Alliance Report–February 28, 2023
Alliance Report
February 28, 2023
Troubling USPS report
The report filed by the U.S. Postal Service with the Postal Regulatory Commission on the mail and package agency’s results through January 2023 is very troubling. Volumes are down much more than expected and losses are more than twice what the agency projected in its official Integrated Financial Plan which was filed with the regulator only three months ago.
The USPS lost $1.107 billion in the single month of January 2023, and $2.210 billion in the past 4 months (Oct 2022-Jan 2023). The four-month loss is more than twice as bad as the planned $1.046 billion loss.
The agency initially planned to lose $4.5 billion for the year.
Volumes
The total volume of mail and packages was down 2.58 billion or 5.6% in the four months ending in January. The volume drop accelerated in January when the total was down 8.5%.
January 2023 Volumes:
Market Dominant -8.7%
Competitive -5.0%
Total -8.5%
FY 2023 To Date Volumes:
Market Dominant -5.8%
Competitive -3.2%
Total -5.6%
The volume decline was consistent across USPS products.
January 2023 Volumes:
First-Class Mail -7.5%
Marketing Mail -10.1%
Periodicals -5.8%
Competitive Packages -5.0%
FY 2023 To Date Volumes:
First-Class Mail -5.2%
Marketing Mail -5.8%
Periodicals -11.4%
Competitive Packages -3.2%
Revenues
The stated USPS strategy concerning Market Dominant products over which it holds statutory monopoly power is to raise rates twice a year as much as the Consumer Price Index and the PRC allow. With the CPI at 40-year highs and the regulator allowing three categories of add-ons to inflation, the rate hikes have been unprecedented.
The Postal Service’s goal is to make substantial revenue based on historical data showing that mailers had very low price elasticity. In other words, the agency knows rate increases reduce mail volume, but historically it has made healthy revenue gains after very moderate volume declines. Here’s how they put it in their Integrated Financial Plan:
“Revenue is projected to increase by $2.4 billion in 2023. We anticipate that the surge in revenue from consumer behavior changes during the COVID-19 pandemic will continue to subside in 2023; price increases will more than compensate for the revenue lost due to reduced volume.”
In the first four months of FY 2023, USPS revenue has increased by only $269 million, or 1%. That leaves the agency with revenue growth of $2.131 billion needed in the remaining eight months to make its goal.
The FY 2023 plan is to increase revenue by 3%, mainly through “price increases.” In the first four months, the increase was only 1%. The 2% difference carried out over 12 months would lead to a revenue shortfall of $1.6 billion. Revenue growth decelerated in January with a gain of only $17 million or 0.3% to $6.643 billion.
Postage comparison to other countries
The U.S. Postal Service has for many years published tables and charts that depict its First-Class stamp rate with that of other nations, adjusted for foreign exchange rates. USPS has almost always been the cheapest or nearly the cheapest. The main reason is that the U.S. has the largest postal system in the world. USPS benefits greatly from economies of scope and scale.
Our postal system also benefits greatly from the world’s largest direct mail industry which was encouraged and incented to grow rapidly during the 1980s and 1990s when USPS and the Postal Rate Commission instituted workshare discounts for bar-coding, pre-sorting, and drop-shipping. Our mail volume reached 100 billion pieces after about 200 years of service in 1980. The boom in direct mail doubled mail volume to 200 billion in 1999, less than 20 years later. Private-sector mailers pay part of the cost to private-sector mail service, logistics, and transportation providers. The rest goes to USPS as postage.
During the mail boom years, USPS used some of its surplus revenue to invest heavily in automating the mailstream, which added greater efficiency to the scope and scale economies.
For many years, USPS rightfully bragged about its worldwide efficiency and size leadership as reflected in the lowest postage rates. Being the cheapest was a badge of honor.
Now, USPS leadership seems to be flagging its lower postage rates for another reason—to justify raising them more than inflation to catch up with the rest of the world. Unfortunately, higher and higher postage rates are a sign of weakness, inefficiency, and loss of economies of scope and scale. It’s a race to the bottom, not the top.
From the perspective of the rate-paying mailers who determine USPS mail volume, a comparison of pricing with other countries is not relevant. Large rate hikes on multi-million dollar mailing budgets lead to rapid consideration of alternatives. The recent volume numbers seem to be bearing that out.
The Postal Service unwinds the NDC network and merges the mail streams
February 16, 2023
(This article is republished with permission from its author at Save the Post Office. The Postal Service has not provided mailers with a comprehensive description of its strategy to redesign its network. This article is an excellent reading of the tea leaves. Another report on the consolidation of five metro areas is available here.)
As part of its 10-year plan to streamline the network, the Postal Service is in the process of “unwinding” its 21 Network Distribution Centers, which handle Marketing Mail, Periodicals and some ground packages.
