Transcript

Chris: Hi, this is Chris Lien

     Anita: And I’m Anita Pursley. Welcome to Industry Corner, a podcast where we share postal industry news to help you stay informed.

Chris: On today’s podcast we discuss more details on what may be the USPS 2020 pricing and the potential withdrawal of the United States from the Universal Postal Union. So… Let’s get into it. Hi Anita.

     Anita: Hi Chris.

Chris: Well, welcome to the podcast everyone, here we are in summer. You know it’s interesting, Anita, I’ve always felt like summer, particularly as we come into mid July to mid August, is sort of a quiet period for the mailing industry, but it’s anything but quiet lately there’s a lot of conversations that have been going on.

     Anita: Right. We’ve got 4th of July and then recess in Congress for August, so I expect it to be a little bit quieter for the next month or two.

Chris: It usually is, but there’s still no shortage of topics and of course for our customers and for the mailing industry as we come into early August, mid August, that’s really the beginning of the larger mailing season because we get a lot of those back to school mailing opportunities are coming in and people are starting to get excited about things like Informed Delivery and stuff like that. But what we’re going to talk today instead about what may be some pricing in 2020 and Anita, you recently attended an Idealliance event called the Postal Operations Technology Committee Event.

     Anita: Correct. It was in Minneapolis this year.

Chris: We sometimes refer to that as “Potsie”. Right. So for those of you that grew up watching Happy Days, it’s kind of an interesting tongue in cheek reference, but at the POTCE meeting, Steve Phelps, who is the Acting Vice President of Pricing and Costing, gave a presentation. You were sharing with me some interesting insight that that gave you for what may be the 2020 USPS pricing.

     Anita: Right. You know, we covered some of these topics in a recent podcast, I think a couple of podcasts ago, but I’m getting a better understanding of what the Postal Service is thinking about in this 2020 increase and then what might actually be delayed until 2021 so what I’d like to do is just go over it again. I think it’s on everybody’s mind. You know, what are we going to see in January of this year? Because I think it’s understood that the 10-year rate review will not be settled in time for the January increase. So people can start planning now for 2020. Just a quick review, the Postal Service is planning to file with the Postal Regulatory Commission in October, probably in the first two weeks and they will be using the August CPI and it’s projected to be 1.98% and what I asked Steve at the recent Idealliance meeting is why is that significantly different than what’s on the Postal Regulatory Commission’s website? Because they’re the official keeper of the CPIU calculation. And I looked back, it is trending downward and the latest post was for May and it’s 2.174 but that’s been a gradual decline since October’s high of 2.463 so it was almost at 2.5 and now we’re projecting just under 2% so that’s really what we can expect. And of course I mentioned that Marketing Mail flats have a directive from the PRC to get an increase of 2% above the average class CPI.

Chris: So they’d be looking at like a 4% right?

     Anita: Correct. And that is the non carrier route flat. So, and everybody needs to be prepared for that. But anyway, Steve had shared the ideas that they’re evaluating and I do have some concern over the first one that I’m going to talk about and that is if you recall, I mentioned that they are actively evaluating, according to Steve, the weight break on Marketing Mail flats, the break between the piece rate and the piece pound rate. Right? So if you recall a couple of years ago, they raised it from 3.3 up to 4 and the catalogers were ecstatic because they could add more pages without having that linear increase in postage. So from my perspective, I just thought that’s a great thing. And so when he said that they were evaluating it and you know, I believe he said, is 4 ounces the right number? Well, I just thought, hmm, maybe they’re looking at going up even more. But the reality is, and this is what I pressed Steve on and thankfully he’s very transparent and open with us, is that they’re evaluating going down.

Chris: Oh no, that’s the wrong direction.

     Anita: I know they’re evaluating two ounces, two and a half, three ounces and three and a half. So anyway, we had a pretty lengthy discussion about that because there are certain mailers like shared mailers for example, that are really interested in bringing that down. They were not happy, even though catalogers were excited about the raise to 4 ounces. I don’t think the Postal Service has really seen the additional weight that we anticipated. I don’t know that for a fact, but I’m sure that they are looking at everything. So what Steve said is he really wants to vet this very thoroughly so that there are no unintended consequences and he wants to hear from others that might be impacted by this. And of course we said, boy, some catalogers begin planning their production six months out. So Steve said that he knows which mailers would be affected, so I’m sure he’s looking at the front gates of the world of the heavier catalogs and then look at the lighter weights. But I think you look at shared mailers, I think their argument is probably it would be a good retention strategy to lower that piece rate because they want to stay in certain markets and it’s getting more and more competitive as there’s less inserts. But anyway, like I said, he wants to hear from mailers, so I’m going to be contacting Hamilton Davidson at the American Catalog Mailers Association. I’m sure if they’re not aware of this, I’d be surprised. But anyway, so we have to be prepared for that. I did ask him if a decision would be made in time for a January implementation, and his answer was that he’s not sure because even though he wants to really make sure this is vetted properly, there’s always the possibility that the board or someone on the executive team really wants to head in this direction. So it’s something we have to watch closely and we’ll know that in September when the Board of Governors actually approves the filing.

