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May 30 — June 5, 2011 | businessweek.com
The End of Mail For 44¢, a government employee will take an ounce of paper from your house to the farthest reaches of Alaska. It’s a noble American tradition— and on the verge of collapse. It doesn’t have to be p60 May 30 — June 5, 2011 Bloomberg Businessweek
The U.S. Postal Service is as old as the country, delivers 40 percent of the world’s mail, and is on the verge of collapse. It doesn’t have to be. By Devin Leonard Phillip Herr looks like many of the men who toil deep within the federal government. He wears blue suits. He keeps his graying hair and mustache neatly trimmed. He has an ino ensively earnest manner. He also has heavy bags under his eyes, which testify to the long hours he spends scrutinizing federal spending for the U.S. Government Account- ability O ce, the congressional watchdog agency where he is Director of Physical In- frastructure Issues. As his title suggests, Herr devotes much of his time to highway pro- grams. But for the past three years he has been diagnosing what ails the U.S. Postal Service. It’s a lonely calling. “Washington is full of Carnegie and Brookings Insti- tutes with people who can tell you every option we have in E ypt or Pakistan,” laments Herr, who has a PhD in anthropolo y from Columbia University. “Try and find someone who does that on the postal service. There aren’t many.” Yet Herr nds the USPS fascinating: ubiquitous, relied on, and headed o a cli . Its trucks are everywhere; few give it a second thought. “It’s one of those things that the public just takes for granted,” he says. “The mailman shows up, drops o the mail, and that’s it.” ➡ May 30 — June 5, 2011 Bloomberg Businessweek
61 May 30 — June 5, 2011 Bloomberg Businessweek
He is struck by how many USPS execu- them lose money? And is there a way for tives started out as letter carriers or clerks. the country to have a mail system that ad- He fi nds them so consumed with deliver- dresses the needs of consumers who use ing mail that they have been slow to grasp the Internet to correspond? how swiftly the service’s fi nancial condi- The Capitol Hill debate is primar- tion is deteriorating. “We said, ‘What’s ily about money. The USPS and its em- your 10-year plan?’ ” Herr recalls. “They ployee unions are lobbying for the least didn’t have one.” painful remedy: They want the agency to Congress gave him until the end of be relieved of its requirement to build a 2011 to report on the USPS’s woes. But health-care trust fund for its future retir- Herr and his team concluded that the ees. They are supported by junk mailers, postal service’s business model was so greeting card manufacturers, and maga- badly broken that collapse was imminent. zine publishers whose businesses are, in Abandoning a long tradition of overdue re- some cases, subsidized by the post offi ce’s ports, they felt they had to deliver theirs generously low mailing prices. Never 18 months early in April 2010 to the var- mind that their benefactor loses money ious House and Senate committees and on some of their products, most notably subcommittees that watch over the USPS. magazines and some junk mail. A year later, the situation is even grimmer. Herr advocates closing post offi ces Democrats receive the vast major- With the rise of e-mail and the decline of and creating digital services ity of the contributions made by postal letters, mail volume is falling at a stagger- workers’ unions, according to campaign ing rate, and the postal service’s surviv- plan. Banks fl ooded mailboxes with sub- fi nance records, so they tend to be sympa- al plan isn’t reassuring. Elsewhere in the prime mortgage off ers and credit-card thetic. President Barack Obama inserted world, postal services are grappling with come-ons. Then came the recession. a proposal in his 2012 budget to absolve the same dilemma—only most of them, in Total mail volume plunged 20 percent the USPS of $4 billion of its retiree health- humbling contrast, are thriving. from 2006 to 2010. care liabilities in 2011. This would enable The USPS is a wondrous American cre- Since 2007 the USPS has been unable it