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When the U.S. Postal Service clobbered advertising, catalog and magazine mailers with rate increases totaling more than 40% in 1988 and 1991, the struggling alternate delivery industry got the boost it needed to make its costs competitive.

Now, with the prospect of higher postal rates in 1995, private delivery operations are counting on another surge in business.

Alternate delivery is estimated to be a $500 million annual business, one that will grow to about $1.25 billion by the end of the decade, according to industry newsletter Optimum Delivery. Most of the nation's estimated 312 alternate delivery operations are run by newspapers, which have taken their weekly non-subscriber advertising/editorial products out of the mail and polybagged them along with single-sheet ads, coupons and samples for door-to-door de-livery.

"Every additional rate case continues to make us a larger, more viable alternative," said Phillip D. Miller, president-ceo of Alternate Postal Delivery, which is partially owned by Capital Cities/ABC, Scripps Howard and Tribune Co.

"Just the talk of [a postal increase] has caused more mailers to call us and see what their options are," said Mike Trost, president of Publishers Express, which is owned by 13 media companies including American Express Publishing Corp., Time Inc. and Times Mirror Co.

Alternate Postal Delivery's affiliates deliver 66 publications, with a 6 million monthly circulation; Publishers Express' affiliates deliver 60 publications, with a 4 million monthly circulation. Each charges about $85 per thousand for a brochure and up to $150 per thousand for a bulky sample.

Telephone companies are also a growing force in alternate delivery. Bell Atlantic Corp., BellSouth Corp., Nynex Corp. and Southwestern Bell Corp., and Tele-Direct Publications in Canada sell ride-along ads to go with their annual delivery of Yellow Pages directories.

But the postal service does not intend to give up share easily. The government agency estimates private delivery has slightly less than 2% of its 72.8 billion ad and publications mail volume.

Though mailers and publishers have speculated second- and third-class rates will increase by more than 20% in 1995, Postmaster General Marvin Runyon said he plans to keep rates in line with inflation. The postal service is looking at more frequent-but smaller-rate increases, or phased rates, he said.

On a related front, the postal service has made it a priority to improve service, said John Dorsey, publications mail product manager. It has begun measuring delivery performance for second-class newspaper and magazine deliveries and third-class ad mail. Also, its customer service representatives are trying to win back companies that have defected to private delivery.

Private delivery "com panies are very directly competitive with the postal service," Mr. Dorsey said. "Their sheer numbers are very, very small .|.|. But it is not something we take lightly or underestimate at all. We're respectful of the threat."

Here are some examples of what alternate delivery companies are doing:

Alternate Postal Delivery in 1994 will offer database marketing, allowing advertisers to reach specific prospects. A children's clothing store, for example, will be able to have its ad reach households with children ages 6 to 12, rather than doing a saturation mailing.

Publishers Express has hired two ad agencies to help it get more ride-along advertising. The Peer Group, New York, is calling on the top 30 package-goods companies to get product samples and coupons to go with magazines delivered by Publishers Express newspaper affiliates. Sawyer Riley Compton, Atlanta, will handle promotional material and direct mail to media buyers. (Alternate Postal Delivery has a staff person that calls on national advertisers.)

Direct Marketing Association this year plans a 12-market test involving catalogs with Alternate Postal Delivery and Publishers Express. Participating catalogers will include J.C. Penney Co., Bass Pro Shops, Hanover Direct, Tandy Corp. and Sara Lee Direct.

"We need volume," said Mr. Trost of Publishers Express. "We need the support of the mailing community to keep alive."

The Yellow Pages Publishers Association is working to establish a one-order one-bill network to make multimarket buys easier. Ad rates vary by publisher. BellSouth's Delivers More, for example, charges from $15 a thousand for a mass saturation mailing to as much as $150 a thousand for its new mover program.

National advertisers have had samples, product brochures and coupons delivered at prospective customers' doorsteps through value-added merchandising programs offered by more than 40 magazines delivered via Alternate Postal Delivery and Publishers Express.

"The reason I like it as a publisher is we are using it as an opportunity to merchandise for our clients .|.|. who run large schedules," said Lori Zelikow Florio, publisher of New Woman, which delivers 60,000 of its 807,000 monthly circulation via alternate delivery. "We might pick up the tab or a large part of it. It's not an extra source of revenue for the magazine. We do it to give our advertisers extra bang by putting their product in front of our customer base."

Reader's Digest, the largest circulation magazine in the U.S. at 16.5 million, used alternate delivery for about 10 years but quit in the mid-1980s. But since then, the alternate delivery business has become more organized and imposed stricter delivery standards.

"When we looked at our total expenses .|.|. we found it less expensive to rely on the postal service than alternate delivery," said Craig Lowder, public relations director for Reader's Digest Association.

Newspapers are using alternate delivery programs to develop new revenue sources and steal share from direct mail. But the real value for newspapers is having control over the costs and distribution of its total market coverage non-subscriber product.

"If we do not have the ability to deliver to non-subscribers, food stores, home improvement stores, discount stores would not do business with us," said James E. Smith, VP-director of marketing at the Fort Lauderdale (Fla.) Sun-Sentinel.

Burdines, a Florida-based department store, is delivering about 340,000 pieces a month via alternate delivery services offered by the Sun-Sentinel, The Orlando Sentinel, St. Petersburg Times, and Tampa Tribune. However, it temporarily dropped The Miami Herald after delivery problems.

Alternate delivery is not for every newspaper. Most that do use it set up separate delivery operations, which is quite expensive. The Rocky Mountain News last year discontinued its nine-month alternate delivery test. With two daily newspapers, Denver already had a high penetration of households, and alternate delivery would not provide enough extra advertising to be profitable, a spokesman said.M

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