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.
APD 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 Corp, 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."
With each rate hike, says Rosen, "alternate delivery becomes that much more viable." Mitchell Newman, president of Mitchell's Newspaper Delivery Inc. of New York and a member of the Nationwide alliance, says that since the rate boost, his firm has been "flooded with calls."
During past rate hikes, publishers frequently threatened to use alternate delivery systems, yet they seldom did more than dabble in a few pilot demonstrations. This time, mailers say they are serious, and they're putting up the money to prove it. If Publishers Express is merely a bluff, "it's a very costly one," notes George Gross of the Magazine Publishers Association.
Despite all the excitement, alternate delivery is not without its pitfalls. The Postal Service enjoys a number of powerful advantages. It offers universal delivery six days a week, through 40,000 post offices. It enjoys sole access to its patrons' mailboxes. It retains its monopoly on all addressed letters, leaving most third-class mailers—who, as the most profitable category of customers, subsidize first-class service—firmly in its clutches.
So far, alternate delivery is available in only a handful of cities. Even in those areas, coverage can be spotty. Private delivery is too costly in many low-density rural areas, and it is sometimes difficult to gain access to urban apartment buildings. Almost no one expects that mailers will ever achieve 100-percent alternate distribution. Moreover, not all the pilot projects have been unalloyed successes, at least at first. "It clearly isn't as easy as it sounds, just to go out there and deliver magazines outside the post office," says Campbell of Times Mirror Magazines. "There's a definite learning curve out there."
Cashing in on concerns raised by the recent rate hike, APD is racing to expand nationwide to achieve a critical mass, so that wider geographical distribution will in turn draw heavier mail volume. "This will be the best window of opportunity private mail deliverers will ever get to show to the marketplace that they're up to the task," says Gene DelPolito, executive director of the Third Class Mailers Association. But he warns, "If you can't deliver me my marketplace, then you're of no use to me whatever."
APD's Miller agrees that he has about 36 months to establish a network, but he sees things a little differently. "Either the third-class and magazine mailers jump on board and participate in alternate delivery," he says, "or they'll lose the opportunity forever to have a true, viable competitor against the Postal Service." He is confident that mailer participation "will be there, and we don't think there's any chance we'll miss the window of opportunity."
Private deliverers must make alternate delivery painless, DelPolito contends, offering mailers the same "one-stop shopping" and standard specifications available at the Postal Service. At the moment, APD and Publishers Express emphasize that they are not competing against each other and do not plan to invade each other's markets. Mailers want one nationwide network, says Rosen of Publishers Express, "and if there are competing forces, I don't see alternate delivery working."
It might be preferable to have more than one or two nationwide companies; after the Postal Service raised its rates in February, UPS followed suit. Still, mailers believe even one alternative to the Postal Service would be a big improvement, if the two systems compete against each other.
Duplicating the capacity of the Postal Service is too costly, as Publishers Express has discovered. The company now is copying the APD strategy of using local companies for distribution. Newspapers seem especially well-suited for the work. The Sacramento Bee and the Orange County Register in California were among the first to set up alternate-delivery systems for their own solicitations and promotional mailings, mainly to defend themselves against rising postal costs and uncertain deliveries.
Both papers discovered, however, that alternate delivery is a profit maker; the Bee is negotiating a contract with APD. Newspapers "already have the means in place to become…not just a newspaper company, but a delivery company," says Jim Spivack, alternate distribution manager for the Bee. Newspapers have customer service and circulation departments, he notes. "We have existing carriers. We have distribution trucks. I can only see an unlimited expansion."
Although Postmaster General Frank claims that the postal monopoly is a "necessary public institution that serves an important social function as a binding, unifying force in our national life," postal patrons seem to be bound together mostly by shared horror stories. Magazine circulation directors complain of convoluted, unnecessary rules capriciously administered. Navigating the U.S. Postal Service, says one, "is like trying to get an export visa for an automobile in Peru."
Ken Bradstreet, president of the Association of Alternate Postal Systems and an executive at Advertisers Postal Service, a private deliverer of saturation mail in northern Michigan, recalls a local advertiser who had complained that Bradstreet's operation did not reach as many potential customers as the post office could. The advertiser drew this conclusion from the fact that Advertisers Postal was asking for significantly fewer mailing pieces than the post office wanted for delivery to the same area.
So Bradstreet decided to visit the dumpster at the local post office. He pulled out a pile of the advertiser's undelivered mailings and showed him what amounted to some 8 percent of the zip code he was trying to reach. "That picture was worth a thousand words," Bradstreet recalls. The Postal Service was routinely asking for more pieces than it needed and dumping the rest, even though the mailer had paid postage for it as well as printing costs.
The local postmaster, riled by the affair, wanted to call in a postal inspector to determine for certain who had been rooting in the postal garbage, "so that I could be arrested properly," says Bradstreet. No arrests were made, and the advertiser subsequently switched to Advertisers Postal. "The Postal Service is quite good at—I don't want to say covering up—but disposing of excess materials," Bradstreet says. "The mailers never see it and never suspect it."
Alternate deliverers are confident they can deliver superior service. As Newman of Mitchell's Newspaper Delivery puts it, try calling the U.S. Postal Service to find out why Mrs. Jones of Ann Arbor failed to get her People magazine last Thursday. Newman boasts that on the rare occasion his company doesn't deliver, he'll find out why and have it fixed within an hour.
The Postal Service is frequently compared to a battleship, but Thompson, publisher of Optimum Delivery, says the behemoth is not merely slow to respond. "I think it's far beyond that," he says. "I just don't see how the Postal Service is ever going to be able to accomplish what private industry can accomplish."
The emergence of alternate delivery could help convince people of that. "If alternate deliverers play their cards right, you're looking at something which is going to be a permanent fixture in the postal market, and something which has tremendous potential to grow," says DelPolito of the Third Class Mailers Association. "Every day that alternate delivery shows it is up to the test of satisfying the market's needs is one day less that you will find for the future of the private express statutes."
Who knows? Someday, even Cub Scouts may get to deliver Christmas cards.
Carolyn Lochhead is a writer for Insight magazine.