to slog through another year without ex- ation. Six days a week it delivers an aver- to cover its annual budget, 80 percent of traordinary changes. Meanwhile, Senator 62 age of 563 million pieces of mail—40 per- which goes to salaries and benefits. In Thomas Carper (D-Del.) introduced a bill cent of the entire world’s volume. For the contrast, 43 percent of FedEx ’s budget on May 17 that would relieve the USPS of price of a 44¢ stamp, you can mail a letter and 61 percent of United Parcel Service ’s its prefunding headaches. “If we do noth- anywhere within the nation’s borders. pay go to employee-related expenses. Per- ing, we face a future without the valuable The service will carry it by pack mule to haps it’s not surprising that the postal ser- services that the postal service provides,” the Havasupai Indian reservation at the vice’s two primary rivals are more nimble. Carper cautioned in a statement the same bottom of the Grand Canyon. Mailmen on According to SJ Consulting Group, the day. The bill would give the postal ser- snowmobiles take it to the wilds of Alaska. USPS has more than a 15 percent share of vice access to as much as $75 billion it If your recipient can no longer be found, the American express and ground-ship- claims to have overpaid the federal re- the USPS will return it at no extra charge. ping market. FedEx has 32 percent, UPS tirement system. Naturally, the USPS and It may be the greatest bargain on earth. 53 percent. its unions are pushing for this because it It takes an enormous organization to The USPS has stayed afloat by bor- would swiftly erase the agency’s red ink. carry out such a mission. The USPS has rowing $12 billion from the U.S. Treasury. Others in Washington dispute the postal 571,566 full-time workers, making it the This year it will reach its statutory debt service’s claim and call this wishful think- country’s second-largest civilian employ- limit. After that, insolvency looms. ing at a time when there is such concern er after Wal-Mart Stores . It has 31,871 post On Mar. 2, Postmaster General Pat- about the rising defi cit. They also add that offi ces, more than the combined domestic rick R. Donahoe warned Congress that the bill would do nothing to address the retail outlets of Wal-Mart, Starbucks , and his agency would default on $5.5 bil- larger issues affl icting the USPS. McDonald’s . Last year its revenues were lion of health-care costs set aside for its House Republicans are less charitable. $67 billion, and its expenses were even future retirees scheduled for payment on They oppose anything that could be con- greater. Postal service executives proudly Sept. 30 unless the government comes to strued as a bailout. They are pushing in- note that if it were a private company, it the rescue. “At the end of the year, we stead for the USPS to make deep budget would be No. 29 on the Fortune 500. are out of cash,” Donahoe said. He noted cuts. Even so, budget hawks sound ner- The problems of the USPS are just as that the unusual requirement was enact- vous. In a March hearing, the often pro- big. It relies on first-class mail to fund ed fi ve years ago by Congress before mail vocative U.S. Representative Darrell Issa most of its operations, but fi rst-class mail started to disappear. (R-Calif.) said two post offi ces could be volume is steadily declining—in 2005 it fell This should be a moment for the coun- closed in every congressional district. He below junk mail for the fi rst time. This was try to ask some basic questions about its added with a laugh: “Let’s hope there’s a signifi cant milestone. The USPS needs mail delivery system. Does it make sense not one—or three—in mine.” (A spokes- three pieces of junk mail to replace the for the postal service to charge the same man for Issa says that the congressman profi t of a vanished stamp-bearing letter. amount to take a letter to Alaska that it was trying to “introduce a bit of levity” During the real estate boom, a surge does to carry it three city blocks? Should into the proceeding and is fully in favor in junk mail papered over the unraveling the USPS operate the world’s largest net- of shuttering postal facilities.)
