Postal hikes force direct cutbacks

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While neither rain nor sleet will keep postal carriers from their appointed rounds, they may soon carry significantly less direct mail on those routes.

Consider this: 3 billion pieces of standard business mail will vanish in 2002, according to the Direct Marketing Association. Direct marketers, who rely heavily on the U. S. Postal Service, are changing their tactics and finding alternatives to the U.S. mail, largely as a result of frequent rate increases.

To cope with the USPS rate hikes—the latest of which goes into effect on June 30—some marketers are decreasing their direct mail budgets, conducting smaller, more targeted mailings and using alternative media such as e-mail to acquire and retain customers. Marketers have already cut back significantly on their direct mail efforts.

“Volume is down,” said Jerry Cerasale, senior VP-government affairs for the DMA. “Direct marketers are not prospecting.”

That scenario sets up a dangerous cycle: Fewer pieces of mail in the postal pipeline could trigger future rate increases, resulting in even less use of the Postal Service.

Dick Goldsmith, president of Horah Group, a New York-based marketing agency that specializes in direct mail, said his clients are “cutting back on the number of pieces in their mail plans, and they’ve already accounted for it in their budgets.”

The future viability of the USPS is an issue of concern for b-to-b publishers, too. “We have less direct mail volume today than we had in the past,” said Howard Schwartz, executive director-distribution sourcing and postal affairs for Advance Magazine Publishers Inc., which includes Conde Nast Publications, Fairchild Publications and Parade Publications. “We have less direct marketing-type mail for new subscription prospecting.”

Suppliers to the direct marketing community are affected as well. “Indirectly, it hurts us, too, and already we’re smarting from the economic downturn,” said John Campo, Pitney Bowes Inc.’s VP-postal relations. Pitney Bowes licenses inkjet technology to direct mail marketers.

On the other hand, GE Financial Assurance Partnership Marketing Group, Schaumburg, Ill., which sends out millions of direct mail pieces to market consumer insurance and investment products, hasn’t decreased mail volume at all.

The USPS imposed three postal rate hikes in just the past 18 months, slamming marketers already taxed by the economic slowdown.

“It’s frustrating for people whose livelihood depends on the mail,” said Hank Cleffi, director of postal affairs at the Mailing and Fulfillment Service Association.

That view is shared by John Van Horn, president-catalog market, North America, at Quebecor World. “The long-term concern we have is that the Postal Service will price themselves out of their most profitable segments, which are first class and the business segments,” Van Horn said. “If that mail were to decrease substantially, their business would be severely impacted.”

Vincent Giuliano, senior VP-government relations for cooperative mailer Advo Inc., commented at a public forum on postal affairs in Washington last month, “Uncertainty just raises havoc with our business.” Giuliano then added: “The FUD factor—fear, uncertainty and doubt—is an enemy of strong economic and sustainable business growth. Predictability allows business planning.”

Gravitating online Some 46% of respondents to a month-long Web poll at agreed the current rate hike will cause marketers to shift efforts to e-mail and the Web; another 22% strongly agreed.

“People will have to try and find different ways to reach potential new customers,” said the DMA’s Cerasale. One solution is online marketing.

For example, Masune First Aid & Safety, one of Medco Supply Co. Inc.’s four b-to-b medical catalogs, has already begun to explore such ideas. Without reducing mail volume, Masune, which accounts for 80% of Medco’s 5 million catalogs shipped yearly, added more e-mail marketing and telemarketing efforts this year. It also consolidated printing with one vendor in May and negotiated more competitive rates from its data-cleansing vendor.

“We’re not growing [our mail volume], but we’re trying to do a better job,” said Susan Barone, the company’s direct mail manager. “As a catalog company, you can’t completely get away from that traditional method.”

However, Masune will test mailing fliers or brochures in lieu of catalogs later this year. “It’s definitely as a result of the rate hikes, but also to better target our market,” Barone said.

Use of e-mail marketing depends on the target audience. “We don’t do much e-mail marketing right now,” said James Huhn, director of advertising at Hunter Engineering Co., St. Louis, because Hunter sells wheel alignment products to automotive repair shops and car dealers who don’t spend their workday online. The best ways to reach his customers, he said, are direct mail and direct contact from the company’s 300-person national sales force.

“We have not decreased our volume [of direct mail] due to the rate increase. What we’re trying to do is have cleaner lists, looking at our databases and running NCOA [national change of address] programs more frequently.”

He said if rates continue to go up at the same pace, “there gets to be some point where it does have an impact on the frequency and quantity of our mailings.”

Publishers, meanwhile, are suffering the double whammy of postal rate increases and precipitous advertising declines.

“As of June 30, periodicals will have gone up 22% in 18 months,” said Jim Cregan, executive VP-government affairs at the Magazine Publishers of America. “That kind of pattern cannot continue.”

Cregan said the only solution would need to combine short-term incremental fixes to make the current system “livable and sustainable” and longer-term presidential reform. “Ultimately, the Postal Service as we know it today will not exist in the future,” Cregan predicted. “You can debate when that day will come—five years, 10 years, 20 years.”

David Straus, managing partner at Thompson Coburn LLP, said, “Publishers that were making money are now losing money.” Straus represents American Business Media, the New York-based trade association for business media, in postal matters. “There are start-ups that aren’t starting. There have been closings of magazines. There are people who’ve lost their jobs.”

Postal reform While some drop-off in direct mail can be blamed on the economic slowdown and the anthrax scare last year, many b-to-b marketers cite the USPS as the root of the problem.

They say the government-run organization, with 890,000 employees, has become an immovable force in the face of rapid marketplace changes. Worse, they say outdated laws that restrict its leaders from enacting reform hamper the USPS. Unable to improve its business processes, it depends on rate increases—a strategy that would spell doom in the private sector.

This year, the USPS expects a net loss of $1.5 billion, its third consecutive year of losses; it expects annual mail volume to drop by 6 billion pieces, its most significant decline in more than 70 years. About half of the decline will be standard business mail.

At request of Congress and the U.S. Comptroller General, the Postmaster General proposed a comprehensive “Transformation Plan” of the USPS to Congress last year. The plan outlined a long-term series of changes to modernize the business of running the post office as a “commercial government enterprise.” Those changes are now impossible to implement due to limitations of current law.

The U.S. General Accounting Office, the investigative arm of Congress, placed USPS’ transformation efforts on its so-called “High-Risk List” in 2001. It said the transformation plan is a “good first step” but “does not adequately address certain key issues or include an action plan with key milestones, which will be critical to assuring success and assessing progress,” according to a report presented to the Senate by Comptroller General David M. Walker.

However, the GAO does support the USPS’ attempt to enact reform based on existing law, and supports a call for a presidential commission. Finally, the GAO recommends that Congress establish a “mechanism similar to that used for closing military bases” to avoid political roadblocks to reforming the USPS.

But while the USPS, the GAO, congressmen, marketers and mailing associations all agree on the need for reform, no one is optimistic about change any time soon.

Pitney Bowes’ Campo said that while the Postal Service has been doing all it can to “get its postal house in order,” it will take from 18 months to three years before it gains “flexibility on pricing,” which would allow the USPS to negotiate postal prices with business mailers.

Quebecor World’s Van Horn warned that companies will increasingly switch from U.S. mail to alternatives like the Internet, e-mail or newspapers. “If you’re a publisher or a cataloger, you’ve got to find a way to make your business grow and be profitable,” he said. “Companies will look for options, and if they find options, they may not come back.”

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