SMC-RT-1 ilECEI:‘E!) BEFORE THE POSTAL RATE COMMISSION WASHINGTON, D. C. POSTAL RATE AND FEE CHANGES, : 1997 hcIJ fjslfj;‘g y; ‘!,,i. ,: _ i!pf-j,;,: ~,, ::;y Docket No. R2000-1 REBUTTAL TESTIMONY OF BERNARD BRADPIECE ON BEHALF OF THE SATURATION Communications MAIL COALITION with respect to this document should be sent to: John M. Burzio Thomas W. McLaughlin BURZIO & MCLAUGHLIN 1054-31st Street, N.W. Washington, DC 20007-4403 Counsel for the Saturation Mail Coalition August 14, 2000 ::, TABLE OF CONTENTS AUTOBIOGRAPHICAL SKETCH 1 2 PURPOSE OF TESTIMONY I. II. Ill. THE COSTS FOR PRIVATE CARRIER DELIVERY ARE SUBSTANTIALLY BELOW EXISTING AND PROPOSED POSTAL RATES FOR STANDARD A ECR SATURATION MAIL 3 HIGH POSTAL COSTS MAKE PUBLICATIONS DISTRIBUTING BY MAIL TOO EXPENSIVE FOR MEDIUM TO L4RGER ADVERTISERS 6 THE POSTAL SERVICE IS VULNERABLE MAIL VOLUMES FROM FREE PAPERS CONCLUSION TO LOSING SATURATION 10 12 REBU-ITAL TESTIMONY OF BERNARD BRADPIECE AUTOBIOGRAPHICAL My name is Bernard Bradpiece Pennysaver Group, a saturation distributed and I am the President, CEO, and owner of the mailed weekly free paper with a circulation 1,300,OOO in the States of Maryland Metro Community SKETCH and northern Virginia. News, a 290,000 circulation I am also the owner of the saturation weekly free paper that is in Erie and portions of Niagara Counties in New York by private carrier. I came to America and bought the Maryland Pennysaver publication moved here from the United Kingdom and sought an entrepreneurial would help me and others pursue the American owning your own business. consultant Before 1996, I worked as an independent and provided business 11 businesses that included 12 Publishing, Ltd. (now known as Midland Independent 13 and Spode Potteries, 14 For each of these businesses, I5 strategies to restructure I6 operating performance and Derby International, business operations Newspapers), the manufacturer I was responsible President I9 Manhattan 20 my own business 21 petrol filling stations. 22 Cranfield and international known as turnaround for British Aerospace, work to Ingersoll Royal Worcester of Raleigh bicycles. for creating and executing or balance sheets in order to improve and/or attract new capital. for Citi Bank and culminating in 1991as the Managing Bank, head of UK Corporate Finance. as Vice Director for Chase Prior to 1983, I created and owned involving the sale and service of automobiles and operation I have a Masters Degree in Business Administration of from the School of Management. My papers are members 24 Papers), the Alliance 2.5 the Steering Committee of the AFCP (the Association of Independent of Free Community Store Owners and Professionals, for the Saturation Mailers Coalition. I venture that I felt From 1983 to 1991, I worked for various bank groups with positions I8 23 services commonly the parent corporation in 1996. dream of starting, building, IO 17 of and I am on -2PURPOSE OF TESTIMONY I As a newcomer to this country, and the mailed free paper business, 2 never tracked or participated 3 William 8. Tye, an economist 4 John White who operates in a postal rate proceeding. hired by the Newspaper a distribution I have read the testimony of America, and company owned by a daily newspaper and who is testifying on behalf of the Association 6 clarifying that Mr. White is in fact employed 7 description 8 represented 9 business. Association of Alternate Postal Systems. by a newspaper group, of his position could have led to the unintentional a small independent The purposes IO 1. II ECR saturation I2 AAPS-T-1 I have business, of my testimony I do represent It is worth His own misinterpretation that he a small independent are: To rebut the NAA and AAPS argument that “the USPS proposal [for Standard A a. mail] would significantly harm [AAPS members or other competitors].” at p.7. My testimony will show: Data that compares the costs to deliver a free paper by private carrier I4 and the costs to deliver that same paper under existing and proposed IS saturation I6 by the USPS, the costs of private carrier will still be one-third I7 USPS distribution. b. I8 of mail rates. Even with the modest pound rate reduction The high costs I am paying for postal distribution mailed paper less competitive the cost of have made my 19 saturation in securing 20 business 21 decline in the account 22 largely unable to sustain price increases for the last four years. of medium and larger advertisers. sought and holding the Our paper has seen a base of these customers and we have been To rebut the NA4 position that the record does not show that the USPS is being 23 2. 