Looking forward: Ten reasons to think twice about Metro Post

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In Edward Bellamy’s utopian novel Looking Backward, written in 1887, a young man falls asleep and wakes up in the year 2000.  It’s a romance as well as a sci-fi story, so the time-traveling hero soon meets a young lady who helps introduce him to the brave new world of the future. 

Naturally enough, one of the first things they do together is to go shopping.  In the world of 2000, you don't have to waste time going from one store to the next, comparing prices and products, and there's no need to deal with pushy shopkeepers and sales clerks.  Instead, you shop at a large showroom where there’s nothing but sample products.  After selecting what you want, an invoice for your order is quickly sent via pneumatic tube to a giant warehouse, and from there your purchases are delivered directly to your home. 

In Bellamy’s socialist utopia, the system makes perfect sense.  It reduces costs by eliminating retail middlemen, it saves time for consumers, and purchases are delivered "with lightening speed."  As the young lady explains, “You may understand how quickly it is all done when I tell you that my order will probably be at home sooner than I could have carried it from here."  The downside, of course, is that while the system is perfectly efficient, it lacks all the charm and pleasures of the shopping experience.

Now a version of Bellamy's utopia is coming soon to New York City, and we won’t have to wait for socialism to deliver it. 

 

Utopia, New York

Earlier this week the Postal Service gave notice to the Postal Regulatory Commission that it would be expanding test marketing of same-day delivery to New York City.  Under the pilot program, which is called Metro Post, if you buy something at selected e-commerce retailers by 2 p.m. (online or in person at one of their retail outlets), your purchases will be delivered between 4 p.m. and 8 p.m.

Metro Post got started a year ago in San Francisco.  There were a number of news articles about it, but then it seemed to fade from the media’s attention, even though it was described at the time as a “game changer.”  This week the Postal Service told the PRC that it was going to extend the pilot to New York.

ECommerceBytes had the scoop on the story the day before the Postal Service notified the PRC.  (One wonders if the Commission first learned about it that way.)  Bloomberg News then followed with a brief article about the PRC filing, but it couldn’t say much more.  “David Partenheimer, a Postal Service spokesman, had no immediate comment,” reported Bloomberg. 

While the Postal Service remains mum about the plans for New York, one can learn more about Metro Post in PRC Docket Number MT2013-1, which was created when the Postal Service requested approval last year.  (The initial notification from October 2012 is here, and the PRC order granting approval is here.)

Under Metro Post, customers can request same-day delivery when purchasing items at participating retail stores or visiting their website.  The pilot program involved all but one of San Francisco’s 27 zip code areas.  (For some reason, it excluded 94130, one of the less affluent areas of the city.)

The test market was limited to up to ten online e-commerce companies, but apparently only one of them ever made it into the news, 1-800-FLOWERS.com, and that may be the only company that participated during the first year.

There’s a page on the USPS website about Metro Post in San Francisco, which says that you can buy online or at the store. (“Skip the bag. We deliver for you.  You'll never have to lug a shopping bag again.”)  A popup window says the promotion is no longer available, so it’s not clear if Metro Post is still going on in San Francisco.  The website says nothing about Metro Post in New York, but a USPS press release is probably in the works.

 

A special service for the special few

In Bellamy’s novel, one of the first questions the time traveler asks about the shopping network of the future is how rural areas fare.  He’s told that the lightening-quick delivery service is available in cities, but things are a little different in ”the thinly settled rural districts areas,” where it actually takes two or three hours for orders to be delivered — a “lack of perfection" soon to be remedied "when every village will have its own set of tubes.”

Unfortunately, it’s not likely that rural areas in today’s America are going to see same-day delivery anytime soon.  As the name suggests, Metro Post is strictly for large metropolitan areas, and probably only their most affluent neighborhoods at that.

For all the problems one might have with Bellamy’s socialist utopia, he at least recognized the importance of providing everyone, whether they live in cities or rural areas, with the same kind of delivery service.   And that points to one of the main problems with Metro Post: It’s not uniformly available across the country, and it never will be.  It’s just a special service for the special few.  That’s just the first of ten reasons why we should think twice about the benefits of Metro Post.

 

1. It is unfair to everyone living outside metropolitan areas.

Metro Post is a perfect example of skimming the cream.  Like delivering Amazon Prime parcels on Sundays in a few big cities like New York and L.A., it just goes after the most profitable markets.  That’s completely anathema to the universal service obligation, the heart of which is that all communities are served in a relatively uniform way, especially rural areas, at least insofar as it is reasonable to do so.  (There's more on that here.)

