Without An Extreme Makeover, The Postal Service Is Doomed

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Post OfficeAccording to Post Office lore, "Neither snow nor rain nor heat nor gloom of night stays these couriers from the swift completion of their appointed rounds." But fearless as its couriers may be in the face of meteorological adversity, the U.S. Postal Service makes no claims to skill at dealing with storms of an economic sort -- and that's the danger it faces today.

On Tuesday, Postmaster General Patrick Donahoe went hat-in-hand before the Senate Homeland Security and Governmental Affairs Committee to plead for a government bailout. USPS, you see, is losing $9.2 billion a year running those appointed rounds. That's bad; worse, the Post Office is on track for $20 billion in annual losses by 2015.

The more immediate issue, though, is that later this month the agency must find $5.5 billion to pay for future employee health-care obligations. Problem is, it doesn't have the cash -- and has no way to get it.

How Likely Is a Sept. 30 Shutdown?

Within just a few weeks, the Post Office's growing deficit will take it right up to its federally mandated borrowing limit of $15 billion. At that point, barring a miracle, the agency will be unable to pay salaries to its 560,000 employees.

Now, don't go panicking just yet. With the memory of the federal government's near-shutdown over another supposed debt ceiling so fresh in everyone's minds, it's unlikely that Congress will let USPS shut down on Sept. 30. Somewhere, somehow, the feds will find the money -- whether by lifting the borrowing limit, postponing the $5.5 billion health-care payment, or tossing some other sort of financial life preserver.

A temporary fix, however, will not solve the Post Office's real problems, which boil down to two things: costs and revenues.

Problem No. 1: Budget Bloat

On the cost side of things, the USPS is bloated. Having 560,000 employees may not sound like much, compared with the 670,000 workers USPS had just four years ago -- more than the payrolls at FedEx (FDX), UPS (UPS), YRC Worldwide (YRCW), and Expeditors International (EXPD) combined -- but apparently, it's a whole lot more workers than even the Post Office thinks it needs.

In a break from its no-layoffs tradition, Donahoe hopes to eliminate 220,000 Post Office positions by 2015, including 120,000 layoffs.

In part, these workforce reductions will track Post Office plans to close 3,700 outlets in smaller American towns. But that's just a start. Donahoe admits that the planned closures will reduce annual costs by no more than $200 million. A bigger move toward efficiency, if that's what you call it, is also in the works, as the Post Office presses forward on proposals to eliminate Saturday delivery. Here USPS hopes to save $3.1 billion. But even that won't be enough to close the gap. To truly repair the service's income statement, USPS must also address revenues.

Problem No. 2: Disappointing Deliverables

Revenues are what a business collects in exchange for providing a valuable service. But what real value does the Post Office provide you today? In a wholly unscientific experiment, I opened my mailbox today to find out. Within I found:

  • One (1) Victoria's Secret catalog. (Stop giggling. I have three women living with me in this house.)
  • One (1) package ValPak coupons.
  • One (1) bubble-wrapped package from an e-tailer.

No postcards -- all my friends and relatives have email, and most are on Facebook. No bills -- I have an online bank account and online billpay. So this wasn't an atypical haul at the Smith household.

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But think for a moment: What is there in the catalog that I can't get, in interactive detail and with chat support from customer service, on victoriassecret.com? What can ValPak give me that Groupon can't? In either case, I doubt that the Post Office delivers much "value" to its customers -- so even though the postage rates aren't printed on the envelopes, I seriously doubt that these companies are paying top dollar.

As for the one item of mail I actually wanted to receive -- the package -- well, UPS or FedEx could have delivered that just as easily. True, they'd probably charge more, but that's just the point. Even where the Post Office does deliver value, it doesn't charge enough to cover its costs!

3 Solutions to Fix the Postal Service's Problems

If the Post Office is to escape the fix it's gotten itself into, it must start acting like a business. Here are three ways it can do that.

1. Raise rates -- on everyone -- enough to cover costs. If this means losing customers, well, that's where we're headed anyway. USPS estimates that mail volume dropped 17% from 2006 through 2009 and will decline by a further 37% from now through 2021. "Always low prices" may be a fine business philosophy for Wal-Mart (WMT), but it doesn't seem to be working out for USPS.

2. Think outside the mailbox. The Post Office has to start thinking about where else it can add value. Proposals on the table today include permitting the service to deliver alcohol by mail, doubling down on the use of labor-saving self-service kiosks and stamp vending machines, and permitting USPS trucks to do contract work covering the "last mile" of delivery for FedEx and UPS.

3. Provide door-to-door delivery service on, well, everything else, too. As long as we're talking about deliveries, one thing I'd add to the mail truck and revenue stream is newspaper delivery. (Why do two separate fleets of vehicles need to circle the same neighborhoods daily, for essentially the same purpose?) And what about grocery delivery -- perhaps in partnership with Amazon.com (AMZN), which is turning itself into a true supermarket to the world?

And I'm sure even that's just the beginning of the possible ideas for improvement. If you had the chance to tell the Postmaster General how to fix his business, what would you say? Give him a shout in the comments section below.

Motley Fool contributor Rich Smith does not own shares of any companies named above. The Motley Fool owns shares of Limited Brands, FedEx, United Parcel Service, and Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of FedEx, Wal-Mart Stores, and Amazon.com and creating a diagonal call position in Wal-Mart Stores.

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