Episode 2 – Industry Corner Podcast

IN THIS EPISODE: Keeping an Eye on CPI - The Consumer Price Index and the impact on postage, the Board of Governors nominations, and an update on the President's Postal Task Force.

 

Transcript

Chris: Hi Everyone, I'm Chris Lien

Anita: And I'm Anita Pursley, welcome to Industry Corner, a podcast where we'll be talking about industry topics and breaking them down into easy-to-understand terms

Chris: On today's podcast, we're keeping an eye on CPI, the consumer price index, and the impact on postage, the Board of Governor nominations, and an update on the President's Task Force. So let's get into it.

Chris: Well, hello everyone and welcome again to the BCC software podcast. My name is Chris Lien, President of BCC Software and I'm pleased here to be again with Anita Pursley. Anita, great to be with you again.

Anita: Great to be with you too, Chris.

Chris: So, Anita, on our last podcast, we talked a little bit about the President's Task Force and I think you've got an update as to some changes with that. Can you bring us up to date on what's happening with the President's Task Force?

Anita: Sure. So the President's Task Force, their report was due on August 10th. Well, here we are on August 15th and of course there's been a lot of anticipation about this report. Well, reportedly the task force has completed its work. The Hill reported this morning that the report was given to the Presidenton Friday and that he'll be briefed this week, so it's really unclear at this time when we'll see the recommendations of the task force hopefully before the September 5th hearing, but as I understand it, the September 5th hearing is still anticipated and hopefully we'll see the report before then.

Chris: Okay, good. So some progress with it. We haven't seen it yet. You mentioned September 5th, that's Senator Johnson that's going to be heading up that subcommittee hearing on that, is that right?

Anita: Correct. The Senate Homeland and Governmental Affairs Committee.

Chris: Got It. Okay. All right, well that'll be good. So hopefully the industry will get a chance to take a look at it. It's at least encouraging to know that the President is getting briefed on that. As a reminder to our listeners, the President kind of followed up with and it was rather large document, 130 pages, but I think buried deep in there, page 68 or something like that, it was sort of that either or, EITHER the task force has to come up with recommendations to get the post service on a financial sound footing OR explore privatization. So be really interesting to see, don't you think on, on what they're going to say regarding either one, but certainly on the privatization part.

Anita: Exactly. You know, one of the other things we talked about was that house resolution, the resolution opposing privatization. And of course I checked the website pretty regularly now that resolution has 101 cosponsors. I think when we first looked at it, I think the number was only like 22.

Chris: Yeah, I think that's a strong indication from Congress that we don't want a privatized U.S. Postal Service. And I think generally speaking, the industry doesn't really want that either. But you know, we're not here to really talk about the task force. You mentioned that August 15th, here we are and something came out recently and that's the consumer price index, a measurement from the postal regulatory commission. And I thought we talked a little bit about what CPI is, why it's important for our listeners to understand and in kind of this strange way that the postal regulatory measures that. So Anita, tell us what was the CPI measurement that the PRC reported?

Anita: Okay, the latest number is from July. It's 2.356%. So that's up from 2.254 in June. And the trend has been ticking upward.

Chris: Yeah. Okay. So it's increasing, and again, the consumer price index, you know, there's so many different ways to measure economic growth in the country. The consumer price index and I think that there's several different measurements, but I understand the one that the postal regulatory commission works with is the Urban CPI-U, is that right?

Anita: That is correct.

Chris: Okay. And am I understanding of CPI-U is really kind of a measure of the average change over time in prices paid when urban consumers for a market basket of goods and services. So, being from northern Minnesota when I would go out and… out and about in the boat… When I go out to get groceries, you know bread and milk and cheese and things like that, maybe gas or whatever, that's kind of that average measure of how much I'm willing to pay, right?

Anita: Correct.

Chris: Okay. So eggs, milk and gas and stuff like that. So somehow that includes postage stamps. Where did you, where did we get CPI-U as a measurement relative to postage rates. Anita.

Anita: Well, as you'll recall, when the last postal reform legislation was enacted, that was back in 2006, the Postal Accountability and Enhancement Act. The law stipulated that the postal service was to be kept by CPI-U. Now how they came up with CPI-U. I really don't have any background information on that, but that's what we're governed under at the current time it's business as usual, like the last 10 years.

Chris: Yeah. Okay. So, so at least it gives us some kind of a consistent measurement and like you said, there's a number of different ways that people maybe look at the economy and stimulate the growth. In fact, I thought I thought the President was toting a 4% growth, 4.1 or something like that a couple of weeks ago. Um, that's certainly not the 2.35% that the PRC is talking about.

Anita: That's GDP growth,

Chris: GDP growth. Okay. So they had all these different economic measurements, right? So apparently milk,, cheese, gasoline, and postage stamps are somehow all in common. And I guess maybe that makes sense. Universal service obligation with the postal service that might make sense for them to use that. But I know one of the main things you mentioned at the Postal Accountability Enhancement Act, one of the main things that the industry wanted at the time was predictable and consistent pricing approach. We had to be able to plan for what our postage rates were going to be, so, so we need to be able to forecast that in advance. Now the PRC does something goofy with CPI because I know it changes, you said it's been trending up. So how does the PRC look at CPI and what's their measurement to come up with the number?

Anita: Well, I was kind of hoping you would explain that, but okay. Well the fact that it is a backward looking calculation. And that may explain the difference between GDP growth and, and the CPI-U because what I understand is that the commission looks at the last 12 months and comes up with an average monthly CPI-U and then divides it by the previous 12 months. So it doesn't really seem like it's a good representation of…

Chris: Well the current economic trend, right? The economy's been growing, you mentioned that GDP with a 4.1% growth. But we want to make sure, and I think that this was the whole approach is that, again, for predictability, but that it was something that wouldn't be impacted by short term changes and fluctuations in that. So we've got a 12 month, the trailing 12 month or a proceeding, excuse me, the preceding 12 month numbers that we look at and then we look 12 months back, so two years. Right. And then come up with an average. And as you reported earlier that, that averages, what 2.35, is that right in Anita?

