The hairline cracks long evident at the edges of the U.S. postal monopoly have been opened wide by February’s seismic postal rate hike. Within the next few years, sizable chunks of postal business could start breaking off into the private sector.
Stephen L. Thompson, publisher of the Dallas-based newsletter Optimum Delivery, puts it bluntly: “Privatization of this industry is already starting to take place around them, without them, in spite of them.”
The “them,” of course, is the $48-billion U.S. Postal Service. Up to now, that Brobdingnagian institution has easily fended off those would-be usurpers so bold, or so foolish, as to take on a federally protected monopoly that employs some 760,000 workers liberally sprinkled throughout every congressional district. So scrupulously does the Postal Service protect its turf that it once sued a Cub Scout pack for delivering Christmas cards.
Yet this time around, the Postal Service is facing competition from big boys, fellow giants of the corporate kind. Some of the biggest names in publishing and catalogue mailing—Time Warner Inc., the Times Mirror Co., the Hearst Corp., J.C. Penney-have signed on with two companies leading an industry known as alternate delivery. Taking advantage of exceptions to the Postal Service monopoly—mainly for magazines and catalogues-alternate deliverers seek to grab a large piece of the mail business. Conditions are ripe. Coming on top of deteriorating service, this year’s $6.2-billion postal rate hike has hit mailers hard. Magazines have been socked with a 22-percent rate boost, making rates 40 percent higher than before the 1988 increase. Catalogue mailers are among the most affected, facing a 40-to- 45-percent rate jump this year alone, a 70-percent increase since 1988. Catalogue mailer L.L. Bean says its postal costs will go up $11 million this year.
While a number of peripheral causes may help explain why postal prices are rising astronomically, most mailers see one fundamental reason: Labor costs at the Postal Service have spun out of control. Postal employees, with salaries averaging $42,000 a year with benefits, are among the world’s best-paid semiskilled workers. Entirely unionized, the Postal Service is also the country’s largest single employer, ranking internationally behind only the Soviet and Chinese armies. Postal workers are believed to make at least a third more than their private-sector counterparts. By some estimates, labor represents an astonishing 87 percent of Postal Service costs.
While management claims to be improving productivity, critics argue that any gains are sure to be squandered, as in the past, on higher wages and salaries, featherbedding, and other worker benefits. Facing no competition and no bottom line, the Postal Service operates much like a private club, existing primarily to serve itself, contends economist Douglas Adie of Ohio University. Says Lee Epstein, president of Mailmen Inc. of Long Island, a volume mailing service: “There’s no competition, so they feel free to do whatever they want.”
In the latest round of contract negotiations with the postal unions, now in arbitration, management claims that union demands would lead to a 48-cent stamp. Tom Fahey, spokesman for the American Postal Workers Union, retorts that Postmaster General Anthony Frank is “the Great Privatizer,” because he has let service decline to such an extent as to invite private-sector competition. Whatever the contract outcome, mailers see no end to large rate increases. “We feel that postal rates will continue to escalate, not just this year but for years to come,” says Patricia Campbell, executive vice president of operations for Times Mirror Magazines Inc., publisher of such periodicals as Popular Science and Ski magazine. “We really need to find a way to protect ourselves.”
Although the 1872 private express statutes grant the Postal Service a monopoly on all first-class and much of third-class mail, Congress permits competition in some areas, the most familiar being parcels and overnight express, where the United Parcel Service and Federal Express, respectively, dominate. It’s less commonly known, however, that the government also permits private delivery of second-class magazines and newspapers and certain categories of third-class mail: catalogues of 24 or more pages, unaddressed advertisements “riding along” with privately delivered material, and saturation mail (unaddressed mass mailings).
These categories represent a considerable market. “Just to give you an idea how big this is, national advertisers last year spent $23 billion, with a b, on direct-mail advertising,” says Chet Dalzell, spokesman for the Direct Marketing Association in New York. Nearly 100 million people placed orders in response to mail pieces, up 70 percent since 1983. Adding in the millions of magazines mailed each month, direct marketers estimate that 26 billion pieces of mail-some 16 percent of all domestic mail-could be diverted annually to alternate delivery. Alternate delivery, in various forms, has been around for decades. Newspapers have long been delivered privately. Companies belonging to the Association of Alternate Postal Systems have delivered door-to-door saturation advertising for years. A number of established firms, recently forming the Nationwide Alternate Delivery Alliance, deliver such time-sensitive trade magazines and newspapers as Variety and the Financial Times in 45 U.S. cities.
What’s new is the emergence of two companies launching nationwide delivery networks primarily for consumer publications, catalogues, and ride-along advertising. The largest, Alternate Postal Delivery (APD) of Grand Rapids, Michigan, serves 16 cities and plans to reach 95 major markets in the next five years. APD delivers about 1.25 million pieces a month, including at least 32 magazine titles. President and CEO Phillip D. Miller predicts a fourfold jump in volume this year.
Miller likens his system to a television network, in which independent stations operate as affiliates. APD signs contracts with local firms, often newspapers, to deliver magazines, catalogues, samples, and even telephone directories and books. Deliverers also sell local advertising ride-alongs that can be targeted to subscribers. A nursery, for example, might send fliers to House and Garden readers. The magazines serve as a base for targeted advertising, while the ride-alongs generate the profit. APD can now undercut postal rates by 15 percent to 20 percent.
Most deliverers use part-time labor and go out once or twice weekly. Because the postal statutes prohibit access to mailboxes by anyone but postal employees, packages are wrapped in plastic bags and usually hung on doorknobs. “Those polybags are to us what the mailbox is to the post office,” Miller says. APlD has contracts with the Gannett Co. and Capital Cities/ AIBC for 14 newspaper markets and with ADVO Systems Inc., the nation’s largest direct mail processor. Among ADVO’s clients are retailer J.C. Penney; the Hearst Corp., which publishes Good Housekeeping, Redbook, and House Beautiful, among others; and the Meredith Cop, publisher of magazines such as Metropolitan Home, Better Homes and Gardens, and Ladies Home Journal. While many of these companies have not ventured beyond testing, they are clearly interested in alternate delivery.
J.C. Penney seems pleased so far with its catalogue distribution tests. Richard Schart, media distribution and postal services manager, won’t reveal how many of the company’s monthly catalogues are sent by private delivery, other than to say, “It’s more than a handful, let me tell you. It’s enough to get a good measure.” He sees no constraints on APD’s growth. “It appears to me that it’s going to be a major market force in the next two to three years.”
APD is “getting a real strong hold on a lot of solid markets right now,” says Patrick J. Tracey, general manager of Commonwealth Printing Co., a sister company of the Virginian Pilot and Ledger Star in Norfolk, Virginia, that delivers for APD. “They’ve inked some pretty phenomenal contracts with some pretty heavy hitters of late.”
Time Warner is the leading backer for Publishers Express, the other major player in alternate delivery. Investors include Times Mirror, Murdoch Magazines, Meredith Corp., American Express, and the New York Times Co. Publishers Express delivers about 30 magazine titles as well as catalogues, but only in the Atlanta area. President Howard Rosen expects the company to “begin to penetrate multiple markets during 1991.”