Legal issues aside, it’s really just a matter of basic fairness to offer the same services everywhere.  Is it right for people living in upscale neighborhoods in big cities to get a postal service that’s not available in the rest of the country?  Why should a few affluent people in Manhattan enjoy same-day delivery while the rest of the country has to deal with the mail slowing down (thanks to the plant consolidations) and post offices being open just a few hours a day (thanks to POStPlan)?

 

2. It is unfair to non-participating retailers, especially small businesses.

The Postal Service’s original description of the test marketing of Metro Post indicated that there might be as many as ten e-commerce companies participating, but it didn’t say which ones, and it wasn’t clear what the criteria for selecting them would be, whether companies would compete for the opportunity to participate in the pilot, whether the list of companies could change during the pilot, and so on. 

As a result of these unanswered questions, the PRC’s Public Representative expressed concern that it was not possible to determine whether the pilot would comply with the statute on test marketing, which says that the test cannot “create an unfair or otherwise inappropriate competitive advantage for the Postal Service or any mailer, particularly in regard to small business concerns.”

By limiting itself to large e-commerce companies with at least ten physical locations nationally, other large and many small companies would be excluded, which would give the participating companies a competitive advantage.  If 1-800-Flowers can offer same-day delivery through the Postal Service and the neighborhood flower shop can’t do the same, doesn’t that mean the Postal Service is creating an advantage for one particular big e-commerce company?

 

3. It competes unfairly with other shipping companies.

Another problem with Metro Post is that it may pose unfair competition with other delivery services and shipping companies.  When Metro Post was reviewed last year, there were a number of same-day delivery services being offered, tested, or explored.  The list includes retailers like Amazon, Wal-Mart, E-Bay, Office Depot, Nordstrom, Barnes & Noble, as well as shipping companies like UPS, FedEx, National Parcel Delivery, 1AExpress delivery service, and USPack Logistics.

The Postal Service apparently did not tell the PRC what it would charge for Metro Post.  It simply said that it “would be at the lowest end of its price range for this market test.”  (UPS and Wal-Mart charge $10, Amazon advertises $8.99, etc.)  In fact, one of the purposes of the test was to “assist the Postal Service in determining the optimal pricing structure for this type of service.”

As for concerns that the product and its pricing might cause a “disruption” in the marketplace, the Postal Service told the PRC that that the price for Metro Post would not give it “overwhelming market power” in the same-day delivery market.  It also pointed out that the pricing would only be in effect during the test market.  If Metro Post were to become a permanent product, its price would need to cover attributable costs.

That raises the question of how those costs are calculated.  Some mailers and shippers complain that the cost for processing and delivering competitive products is being underestimated and that they are being cross-subsidized by market-dominant products, which gives the Postal Service an unfair advantage in the marketplace.  In its filing on the exigent rate increase, for example, UPS argues that the competitive products should be contributing more to covering institutional costs, which means they should cost more and not undercut UPS.  

Because of such concerns, as well as a few others, the PRC’s Public Representative concluded that “the Postal Service’s proposed Metro Post market test is not ready for implementation.”  The Commission approved the Market Test anyway, and it began a few weeks later.  There are also other concerns that were not addressed in the Commission’s review, but they are worth considering.  These include the following.

 

4. It was approved with only a cursory review.

The Market Test category was created by the 2006 Postal Accountability and Enhancement Act as a means for allowing the Postal Service to test and develop new ideas without committing the major resources a full national rollout might entail.  Because it’s just a test, these products are exempt from the more stringent requirements for new products (39 U.S.C. 3642), the general ratemaking rules (3622), or the specific rules for competitive products (3633).

Market Tests must simply meet the relatively relaxed requirements discussed in 39 U.S.C. 3641.  (There’s more about the rules here.)  Market Test products must meet three basic conditions. First, the product must be “significantly different from all products offered by the Postal Service within the 2-year period preceding the start of the test.”  Second, “the introduction or continued offering of the product will not create an unfair or otherwise inappropriate competitive advantage for the Postal Service or any mailer, particularly in regard to small business concerns.”  And third, the product must be correctly categorized as either market-dominant or competitive and meet the basic characteristics of the category.

The original proposal for Metro Post stated that the test would run for one year, but it also indicated that the Postal Service might extend it for an additional year, as permitted by the statute.  The Commission’s final order approving the test said that the Postal Service needed to notify the Commission prior to expanding the market test to other metropolitan areas.  No additional approval was required.  Thus, the Postal Service simply had to notify the PRC that it was extended the text for a second year, this time in New York City, and that was all there was to it.

