A SUBMISSION BY THE FRASER INSTITUTE TO THE CANADA POST
MANDATE REVIEW
A Proposal to Reorganize the Provision of Postal Services in Canada
by Gordon W. Davies, Ph.D.
February 14, 1996
Recommendations
The Fraser Institute makes the following recommendations to the Canada Post Mandate
Review:
1 (a)That the exclusive privilege which CPC has over the collection and delivery of
letters in Canada be revoked.
(b)That the entire Lettermail operation be put up for bids from private entrepreneurs, in
which group the Institute would include postal workers who have an obvious interest in
maintaining a viable postal system. Many postal employees will be willing to invest a
share of their earnings or savings in the new postal enterprise, as an expression of
confidence in their own work and in anticipation of dividends and capital appreciation
from such an investment.
2 That CPC's Addressed Admail business be included in the package of Lettermail and
related assets to be put up for bids from private entrepreneurs.
3 That the Retail Counter Operations of CPC be included in the package of Lettermail,
Addressed Admail, and related assets to be put up for bid; that the privatized enterprise
use the counter operations to continue to market, sell, and accept for processing and
delivery Lettermail and Addressed Admail; and that the enterprise be free to market, sell
and provide any package, parcel and courier delivery service through these counter
operations.
4 That CPC be directed to prepare, announce and execute a plan whereby it divests itself
of its flyer operations in a way that produces a reasonable return to the federal treasury
in exchange for CPC's limited flyer delivery infrastructure, its related information
systems, and its extensive customer base.
5 That CPC's parcel, package, and courier operations--including Purolator--be physically
and financially segmented from the remainder of the corporation's operations and be put up
for bid.
6 That CPC forever disabuse itself of the notion that it should develop and market
electronic communication and messaging services, in the provision of which the corporation
has utterly no competitive advantage.
The Fraser Institute
The Fraser Institute is an independent Canadian economic and social research and
educational organization. It has as its objective the redirection of public attention to
the role of competitive markets in providing for the well-being of Canadians. Where
markets work, the Institute's interest lies in trying to discover prospects for
improvement. Where markets do not work, its interest lies in finding the reasons. Where
competitive markets have been replaced by government control, the interest of the
Institute lies in documenting objectively the nature of the improvement or deterioration
resulting from government intervention. The Fraser Institute is a national, federally
chartered non-profit organization financed by the sale of its publications and the
contributions of its members.
In the arena of debate on Canada Post Corporation (CPC), the Institute in 1990
commissioned and published a study, The Mail Monopoly, by Douglas K. Adie. Following the
release of this study, the Institute also sponsored a conference on efficiency, regulation
and ownership of the post office. For the purposes of this submission, the Institute
additionally draws on the experience and expertise of a qualified economist who was for
seven years a senior manager with CPC, and on a substantial body of research and scholarly
work on related topics, sponsored and published by the Institute over the last twenty
years.
The general arguments for privatization are not repeated in this submission. Readers
interested in this topic may wish to consult J.D. Gwartney and R. L. Stroup, What Everyone
Should Know About Economics and Prosperity (The Fraser Institute/The James Madison
Institute, 1993) and M.A. Walker, ed., Privatization: Tactics and Techniques (The Fraser
Institute, 1988).
It should be emphasized at the outset that The Fraser Institute recognizes the worthwhile
changes that management at CPC have wrought over the last several years, particularly
since the Institute's study and conference referred to above. CPC has succeeded in:
introducing new efficiencies such as franchisees at retail; improving productivity in
mechanized mail processing; cutting some unnecessary costs; improving service performance;
and, in the process, generating positive net revenue.
The Institute also recognizes the efforts of the dedicated unionized and non-unionized
workers at CPC who move an incredible 30 million of pieces of mail a day across an
exceptionally broad geographic region. These people work hard. They deserve to have
priority access to a portion of the shares that might be issued by a new privately-owned
and operated postal enterprise, in the event that the Lettermail, Addressed Admail and the
Retail Counter Operations of CPC are collectively privatized in a single enterprise, as
this submission recommends.
Building on the progress which has been made in recent years, The Fraser Institute
suggests that more can be done to improve the way the postal system in Canada operates, to
the greater benefit of all who might use it. The Institute's recommendations are not based
on preconceived notions. Rather, through analysis of the economics of each of CPC's major
product lines and of other specific, relevant factors--and based on years of study and
analysis of modes of business organization that promote economic efficiency--The Fraser
Institute makes these recommendations, to be viewed as a package, which will produce a
healthier and more efficient postal system in Canada than the one we have today.
