The U.S. Postal Parcel Service

In a famous scene from the 1967 film "The Graduate," a man approaches recent college graduate Benjamin Braddock at a party and whispers one word of advice in Braddock's ear about his future career:

"Plastics."

In that spirit, one can almost envision Benjamin Franklin, the founder of the U.S. Postal Service (USPS), pulling Paul Vogel, USPS's president and chief marketing and sales officer, aside at a function and whispering one word in Vogel's ear about the post office's direction:

"Parcels."

Unlike Braddock, who recoiled at the idea of choosing plastics as a career, the 61-year-old Vogel, who runs all sales, marketing, and domestic and international product development and management, would likely be receptive to Franklin's advice. Though far from being the tail that wags the postal dog, parcels are becoming an increasingly critical part of the quasi-governmental agency's present, and more importantly, its future.

"It's a growth area," Vogel said in a recent interview with DC Velocity. "The shipping industry is doing well for us."

Vogel has good reason to be upbeat about USPS's place in the parcel world. The growth of online commerce from all sources—computers, mobile devices, and social media—plays to the strength of the USPS's infrastructure, which is built around handling packages weighing one to five pounds—the typical weight range of an online shipment—and delivering it to any address in the United States at a lower cost than its private rivals can.

And there is more of that growth expected to come. According to Forrester Research and Booz & Co., the value of all U.S. online sales—excluding groceries—will hit $324 billion by 2015, up from $204 billion in 2011. Those projections do not include the cost—and potential revenue—involved in handling the returns of products bought online.

Vogel said he's focused on strengthening USPS's niche, which is moving large quantities of parcels from merchants, fulfillment houses, and parcel consolidators to millions of residences. By contrast, Vogel is steering the agency away from the corporate business-to-business parcel category dominated by its rivals, and its partners: FedEx Corp. and UPS Inc.

"I am a harsh realist," he said. "Our strength is with the consumer and the small business."

Vogel also believes USPS is in the sweet spot of the shipping segment. "I would question how much the [business-to-business] market is growing," he said. Vogel said USPS speaks regularly with businesses that would like to enter or expand into the consumer market but have yet to do so or as yet have made minimal strides.

Wanted: new business
The surge in online shopping and shipping can't come soon enough for USPS, which desperately needs new revenue sources to offset the declines in products like first-class mail that are being cannibalized by digital transactions.

In its fiscal 2012 first quarter, which ended Dec. 31, USPS said revenue for its "shipping services," which encompass Express Mail and Priority Mail, International Mail, and the fast-growing product called "Parcel Select"—where packages are inducted by shippers and consolidators deep into the postal system for the final delivery to the consignee—hit $2.8 billion, an increase of $179 million, or 7 percent, over the fiscal 2011 period. The increase was due in part to greater online buying—and shipping—activity during the holidays.

However, those gains were dwarfed by a combined $650 million revenue decline in first-class mail and the bulk mail service for printed matter and advertising known as "standard mail," USPS said. Revenue for first-class mail, which contributes two-thirds of USPS's profit, declined 4.1 percent from the year-earlier period. Total mail volume declined by 6 percent.

First-class mail's future seems none too bright. It will account for 37 percent of total volumes in 2016, down from 44 percent in 2011, according to agency data. Its revenue contribution will drop to 41 percent from 49 percent in that period. Due to the weakness in first-class mail, total USPS revenue is expected to drop to $62 billion by 2016, down from $66 billion in 2011.

In a government filing accompanying the first-quarter results, USPS said the decline in its most profitable product, combined with congressional restrictions on entering new lines of business, could keep it revenue-challenged for many years to come. "There currently is no foreseen revenue growth solution that would completely resolve the Postal Service's financial problems," it wrote.

The multiyear outlook for shipping is somewhat different. By 2016, shipping services will account for nearly 20 percent of USPS's revenue, up from 16.1 percent in 2011, according to USPS data. The volume contribution, however, will be virtually unchanged, with shipping accounting for 1.7 percent of total volumes by 2016 compared with 1.6 percent in 2011. Today, shipping contributes 9.5 percent to USPS's annual profit.

