Exponential -- June 14, 2015

• The UK government will start selling its 30% stake in
Royal Mail later this year.
• Since 1987, the number of letters received per
American household has plummeted 80%.
Exponential the Skillbridge Magazine
Deeper Dives
Red-letter day: the
future of the post
office and mail
UK government to sell its last remaining stake in the Royal Mail
The UK government has announced it will sell its remaining stake in Royal Mail PLC.
Treasury chief George Osborne told the Westminster parliament that the government
will start selling its 30% stake in Royal Mail later this year. The holding is now worth
about $2.3bn.
Royal Mail traces its history to 1516, when King Henry VIII ordered the creation of the
first national post service. In the twenty-first century it has struggled with losses
following the rise of the Internet, the advent of free email, and the emergence of
tougher competition from private postal services.
Royal Mail was partially privatized in 2013 under the previous administration’s plan to
sell off several state assets to repair Britain’s public finances. But the privatization
drew fire from workers’ unions and critics who said the government sold the public’s
stake too cheaply. The Royal Mail privatization echoes those carried out in the 1980s
under Conservative Prime Minister Margaret Thatcher, who sold many state
companies, including the state airline, the telephone operator, and various utilities.
Thatcher’s privatizations were controversial, with critics saying she was selling state
jewels at bargain prices, depriving the treasury of funds and rewarding speculators.
American mail trucks of the future
America’s delivery and collection fleet of
190,000 mail trucks includes 142,000
vehicles that desperately need to enter
retirement. Their average age is 24 years
with the first Grumman Long Life Vehicle
rolling off the assembly line in 1987.
Maintenance costs on mail trucks hit almost
$1bn in 2012. Replacement parts for older
models are scarce. The trucks are not up to
today’s safety codes and consume high
amounts of gas. Replacing the fleet would
cost the post office about $5bn, and that’s a
check they currently can’t afford to write. The
financially struggling mail agency has
exceeded its legal borrowing limit and
doesn’t have the necessary cash for such an
expensive investment.
US Postal Service reports narrower loss
In the second quarter of 2015, the US
Postal Service (USPS) delivered 37.7bn
items, down from 38.2bn a year earlier,
but its shipping and package volume
increased 14.4%. US Postmaster
General Megan Brennan said in May
that its “cost containment and revenue
strategies are delivering results.”
Despite the increase in packages, the
post office’s operating margins “are
lower than in mailing services,” Chief
Financial Officer Joseph Corbett said.
He added that USPS will make
investments in improving its network
infrastructure and delivery vehicles.
In August 2014, USPS won approval
from regulators to lower prices by as
much as 58% on certain Priority Mail
packages for customers shipping at
least 50,000 parcels a year. USPS then
started cutting prices to attract big e-
commerce. Operating revenue in 2014
grew 1.3% to $16.9bn while operating
expenses fell less than 1% to $18.4bn.
Key Sources:
• Bloomberg: The U.S. Postal Service Is in
Even Worse Shape Than You Think
• McKinsey: USPS Future Business Model
• WSJ: British Government to Exit the Royal
Mail
Why the mail is in bad shape…
There are many reasons that explain
why postal services around the world
are facing problems. A report by The
Heritage Foundation details many of
these reasons for the USPS decline:
• Letter writing is disappearing. Since
1987, the number of letters received
per household has plummeted 80%.
The total volume of such mail has
declined by 25% since 2010.
• The Internet Is decimating paper bill
paying. As late as 2002, 75% of all bills
were paid by mail and only 17% were
paid electronically. In 2012, the USPS
reported that 56% of bills were paid
electronically and only 40% by mail. The
rest were paid in person.
• The greeting card Industry has
declined. The number of mailed
greeting cards has dropped by 50%
since 1978, and by 10% since 2010.
• The future looks bleaker. The US
Government Accountability Office (GAO)
has estimated that total US Postal
Service volume could fall by 20%.
How will the USPS continue to fund
itself with these massive declines?
Thoughts on how to save the post office
In 2010, the US Postal Service hired
McKinsey to conduct an analysis on
methods that could be used to reduce
its expenses and increase its revenues.
Many of McKinsey’s suggestions
involved expanding the products and
services that the post office offers.
McKinsey recommended incorporating
financial services such as banking and
insurance into the post office and
offering transportation services such as
warehousing. It also recommended
introducing new retail products such as
vending machines, and using asset
commercialization strategies like selling
advertising on the side of mail trucks.
Other McKinsey-proposed solutions that
would require legislative changes
include improving workforce flexibility
and leveraging a natural shift in
employee mix due to a 5% annual
attrition rate. As career employees leave
the post office, they can be replaced
with non-career employees up to
bargaining limits. McKinsey is quick to
emphasize that time is of the essence
for the post office to remain solvent,
and only a limited subset of options will
take effect quickly enough to address
short term financing requirements.
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