Advertising Mail: Past and Present
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Cover Advertising Mail: Past and Present RARC Report Report Number RARC-WP-16-006 March 28, 2016 Since the end of the Great Recession, advertising mail volume growth has stalled. Advertising mail is one of the Highlights U.S. Postal Service’s most important products. In fiscal year Executive The OIG asked RCF, an economic firm with (FY) 2015, total advertising mail volume, composed primarily longstanding postal expertise, to look at recent of Standard Mail, was close to 85 billion pieces, generating trends and possible future scenarios Summary $19.4 billion in revenue and $7.8 billion in contribution. Beyond for advertising mail. the benefit to the bottom line of the Postal Service, advertising mail is also an important tool for businesses and nonprofits to Advertising mail generated 19.4 billion in increase their sales and customer bases. revenue and $7.8 billion in contribution in FY 2015 (85 billion pieces). In order to understand the stagnation in advertising mail growth, Most ad mail is sent as Standard Mail. Standard the U.S. Postal Service Office of Inspector General (OIG) asked Mail volumes declined 20 percent during the RCF Economics and Financial Consultants, a firm with deep Great Recession and have not rebounded. expertise monitoring postal volumes and trends, to examine recent historical trends and provide insights into the overall Budgets for overall advertising spending have advertising market. This paper summarizes that research. been declining, in part due to digital deflation (pressure for lower prices driven by low-cost Working with RCF, the OIG examined trends in the size of the digital technologies). advertising market as well as the size of its respective market Future risks include continuing cannibalization shares. Despite the ubiquity of advertising in today’s world, by digital alternatives and macroeconomic spending on advertising has declined as a share of Gross trends such as declining median household Domestic Product (GDP). At the same time, the Internet has income and structural changes in industries like gone from a virtually nonexistent share of the market to a financial services. 30 percent share in just 20 years. However, by pursuing a digital-physical In an ironic twist, for many years, the primary loser of market integration strategy, the Postal Service may be share to Internet advertising has been newspapers, which have able to turn the looming competitive threat from the Internet into an opportunity for future growth. long been close competitors of direct mail advertising. Now that newspapers’ market share is in the single-digit range, Internet advertising may begin to take market share from other media, including television and advertising mail. Advertising Mail: Past and Present Report Number RARC-WP-16-006 1 The pattern of historical growth suggests that advertising mail ■ Repurposing advertising mail offers opportunities for is a mature product, one not likely to repeat the exceptional direct mail to feed and benefit from the fast-growing growth of the 1980s. Nevertheless, advertising mail has many ecommerce market. inherent strengths that make it still relevant in the digital age. Moreover, with the rise in mobile communications, the ■ Service levels must be maintained and improved. Postal Service could find an opportunity for advertising mail to Predictability and consistency in delivery is especially experience synergistic growth. important when competing in a world of instant electronic communication. To succeed in the smaller, Internet-dominated advertising market, several strategies are suggested: By combining these strategies, the Postal Service may be able to turn the looming competitive threat from the Internet into an ■ Simplification of mail make-up requirements and acceptance opportunity for future growth. would improve direct mail’s competitiveness. The historical trends examined in this paper have implications ■ Advertising mail needs to innovate mail piece functionality for the future of advertising mail. A forthcoming OIG paper and take advantage of exploding growth in mobile-based develops 10-year projections of Standard Mail volume, based advertising. The Postal Service should promote multichannel on various scenarios about the advertising market and Internet marketing that integrates direct mail with other advertising growth. advertising media. Advertising Mail: Past and Present Report Number RARC-WP-16-006 2 Table of Contents Cover Executive Summary......................................................................................1 Table of Contents..........................................................................................3 Observations ................................................................................................4 Introduction ..............................................................................................4 The Importance of Advertising Mail .........................................................4 Four Eras of Advertising Mail ..................................................................5 Advertising Mail and the Advertising Market ...........................................8 Factors Underlying Historic Trends in Advertising Mail ...........................9 Strengths ..........................................................................................12 Weaknesses ....................................................................................13 Fighting Back .........................................................................................14 Simplifying Advertising Mail ..............................................................14 Mail Innovations ...............................................................................14 Multi-channel Initiatives ....................................................................14 Repurposing Traditional Advertising Mail .........................................15 Maintaining and Improving Service ..................................................15 Conclusion .............................................................................................15 Appendices .................................................................................................16 Appendix A: Direct Mail: Challenges and Opportunities for the U.S. Postal Service ....................................................................... 17 Appendix B: Management’s Comments ................................................47 Contact Information ....................................................................................49 Advertising Mail: Past and Present Report Number RARC-WP-16-006 3 Observations Introduction Like Facebook, Google, and network television, the U.S. Postal Service relies significantly on revenue from advertising. Without advertising, many of these familiar businesses and institutions — including the Postal Service — might not even exist in their current forms. The Postal Service derives over a quarter of its revenue and volume from advertising. Advertising makes a significant contribution to the funding of the Postal Service’s vast network. Yet there is a serious challenge facing the Postal Service: unlike many other parts of the economy, direct mail advertising has not recovered from the Great Recession. After decades of growth, advertising mail Unlike many parts of the volume growth has stalled. This paper looks at possible reasons why this is the case. A forthcoming second paper will examine economy, advertising mail what this might mean for the future of advertising and the Postal Service. The U.S. Postal Service Office of Inspector General (OIG) worked with RCF Economics and Financial Consultants to examine advertising mail. RCF has over 3 decades of experience has not recovered from the monitoring trends in Postal Service mail volumes and their underlying causes. Its report is contained in Appendix A. Great Recession. The Importance of Advertising Mail Advertising mail is not a formal postal product. It does not appear explicitly in official reports such as the Revenue, Pieces, and Weight Report (RPW) or the Cost and Revenue Analysis Report (CRA). Nevertheless, the vast majority of Standard Mail is advertising mail.1 This is also true of a significant portion of First-Class Mail.2 In fact, more than half of all mail volume is advertising mail.3 Advertising mail’s revenue per piece and cost per piece are relatively low. As a result, despite composing more than half of all mail volume, advertising mail accounts for 28 percent of revenue, 29 percent of attributable cost, and 27 percent of contribution to institutional cost. Put succinctly, without advertising mail, $7.8 billion of contribution would have to be borne by other postal products. Obviously, this would put tremendous stress on the entire the Postal Service, its employees, and its customers (See Table 1). Table 1: Advertising Mail by the Numbers in Fiscal Year 2015 (in Billions) Volume Revenue Attributable Cost Contribution Standard Mail Advertising 80.1 $17.7 $11.1 $6.6 First-Class Advertising 4.4 $1.7 $0.5 $1.2 Total Advertising 84.5 $19.4 $11.6 $7.8 All Mail 154.2 $69 $40.2 $28.8 Percent of Total 55% 28% 29% 27% Source: OIG – Calculation based on data from the fiscal year (FY) 2015 U.S. Postal Service RPW; 2015 Cost and Revenue Analysis; and 2014 Household Diary Study Reports. Beyond its immediate financial importance to the Postal Service, advertising mail serves important roles in American life. Businesses use advertising mail to maintain relationships with current customers.