One of the goals of this NDC Unwind is to merge the mail and packages handled by the NDCs into the First Class Mail stream. While that may improve the efficiency of mail processing, it blurs the differences between postal classes and products and the speed of delivery one expects from each.
The 21 NDCs are all located in properties that are owned by the Postal Service, most of them since they were originally created in 1975, when they were called Bulk Mail Centers (many, like the Philadelphia NDC pictured above, still have the original signage). The BMCs processed Parcel Post, Bound Printed Matter, Media Mail, Standard Mail and Periodicals. In 2009, the Postal Service transformed the BMC network and turned the facilities into Network Distribution Centers.
Here are a map and list of the 21 NDCs. (View on Google Docs here.)
The 207 Report
News of the “NDC unwind” appeared last month on the website of the National Association of Postal Supervisors in a summary of a meeting in October with representatives of the Postal Service: “The NDC unwind initiative,” reads the summary, “is to explore changes in processing at the NDC, such as eliminating originating processing of marketing/periodicals and retail ground processing while continuing to provide excellent service. Every NDC will need an individual plan. The plan is to modify and possibly eliminate the NDC to NDC network.”
More details about the “unwind” appeared last week in a report submitted by the Postal Service in response to a requirement of Section 207 of the Postal Reform Act. (The report is dated December 2, 2022, but the redacted version wasn’t published on the PRC website until Feb. 10, 2023.) The 207 report describes changes afoot at the NDCs in Atlanta and Chicago.
“The Atlanta NDC,” says the report, “is being completely overhauled and developed as a future location for other operations when the packages and mail processed in this location are moved to a new building in Palmetto, GA.” (That’s the new mega-plant the Postmaster General visited with the Washington Post last fall.) It goes on to say the Atlanta NDC is being fully renovated with “improved lighting, upgraded facilities and bathrooms” and the removal of obsolete equipment, “which will free workroom floor space to support the reconfiguration of the Atlanta area.”
The report doesn’t get into it, but these “other operations” and “reconfiguration” include turning the Atlanta NDC into one of the new Sorting & Delivery Centers, as we learned from a USPS presentation from July 29, 2022, which shows seven S&DCs in the Atlanta metro area, including the NDC.
The 207 report also describes changes at the Chicago NDC, which will be transformed into one of two Regional Processing and Distribution Centers (RPDC) in the Chicago metro area. These RPDCs are the multi-functional mega-plants that have been previously reported. Most if not all of them will not only process the mail but also function as Sorting & Delivery Centers.
In addition to the two in Chicago, three RPDCs are being built in Indianapolis, Charlotte and Atlanta. According to the 207 report, “These are all leased buildings. Currently, the projects are at the early stages of construction (Atlanta), buildout design (Charlotte), and construction (Indianapolis). Atlanta and Charlotte will start processing in 2023 while Indianapolis will be operational in 2024.”
As for the remaining 19 NDCs, the 207 report says the Postal Service is evaluating what to do with them: “The other 19 NDCs are the focus of design studies to evaluate how best to use the buildings and equipment as part of the RPDC network.” The Postal Service owns all 21 of the NDC properties, so rather than closing any of them down completely, the Postal Service may turn the biggest NDCs into RPDCs while repurposing the others as S&DCs.
The 207 report, it should also be noted, confirms what’s been suspected all along — the new Sorting & Delivery Centers will eventually lead to post office closings.
The report says that through changes in the Chicago metro area, including the repurposing of the NDC, the Postal Service will “realize substantial savings due to the non-renewal of leases.” The same goes for Atlanta, where, by combining smaller operations into the new Palmetto RPDC (also a S&DC), “we expect to reduce lease costs.” And ditto for Charlotte, where thanks to its new RPDC/S&DC, the Postal Service expects “to see savings through the elimination of leased facilities.”
These leased facilities may include a processing plant or two, but the context makes it clear that the Postal Service is referring to leases on post offices. When it comes time to renew the lease, many of the post offices that that lose their carrier operations to an S&DC will be closed. It’s part of the plan. But since the Postal Service has been claiming that these post offices will remain as is, it didn’t want to spell that out in the report, which barely even mentions post offices.
The NDC Unwind
The “NDC unwind” was also the subject of a USPS presentation shared in a recent daily huddle at one of the NDCs.
According to the presentation, the objectives of the plan are to “eliminate origin processing at NDCs, eliminate the NDC-to-NDC network, and merge Marketing, Periodicals and package services into the First Class mail stream.”
