Thursday, June 21, 2007

It's Final: No Reprieve on Postal Rate Hike

"One of the common denominators I have found is that expectations rise above that which is expected."
George W. Bush

It's Final: No Reprieve on Postal Rate Hike

By Mark Del Franco and Jim Tierney

Catalog mailers can kiss any dreams of a postal rake hike reprieve goodbye. The U.S. Postal Service's Board of Governors (BOG) on June 19 rejected the Postal Regulatory Commission's temporary rate reduction. That means catalogers, who were hit hardest when the new pricing structure took effect May 14, will have to live with the postage increases of 20%-25%, and as high as 40%.

The PRC had less than one month ago recommended to the BOG a temporary rate reduction of $0.03 in its reconsideration of rates for Standard Mail flats--the category affecting most catalogers. The PRC recommended the temporary lower rates last through Sept. 29, before fiscal year 2008 begins for the USPS on Oct. 1.

No dice, said the BOG: "We appreciate the commission's thorough review of this matter and its creative recommendations to implement temporary rate reductions for mailers of Standard Mail flats. We are concerned, however, that approving those recommendations would not be legally sound or practically prudent." The BOG had asked the PRC to consider whether "some rebalancing between Standard Mail letter and flat rates might be appropriate."

By recommending temporary rate reductions that would expire before the test year (the postal fiscal year 2008 that runs from Oct. 1, 2007 through Sept. 30, 2008) begins, the BOG says the PRC "devised an approach that would avoid any direct financial consequences in the test year." The PRC failed to address the BOG's request to rebalance the pricing between flats and letters, the decision says. As postal rate cases are a zero-sum game, the BOG says lower rates for some must be offset by higher rates for others. "As the commission estimates, the financial cost to the Postal Service would be on order of $100 million. That amount of money is substantial and its financial effect cannot be discounted even though the effect comes before the test year, rather than during the test year."

The BOG also said the temporary rate reduction for Standard Mail flats would be difficult to implement. "Given the amount of lead time necessary to develop the software changes required to support these rate changes, the actual number of weeks in which the reduced rates might be in effect would be minimal," according to the decision. "Such a short timeframe of relief, during the low mailing season of a catalog industry that makes plans months in advance, is not likely to mitigate rate shock significantly."

Others disagree. Mark Lee, who owns the Charlottesville, VA-based catalog consulting firm Mark Lee Group, says the majority of damage to catalogers was already inflicted on May 14. But he adds that "Its abruptness and severity is sending a shock wave throughout the catalog industry, and some companies probably won't survive it. The $0.03 temporary reduction would have eased the pain a bit, since it represents a 5% - 6% reduction in the overall cost of a typical catalog. Given the length of the planning cycle, most firms could have altered the course of one catalog as a result of the reduction."

Dana Springfield, the general manager of consumer direct for South Deerfield, MA-based scented candles manufacturer/marketer Yankee Candle, says "a favorable ruling would have allowed us to increase circulation in August-September and drive more growth in our business. Now we are forced to employ a conservative growth strategy in the face of this cost increase."

Indeed, in a June 20 release, DMA President John A. Greco Jr. warned that the BOG's rejection of any rate reduction for flat-shaped mail would have a severe impact on the mailing community. "America's mailers sent a clear message to postal officials that the surprisingly high increases in flat mail rates will lead to significant cuts in mailing volumes, and a long-term downward spiral in postal revenues," he said. "The Postal Governors made a bad call yesterday. It was a bad decision in February when the PRC made its recommendations for rates far in excess of what the Postal Service originally requested. Now by refusing to make the much-needed corrections, the Governors have all but assured a decrease in mail volume that will be felt for years to come."

It's not just the catalogers that are going to feel the pain, warns the DMA's senior vice president, government affairs Jerry Cerasale. "Paper companies are dropping production of coated papers in anticipation of lower demand caused by these high postal rates," Cerasale says. "This is only the beginning."

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