Scope of Submission
This submission examines the economics of the markets and competition for the three main
business segments of CPC, which are Lettermail, Admail, and Parcels. In each case, we also
examine the cost structure which results from CPC's modus operandi for supplying each of
the services in question, as well as the competitive conditions which the Corporation is
subject to in each of the major markets in which it operates, including in some cases the
cost structure of the major competitors who provide services which are reasonably close
substitutes for those provided by CPC in each of the major markets in which it operates.
In addition, this submission considers the cost implications of sharing elements of the
production process among the three major product lines. The Corporation provides
collection, processing and distribution services for Lettermail, Admail, and Parcels. Only
in some cases is the provision of one of these functions for a given product shared with
the provision of the same function for another product line. All products share certain
management functions, particularly many of those functions at Head Office.
Lettermail
Markets
Lettermail, or first class mail, had long been a cash cow for CPC and the staple of its
volume and revenue growth, although it had always been vulnerable to cyclical downturns in
the economy. In part because of CPC's monopoly on Lettermail and in part because users of
the postal system had few alternatives for billing and bill payment, businesses and
consumers have been held hostage to the postal monopoly for a very long time. The
corporation took advantage of the resulting price-inelasticity in the demand for
Lettermail by raising rates beyond levels which would have been possible in a competitive
environment.
Many observers insist that excessive profits from Lettermail have been used to subsidize
other product lines, to the detriment of private businesses attempting to compete fairly
in those markets. Certainly, CPC has had a lot of cash to support ventures which would
have been considered to be uneconomic by an enterprise more subject to the discipline of
competition and the orientation of profit.
Unfortunately for the post office, in the early 1990s Lettermail volumes and revenues
entered a phase of chronic decline. This decline has been mainly due to the emergence of
new, faster, more convenient and less costly alternatives to the postal system, such as
direct deposit of government pensions and new bill payment options, such as Automated
Teller Machines and, most recently, telephone-based, automated bill payment systems, which
are rapidly gaining acceptance.
In the business sector, the widespread use of fax machines has also helped to throw
Lettermail into a tailspin. More and more businesses are also increasingly using
Electronic Data Interchange as a substitute for mail-based purchasing and invoicing, as
well as private electronic networks for E-mail. Once the Internet becomes capable of
providing a secure environment for financial transactions, both businesses and consumers
will use that medium to transact business.
The major banks and trust companies will also enter the computer-based electronic
transactions arena with their own, independent computer-based banking systems to be
accessed remotely. Not too far down the road, we can anticipate new TV-based technologies
which will enable households to communicate voice, data and video interactively, without
having to invest in and learn to use an expensive and complex computer system, and to pay
for access to the Internet.
Some very large volume users remain, to a degree, captive of the postal system for billing
purposes, particularly credit card companies and utilities. If local utilities were
unhindered by exclusive privilege, they would deliver their own bills, rather than post
them. Likewise, a national syndicate of regular large volume mailers could do the same, at
least in high density areas.
Because of the large volumes involved, high volume mailers are always looking for
alternatives to save on mailing costs, which are high, given the frequency and size of
mailings. This need coalesces in the communications marketplace with the consumer's
on-going need for more convenient transaction options which are less expensive in terms of
both time and money. It seems reasonable to suggest that any consumer willing to pay his
or her bills over the telephone, on a computer network, or via interactive TV, should also
be willing to receive those bills electronically--another serious threat to the Lettermail
business.
Exclusive Privilege
The most common objection to any suggestion that CPC's monopoly on letters be revoked and
the letter business privatized is that a private postal enterprise without monopoly
privileges--and without the accompanying obligation to serve all residents--would eagerly
"skim the cream" off the market, leaving some ordinary users of the system with
service only at a much higher price, or with no service at all.
In response to this argument, the Institute suggests that the supposed cream of the market
will find ways to conduct its business other than through the postal system, as discussed
above, unless postal services become radically more economic in the not-too-distant
future. If some ordinary users of the postal system impose costs on the system which are
inadequately reflected in the rates they pay, then they should be expected to pay more for
the services they use.
We already have a two- or multi-tier postal system in Canada because volume mailers get
discounts for preparing their mail in a way that reduces processing costs for CPC,
although these discounts may soon be revoked as CPC automates sequencing by letter carrier
walk. In addition, CPC sponsors two basic tiers of mail delivery in Canada: door-to-door
service in areas that had direct delivery prior to the introduction of community mailboxes
in contrast to delivery to community mailboxes in areas that received service after that
cutoff point.