24 threatened by ECR competitors or loss of ECR business, 25 vulnerable to loss of saturation mail business by saturation 26 or together with other mailers to convert all or portions of their saturation 27 coverage to private delivery. NAA-T-1 at p.45. I will show the USPS is mailers acting individually mail delivery -31. THE COSTS FOR PRIVATE CARRIER DELlVERY ARE SUBSTANTlALLY BELOW EXISTING AND PROPOSED POSTAL RATES As somewhat I of a newcomer to a business relationship to find that the statute gives our fiercest competitors with the USPS, I was 2 surprised 3 in determining 4 vendor. 5 provide proper sworn evidence of their own costs to justify the self-serving 6 unsubstantiated the business relationship In addition, the newspapers assertions and authority and pricing levels I must pay with my largest and private delivery concerns they make about competitive In my industry, there are publishers 7 standing have chosen not to and harm.’ like me who distribute papers both by mail 8 and by private carrier. Because of the great cost disparity between private carrier and 9 mail, and the high pound rate, papers that use the mail are often lighter weight papers IO or papers in rural, less dense areas, where the cost of setting up a private carrier II force are greater. My competitors’ 12 testimony in this case has been somewhat coy in criticizing 1: USPS data on costs for “thinness of tallies.” 14 examples I5 distribution of heavier pieces is so high and so totally out of proportion I6 distribution costs for similar pieces. of saturation It is no wonder to me that there are few pieces mailed at the heavier weights as the cost for mail Here is an example from my own experience I7 of the great cost disparity I8 private carrier distribution I9 purchased 20 had thoughts 21 the service I received from the USPS and prefer to keep my organization 22 publishing and marketing 23 acquisition, any thoughts 1 and existing and proposed to alternate postal rates. between I recently a free paper in the area of Buffalo, New York. When I acquired the paper, I of converting my distribution the paper. of converting From my own research, to the USPS as I have been satisfied with When I analyzed the distribution focused on costs of my new to postal delivery vanished. I believe it would be difficult for the newspaper industry to show competitive harm. Because of their significantly lower delivery costs, carrier delivered newspa! pers enjoy average operating profit margins of 31.56% (Ink md Studv, Press Association 1998--Daily Newspapers Circulation 51,400 to 60,500). -4Printed on the following page is a chart comparing the private delivery costs to deliver a typical paper with what I would pay under current postage rates and under the proposed postage rates. Some highlights 1. distribution 7 8 9 to note in this comparison The name of the paper is Metro Community in Erie County and part of Niagara County. piece but has built up a substantial 2. and the chart: insert distribution News in New York with The paper itself is a lightweight business. The costs for hand delivery labor reflected below show a set price of $56.00 per thousand paid to the carrier, as well as a separate fee of $1.20 per IO thousand to a route supervisor. The carrier of this paper is paid $5.60 per thousand II for every insert in the paper. I2 piece in the paper and its distribution. I3 are not set based on weight. This compensates the carrier for actually inserting the The carrier is paid a flat rate per insert. 14 3. I5 costs a publisher 16 costs in smaller market areas are likely to be less. Prices The rates paid for labor in these counties of New York are on par with the would encounter 17 4. Currently, I8 saturation with destination I9 thousand. The proposed 20 thousand 21 to hand deliver a paper weighing 22 compared 23 difference. 24 5. in other major metropolitan my starting postage rate for my Pennysaver increase. a total of $406.23. 