit box into a bin.

  • By Investor Junkie, March 4, 2010 @ 11:57 pm

    Like the telegram, and pony express it should die a natural death. Or at least be much smaller than it is now. For me this argument always comes back to Seinfeld.

    http://www.youtube.com/watch?v=Hox-ni8geIw

    “I’d like to cancel my mail”

    @Kosmo @ The Casual Observer Maybe 90% are like me and try to AVOID the USPS at all costs. I would rather get my teeth pulled.

    I keep saying to myself, if this is what our government does to mail, I can’t wait for health care. FedEx, UPS stores are always a much palatable experience.

  • By haln, March 13, 2010 @ 12:51 am

    I hope the post office dies and takes the postal monopoly with it. I think its high time for the American Letter Mail Company to make a comeback:

    http://www.digitaljournal.com/article/271139

  • By Jc, December 27, 2010 @ 11:58 pm

    I think they are dying and not because of Saturday delivery. They’re not convenient anymore. I’ve had a package sitting at the post office waiting to be picked up for two weeks. I work in banking. We have better hours than the post office and we offer evening hours. Why? Because we’re a business and our customers demand it.

    It needs to start being ran as a business not a politically charged extension of the Government.

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