of the postal service’s longtime business work of post offi ces when 80 percent of The irony of the political stalemate BUSINeSSWeeK BLOOmBeRG FOR WOLBeRGeR OFeR By PHOTOGRAPHS May 30 — June 5, 2011 Bloomberg Businessweek
climbed 7.1 percent. “That proves that over the period of the contract, along with there is viability in our system,” Donahoe seven upcapped cost-of-living increases. insists. (Unfortunately for the USPS, junk The union is happy. “Despite the fact that volume has since plateaued.) the postal service is on the edge of insol- The Postmaster General promises that vency, the union and management have if the USPS is excused from its annual reached an agreement that is a ‘win-win’ health-care prepayment, he will wring proposition,” said APWU President Cliff enough costs out of the system to turn a Guffey on the union’s website. A USPS profit on its remaining mail stream. He spokeswoman said the agency agreed to wants permission from Congress to cut the raise because it feared the decision weekly delivery from six to five days, would otherwise be made by an arbitra- which he says will save $3 billion a year. tor who might be even more deferential He says he wants to reduce the USPS’s to the union. headcount by 20 percent over the next Congressional Republicans say the five years through attrition, though the agreement sets a bad precedent for the agency’s union contracts prohibit layoffs. USPS’s other three unions, whose con- What’s more, Donahoe wants to close tracts expire this year. Fredric V. Rolando, post offices and move some of their op- president of the 275,000-member Nation- Donahoe says cutting delivery to five days erations into convenience stores and su- al Association of Letter Carriers, doesn’t a week could save $3 billion annually permarkets, where nonunion workers can sound like he’s interested in making staff them. The USPS is targeting 2,000 of major concessions. He argues the agency is that it may be much simpler to fix the its 31,871 post offices. That’s not much for should be increasing rather than cutting USPS than more intractably troubled an agency that’s nearly $15 billion in debt. its services. One of his ideas is to outfit federal programs such as Medicare and Donahoe says he’s doing what he can, de- postal trucks with sensors so mail carri- Social Security. Indeed, many other coun- spite a federal stricture that forbids the ers can thwart possible biological terrorist tries have figured out profitable ways to closing of post offices solely for economic attacks. “They can work with Homeland run a postal service. The U.S. could learn reasons. He tells anybody who will listen Security to detect things that are in the a lot from them. Yet hardly anybody is on Capitol Hill that the prohibition makes air,” Rolando says. The Homeland Secu- talking about this, except for Herr. little sense at a time when his agency’s cof- rity Dept. declined to comment. 63 fers are nearly depleted. It’s a sunny afternoon in early March, and Some praise Donahoe for his early ef- The more Phillip Herr tried to figure out Patrick Donahoe is talking about music. forts. “I’m really high on the guy,” says the USPS and its financial agonies last year, “Are you a fan of the Allman Brothers?” Anthony W. Conway, executive director the more he was vexed by something: He he asks. “They used to sing that song of the Alliance of Non-Profit Mailers, a couldn’t say for sure how poorly it was One Way Out. There’s a way out.” coalition of colleges, fraternal organiza- doing because he had nothing to contrast The 73rd Postmaster General sits com- tions, and advocacy groups that use the it with. “There is always the ‘compared to fortably in a blue leather chair in his wood- mail for fundraising. “Pat,” he says, “is a what?’ question,” Herr says. “Compared paneled Washington office, surrounded breath of fresh air.” to FedEx? Compared to UPS?” by postal artifacts. There’s a portrait of The USPS has historically placed the Herr thought it made more sense original Postmaster Benjamin Franklin on interests of its unions first. That hasn’t to compare the USPS to postal servic- loan from the Smithsonian Institution and changed. In March it reached a four-and- es in other countries. Last summer he a bronze statue of a Pony Express rider. a-half-year agreement with the 250,000- sent a small team of analysts to Finland, Donahoe, a car buff, has also decorated member American Postal Workers Union, Sweden, Germany, Switzerland, Austria, the room with sports car stamps. which represents mail clerks, drivers, me- and Canada. He was fascinated by what A broad-shouldered 55-year-old from chanics, and custodians. The pact extends they discovered. Pittsburgh, he looks like he could easily the no-layoff provision and provides a Three decades ago, most postal servic- deliver a heavy sack of mail. He has