27 28 be $334.90 The combined carrier and supervisor almost 11 ounces is $105.84 for postage The per thousand cost per thousand for my mailed 3.3087 ounce piece. That same paper weighing 26 product with full increase on the piece rate will take me to $120 per to the $120 per thousand rates would be $369.23 The labor delivery unit discount up to 3.3087 ounces is $114 per or a $6 per thousand 2s areas. A dramatic almost 11 ounces under today’s postage plus another $37.00 for inserting and labeling for costs under the proposed postage for postage plus inserting and labeling for a total of $371.90. rates would COST COMPARISON Typical -5OF POSTAL AND PRIVATE CARRIER FREE PAPER Piece weight Product in oounds Paper with 8 Inserts Hand Delivery Costs Paper Inserts Paper* Inserts3 Carrier 56.00 perM’ 5.60 perM Postal costs Current Proposed 114.00 perM 120.00 perM 0.450 per lb 0.537 per lb +.OOYpiece +.028/piece Current Postaae 369.23 Suoervisor 1.20 perM 0.48 perM Paper Grocery Tab Grocery Tab Grocery Tab Grocery Tab Car Service Flyer Retail Circular Retail Circular Total Weight Carrier 56.00 5.60 5.60 5.60 5.60 5.60 5.60 5.60 5.60 Suoervisor 1.20 0.48 0.48 0.48 0.48 0.48 0.48 0.48 0.48 TOTAL Proposed Total 406.23 57.20 6.08 6.08 6.08 6.08 6.08 6.08 6.08 6.08 105.84 Total perM perM perM perM perM perM perM perM oerM perM lnsertina and Labelina Costs4 Paper 9.00 perM 3.50 perM Inserts Postal Rates InsetVLabelina 37.00 0.084 0.046 0.132 0.084 0.044 0.010 0.020 0.022 0.682 (10.91 oz.) Postaae 334.90 Postal Rates Insert/Labelina 37.00 Total 371.90 Total Costs PerM to Deliver 10.91 Ounce Paper By: $105.84 Hand Delivery Current postal rates $406.23 $371.90 Proposed postal rates perM = per 1,000 Plus inserts up to 3.2985 ounces Cost for inserts after paper and inserts exceed 3.2985 ounces Labeling costs required by postal regulations--NOT a required cost for hand delivery. -6AAPS Witness White states in his testimony, 1 delivery’s “Lowering 2 further damage alternate 3 shared mail packages 4 companies 5 data from their industry to support their position that the USPS proposal will hurt their 6 members, 7 USPS competitors refuse to share their costs with this regulatory 8 the rates proposed by the USPS, my postal cost of distribution 9 times higher than my competitors. to arbitrarily out of business.” ability to compete. the pound rate would .with prices that could allow price below our costs, forcing alternate AAPS-T-1 at p.5. AAPS and NAA do not provide any cost let alone allow mailers to price below their costs. It is no wonder that body. Even under will still be two to three The reality is that even the proposed 10 are too high. The USPS should be charged with generating II and its customers 12 changes can better meet the challenges postal prices price reductions of the dramatic so that it technological we all now face. Based on the evidence, I3 delivery or lack thereof, produced by my competitors and my 14 own analysis of a cost comparison 15 proposed 16 adversely affect private competitors of the USPS” or tilt the playing field to favor 17 saturation publishers 18 carriers II. 19 between private delivery and existing and postal rates, it is hard for me to fathom how the USPS proposal mailers over advertising and distributors “could who use private HIGH POSTAL COSTS MAKE PUBLICATIONS DISTRIBUTED BY MAIL TOO EXPENSIVE FOR MEDIUM TO LARGER ADVERTISERS AAPS Witness White maintains that the USPS proposal for ECR saturation 20 will “significantly harm” AAPS members. AAPS-T-1 at p.7. Although 21 declines to offer any specific information 22 newspaper 23 impact of rates on competitors 24 pattern of an enterprise 25 from private enterprise 26 objective of diverting mail from private enterprise competitors.” mail NAA Witness Tye about the costs, prices, or margins of the industry, he criticizes the USPS filing for not offering any evidence of the and concludes, “The rate proposals conform to a seeking to use rate levels and rate design to shift volume competitors.” Tye accuses the USPS of having a “stealth NAA-T-1 at pp. 21 and -71 47. Both Witnesses 2 submitting 3 NM-T-1 White and Tye criticize the USPS for not doing its job in these rate proposals by “considering the impact of rates on competitors.” at p.46. I understand 4 that this regulatory upon the general body has an obligation to consider “the effect of 5 rate increases public, business 6 private sector of the economy engaged 7 USC §3622(b)(4)) 8 health and stability of the USPS as a viable enterprise 9 delivery industry. but also a desire mail users, and enterprises in the delivery of mail other than letters,” (39 and an obligation to preserve the long-term In this section of my testimony, and competitor in the mail I will show that the present 10 saturation II shopper 12 competitive I3 provide a small amount of relief to my paper but will have little impact on our I4 competitors. 