Monopolistic postal mandarins invoke the uniform postal rate bugaboo when they feel
threatened by talk of privatization and de-monopolization. Rates, they say, are supposed
to be "universal" because the legislation authorizing and obligating CPC to do
what it must do at the same time requires that it provide a universal service, which
indeed means a service which is available to all Canadians.
It is not unusual to impose such a requirement on a monopolist. For example, a telephone
monopolist is required to do the same in the service area over which it has a monopoly.
But there is nothing in the legal requirement to provide a universal postal service that
also requires that service be at a uniform rate. CPC's own parcel rates vary by distance,
size, weight and--for big users--by volume.
Health care is supposed to be available at a uniform price (free to the consumer) only
because the federal government has attempted to decree that it be both universal and
equally accessible to all residents which, for all practical purposes, requires a zero
price. However, health care resources are far from equally accessible across Canada:
hospital and specialist services are rationed by the device of waiting lists, which
involve a positive cost to the health care consumer and an overall misallocation of
resources. (See Waiting Your Turn: Hospital Waiting Lists in Canada by C. Ramsay and M. A.
Walker, The Fraser Institute, 1995). In any event, there is no similar requirement that
postal services be equally accessible to Canadians, in terms of a uniform price.
Postal monopolists argue against loss of exclusive privilege and against privatization
particularly on behalf of rural residents whose service is now cross-subsidized by postal
users who live in more densely populated areas. In a non-regulated, competitive
environment, they argue that the government would have to step into the lurch and provide
a direct subsidy for postal delivery to rural areas, a proposition that throws some cold
water on otherwise seemingly worthwhile arguments for privatization and deregulation of
the sacred post office cow.
Similar arguments were made when the government first talked about privatizing Air Canada.
How could small communities ever survive without subsidized air service? The abandonment
of rural railway spurs also used to be unthinkable for the same reason. Yet, in this brave
new world of reduced transportation subsidies and cross-subsidies, our rural brothers and
sisters capably manage to get themselves and their things transported here and
there--whether via regional airlines, buses, cars or trucks--in much the same way that
those of us who live in more densely populated regions do.
Most of CPC's community mailbox and all of its rural points of call are serviced by
suburban and rural contractors who are paid a pittance by CPC for delivering mail to these
areas, an enterprise that requires a contractor's private vehicle, in addition to his time
and energy, and money for fuel, maintenance, insurance and eventual replacement of the
vehicle. CPC over the years has managed to drive a hard bargain with these unprivileged
entrepreneurs, by putting all such contracts up for unrestricted private bidding every few
years. CPC is in fact adept at using markets to its own advantage, a point made again in
the discussion on Addressed Admail which follows.
Any owner/manager of a privatized, unregulated postal system would have a powerful
incentive to maintain rural delivery because those who use, or might use, the postal
system--persons and businesses alike--want to be able to send a letter to anyone of their
choice, not just to those who live in areas of high population density.
Curiously, most local newspaper dailies also find it economical to deliver to rural areas.
Most major courier operations in Canada use agents to deliver parcels in rural and remote
areas, something CPC itself does when it delivers the mail in suburban, rural and remote
areas.
CPC does not, in fact, usually deliver parcels to households; instead, it leaves a notice
in the recipient's mailbox indicating that the parcel may be picked up by the addressee at
the nearest post office or retail counter, wherever that might be.
The Fraser Institute therefore suggests that the problem of rural mail delivery in a
privatized and de-monopolized postal enterprise can be worked out through some combination
of:
1 An acceptable rural rate differential, similar in principle to the rate
differential that Ontario Hydro, for example, charges its rural customers;
2 Market forces, which ensure that needs capable of being expressed in dollar terms
will be satisfied privately, potential profit being the motivating force: if there is a
dollar to be made delivering letters to farmers, someone will do it--and private owners of
the postal system will want to pay them to do it; and
3 If worse comes to worst, an explicit direct subsidy from the federal treasury
which the government may decide, as a matter of public policy, to be warranted in cases
where the postal service of those who live in rural areas would be jeopardized. Such a
subsidy would be similar in principle to the one now given to CPC by the federal
government to finance postal service to remote northern areas.
If CPC's letter business is not privatized and deregulated, all Canadians may yet be
delivered from the archaic postal mode of communication, by further advances in electronic
technology--such as satellites--which governments in Canada have for three decades used to
promote the communication and dissemination of information to and from remote areas.
Courier companies will still be keen to deliver parcels.
Production
On the production side, the collection system for Lettermail is for all practical purposes
dedicated to that product, because one cannot post Admail or Parcels in a post box. The
larger volume mailers make special arrangements with CPC for the transfer of their
out-going mail.