toted 3.5 percent raise for APWU members es around the developed world were gov- plenty in his time. He started as a clerk in ernment-run monopolies like the USPS. In his hometown mail sorting center when the late ’80s, the European Union set out he was in college. “I just never left,” to create a single postal market. It prod- Share of 2010 American express Donahoe chuckles. “That’s the story of a and ground-shipping service ded members to give up their monopo- lot of people around here.” lies and compete with one another. The Donahoe, who took office in Janu- effort roused an industry often thought to ary, is surprisingly upbeat for someone FedEx be sleepy and backward-looking. in charge of an agency on the verge of 32% Many countries closed as many of their bankruptcy. He says he wants to dispel UPS brick-and-mortar post offices as possible, “some of the negative vibes that have 53% moving these services into gas stations been floating around” the postal service. and convenience stores, which then take He acknowledges that first-class mail is in them over—just as the USPS is trying to do an inexorable decline, but he sees junk now, only far more aggressively. Today, mail rebounding with the economy. In USPS 15% Sweden’s Posten runs only 12 per- ➡ DATA: SJ CONSULTING GROUP CONSULTING SJ DATA: the last quarter of 2010, junk revenue cent of its post offices. The rest are May 30 — June 5, 2011 Bloomberg Businessweek
in the hands of third parties. Deutsche The postman’s profit margins for the first three months in 2011 Post is now a private company and runs just 2 percent of the post offices in Ger- many. In contrast, the USPS operates all of its post offices. Some of these newly energized mail services used the savings to pursue new business lines. Deutsche Post bought 26.15% 4.89% 3.6% -−-----13.58% DHL, a package deliverer that competes SingPost Deutsche Post DHL PostNord USPS with FedEx and UPS. “More than half of our workforce is outside of Germany,” says Markus Reckling, executive vice-president with Posten executives who told him how of its customers to the Net. The man in for corporate development at Deutsche hard they had worked to sell their plans charge of this task, which brings to mind Post. “It’s pretty much the same thing for to close post offices to a skeptical public. King Canute’s attempts to hold back the our profits.” Not everyone approved. Some Swedes incoming tide, is Paul Vogel, a former Many used their extra cash to create were very upset. Eventually, they got letter carrier who is now the postal ser- digital mail products that allow custom- over it. In the end, they got their mail as vice’s chief marketing sales officer. He ers to send and receive letters from their efficiently and reliably as before. is less spirited than his boss and under- computers. Itella, the Finnish postal ser- In Switzerland, Herr met with Swiss standably so; his job is to persuade banks vice, keeps a digital archive of its users’ Post executives who demonstrated the to keep sending paper statements in the mail for seven years and helps them digital mail service. “You can say, ‘Here’s mail. It’s a losing battle, and Vogel knows pay bills online securely. Swiss Post lets what I want,’ ” he explains. “ ‘No, thank it. “Inevitably, it’s going to go to those new customers choose if they want their you, I’d rather not have that seed cata- technologies,” he sighs. mail delivered at home in hard copy or logue. But I would like to have my bill Herr couldn’t agree more. The other scanned and sent to their preferred In- from Citibank and my mortgage.’ Well, day he got a notice in the mail from the ternet-connected device. Customers can maybe the advertising mail people U.S. Senate Federal Credit Union. It said also tell Swiss Post if they would rather wouldn’t be too excited about that.” it was going paperless in August. Custom- not receive items such as junk mail. Herr returned to America full of ex- ers who still want to get their statements 64 Sweden’s Posten has an app that lets citement. In February he delivered a mailed to them would have to pay a fee. customers turn digital photos on their 40-page report to the House subcom- He dropped by the office on Capitol Hill to mobile phones into postcards. It is un- mittee that oversees the postal service. find out how much. “I have a dispropor- veiling a service that will allow cell-phone It makes two major points: The USPS tionate interest in things like this, given the users to send letters without stamps. needs to close post offices, as many for- work I’ve been doing lately,” Herr says. Posten will text them a numerical code eign postal services have done despite real A credit union worker told him the fee that they can jot down on envelopes in opposition. And the USPS needs to create was $5 a month. Herr was astonished. “I place of a