15 objective” I6 in the mail rates and the high pound rate have made it difficult for my mailed to be competitive in our market area, which in turn makes the USPS less as a distribution supplier. The USPS proposals in this rate case will They will certainly not help us, or the USPS, achieve any “stealth of diverting advertising The Pennysaver from private enterprise.’ Group free paper is distributed weekly to approximately I7 1,300,OOO throughout Maryland and northern Virginia. I8 consumers, I9 low income and high income demographic 20 markets, we offer complete saturation coverage. To serve our advertisers We do not distinguish areas, rural, suburban, and between or metropolitan In the four years I have owned and operated the paper, postal rates may 2 As substantiation for Tye’s conclusion that the USPS is targeting “the heavier pound rated ECR traffic for diversion,” he points to a meeting that occurred between Witness Moeller and representatives of the Saturation Mailers Coalition and the Mail Order Association of America in November, 1998. I recently attended a meeting between Witness Moeller and representatives of the Association of Free Community Papers at the AFCP’s annual conference. The mailed free papers in attendance at the meeting were not telling Witness Moeller how the proposed rates would help them divert business from competitors. Instead, many of the mailers in the room were questioning why the USPS rates for saturation papers would still be so high. One publisher, who has a small paper in an area that is largely rural and distributes his circulation 50-50 by mail and private carrier, states that when advertising brokers call him to place advertising in his paper that they comment that they know he must charge them more than they are paying to place advertising in papers that are distributed by private carrier because of the high postal distribution costs he pays. If I was to characterize the message the USPS is hearing from its saturation mail customers, and in particular mailed free papers, it is “if you want to keep our business you need to contain your costs.” -aI have been relatively stable but competitive 2 become increasingly 3 demand more for their dollar. competitive conditions and our medium to large customers As a free paper or shopper, our advertisers 4 5 that fits their pocketbook 6 and Virginia Pennysavers, 7 Buckel. 8 small businesses and individuals, 9 Baro. AISOP-T-2 at p.3. SMC-T-1 and trade areas, at pp. 6-10. II large local businesses. 12 information like those described are able to and our Maryland as SMC Witness Harry are the mom and pop by A/SOP Witness Orlando however, it needs a mix of small, medium, and Both advertisers and consumers want a paper with on a wide variety of the shops and services in their area, conditions and high postal distribution costs have 14 made it more difficult for our paper to retain the business of our medium to large 15 customers. 16 substantially 17 have seen from our retail and service advertisers 18 the pages of our paper. The proposed postal rates, and the reduced pound rate, will not change this equation. But it will help stem the erosion of business who purchase ROP advertising we on Once again, I want to give this regulatory body facts, based on my personal 19 20 has a zoned market buy The shopper business, Our core group of customers In recent years, competitive I3 can purchase operate very much as described For a shopper to be successful, IO have not. Our marketplace experience, to substantiate my position. When I acquired the Pennysaver 21 paper, our advertising 22 roughly 75% with display ads and 25% with classifieds. 23 placed by individuals and consumers 24 businesses individual 25 Display advertisers including Fierce competition 26 27 resulted 28 of revenue, Classified ads include ads but they are also the ads run by the smallest of service providers are, in general, revenue was split and home-based bigger concerns for the business than classified businesses. advertisers. of medium to larger advertisers in an erosion of our display ad customer our paper has focused on consumer base. To compensate and small business has for this loss customers, and -91 today our pages are divided roughly one-third between 2 approximately two-thirds 3 too expensive to effectively compete for any significant 4 Insert advertising 5 Sunday newspaper. 