Processing of Lettermail and Addressed Admail is combined, although for larger volume
mailings of both products, some processing is avoided by having the mailer presort his
mail, for which the mailer receives a discount. Lettermail and Addressed Admail are both
transported by the same mode, whether truck or air. All processing prior to delivery is
shared by the two products. Delivery services are shared by Lettermail and Addressed
Admail. In effect, the two products meet the same delivery performance standard.
Recommendations
We can expect that Lettermail volumes and revenues will continue to decline, unless
something radical is done to streamline, modernize and reorganize the postal system to
make it more competitive.
The only way to make the postal system more competitive is to subject it more to
competitive forces, which requires:
1 (a)That the exclusive privilege which CPC has over the collection and delivery of
letters in Canada be revoked.
(b)That the entire Lettermail operation be put up for bids from private entrepreneurs, in
which group the Institute would include postal workers who have an obvious interest in
maintaining a viable postal system. Many postal employees will be keen to invest a share
of their earnings or savings in the new enterprise, as an expression of confidence in
their own work and in anticipation of dividends and capital appreciation from such an
investment.
Addressed Admail
Markets and Production
Addressed Admail differs from Lettermail only insofar as the content of the former has to
be virtually identical for every intended recipient, whereas a piece of Lettermail, such
as a bill or credit card statement, will be different for every recipient. Because a piece
of Addressed Admail is deemed not to be a "letter," CPC does not have exclusive
privilege to deliver the product. Delivery densities are not high enough throughout an
urban area to make it profitable for a private entrepreneur to deliver Addressed Admail.
Addressed Admail grew out of the old distinction between first and third class mail, a
distinction that was based on faster delivery performance for first class compared to
third class. CPC now distinguishes between the products in order to segment the market and
maximize revenue from both.
Addressed Admail is priced lower than Lettermail because it would not be economical for
advertisers or direct marketers to use Lettermail at the higher price for that product.
They would instead revert to other advertising and direct marketing media, or they would
choose a different way of marketing and selling their products.
In other words, the demand for Addressed Admail has been, and continues to be,
price-elastic--which means that a given increase in price would cause a greater
proportional reduction in volumes, resulting in a decrease in total revenues from the
product, as advertisers switch to other alternatives.
By segmenting the market in the above manner, based on the otherwise irrelevant aspect of
content, CPC maximizes its profits and revenues, because:
1 The segmentation allows the corporation to charge more to the captive users of
Lettermail;
2 It allows CPC to earn a positive contribution to overhead from Addressed Admail;
and
3 In production, it provides an opportunity to realize overall economies of scale by
processing and delivering Addressed Admail indistinguishably from Lettermail.
Recommendation
Addressed Admail is a viable product which helps to spread some of the high fixed costs of
mail processing (physical plant, automated sorting equipment and labour) over greater
volumes due to the fact that the product shares parts of the mail processing system with
Lettermail. The product also helps to spread the considerable fixed costs of delivering
mail over greater volumes. The Institute therefore recommends:
2 That CPC's Addressed Admail business be included in the package of Lettermail and
related assets to be put up for bids from private entrepreneurs.
Retail Counter Operations
One of the strongest commercial assets that CPC has is its pervasive network of retail
postal outlets. Management at CPC turned most of these outlets into franchise operations,
at least in centres where there are sufficient volumes to warrant that mode of operation.
There has been no difficulty attracting franchisees, who understand the agglomeration
economies that are inherent in providing a range of other services to Canadian postal
consumers (such as video rentals and cosmetics). Consumers also benefit from the greater
convenience of postal counter service over more days of the week and many more hours of
the day than had been provided at the former postal wickets.
The Fraser Institute recommends:
3 That the Retail Counter Operations of CPC be included in the package of
Lettermail, Addressed Admail, and related assets to be put up for bid; that the privatized
enterprise use the counter operations to continue to market, sell, and accept for
processing and delivery Lettermail and Addressed Admail; and that the enterprise be free
to market, sell and provide any package, parcel and courier delivery service through these
counter operations.
It is important that the counter operations be kept together with the mail processing and
delivery operations because it would be difficult and unwise to try to find new owners for
the mail operation without providing them with the ability to interface with the very
customers they serve. Keeping the counter operations together with the Lettermail
operations is also in the obvious interests of postal consumers.
Unaddressed Admail
Production
There are two versions of the Unaddressed Admail product--Economy and Premium. The main
differences between the two options are that Premium is delivered regularly by letter
carriers and Economy is delivered one day a week (in some centres two, depending on
customer demand) by an occasional or "helper" work force which is paid a much
lower wage than are letter carriers.