stamp for a yet-to-be-deter- products for its wired customers if it wants thought to myself, that’s $60 a year,” he mined charge. to play a role in the future of communica- recalls. “Who’s going to want to do that? Anders Asberg, Posten’s head of mar- tion. He acknowledges some foreign digi- What happens when Bank of America or keting and development, says the service tal services are in early stages, but they are Citigroup says you are going to have to pay is experimenting with these initiatives, and in demand, and in some cases the digital to get your statement on paper? That’s he expects some will prove to be lucrative. technology reduces delivery costs. going to change a lot of behavior. It’s going “The customers are all on these digital in- Joseph Corbett, the American postal to affect the postal service. That’s how terfaces now,” he says. “That’s where the service’s chief financial officer, thanked they make most of their money.” growth is going to be in the future.” Herr for his efforts. At the same time, Posten can afford to take chances. In he said the agency was sticking to its The baying begins as soon as Jim Rice 2009 the Swedish mail carrier merged plan. Postmaster Donahoe says he isn’t climbs out of his truck with his mail sack with Post Danmark, the Danish postal so sure about the digital mail initiatives on his shoulder. He looks around warily. service, creating PostNord, a company emerging outside the U.S. “The value “This is the street where I’ve had some with $6.2 billion in net sales and $320 mil- added there might not be as much as ev- issues with dogs,” he says. lion in EBITDA. In 2010 the latter rose by erybody thinks,” he says. Joanne Veto, It’s a pleasant morning in early April, 43 percent, to $490 million. a USPS spokeswoman, said in an e-mail and Rice, a 58-year-old letter carrier, is “The question is, are there any spe- that the USPS had hired outside consul- going from house to house on Rugby Road
cial circumstances that suggest all these tants who examined some of these digital in Cardinal Valley, a blue-collar neighbor- r e ports
other countries are wrong and we are mail offerings and advised the agency not hood in Lexington, Ky. He hardly appears right?” says James I. Campbell Jr., a con- to pursue them: “While foreign posts did a threat in his white pith helmet and ill-
sultant in Potomac, Md., who advises for- make money by diversifying their prod- fitting blue uniform. The pets on his route ve rn me nt go eign governments on postal policy issues. ucts, it took as many as 20 years before have a different view. Rice has fought off
“The answer is pretty simple: The Euro- a profit was realized. In the short term, Piper, a black Labrador retriever. He and pean countries are on a reasonably viable there was limited or no profit. We do not recently used his mail pouch to fend off course. The U.S. is not.” have 20 years.” Rocky, a German shepherd. Herr traveled to Sweden, Switzer- Under Donahoe, the USPS is focused The Kentucky letter carrier is stoic y C o m pan :
land, and Finland last summer. He met instead on trying to slow the migration about his scrapes. Some things about his data May 30 — June 5, 2011 Bloomberg Businessweek
job are eternal. Others are changing rap- sumption. The USPS’s leaders rewarded master General at the time, was ecstatic idly. He carries a lot more of what he calls their union employees with more expen- when the bill was signed into law. “We’re “standard mail.” “Civilians call it junk sive benefits than most federal employ- planning for the future right now,” he mail,” Rice says, joking. “We don’t like that ees enjoy. According to the U.S. Postal said. “Today the postal service is operat- term. We call it job security.” Service Inspector General’s Office, it ing in the black.” Rice’s ritual hand delivery of the mail covers 79 percent of most of its employ- The USPS was O.K. that year. Then, remains the essence of the USPS’s busi- ees’ health benefits, compared with the over the next three years, the economy ness. Until fairly recently, this was a typical 72 percent for federal workers. collapsed, and the service lost $12 billion. fabulous model, although its history of The USPS was slow to react to shifts A former letter carrier in the Bronx, success, in retrospect, is notable for its in the industry. In the late ’70s, Congress Potter remained ebullient. He testi- missed opportunities. prodded it to allow private companies fied before Congress in 2009 that mail As America’s population expanded, so to carry letters needing urgent delivery. volume would eventually return. Herr sat did the postal service. In its early years, FedEx and UPS built enormously valu- nearby. He says he was stunned. Potter people paid to receive mail. In 1863 the able businesses on the USPS’s turf. They announced his resignation six months U.S. Post