Chris: Wow. Okay. Well that’s, that’s a huge change, right? So first of all, it would be nice if we could at least get some indications by the August MTAC meeting, even though that’s late August. It’d be nice to know even earlier than that because you’re absolutely right. I mean these decisions about catalogs and what’s going to go in and that break on the piece versus piece pound rate is a factor for, you know, marketing flats on what they’re going to do with that. And to help me understand this Anita, but if it’s a 1.98% plus a 2% for the marketing mail flats, and if they move that bar to lower and the piece pound rate that’s just further exasperating this price increase, isn’t it?

     Anita: That is. But then remember it is only on the non carrier route. So I think if a mailer has got a really heavyweight piece, I think, you know, it might be safe to assume, maybe not. I don’t know that they have a large geographic concentration so they wouldn’t have as much in the labs category, but…

Chris: So the concern about multiplying the effect isn’t as big. But here’s another thought that I have on that, Anita, is my understanding that break, right? The 3.3 ounces relatively stayed within a very, very narrow lane for a long time. It was all based on the equipment’s capabilities of how it was going to handle a piece and not necessarily based on economic pricing factors. And now it sounds like it really is more related to economics rather than engineering determinations as to where that break should be, right?

     Anita: Right. Because I think piece weight is more significant on letters and the machine capabilities than it is for flats. But you’re right, in this case, it’s really more of a policy decision.

Chris: Okay. Well we’re going to have to watch that closely, and certainly for our postal listeners earlier is better on that because you’re absolutely right. These decisions about the shape and the weight and the content of the pieces is determined months in advance before the mailing. So the industry needs time to prepare for that. What on the surface may look like a relatively straight forward implementation change on the software side, I’m more concerned about the broader supply chain and the impact because this affects everything.

     Anita: Right, exactly. So the next thing that they’re looking at is combining Marketing Mail flats, carrier route high density and bound printed matter flats into one product. And the explanation is that they have similar demand characteristics, it would help cost coverage – but there’s some problems with it. They’re not sure from a regulatory standpoint that they could include bound printed matter flats. What they’d have to do, of course is raise the weight maximum from marketing mail up to 20 ounces. And then you’ve got the issue of the 24 ounce allowance for co-mailing and then you have a thickness issue as well. So there’s a lot that has to go into this. But what Steve suggested is that this could be done in phases, so it will more than likely be in 2021 but if they do combine, they could do marketing mail flats carrier route high density into one product and then evaluate further their options on the bound printed matter. So we’ll keep an eye on that as well.

Chris: Interesting. Does that open up some co-mingling opportunities for some mailers that have that capability of mixing those different pieces together?

     Anita: Well, it’s really not from a mail prep perspective, this is more from a looking at it as a product.

Chris: More pricing. Right?

     Anita: Right. And what is the overall cost coverage? And I think I’ve mentioned before, I’m not a fan of this because I think it puts the carrier route portion in jeopardy of falling below 100% cost coverage. And you and I both know flats are in a dangerous situation with cost coverage to begin with.

Chris: Right. And that’s a key area that they’ve been focusing on is cost coverage.

     Anita: Right. And then they’re going to evaluate a mail preparation minimums and maximums. I mentioned this, I believe, and this is probably more of a 2020 idea because there’s a lot of work that needs to be done on that, but I asked Steve, are you evaluating letters, flats, all classes? And he said yes, everything. So you know the mins and maximums have been in place for a long time and are they the right numbers? Is 150 pieces the correct number for letters and 6 pieces in periodicals for example. So that’s next year. I’m not too, I think that might be an opportunity for us.

Chris: I think it could be too. That makes sense to revisit that. That I agree with because that in large part is determined based on the volume. We’re not at 200 billion pieces anymore, and likely we’ll never see 200 billion pieces again. So some of them in Max’s in terms of what qualifies for containerization and bundling, that might make sense to revisit that. I’m more concerned about just sort of changing these demarcations of whether it’s going to be processed as a letter versus a flat. Because my understanding is that was all tied to the equipment that’s going to be processing it, but the minmax in terms of bundles and mail prep. Yeah, I agree. That’s probably a good time to take a look at that. But again, lead time is key. We need time to prepare for that too.

