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Emergency Report! Postal Rate Strategies



By Jill Ambroz
04/02/2007

Well, the fix is in. Or so the greater powers that be in the postal world would have us believe, that things are finally on the mend. Last month, the Governors of the United States Postal Service finally voted on recommendations set forth by the Postal Rate Commission (PRC) concerning the highly contentious rate case R2006-1. The Governors largely accepted the recommendations of the PRC, which based much of its new shape-based mailing strategy on a proposal submitted by Time Warner Inc.

Publishers, and the USPS, are now left in the aftermath to figure out how to implement such complex and daunting changes;so complicated that the Governors made a sole exception for the periodicals class to extend the date of the new rate implementation to July 15. All other rate increases go into effect mid-May.

Under the new rate design, which moves to a more shape-based system, rates will apply to pieces and pounds, but also to bundles, sacks and pallets and will vary based on the type of entry facility. Another big change is that there will be new prices for the editorial portions of magazines, which should provide discounts to lower, destination entry rates.

At presstime, the Postal Service had yet to resolve such issues as "machinability, addressing and barcoding requirements to define what mail will qualify for both automation and non-automation rates." And once it makes those decisions, new software must be developed and implemented for use by the USPS and magazine publishers.

Industry sources say that can be accomplished fairly quickly. But there are additional steps that printers and some publishers will have to take. "There is also the issue of training our employees on the changes in mail preparation, which takes time," says Joseph E. Schick, director of postal affairs for Quad Graphics. "We're dependent on the postal clerks in our plants who verify and accept the mail every day to have a good understanding of all the changes."

On top of trying to wrap their arms around the new shape-based rate design, magazine publishers are facing whopping rate increases, at an average of 11.7 percent. But for many publishers, those rate hikes could balloon to a staggering 25 percent increase. Though this has been talked about for years, this really could be the final straw that breaks the camel's back for some publishers.

"Unlike some past postal increases, this new round brings a whole new set of rules and regulations, which, among other things, requires changes in the preparation of certain types of mail, coupled with new machinery being deployed in a number of USPS facilities," said Robert Smrek, director of periodicals production services, IEEE Spectrum.

The confusion seems widespread in the publishing community. Not only are publishers confused by new standards, but the rates themselves are causing some in the industry to scratch their heads. The USPS raised rates last year by 5.4 percent but prior to that hadn't raised rates since 2002. And the large double-digit increase this time around is more than most anticipated.

"The biggest thing I'm hearing is everybody's wondering where some of these rates came from. It just seems strange," said Richard Willis, pub express logistics solutions manager for Publishers Press Inc., a printer based in Shepherdsville, Kentucky. For example, if a publisher is mailing to a destination delivery unit pallet, the fee is less than $2. But, if it's to a sectional center facility, it's more than $8. The disparity is really large, Willis added.

The USPS had provided ample warning to mailers that big changes were on the horizon. The industry has been bracing itself for the shape-based changes for a while. And publishers and their advocates made use of the 10-month window between the rate case proposal and the vote, with ample representation in hearings and actual letter-writing campaigns.

Now it seems the only recourse publishers have is to examine and tweak their own operations, from paper changes to distribution methods. And for those publishers that can take advantage of the most efficient processes, they may even see a discount in postal costs.

Sacking the Sacks
It seems that sacks have become Public Enemy Number One for the USPS. Those publishers that continue to mail in sacks instead of on pallets will face some punishing rates. Indeed, the publishers who will be the hardest hit by the new rate hikes will be those that continue to mail in sacks and enter the mail stream where their printer is. "They'll be hit hard. Real hard," Willis said.

Sacks are difficult to move around; they can't be forklifted like pallets, so it requires more time and manpower to move that mail. Also, pallets get better "cube utilization" than sacks. That's a term the USPS is fond of, getting better use of cubic space of a trailer. Basically, the more square a package is, the easier it is to get on a truck and the more magazines can be loaded per truck, Willis added.

But many in the industry are saying that the new "incentives" are actually cost-prohibitive. "They're offering most of the discounts to very large circulation publications that have enough volume to sort to a minute level," said Willis. "That's just not the volume on 99 percent of publications in the periodicals class. It's excluding the majority of them from having a realistic opportunity to gain efficiency to participate in efficient programs."

Even the postal governors board recognizes the conundrum. In the decision, the governors noted that "some publications face substantial rate increases even though they have limited options to become more efficient or to mitigate the increase."

The onus is on the publisher to address mail preparation to qualify and take advantage of any cost savings. That's why it's important for publishers to choose a printer that has capabilities to match their needs.

"Things like additional charges for sacks, bundles and pallets will add additional cost. The way you offset that is by taking in and building more density," said Jim Wiseman, mail services manager for RBW Graphics Transcontinental, an Owen Sound, Ontario-based printer. "If I have three jobs coming together into one common mailing, you can build enough density;take in enough pieces;to make up the single five-digit bundle."

Renewed Co-Mailing
Co-mailing, where different titles are selectively bound on binders and mailed together, is a potential area of significant savings for publishers. In fact, for many publishers that have already tweaked their paper and trim size, or may not want to adjust them, this is the one area that is worth embracing.

"We aren't making any changes to paper or trim size," says Advanstar's Hammerbeck. "We have made changes in the past and feel that we are in a very good position in regards to our products. What we are doing is working very closely with our printer to take advantage of co-mailing all of our publications. We feel that if we can co-mail every magazine, we are doing everything we can to get the best possible postal rates. It shouldn't matter if you are a large or small publisher, the key is to position yourself with a printer that has the scale to give you co-mail capabilities."