Anita: 2.356 currently. So when the postal service increased rates in 2018 in January, they used the August number. So I think it's safe to assume that that is the plan right now is that the postal service would like to raise rates in January of 2019 if they're able to do so. So I would expect that number to be close to 2.5% in August.

Chris: Okay. So as people are preparing their postage budgets for 2019 they should plan accordingly and like you said, 2.5%. How is that across the board? I mean how can I plan for that if I've got a mix of different type of mail pieces or shapes?

Anita: The percentage increase is by class. And then within that the postal service has flexibility on where they will put that 2.5% increase. In other words, there's been a couple of trends that we've seen lately. The postal service has been decreasing the drop-ship discounts for letter mail. They are correcting a calculation that was incorrect two years ago. So I think we've seen decreases in that discount which means and, and above average increase for standard mail letters and then they'll have to offset it in another category within marketing mail. So we might see a decrease in origin-entered standard letters or we could also see it on the flat side. We know that the underwater products which are considered standard mail flats and of course periodicals, those are considered underwater because they're not covering their attributable costs. So we tend to see a larger increase in those categories.

Chris: Okay. So if you're mailing flats or you're mailing periodicals or some of these so-called underwater classes, and again, under water, meaning that they're not covering according to the postal service, they're attributable costs or they may be more of the post service may be passing through more than the measured cost of avoidance. And you'd mentioned drop shipping. So if you're looking at that, you may see some variation from that 2.5% you talked about, right?

Anita: Correct.

Chris: Okay. Alright. So that'll be something for people to look at. Now in the wake of all of this conversation about pricing and CPI and all this stuff, we come to the other acronym and we touched on this, I think on the last podcast, the BOG, the Board of Governors, the postmaster general and the deputy postmaster general by themselves, even though they're there on the board, they don't have price setting authority right? You still need at least a governor to receded, is that correct?

Anita: That is correct. And right now we do not have a single seater governor. We talked about this at the BCC Software users conference last week and I was kind of surprised at how many attendees were not aware of the situation. So it's very fluid, but I will tell you that there is a lot of optimism right now. So you know, there are two governors, excuse me, nominees that have made it out of committee, made it out of the committee and now we're just waiting for a vote by the full Senate. So the Senate is back in session today. Back in June Majority leader Mitch McConnell had announced that he would cancel most of the August recess so that they would catch up on confirming President Trump's nominees and also to fund the government. So he did do that. He followed up on his promise and Senate is back in session. So, the folks that I am talking to all seem to be pretty optimistic that we should expect the two candidates to be confirmed by the Senate soon. The Postal Service continues to express confidence that governors will be confirmed, of course it's before the session of Congress ends, so we talked about a January increase, but quite frankly, the postal service doesn't have the authority to do that until a governor is seated. So this is something that we're watching very, very carefully. If the postal service can't raise rates in January, we might see a February or March increase. It's all dependent on the Board of Governors situation right now.

Chris: Okay. All right. So we'll have to watch that closely to see what that is. But once that gets put into place, a 2.5% increase, maybe a little bit higher depending on your particular type or shape or class of mail and certainly have to have at least one governor seated to be able to do that. So folks, January, February, somewhere maybe in Q1, calendar year, 2019, would make sense for that. But related to all the pricing, and again, back to governors, is this whole promotion, postal promotions, being able to get additional discounts, maybe offset that 2.5% increase, get a 2% discount by using some of the high tech, combined with high touch of mail. What are your thoughts on the promotions as well? Anita?

Anita: You know, that's really a sad situation because I think mailers had gotten to be so used to receiving these discounts and being more creative in their mail types and taking advantage of these promotions. The postal service is still sitting on ready. I mean let's say the stars aligned and we had a governor seated this week or confirmed this week. It's still possible. I think what we had said was that the proposal should be in the hands of the PRC by mid-August for the postal service to have promotions for a three month period. If you'll recall, we had the mobile shopping promotion and what was the other one? The personalized Color Trans Promo, those are the two promotions with the highest participation levels and they're also in the fall of the year, so things would have had to happen really, really quickly in order to get promotions in 2018. But it's still possible.

Chris: You mean this year, 2018 is year, right?

Anita: I think most people have, like I said, the stars would have to align, but the postal service's sitting on ready and maybe these promotion periods will only be two months. I mean, that's another possibility, but I think we have to look towards 2019 quite frankly and maybe that can be the subject of our next podcast.

Chris: I think you're right on that. And you touched on a couple of things. Color drives your behavior and people respond to that. And certainly high tech mobile devices, being able to connect, relate and interact with your physical mail piece is a powerful way to be able to reach out to more people with mail in particular with millennials. So I think on our next podcast, let's explore a little bit about some of the things that we are looking at recently in the household diary study the 2017 household diary study, the DMA factbook, things like that, and particularly around millennials. I think it's very interesting and we're seeing some trends that we want to share with our listeners. So the next podcast, let's dive a little bit deeper into marketing to millennials and some of the statistics we're seeing with that. And let's keep our fingers crossed that the hearings this week in the Senate and we can get at least one governor seated to be able to get the business of mail moving forward for everyone.

Anita: Sounds like a plan, Chris.

Chris: All right, great. Anita, thank you so much and thank you to all of our listeners for attending today's podcast. We appreciate your feedback. From your friends here at BCC Software. Give us a call or visit our website bccsoftware.com. We definitely want to know how can we help you? Have a great day. Everyone.