5 Businesses That Will Suffer From a Post Office Overhaul

by Jeff Reeves | September 20, 2011 5:00 am

USPS 300x167 5 Businesses That Will Suffer From a Post Office OverhaulThe United States Postal Service is in dire straits. It is projecting a $6.4 billion loss and could run out of money by the end of the month without a Congressional bailout to meet pension requirements.

The driving forces behind the agency’s financial woes are many — a precipitous drop in mail volume because of the digital age, skyrocketing labor costs and an inefficient network populated with infrequently used rural post offices and routes that just don’t make sense financially.

As a result, Postmaster General Patrick Donahoe asked Congress this month to untie his hands so he can make the kind of sweeping changes the organization needs to adjust. On the table are cuts to routes, office closures and even the elimination of Saturday delivery altogether.

Such big changes won’t be noticed by many Americans who do most of their communication and bill-paying via email. But for a handful of businesses, the big changes at the USPS will have a material impact.

Here are five businesses that could suffer from a post office overhaul.

eBay

Yes, there are other private shipping companies like UPS (NYSE:UPS[1]) and FedEx (NYSE:FDX[2]) — but it’s hard to imagine either company having anywhere near the convenience and reach of a post office. Whether you live in a remote part of Wyoming or Alaska or Mississippi, there always is a post office nearby that can offer prompt mailing of your knick-knacks to crazed collectors worldwide. If eBay (NASDAQ:EBAY[3]) users have to factor in the added time (and perhaps added expense) of finding a FedEx or UPS outlet, it could slow the flow of Beanie Babies and PayPal money around the eBay auction scene.

Think this is just a conspiracy theory? Wall Street doesn’t think so. EBay stock dropped more than 6% in a single day earlier this month on fears that massive USPS closures would hurt its business. The big merchants and big-city folks will be fine, but small- and medium-sized online sellers are a major trouble spot amid the post office woes.

Netflix “Qwikster”

Allow me to state the obvious about Netflix (NASDAQ:NFLX[4]) — after the dustup caused by the recent dual-pricing model for DVDs and streaming video, and after a rather half-hearted apology[5] to upset subscribers, Netflix isn’t very popular. The stock is off about 50% from highs above $300 just several weeks ago in mid-July.

The newly branded Qwikster arm of Netflix will focus purely on DVDs by mail to eager subscribers looking for a deeper catalog and access to new releases. But one of the biggest complaints about NFLX has been the wait for quality titles. If just one more day is tacked onto shipping, it could create a logistical nightmare for the movie rental company as it struggles to meet growing demand and growing impatience.

Perhaps Netflix should rethink that Qwikster name while it has the chance — because if Saturday delivery is killed or if DVDs don’t move around as quickly as they used to, it’s going to only remind customers of how long they’ve been waiting for The Blind Side.

FedEx

It seems counterintuitive that a post office competitor could take a hit as the USPS struggles. But FedEx transports Express (overnight), Priority (two to three days) and First-Class Mail for the United States, and it earns a pretty penny for its services. In fact, in fiscal 2010 FedEx tallied a cool $1.37 billion in fiscal 2010. Yes, that’s “billion” — with a B.

FedEx’s postal revenues at one time topped $1.6 billion but have been on the decline recently as the U.S. has seen its mail volume decline. If the USPS eliminates delivery on Saturdays or cuts back in other ways, FedEx could see an even deeper decline in its revenue.

Northrop Grumman

Ever wonder where you can buy yourself one of those distinctive USPS trucks? No, they are not Jeeps — but a transport truck known as the Grumman Long Life Vehicle (or LLV). These machines are made by industrial giant Northrop Grumman (NYSE:NOC[6]).

Northrop Grumman is the No. 2 contractor behind FedEx on the list of USPS suppliers for fiscal 2010, with almost $500 million in revenue from Uncle Sam’s letter operations. While there haven’t been any new purchases of LLVs, the upkeep is pretty pricey since many of these mail trucks are approaching the end of their service life.

It would cost about $4.2 billion to replace the entire fleet — but you can bet that a simpler solution is to slash the number of Grummans as the USPS slashes the number of post offices and mail carriers in its ranks.

Northrop Grumman does almost $35 billion in annual revenue, so it’s not like the company lives and dies on the USPS contract. But considering the big defense spending cuts that will hit the rest of NOC operations, the loss of postal business couldn’t come at a worse time.

Every Consumer Business Nationwide

Did you know the USPS is the second-largest civilian employer in the U.S. after Wal-Mart (NYSE:WMT[7])? It’s true. There are some 570,000 full-timers on the payroll.

Let’s lay aside for a moment the value of those jobs, the efficiency of the Postal Service and the rate of pay those workers receive. Because any way you slice it, a significant reduction in that work force will have a significant impact on the American economy.

The U.S. Postmaster General has proposed reducing the payroll by 20% over five years — admittedly, mostly through attrition since union contracts prohibit layoffs — and that would result in about 114,000 jobs lost.

Consumer stocks already are hurting these days thanks to a downtrodden economy and weak spending nationwide. It would be silly to propose the USPS keep workers on its payroll just to prop up retailers — but it would be equally silly to act as if these massive reductions in the work force won’t have an impact.

Endnotes:
  1. UPS: http://studio-5.financialcontent.com/investplace/quote?Symbol=UPS
  2. FDX: http://studio-5.financialcontent.com/investplace/quote?Symbol=FDX
  3. EBAY: http://studio-5.financialcontent.com/investplace/quote?Symbol=EBAY
  4. NFLX: http://studio-5.financialcontent.com/investplace/quote?Symbol=NFLX
  5. a rather half-hearted apology: http://investorplace.com/2011/09/netflix-nflx-qwikster-dvd-video-games/
  6. NOC: http://studio-5.financialcontent.com/investplace/quote?Symbol=NOC
  7. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT

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