Under the current system, the presentation explains, the largest mailers truck their Marketing Mail directly to an NDC, while smaller mailers usually drop theirs at one of several Processing & Delivery Centers in their area — which are usually closer since there are hundreds of them as opposed to 21 NDCs. (According to the 207 report, “In FY 2022 Q3 and Q4 there were 989 customers who inducted commercial mail directly at NDCs and 5,010 customers who inducted commercial mail directly at P&DCs.”) The mail is trucked from the P&DC to the NDC, and then, if necessary, to another NDC, then to other P&DCs, and then to delivery units at post offices.
The new system will streamline the process. The Marketing Mail, Periodicals and ground packages will go to a P&DC and be merged with First Class Mail and routed via the existing First Class network. Retail Ground and Parcel Select Ground Packages will be processed with First Class Packages. The mail will be trucked directly to delivery units at S&DCs and post offices, bypassing the NDC network.
Eventually the trips between P&DCs and NDCs and between NDCs and NDCs (inter NDC) will be minimized or eliminated. The NDC transformation is expected to result in workload reductions at the NDCs, with P&DCs absorbing much of the work.
The implementation is taking place in three phases: (1) Retail Ground & Parcel Select packages move to the First Class Mail network; (2) Marketing Mail, Periodicals & Bound Printed Material decentralize to FCM routing; (3) the remaining Market Dominant Package Services merge to FCM. A timeline in the presentation shows much of the implementation got started last summer, while the remainder is scheduled for the first half of 2023, one NDC after another.
Service Standards and Product Classifications
The merging of the mail streams helps explain the changes to service standards and product classifications that have been going on since 2021 and that are still underway.
In October 2021, the Postal Service relaxed service standards on First Class Mail and Periodicals (PRC Docket N2021-1), which allowed it to decrease its use of air transportation from 21 percent of First Class Mail to 12 percent.
In May 2022 it did the same with First Class Package Services (PRC Docket N2021-2).
In June 2022, the Postal Service upgraded (i.e., accelerated) service standards for Retail Ground and Parcel Select to align with the standards for First-Class Package Services (PRC Docket N2022-1).
In October 2022, the Postal Service was granted approval by the PRC to streamline its competitive ground package services. Retail Ground and Parcel Select Ground were discontinued as distinct products and subsumed into First Class Package Services, which had previously included only small packages but will now include packages up to 70 pounds.
Last week, the Postal Service announced its intention to rename First Class Package Services as Ground Advantage. Service standards for all ground parcels will align with the First Class service standards.
As some mail speeds up while other slows down, the various mail streams for First Class mail (except for the percent that still uses air transportation), Marketing Mail, Periodicals, and Ground Advantage parcels will essentially merge into one stream.
Merging the Mail Streams
The full implications of this transformation of the postal network remain to be seen, but streamlining the processing and delivery network and integrating the mail streams will homogenize the mail, diminishing the differences between the way in which various classes and products are processed and delivering everything at approximately the same speed
Back in 2000, First Class Mail averaged about 1.9 days to deliver, while standard mail averaged 4.4 days. The difference in class meant something. Now, not so much.
According to reports recently submitted to the PRC for its annual compliance review, the average delivery times for First Class Mail and Marketing Mail are becoming almost indistinguishable.
As recently as 2015, average delivery time for First Class Mail was still less than 2 days. During FY 2021, the average days to deliver for First Class Mail had increased to about 2.6 days while Marketing Mail averaged about 3.1 days. During FY 2022, First Class averaged 2.55 days and Marketing Mail averaged 2.7 days.
As more First Class Mail eventually shifts to ground transportation (taking advantage of the new, slower service standards), its average delivery time may slow down more, while the more streamlined treatment of Marketing Mail may speed up its delivery time. The differences between First Class and Marketing Mail could become even less recognizable.
In a similar way, ground packages, which used to take several days, will speed up — next-day delivery is one of the selling points of the new USPS Connect brand and the new S&DC system — which will make the differences between Ground Advantage and Priority less noticeable as well.
Where it’s all going
The Postal Service has been implementing the Delivering for America plan and its transformation of the postal system in a piecemeal way: modifying service standards on one class, then another; changing product classifications on one product, then another; moving equipment from one plant to another; repurposing one processing center into Sorting & Delivery Center, then another; and relocating carriers from post offices, one by one.
The Postal Service has thus evaded a holistic review of what the 10-year plan will do.
In 2021, the attorneys general of nineteen states filed a complaint with the Postal Regulatory Commission arguing that it should do an advisory opinion on the whole plan, not its individual components, but the Commission dismissed the complaint.
Implementation of the DFA will thus continue with no comprehensive, external analysis of what it will all mean in the end — that is, aside from the inevitable: reducing the workforce by tens of thousands, closing post offices, cutting retail hours, selling historic properties, and transforming the Postal Service into a business rather than a public service. And that cannot end well.
— Steve Hutkins