When it introduced Metro Post in San Francisco, the Postal Service identified which ZIP code areas would be included.  There’s nothing about that in this week’s notice about New York.  Likewise, the Commission has not asked the Postal Service to identify which companies it would be doing business with, so there’s nothing about that in this week’s notice either.  The original request got a rather cursory review.  The extension of the pilot into New York City didn’t require a review at all.

 

5. It probably depends on non-career City Carrier Assistants.

The Postal Service has not said who will be doing all this delivering between 4 p.m. and 8 p.m.  Most likely, it will be City Carrier Assistants, the same non-career casual employees who are doing the Sunday deliveries for Amazon Prime.  That should be of concern for several reasons.

First, it means that the success of the test depends on using workers who earn $15 an hour with virtually no benefits.  The non-career workforce of the Postal Service continues to grow and grow.  It now composes twenty percent of the total workforce, the highest ever.

Second, it means that CCAs won’t be available to help with regular deliveries, which will put more stress on the already over-taxed workforce, and it might mean even more overtime for career employees.  According to a recent USPS OIG audit, overtime costs have soared over the past four years to more than $3.5 billion annually.

Third, using CCAs and any other carriers for Metro Post may cause the regular mail to move more slowly because it distracts attention from the main business of the Postal Service.  While some customers may get extra fast delivery, regular customers may get slower delivery.

 

6. It will require more deliveries after dark.

Now that a letter carrier has been killed delivering the mail after dark — a CCA, by the way — one wonders whether it’s a good idea to be doing a lot of deliveries after 4 p.m.  Of course, these deliveries will probably take place in the more affluent areas of Manhattan, so maybe that’s not an issue.

Still, creating a program that requires delivery in the evening should be of concern.  The unions have expressed concern that the plant consolidations and other cutbacks are causing problems. "Mail now arrives at carrier stations later,” says Mark Diamondstein, the new president of the APWU, “pushing delivery times into the evening."  Postmaster General Donahoe has also acknowledged the problem.   Our carriers "are working later, and they're on the street longer." He went on to add, "We have a lot of carriers who have delivered in the dark for years.  We like to have them back by 5 o'clock or so, but it's the changing nature of the business."  

 

7. It probably means more partnering with 1-800-Flowers.

The Postal Service hasn’t said which ecommerce businesses it will be partnering with on Metro Post in New York.  The original PRC filing said only that the participating companies needed to have ten retail outlets across the country, along with a few other characteristics. 

The only business that seems to have made it into the San Francisco phase of the test was 1-800-Flowers.com, as announced in this press release.  It appears that the test involved only four of its gourmet gift brands — popcorn and specialty treats from The Popcorn Factory, cookies and baked gifts from Cheryl’s, premium chocolates and confections from Fannie May fine chocolates, and gift baskets from 1-800-Baskets.com.

1-800-Flowers is not a regular flower shop.  It’s essentially a call center business in which seasonal employees take orders in their homes for $9 an hour, and it gets a lot of complaints about late deliveries and other problems.  The PR video put out by the Postal Service shows a postal worker going to a small retail flower shop to pick up the packages, but that’s not what will really be happening.  Most likely, the order is placed online or over the phone to someone sitting in her home, and the product is shipped from the 1-800-Flowers warehouse in Long Island to a USPS Delivery Destination Unit, and from there it's delivered to the residence, business, funeral home, or whatever.

1-800-Flowers is the kind of business that makes life tough for traditional brick-and-mortar retailers, the same way Amazon does.  So one has to ask if it’s really a good idea for the Postal Service to be giving a business like this a competitive advantage over traditional retailers, many of which are small family businesses.

The Postal Service may not care very much about its own network of brick-and-mortar post offices (it would prefer postal units in Staples), but does it also have to undermine the vitality of other brick-and-mortar businesses?  That’s not good for towns and cities and downtowns that depend on retail activity to prosper, and it’s not good for the country as a whole.

 

8. It won’t do much for the bottom line.

While the package delivery business is one of the bright spots in the Postal Service’s operations, one shouldn’t expect too much from Metro Post.  There’s a $10 million limit on annual revenues from a test marketing product.  The Postal Service asked for an exemption, which allows it to bring in as much as $50 million during the test year, but there’s no way to know if the Postal Service brought in anything like that during the first year.  The data collect reports filed with the PRC are non-public because they’re considered commercially sensitive information.

It's not likely that the first year of Metro Post brought in anything like $10 to $50 million.  If the Postal Service charges a little less than its competitors ($10 per delivery), bringing in $10 million in gross revenues would require something like 3,400 deliveries per day, and $50 million would require nearly 17,000.  It would take a small army of CCAs to pull that off.