Office Dept., a Cabinet level weren’t required to visit every doorstep after Herr issued his report on the USPS’s agency, was flush enough to begin offer- in the country on a daily basis. They set broken business model. The postal ser- ing free city delivery. In 1896 it expanded their own rates and had no qualms about vice rushed out a study of its own around free service to rural areas, providing what extracting concessions from their unions. the same time by McKinsey that reached it now refers to as “universal service” to The postal service tried to compete, with- the same dispiriting conclusions. all Americans. Mail volume exploded. In out much success. “They just cleaned the The USPS, however, still seems to be cities such as Philadelphia and Boston, postal service’s clock,” says Tad DeHaven, in denial. “The postal service is already letter carriers made their appointed a budget analyst at the Cato Institute, a carrying more junk than first class,” says rounds three times a day. libertarian think tank in Washington. It postal consultant Campbell. “Pretty soon Inevitably, perhaps, there were prob- didn’t matter at the time. The agency had it’s going to be a government-run advertis- lems. The post office became a patronage its slower-moving letter monopoly, and ing mail delivery service. Does that make dumping ground. After decades of mis- mail volume kept climbing. any sense? It doesn’t make any sense.” management and neglect, service broke The USPS slumbered as the postal There are still flaws in the USPS’s junk- down completely in Chicago in 1966. service industry was upended overseas. centric plan. The service now predicts that “The sorting floors were bursting with Michael Coughlin, former Deputy Post- total mail volume will decline from 171 bil- 65 more than 5 million letters, parcels, cir- master General, attended meetings in lion pieces annually in 2010 to 150 billion culars, and magazines that could not be Brussels in the early 1990s where his in 2020. That’s a best-case scenario. The processed,” Lawrence O’Brien, the Post- peers in Sweden and Germany described worst-case, according to its own projec- master General at the time, would recall the innovative things they were doing. tions, is 118 billion. somewhat poetically. “Outbound mail “I would sit there and think, I wish that That’s still a lot of stamps to sell. The sacks formed still gray mountain ranges was us,” he says. Coughlin left the USPS in problem is that costs keep rising. The as they waited to be shipped out.” 1999 to work at Accenture, a global con- number of addresses the USPS services Four years later, President Richard sulting firm, where he advised foreign climbs at an average of roughly 1 million a M. Nixon signed the Postal Reorganiza- postal services on their streamlining ef- year as the population grows. Meanwhile, tion Act, transforming the Post Office forts. He retired in 2009. the agency continues to raise the salaries Dept. into the U.S. Postal Service, a gov- In the late ’90s, there was talk within and benefits of its clerks and mail carriers ernment corporation that was supposed the USPS about reforms, including priva- even with periodic freezes. to pay for itself and behave more like a tizing the organization. Robert Reisner, “I really believe that the USPS is going private business. This proved a naive as- a former USPS vice-president of stra- to get to a point where, regardless of what tegic planning, recalls raising some of it does with the prefunding [of retiree these issues during a visit to the White health care], it is going to implode,” says House with a Clinton Administration R. Richard Geddes, an associate professor official: “She said, ‘Well, we would have of policy analysis and management at Cor- to ask our union friends. You know they nell University. “It is either going to default are critical to the coming campaign.’ ” on those obligations to its retirees or we At the same time, e-mail took hold. are going to have to give it a direct bailout By 2000 the USPS was losing money. from the United States taxpayers.” The GAO warned that the service might The implosion could happen this year not be able to cover its retiree health- because of the stalemate in D.C. Maybe care costs. that’s what it will take for Americans to Congress came up with what it thought get a modern mail service. Even Donahoe, would be a fix. In 2006 it relieved the who advocates something less, sounds as postal service of $27 billion in pension if he would welcome it because there’s no liabilities for workers with military ser- other way out. “Some people say if you vice. At the same time, the USPS agreed crash the system,” he says, “then people to make annual payments of $5.5 billion First-class mail is three times will pay attention to you.”
DATA: GAO future retirees. John E. Potter, the Post- ing Keane