     Anita: And of course I raised my hand and said BCC Software would be very happy to help with this analysis. All right, so then this is really interesting, Chris. I was shocked at this. They want to possibly further the incentive to create carrier route five digit pallets, which I always thought that was mostly a density thing and that the a movement wouldn’t be that great because they started out with a half cent incentive and then in the last increase, I think it was the last one, they raised it to 2.1 cents per piece. Well, I asked Steve, did this really move the needle? You’re going to be shocked. Okay. So in 2016 on Marketing Mail, 4.3% of the mail was going to the DDU on a five digit carrier route pallet in 2018 at jumped to 15.7. And on the periodical side, in 2016 there were 6.2% of the mail going to DDU on a five digit carrier route. And in 2018 it’s 25% so it’s working and I think this has a lot to do with co-mailing as well in that effort to get into the high-density and saturation categories. But wow, that’s a significant movement. The problem, cost avoidance is only 1.9 cents per piece, so it’s a bit less than, I think in the last case they argued operational efficiencies to get the PRC to buy into this…

Chris: Right… They’re going to have to sell that.

     Anita: So that’s not something we have to be worried about, but it could be a good thing. And then the full service requirement for automation rates that we’re going to have to watch that closely also because the Postal Service wants to use whatever incentive they give to be a full service mailer as more of a carrot than a stick. So I don’t think we have too much to be concerned about. But what happens if somehow you fail to meet the full service requirements? What’s the fallback rate. You know, I mean it can be significant.

Chris: Yeah, it could be a precipitous drop.

     Anita: Right, exactly. So that’s a little concerning. So I think the last thing that I want to mention before we move to the UPU Topic is that on the last User Group 13 Work Group meeting…

Chris: That’s MTAC User Group…

     Anita: Right, and it’s Pre-sort Optimization is the title of that User Group. The Postal Service shared information on how mail has migrated from one presort category to the next on both letters and flats. And it wasn’t surprising necessarily to the industry because of all the co-mingling and co-mailing and everything that’s going on to reduce the customer’s postage. But the Postal Service is looking at this closely. How has the volume migrated and what is the appropriate pass through? So during the UG13 meeting I kept saying, well, what’s the problem here? Why are you sharing this data but Steve had a slide on it, talking about the fact that this is really a pricing strategies that an effort to protect top line revenue. So if we see mail shifting into the high density and high density plus, is that an opportunity to raise the prices there? But at the same time, how do we insent retention and reward our best customers? So since there’s been such a significant shift in both letters and flats, that’s something else that we need to keep an eye on what they’re thinking there. I don’t think that’s a fully mature discussion just yet, but they’re looking at it closely.

Chris: Wow. So lots of conversations going on. Steve Phelps sounds like the key person in all of this, so we’ll have to watch carefully what’s happening with that and listen to signals that Steve Phelps, the acting VP of pricing and costing is sharing with us. But I agree with your earlier comment about Steve. I find him to be really transparent and it could person to be working with and I know he’s gotten out of his way to say hi when we see him at MTAC and at NPF and things like that. So.

     Anita: Right. Hey Chris, I’m sorry but I did remember one other thing I wanted to mention. I mentioned that the Postal Service is really interested in doing more market tests for detached address labels for saturation letters. That’s the one we’ll probably see first. But I wasn’t really clear on what the definition of a market test was and so Steve cleared that up for me. It would be a new product altogether with a new price and it can be done relatively quickly because the PRC can approve them within 30 days and the test can usually have like a two year duration and get the feet on the ground and understand whether it’s a product that will actually take off. It’s not capped by CPI, so you don’t have to worry about that. But it does have an 11 million revenue target that can be expanded to up to 50 million. So the impression I get is they’re going to start putting some more out there, extended mail forwarding where you would pay a fee for forwarding past a year. And then also something in the remittance mail where they dynamically redirect the mail from an address on the mail piece to the actual remittance processor. So they’re trying to be as creative as they can, so we should hear more about that as well.

Chris: All right, well thank you Anita. A lot of great information about pricing. I know we’re just about at the end of our time here. So let’s talk briefly about the Universal Postal Union. President Trump sent out a notice on October 17th of 2018 and the intention is the United States will withdraw from the Universal Postal Union. Help our listeners understand a little bit more about the UPU and what does that possibly mean?

