Staples Delivers First Blow for Postal Privatization

A company that routinely loses billions of dollars annually -- and even hundreds of millions of dollars in its strongest quarter -- can't be expected to survive too long. While the Postal Service doesn't quite operate like a private corporation the nation's postal service is finding itself in an increasingly difficult position. The postal service lost $5 billion in its last fiscal year and $354 million in the first fiscal quarter, which covers the Christmas holiday, when package shipments surge. This loss does take into account pre-funding of retiree health benefits as required by Congress, meaning that the Post Office is operationally profitable, but these losses will need to be addressed in the long term. That being said, all hope is not lost for the USPS.

Source: United States Postal Service.

Indeed, it was a 10% increase in package volume and a 14% jump in package and shipping revenue that allowed the U.S. Postal Service to slash last quarter's losses from more than $1 billion the year before. But hundreds of millions in losses is still unacceptable, which is why the agreement it signed with Staples (NASDAQ: SPLS  ) last year to offer postal services at some 80 stores has some fearing it could be the first step toward privatizing the mails.

Last November, the government began as part of its Retail Partner Expansion Program a pilot plan to install mini-post offices in Staples beyond the usual stamp sales such partners are typically afforded. Instead, Staples will also include first-class domestic and international mail and package services, Priority Mail, Priority Mail Express, Global Express Guaranteed, and Standard Post services. A key detail was that a Staples employee, not a postal worker, would receive your package or envelope.

Last week, the American Postal Workers Union staged picket lines outside dozens of Staples stores across the country to protest the creeping privatization of the service. They don't necessarily mind putting postal outposts in retail stores -- what they object to is the use of Staples employees to handle the mail. The union wants a postal worker standing behind the counter, which is why the partnership the post office launched with Amazon.com to deliver packages on Sundays didn't rankle: It was an expansion of business for postal workers.

Staples is not interested in being as revolutionary as all that. All it's looking for is to bring more people into its stores. It had also entered into a partnership with Amazon to install lockers in its stores as a way to derive incremental income from people picking up packages, but it was a failure because it did nothing more than make it more convenient for its rival's customers to shop the e-commerce site. It ended the program after less than a year. 

Sales at Staples fell to $24.8 billion last year, a decline of more than 1%, primarily from Europe's continued economic malaise, but also anemic growth here at home. Comparable sales were down 4% in 2013 as traffic fell even as it closed almost 80 stores. It can't afford to put those revenues at risk by angering a large portion of the populace that has operations in virtually every city, town, and hamlet. It's what has made post office closings so difficult, because they affect every congressional district, creating a powerful bloc of protest.

The task the postal service sets out to accomplish is a truly vast and mind boggling enterprise. It involves the sorting and delivery of 158 billion pieces of mail. It also happens to employ 626,000 people, making it the third-largest employer in the country, and it would rank 45th in the 2013 Fortune 500 if it were a private company. That gives it a lot of clout in stymieing efforts that even remotely seem to suggest the system may be privatized or altered. 

Although the USPS doesn't directly receive tax dollars anymore to operate, it does get about $100 million annually to fund special delivery programs such as those for the blind, and those multibillion-dollar annual shortfalls are financed by borrowing money from the government. 

Partnerships like those with Staples can help narrow the gap between income and expenses, and as snail-mail use continues to drop, package delivery will assume a greater portion of its revenues. This represents a radical shift from the current structure of the United States Postal Service - a structure that has been resistant to change. The existence of a "post office" at Staples precludes the need for even having many of the high-cost brick-and-mortar buildings owned by the government.

I'm not sure this partnership will be any more successful for Staples at boosting traffic than its venture with Amazon was, and angering the very people it's supposedly working side by side with could cause it to become an even bigger disaster.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 29, 2014, at 9:04 AM, grannybunny wrote:

    Operationally, the Postal Service is profitable. It's multi-billion dollar losses and debt are due to a 2006 Congressional mandate to prefund 75 years' worth of future retiree health benefits within 10 years, a draconian requirement to which no other entity -- public or private -- has ever been subject, and it has brought USPS to the very brink of bankruptcy. The prefunding wasn't needed; due to errors in the statutory formula setting the payment amounts, the Postal Service has been forced to overfund both its retirement programs: CSRS by $50-$75 Billion and FERS by approximately $10 Billion (estimates vary). The prefunding mandate was just a cheap accounting trick to bring off-budget Postal revenue -- paid in by mailers, not taxpayers -- into the reach of the greedy mitts of Congress, that has spent the resulting $50+ Billion slush fund for non-Postal programs that would otherwise have to be funded by the taxpayers. In other words, USPS is "bailing out" Congress, the U. S. Treasury and the taxpayers. Eliminate the prefunding boondoggle, and you would eliminate 80% of the Postal Service's financial problems. Congress created the problem, and Congress needs to fix it, ASAP!

  • Report this Comment On April 30, 2014, at 11:28 AM, TMFCop wrote:

    Unfortunately, the trope the USPS has to "prefund 75 years of benefits" that's often trotted out is simply not true. The General Accounting Office specifically says the reforms enacted "did not require USPS to prefund 75 years of retiree health benefits over a 10-year period."

    It does require the USPS to prefund current employee and dependent benefits, but the "75 years worth" is misrepresented because some employees will live to 75 years of age, others will not, so there is a balance.

    http://www.gao.gov/assets/670/661637.pdf (p. 10, footnote 16)

    The real problem is the declining usage of mail, which is down by 30% or so. Congress has definitely impeded efforts to truly reform the USPS, but I can't say I oppose the call to privatize the service either.

    But unfunded pension liabilities in corporations is a huge ticking time bomb for them. They've used overly optimistic estimates to cover up the fact they don't have the money there to pay for them and investors will be burned when it goes off.

    Rich

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