David Straus, who lobbied on behalf of business-to-business publishers as American Business Media postal counsel, says, "Get into co-mailing. Encourage your printer to purchase equipment for co-mailing to get out of sacks. Do that now and you may not see a postage increase."

It's often more efficient for a printer to get a shipment from point A to point B than the USPS, because the postal system has to go through so many more steps.

One gray area is that the USPS is moving toward changing its sortation capabilities. The Postal Service wants to get to a seamless operation that produces one package of mixed letters and flats for each delivery point. The USPS plans to implement a new Flat Sequencing System, a machine that will sequence flats in delivery order using a two-pass system, as well as a Delivery Point Packaging system, which would replace the more labor-intensive carrier casing and pull downs of the current manual system. The new systems are expected to be implemented within the next year or two.

Adding to the complexity is the postal reform law that was signed in December, which has no real bearing on this rate case. The main difference is that future rates will be based on the Consumer Price Index. Many in the industry applauded the move, believing that rate increases would become more predictable and therefore easier to budget against.

However, the new law states that the average rate cannot rise above the CPI, which has 3 percent rate caps. But the emphasis there is on the word "average." The Postal Service can still do whatever it wants as long as the average rate stays within those guidelines, ABM's Straus explains. That could mean that the Postal Service could raise some rates as high as 25 percent and decrease other rates to get to that average rate.

Quad Graphics' Schick advises that publishers cover their own bases. "Start with your mailing lists and ensure that you are meeting all postal requirements for work-sharing discounts and deliverability," he says. "That will help eliminate any unexpected rate increases due to the loss of carrier route and/or automation."

Next, design the publication and automation to guarantee you'll be able to claim automation discounts. "Then they should utilize our co-mailing programs wherever and whenever possible for the best presort and lowest postage costs," says Schick.

Finally, as publishers and vendors work to reduce postage costs, look for ways to increase the value of the publication through the use of personalization and other marketing techniques that will attract advertisers and complement the editorial content, Schick adds.

Paper
Publishers will have to take yet another hard look at making changes in products and operations to offset the postal increase. We talked about the necessary changes to the distribution chain. Beyond mailing, there are other areas that will impact postal costs, from paper to print choices.

Whenever there's a postal rate hike;especially one of this magnitude;there is always a renewed interest in lowering paper weights. Paper manufacturers know their customers are always looking for high quality paper with lighter basis weights.

One solution is to look for papers with the chemical additive titanium dioxide. DuPont makes a whole product line called DuPont Titanium Technologies. Basically, the chemical can be added to lightweight papers to give them the print show-through resistance that heavier papers naturally have, said Michael H. Evans, market development manager for DuPont. This additive is typically found in North American products. The paper grades with titanium dioxide provide a sheet with more fiber, more stiffness that will perform like heavier sheets but at a lighter weight. In some cases, paper weight can be reduced by up to half.

And the cost savings can be significant. DuPont used titanium dioxide in its print package of a recent annual report. The mailing included the typical colored annual report, but the company changed the paper just for the printing of the black-and-white financials sheet. It went from a 50-lb. sheet to a 38-lb. uncoated sheet, which actually provided the same opacity at a one-point better brightness. This piece was mailed together with the glossy report and the company saved more than $28,000 on its postage bill.

Granted, the rule of thumb is that you will spend more per hundred weight or more per ton of paper, but you'll need less weight because you will get more for the given weight, Evans explains. So, DuPont's paper bill increased by $400, but that is peanuts compared to the savings it enjoyed on the postage bill.

The thing that publishers give up when they go to a lighter weight is the function of thickness, Evans says. But, there are some things a paper maker can do to provide a bulkier sheet in a given weight. For example, there are paper grades out there that provide the bulk of a 36-lb. at a 34-lb. weight. The paper manufacturers are able to do that by reducing the coweight, reducing the calendaring, putting the paper between rollers to create a glossy surface on the coating.

"There are a number of tweaks that the paper maker can do to improve the bulk and there are specific grades out there that bulk to next higher rate," Evans said. "High-bulk rate is another approach to reduce your postage costs without sacrificing much in the way of stiffness and opacity."

Another area to explore is trim size. But those changes can be tricky. Publishers have to factor in the waste factor. They should also keep in mind the newsstand racks. "If you adjust trim size, what does that do to newsstand racks?" said Wiseman. "You can spend millions switching over newsstand racks and that becomes a consideration if you're going to start adjusting rates or sizes;what's my newsstand looking like?"

New Technologies
All of these changes to the distribution scheme will surely give rise to new technologies. Publishers Press, for example, says it was the first printer to offer tabloid co-mailing a few months ago. The printer was also the first to offer co-mailing to polybagged magazines of short- to medium-run titles.

Publishers Press is working to increase the thickness it can take on its machines and it's able to accommodate nine-inch magazines. "The industry will evolve as the rates change," Willis said. "You have to adapt to the environment to compete. People either have to make changes or they'll get left behind and probably will have to shut down."

Success, which is already exploring the use of lighter paper, is also taking a hard look at digital distribution as a reaction to the high postal rate hike. "The ability for readers and users to interact with advertisers through the use of digital editions offers the experiential components brands crave," said publisher Joseph Guerriero. "The postal increase will definitely drive publishers to more proactively explore digital editions. That Gen Y is already digital just provides us with the impetus to get there sooner."

But for those who want to stay in print, the USPS is a necessary partner to keep magazines viable. "Even the Internet cannot reach every single address in the U.S.;only the Postal Service can do that because not every household has the Internet," Willis said. "But all households receive mail. The USPS is a necessary partner to keep magazines viable. Anything we can do to help them improve as a partner, helps the whole industry."

By Jill Ambroz
04/02/2007







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