Jerry Hempstead, who held high-level U.S. sales posts at the old Airborne Express and DHL Express and now heads a parcel consultancy bearing his name, said parcel volumes at USPS will never reach the levels required to overcome the financial damage done by the loss of first-class and standard mail. "Even if they doubled the number of parcels overnight, it's such a small contribution to their income statement that it's like a pimple on the butt of an elephant," he said.

Steve Rifai, managing director at Dymo Endicia, a Palo Alto, Calif.-based firm that provides automated workflow solutions to large postal users, agreed that the parcel business, in and of itself, will not cure USPS's ills. "However, without parcels, the problems will be much more difficult for USPS to overcome," he said.

Rifai said Endicia's customers tendered $1.5 billion of parcel business to USPS in 2011. That figure is expected to grow by between $300 million and $400 million in 2012, he said. Rifai forecast that parcels will eventually bring in half of all new postal revenue on an annual basis.

Improving the proposition
USPS, which estimates that it handles 29 percent of all U.S. shipping volumes, said it is being as aggressive as possible to boost its shipping value proposition. It has developed flat-rate packaging configurations for its Express Mail and Priority Mail products, allowing users to cram as much material as will fit in a box for a flat rate shipped anywhere in the United States.

Megan O. Brennan, who as USPS's executive vice president and chief operating officer oversees what may be the nation's most complex distribution network, said she and her team are also exploring the possibility of expediting delivery schedules of Priority Mail, which are currently marketed as two- to three-day deliveries. "We want to stretch our capabilities to see how much of the second-day network we can advance into the overnight mail system," she said in an interview.

USPS has begun marketing its first-class mail parcel product—bulk shipments of individual pieces weighing less than 13 ounces—in the free market, rather than keeping it protected from competition, as has been the case for many decades. USPS said the shift will give it more pricing flexibility and align all of its so-called competitive products in one portfolio.

However, Hempstead warned that if USPS decides to raise prices on the product—which accounts for more than 40 percent of its total parcel business—it could lose the historical price advantage over FedEx and UPS and may see that business migrate away.

USPS has also launched regional delivery services for Priority Mail and Parcel Select shipments that allow users to ship their products over shorter distances, a dramatic departure from USPS's traditional model of long-distance shipping.

In the case of the regional service for Parcel Select, USPS is trying to attract low- to medium-volume shippers tendering shipments moving within 300 miles.

The product is an effort to capture a larger share of lightweight ground parcel traffic traveling across shorter distances. About 45 percent of all ground shipments handled by private parcel carriers weigh five pounds or less, according to data from SJ Consulting, a Pittsburgh-based consultancy. Of those, one-third move less than 300 miles, according to the firm.

FedEx and UPS are heavy users of the service because it enables them to pursue more e-commerce transactions without the cost of dispatching a truck and driver to low-density residential areas.

Postal executives said Parcel Select's low costs give merchants the financial latitude to offer free shipping to online customers at a relatively small expense to them. According to data from consultancy IMS Worldwide Inc., three out of every four online orders are canceled if customers are not promised free shipping.

Vogel acknowledges the need of online retailers to provide free shipping in order to stay competitive. However, he said it puts additional pressure on USPS to drive down costs on what is already a low-margin product.

"The term I've learned to hate is 'free shipping,'" he joked.

Cutting out lag time
From an operations standpoint, postal observers said, the agency needs to improve in the areas of online tracking and in ensuring that parcels parked at the facility where they are scheduled to be given to the letter carrier leave the unit the day they arrive—and if they don't, that shippers see exception reports almost in real time to find out why it didn't happen.

Currently, letter carriers scan packages at delivery but must wait until they return to the delivery unit to upload the data into the postal computers. That time lag, which could sometimes be several hours depending on the carrier's schedule and road conditions, is considered unacceptable in today's time-compressed, data-driven world. It also drives up a shipper's customer service costs, observers contend.

USPS is working on the issue, and even its detractors said it is making strides to add technology that enables real-time tracking.

In the case of moving parcels quickly out the delivery door, Rifai of Dymo Endicia said USPS has developed a system where officials at its Washington, D.C., headquarters get daily data feeds from delivery units that enable the agency to monitor its performance. "They now have the visibility at HQ to see which [delivery units] are performing and which aren't," he said.