     Anita: Okay. Well at the last MTAC meeting, Giselle Valera, she is the person from the Postal Service who’s leading the team on the UPU withdrawal preparations. She gave a presentation and it was really chockfull of information, nicely condensed into a few slides and people can find them on the PostalPro website under the MTAC presentations. But anyway, what’s happened here is that ecommerce has expanded so dramatically, not only in the United States, but in the world. And what’s happening is that the Postal Service charges domestic postage for delivering an American letter or American small package, but they have to charge terminal dues for delivering a foreign letter. And those terminal dues are set by the Universal Postal Union. And the problem is that the terminal dues rates are less than half of what the Postal Service actually charges for an American letter. So it’s really an economic distortion that’s hurting American mailers and giving a true advantage to, in particular Asian countries like China.

Chris: So you’re saying that if I’m a domestic mailer and I mail something here in the United States with the US Postal Service, I’m gonna pay one price. But if somebody outside of our country, say from China is mailing into our country, they’re paying a lower postage.

     Anita: Exactly.

Chris: And how much is that costing the Postal Service?

     Anita: You know, I wanted to find out exactly what the number was, but I know it’s hundreds of millions of dollars. Wow. And so the nice thing is that the Postal Service has the attention of President Trump. And when he came out with the presidential memorandum saying that they were gonna exit from the UPU, the Postal Regulatory Commission and the Postal Service are in support of this because it’s quite unfair. And I guess it wasn’t that pronounced when their ecommerce business wasn’t that great. And so they’re really looking at doing something about it. So what’s happened recently is the Universal Postal Union, which is comprised of 192 countries around the world, have voted to hold an extraordinary congress in September. And they’re gonna vote on three different options on what they can do with terminal dues. But the outcome of that Congress is so close to the October 17th date that the Postal Service has to prepare to exit regardless of what happens.

Chris: So if the United States, and again to be clear with our listeners, so this is about the United States withdrawing from the UPU, not the Postal Service, so if the United States withdraws from the UPU, which means that these terminal dues will not be extended to these countries. My understanding is that also there’s a reciprocal problem here is that those mailers that are mailing from the United States into foreign countries, that may be a problem. They may not be able to do that through the USPS United States Postal Service into those countries because we’ve severed ourselves from that relationship.

     Anita: Well, yes, that is probably the worst case scenario, but this exit strategy is really working to establish relationships with these foreign posts so that they can continue to exchange mail.

Chris: So it’s to get people to come back to the table and sit down and revisit this whole terminal dues thing. Right?

     Anita: Exactly. So they’re negotiating and making arrangements. Now time is running out. This is something that I think we’re going to hear much more about, certainly in September, but it’s going to be kind of crazy.

Chris: It will, and one thing. I did do a little bit of research in this myself and I found that in the Postal Accountability and Enhancement Act, the PAEA in 2006 and we talk about that often because that’s what established CPI pricing and so forth. But inside that bill is also the act conferred upon the secretary of state, the responsibility to formulate, coordinating, oversee the foreign policies including international delivery service. So it is well within the purview of the administration to do this because the secretary of state has that responsibility. And so that was something that I thought was interesting that it goes ties to a PAEA in 2006 law.

     Anita: You’re good at that.

Chris: We’re going to have to watch this closely because I know that it’s more than just shipping goods and products. The whole Stop Act, which was passed by the house in June, signed into law on October 24th last year, all related to the estimated $800 million of opioids that were shipped into the United States from foreign countries, particularly China was listed on that. So there’s a whole set of issues around this, but your point is absolutely valid. It’s going to be very busy as we come up into September and I’m sure at this point the USPS is going to have to prepare for an exit from the UPU and we’ll see what happens. Hopefully we can get to the negotiation table again.

     Anita: Or hopefully the negotiations during the extraordinary conference will be successful so we don’t have to exit and we have new self-declared rates.

Chris: That’d be nice. Okay, well let’s just start wrapping up here Anita. Any other final comments to share?

     Anita: Yeah, just two quick things. We are expecting the 10 year financial plan possibly mid week of July 8th And then just a reminder to our listeners that the registration for informed delivery promotion begins on July 15th. Now the requirements are on PostalPro. I urge our listeners to review those requirements very carefully because they’re very specific and must be carefully followed or you’ll lose the 2% discount. And you and I talked about possibly having a special podcast on the informed delivery promotion.

Chris: We’re going to need to because there’s a lot of fine print on that 2% discount for the informed delivery promotion. So we’ll have to go through the details on that on another podcast. All right, well, Anita, great information is always. Thank you so much.

     Anita: Thank you, Chris.

Chris: All right, and appreciate all of our listeners for tuning into the podcast. If you’d like to know more about what we talked about or learn about BCC Software, visit our webpage at bccsoftware.com or give us a phone call. And as always, we’d like to know how can we help? Have a great day.