6 extended 7 privately delivered 8 9 display advertising. classified ads and High postal costs have made our paper volumes of insert advertising. is primarily delivered by private carriers--usually wrapped But this loss of the medium size or larger advertiser to our display advertising advertising has base and has made us less competitive publications The USPS proposal for saturation with and newspapers. rates, and the modest change in the pound rate, will do little to change my paper’s competitive position when it comes to the IO insert advertiser. II and make us better able to retain the business of our display advertisers. I2 this mix of advertisers, I3 continue to deliver customers I4 zoned, classified 15 Witnesses 16 rate, have not increased 17 evidence 18 they charge their customers. 19 that my display advertising 20 business 21 within your It will, however, help us keep our overall prices down for advertisers we can keep our loyal readers interested to the smallest of businesses By retaining in our paper and can that rely on our low cost, ads to stay in business. Tye and White complain that ECR rates, and in particular the pound in real world terms since 1996. They do not offer any about what their industry has been able to do by way of increasing On behalf of my saturation mailed shopper, the prices I can tell you rates today are the same as they were when I started the in 1996. I must grudgingly confess that our prices are not the same today out of charity 22 to our customers or choice. 23 pass on a price increase of approximately 24 sensitive 25 customers could not or would not pay more. 26 advertiser instructed 21 the same budget the advertiser our business After my acquisition of the business, we attempted 3.5%. was in this competitive We immediately market. to found out how price Our small business In the face of a price increase, the small us to reduce the size of the ad, or its frequency had before the price increase. or VOlUme to keep Our medium to large -lO1 advertising customers responded 2 either kept their prices the same or risked the loss of their business. My experience 3 by showing us they had other media choices, is the same as other free paper publishers. revenues We have not been 4 able to increase 5 we have been forced to increase efficiencies by productivity gains and mechanization. 6 The revenue growth of our paper has come from increasing volumes and productivity, 7 not increasing we have had to make 8 due with compression 9 has seen a 2% decline in our profit margin. prices. of our margins. Over the last four years saturation I2 change the competitive I3 My paper in Buffalo will still be distributed I4 Maryland and northern Virginia, I5 would help slightly offset the significant I6 costs at the piece rate. I7 margins, the Pennysaver Group of the market, the USPS proposal to increase the basic II III. In the face of declining To fund growth and capital expenses, From my perspective IO by simply raising prices. We rate by over 5% while modestly decreasing the pound rate will do little to playing field between a mailed free paper and other media. by private carrier. For my papers in I would hope that the slight reduction in the pound rate increase I will be seeing in my overall postage THE POSTAL SERVICE IS VULNERABLE MAIL VOLUMES FROM FREE PAPERS TO LOSING SATURATION NAA criticizes the USPS proposal for ECR mail, and the USPS filing, as being 18 without justification. As a newcomer 19 very much on the USPS, it appears my competitors 20 raise my postal rates to help them increase their prices and profit margins, and in turn 21 to justify charging 22 emotionally 23 role and by pointing to those AAPS members that are not owned by newspapers 24 other publishers 25 the role of asking this regulatory 26 as possible. their advertisers appealing to these proceedings, and a mailer that depends are petitioning this Commission to more. They may attempt to make this request to the Commission but are “independently by pointing to the newspapers’ editorial or owned,” but both come to this Commission body to keep their mailed competitors’ in prices as high -llI NAA Witness Tye asserts that the increase in ECR volumes “undercuts that the USPS is being threatened 2 argument 3 competitors 4 increased 5 competition 6 be able to compete with their prices under existing or proposed 7 ability to set insert prices for advertisers 8 delivery in the paper with the higher costs of mail will continue to allow them to set 9 prices for inserts that I cannot match in any 