In any case, $10 million or even $50 million in revenues will not mean much in the context of an annual budget of $65 billion. As this article in Daily Finance points out, “If USPS's aim in setting up Metro Post is to bring its business into the black, it's almost certainly doomed to fail.”  There are only a dozen cities the size of San Francisco and New York, and most don’t have the density.  Even if Metro Post brought in $50 million in each of ten metropolitan areas, it would still only represent a half billion in revenues — about 0.8 percent of total revenues.

 

9. It might fail.

The PR video on Metro Post characterizes the product as hitting the “sweet spot” of the booming ecommerce market because more and more customers want the instant gratification of quick delivery.  A USPS press release on Metro Post goes even further.  “Metro Post is a premium delivery service that will revolutionize the shipping industry,” said Gary Reblin, vice president, USPS New Products and Innovation.  “Building relationships with prominent retailers like 1-800-FLOWERS.COM will help us leverage our capabilities by making same-day delivery a standard option on retail websites.”

Maybe so, but as this article in New York Business Journal points out, the Postal Service is kidding itself if it thinks it can beat out UPS and FedEx on same-day delivery.  If it were that easy, other companies would have been doing it already.

The one thing the Postal Service does have over its competitors, notes Business Journal, is a ubiquitous presence across the country, including areas with sparse, dispersed populations.  But “it’s an unsolved puzzle” how to make money providing same-day delivery to such places.  “That is to say, every company in the industry would love to lead in same-day delivery in New York City, but how many want to lead in Winfield, KS?  More importantly, the USPS may be the only entity that can lead in Winfield and the thousands of towns like it.”

In other words, in those places where same-day delivery can be profitable, there are plenty of competitors, and in those place where it’s not really feasible, there’s the Postal Service.

 

10. It might succeed.

While Metro Post is not likely to be so successful as to make a real difference for the future of the Postal Service, even limited success should be cause for concern.  It might end up encouraging the leadership of the Postal Service to think about doing more things like Metro Post, and that is worrisome.

More initiatives like Metro Post will lead to more diversion from the main mission of the Postal Service.  That mission is obviously not to deliver specialty popcorn, cookies, and gift baskets for a call center company to upscale neighborhoods in Manhattan as fast as possible.  It is something much more lofty. 

As Title 39 states, “The Postal Service shall have as its basic function the obligation to provide postal services to bind the Nation together through the personal, educational, literary, and business correspondence of the people.  It shall provide prompt, reliable, and efficient services to patrons in all areas and shall render postal services to all communities.”

When the Postal Service goes cream skimming, when it develops products and services that are not for all patrons in all areas, when it sacrifices promptness and reliability because its energies and resources are devoted elsewhere, it puts this basic mission at risk.

 

It's just another distraction

Whether Metro Post succeeds or fails or just does so-so probably won't mean much in the long run.  It's basically just another distraction.  The main storyline is that First Class mail volumes continue to decline, and rather than improving service to curb the decline, the Postal Service has chosen to abandon its flagship product and gone searching for new sources of revenue.  It has relaxed delivery standards and made First Class less reliable, so that at this point it's hard to say how much of the decline is due to the economy, the Internet, or the Postal Service's own actions.

It's of course important for the Postal Service to be innovative, but is putting postal units in Staples, delivering on Sundays for Amazon Prime, providing same-day delivery for 1-800-Flowers, and promoting Harry Potter and SpongeBob what the country really needs?  Is that how you bind the nation together?  Why not work on innovations that help America, like offering more government services at post offices, participating more fully with the Census, extending banking services to help the millions of unbanked, and things like that?

The Postal Service is perfectly capable of thriving in the modern digital world, and it’s not heading toward irrelevance and extinction.  But the last thing we need is for the Postal Service to start taking risks in quest of the quick buck.  When the financial industry got carried away in its infatuation for junk bonds, subprime mortgages, and credit default swaps, it nearly destroyed our economy.  If the banks had been more conservative, we’d all be a lot better off today — and the Postal Service would be in much better shape too.

The Postal Service is not a start-up company, and it shouldn’t need to take risks like one.  It’s an American institution.  For over two centuries, we have built up an infrastructure designed to deliver the mail to all parts of the country in a prompt, efficient way.  That  infrastructure was not created to meet the special requirements of same-day delivery to a few high-density markets.  

The Postal Service should innovate, but it should also remember its core mission. Otherwise, it’s going to kill what’s left of the rationale for a public postal system.  There won’t be any reason left not to privatize it.


[Thanks to Mark Jamison for co-authoring this one. —S.H.]

(Image credits: Looking Backward, MetroPost promotion on USPS.com)

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