Revenue Reality: In a New Commercial Reality, Posts Learn to Diversify

“We cannot just sell stamps,” United States Postmaster General Jack Potter noted in his August 6 testimony before the U.S. Senate, making a case that lawmakers should grant his agency greater flexibility to target new revenue streams and also control operating costs. “We believe the time has come to allow the Postal Service to introduce new lines of business at its retail facilities.” Potter then described how other national postal administrations generate revenue through non-postal offerings such as “banking, cell phone, logistics and other services.”

To be sure, Potter’s management team faces a dilemma that calls into question the viability of their present business model. In July, they announced that net losses of $4.2 billion in their third fiscal quarter put them on track to lose over $7 billion for the year. This comes on the heels of $2.8 billion and $5.3 billion deficits in 2007 and 2008, respectively. A pending proposal to extend the timeline for prepayment of retirement benefits would provide near-term budget flexibility, but not a long-term solution.

The losses are driven by major drops in overall mail volume that have continued to worsen. Domestic mail volume in the USPS’s most recent fiscal quarter was down 7 billion pieces, or 14 percent, from the same period a year earlier. These trends are to a large degree also reflected in international mail volume, which have declined comparably for letters, parcels and express mail, according to Universal Postal Union data.

Observers have widely documented that these trends in mail volume are linked to both the global economic crisis and to displacement due to electronic communications such as email. A related trend, where business mailers have been observed to be shifting volume toward less costly products to meet shrinking budgets, also produces tighter margins and smaller revenues for postal operators. The combined effects of these trends are expected to continue to produce severe consequences for the business environments in which postal operators must strive to maintain sustainability.

Global Trends Toward Nonpostal Product Lines

Increasingly, national postal operators have turned to nonpostal products and services to provide critical new revenue sources. For operators in many industrialized and developing countries this is not new, and Potter had no difficulty identifying examples where national postal operators have utilized their existing network of post offices to offer nonpostal products and services to consumers and businesses:

  • Poste Italiane has established itself as a world leader among the operators of postal savings banks, with some €340 billion deposited in over 5 million consumer accounts, making it one of Italy’s largest savings banks. Because the bank invests only in state bonds, customers consider it a safer alternative to commercial banks. More than half of Poste Italiane’s revenues come from financial services and insurance.
  • Spain’s national postal operator Correos entered a partnership with Deutsche Bank in 2006 to provide banking services which many expect to include loans and mortgages as well as savings accounts.
  • India Post recently announced a new partnership through which it will sell travel assistance services, like air, rail and bus ticketing and hotel reservations, through some 8,000 post offices.
  • Canada Post acquired private courier company Purolator in 1993, and it has become not only the largest overnight-express shipper in the country, but the source of 20 percent of the postal operator’s revenues.

Many national posts are among their country’s leading providers of life and property insurance, and a growing number, including Ireland’s PostBank, have begun to expand beyond savings accounts into brokerage activities giving its customers access to investment vehicles and stocks from international exchanges.

Role of the Universal Postal Union

Under the leadership of Director General Edouard Dayan, the Universal Postal Union (UPU) has repeatedly sought to expand its scope into nonpostal areas such as financial services and promoting global trade.

A proposal supported by Dayan to dramatically broaden the UPU’s mission statement was defeated at the 2008 UPU Geneva Congress. But the Congress did adopt a four-year strategic plan known as the Nairobi Postal Strategy. The strategy seeks to define a UPU role in such areas as regional economic development plans, trade and the provision of financial services by government postal operators.

Also approved was a resolution to undertake a new UPU initiative to aid the development of international postal financial services, particularly cross-border money transfers. Anti-money laundering measures were also approved.

UPU initiatives not directly approved in Geneva but likely to re-emerge in connection with the Nairobi strategy include a program termed “Connect the World” to develop financial services, particular cross-border money transfers, offered by postal operators.

It was no coincidence U.S. PMG Potter mentioned logistics as a potential new line of business he feels his agency could turn into a profitmaking venture. The UPU’s Postal Operations Council specifically discussed outsourced warehouse-to-customer logistics functions as a strong growth area. But the council’s report noted that postal providers would need to first increase their own competencies in these areas. As Jim Butts, a logistics executive at C.H. Robinson Worldwide, noted in a recent article in the Journal of Commerce, “Logistics expertise, developed under practical situations while meeting or exceeding customer expectations, is the premium offering from the best logistics providers.”

Another significant development of the Geneva Congress was the approval of a Global Monitoring System to track performance in the delivery of inbound international mail using radio frequency identification (RFID) technology. RFID systems from companies like Lockheed Martin’s Savi Technology and Maersk Line provide precise, value-added means for tracking inventory across global supply chains. In the future, employing RFID could allow postal operators to link service performance to payment systems.

Domestic Barriers Facing USPS

Traditional letter mail has been on the decline for decades in the United States and around the world, and comprised only 9 percent of mail sent and received by U.S. households in 2007.

Ever mindful of these trends, the Postal Service has targeted the business mailing community as the customer base to generate new revenue to sustain its present business model. Its business strategy has relied heavily on generating increased mail volume through aggressive worksharing discounts, enhancing the program of services it offers domestic business mailers, and even a widely advertised 2009 “summer sale” for bulk mailers.

But as noted in the August Senate hearing by Postal Regulatory Commissioner Ruth Goldway, a longtime advocate for the Postal Service’s monopoly consumers, its past forays into nonpostal services have generally proven unsuccessful. The Government Accountability Office (GAO) noted that in the second half of the 1990s, USPS had publicly introduced 19 new product offerings. Three of these involved strategic alliances with private-sector companies, such as a deal with SmarTalk Teleservices, Inc to sell Firstclass Phonecard in post offices. But GAO noted that 5 of the 19 had been discontinued before 1998. More telling was its analysis that total revenues for the 19 offerings through 1997 was $148.8 billion, while total expenses totaled $233.5 million.

Meanwhile, its cost-cutting strategies have been focused largely on its monopoly consumers. Hundreds of thousands of blue collection boxes have been removed from streets, and pickup times for those that remain have been reduced. But two recently-proposed strategies, eliminating Saturday delivery and closing some 700 post offices, have proven highly controversial amid strong resistance from postal labor unions and political leaders. Potter and his team have reduced the size of their fulltime workforce from over 800,000 to under 650,000 employees, collective bargaining agreements covering 85 percent of their workforce stand in the way of further cuts.

The U.S. Postal Service is barred from venturing into nonpostal offerings by the 2006 Postal Accountability and Enhancement Act. Prior to that law’s enactment, postal management had broad authority to introduce new products and services, but these often produced money-losing ventures.

In addition, the law established an accounting system intended to prevent the Postal Service’s monopoly services from subsidizing those that compete directly with private-sector providers.

Should Potter and his team succeed in changing the current legal framework, there are strong reasons for concern about a strategy of betting USPS’s financial future on new, nonpostal business lines.

Don Soifer