100% mailed shopper. do not choose to share with this Commission from mailed TMC programs behalf of my own circulation II Commission 12 private carrier. Our newspaper how much of these volumes might be due to their own TMC programs. IO I3 by ECR competition.” any I face vigorous in my market area and I cannot and will not ECR rates, by averaging their lower costs of subscriber Speaking that much of that circulation is very vulnerable to being switched to As a mailer and a major customer of the USPS, I would hope one of the Commission’s I5 USPS to continue to provide universal delivery service, at reasonable I6 of a changing I7 vendor has been the USPS, I know that postal prices, and the uncertainty 18 Service’s future in an internet world, has forced me to consider alternatives. paramount concerns communications in setting fair .and equitable environment. rates is to allow the and current economic 21 publications conditions, rates, in the face Certainly, as a business I am happy with the level of service we get from the USPS. 20 22 on of 1,300,OOO that is currently in the mail, I can assure this 14 19 Their mailers like the Pennysaver whose primary of the Postal But at current prices, Group and similar have to explore other ways to deliver their papers. Under present rates, the Pennysaver Group is paying 23% of its total revenues, 23 and 48.5% of our costs of good sold, to the USPS. With the USPS taking such a big 24 bite out of every sale, I am certainly open minded to considering 25 accomplish 26 27 other ways to the delivery of my paper. It is my preference Virginia papers. to remain a USPS customer for the Maryland But as my experience and northern in owning a private carrier paper in Buffalo -121 continues, 2 consider 3 I will be learning about the distribution if postal rates increase, Through my participation or competitive business and refining a “plan B” to conditions change. in SMC, I anticipate networking 4 mailers that distribute 5 products 6 to represent our industry before the USPS, this regulatory body, and other lawmakers. 7 It is a short and logical step to explore the formation of a cooperative 8 venture to deliver our papers or other shared mail advertising 9 may compete saturation mail advertising. in the marketplace, It remains my preference Although more with fellow we have come together to be a postal customer. information our businesses and as an association private delivery programs, I am participating IO case and sharing confidential II Commission 12 be based on the USPS listening to the needs of its saturation I3 paper, and other shared mailers, will identify those portions of our distribution I4 would be cheapest to convert to, and most cost-effective 15 delivery. 16 metropolitan in this rate about my company to give this a good basis on the record to approve USPS proposals that appear to mail customers. But my that to service by, alternative For heavier papers or shared mail pieces, and those in densely populated areas, the USPS is very vulnerable to loss of this business. CONCLUSION I7 Postal distribution costs for saturation 18 greater than the comparable I9 grows as the weight of the piece increases. 20 under existing, or proposed, 21 rural and remote parts of this country. 22 mail advertising are already much private carrier costs for similar pieces. The cost disparity For heavier pieces, USPS distribution rates is out of the question for all but the most spread out Many free papers, like our Pennysaver Group, like the service we receive from 23 the USPS and would like to remain USPS customers. But the existing rate structure, 24 and the high prices we pay as our papers grow and become more successful, 25 us to leave the mail to become competitors 26 proposals of the USPS. tempt I believe the USPS in this case were made as a result of listening to businesses like mine. -131 The USPS is trying to keep our business 2 saturation 3 competitive 4 5 in the mail. The USPS proposals mail will help my paper retain customers. environment, I respectfully for It will do little to tilt or change the but it will help. request the Commission higher than the rates proposed by the USPS. to approve a rate for saturation mail no - 14CERTIFICATE OF SERVICE I hereby certify that I have on this date served the foregoing document upon all participants of record in this proceeding in accordance with section 12 of the Rules of Practice. August 14, 2000
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