Premium is an option provided to customers who feel that having their flyers delivered by
a regular, uniformed letter carrier should result in a better response rate. Although
letter carriers carry a small volume of flyers, realizing economies in the delivery
operation does not depend on such volumes, about the delivery of which letter carriers in
any event are not too enthusiastic.
The physical operations of Economy Unaddressed Admail are quite separate from the other
operations of Canada Post. There are separate induction centres which accept bulk mailings
from customers, collate the mailings into bundles, and distribute the bundles to the
delivery work force. The service provides delivery to all addresses, because the helper
work force has access to apartment lobbies through the same key system used by letter
carriers.
Markets
Unaddressed Admail competes in a market in which there are many other distributors (and
potential distributors), as fully discussed below. It is also important to recognize that
other advertising media compete actively with the flyer medium for advertisers' dollars.
Any advertiser seeking to target a local audience has, as an alternative to flyers,
several options, including placing an advertisement in a newspaper or putting an ad on TV
or radio. In cases where the factual content of a message is high--such as grocery store
flyers--flyers are often chosen because they are the least cost medium for conveying a lot
of information.
Flyers are sometimes also used in more of a broadcast mode. Unaddressed Admail has one
advantage in this regard over the competing delivery services in that a mailer at any
major post office in Canada can direct his flyers to any region or city in the country or,
if he so chooses, to every household in the nation. Other flyer distributors do not have
nearly this degree of geographic integration, although a major distributor in Quebec
covers most of that province, as further described below.
In order for CPC to be able to tell a flyer customer how many flyers are required to serve
a specified geographic area, the corporation maintains a detailed database which records
the numbers of houses, apartments and businesses on each letter carrier walk. The
disaggregation by basic type of point of call is useful because it allows the flyer
customer to target his mailing accordingly, for example, to all apartments which are on
specified walks only.
Statistics Canada maintains a database which gives detailed economic data on households,
aggregated to the letter carrier walk level. This database can be used to target flyer
mailings, but it is only available in electronic mode and is somewhat difficult and
expensive to use. Alternatively, a mailer can target flyers to Forward Sortation Areas
using the same database aggregated to that level. These data are available in hard copy
from Statistics Canada and are made available to customers by CPC.
In practice, flyer mailers do little demographic targeting, but retailers do select
specified letter carrier walks for distribution based on proximity to the store location,
a method of targeting which does not require any demographic data. CPC provides the walk
maps.
The minimal targeting of Unaddressed Admail has resulted in some serious problems.
Households view it as an invasion of their privacy and complain about the considerable
nuisance of having to collect and dispose of their "junk mail" on a regular
basis. Many consumers also express environmental concerns, pointing to waste in trees and
the need to dispose of large volumes of discarded flyers in scarce landfill space.
Large volumes of flyers are also distributed by most newspapers in Canada, by a major
printer in Quebec, and by many other independent distributors. In fact, the market for
flyer distribution is one of the hottest competitive markets around, because there are no
particular barriers to entry, fixed costs are minimal, and two distributor types are able
to realize economies in their operations which will never be available to CPC.
Most of the costs of delivering flyers are variable labour costs. These costs are variable
in that they do not require any fixed investment. Therefore, a flyer delivery operation
can be set up on a shoe-string budget. Pizza outlets often distribute their own flyers,
for example, as do other retail businesses.
What is most important to any flyer distributor is volume because, within reason, more
flyers can be carried by a delivery person with no corresponding increase in cost, except
for a slight increase which may be made necessary by more frequent staging or drop-off of
flyer bundles.
It is precisely because volumes are important that flyer distributors compete vigorously
on price for additional volumes. Up to a certain point, volume is needed just to break
even; after that point, additional volumes contribute to realizing a reasonable return on
equity; and additional volumes beyond that point help to build profit. CPC competes
viciously on price for volumes, often practically giving away the service to the biggest
flyer mailers, in a desperate attempt to break even.
It is even the case that CPC's financial control procedures are so inadequate that many
distributors buy an entitlement to have specified volumes delivered by CPC and then
blithely exceed the contracted volumes because there are no CPC controls to prevent such
an abuse. In other cases, flyer customers receive significant discounts based on a
commitment to a high annual volume, but over the contracted time period only post and pay
for much lower volumes, because there is no adequate mechanism to track the fulfilment of
individual contracts and to bill accordingly.
There are additional factors which make life in the flyer market difficult for CPC.
Newspapers deliver flyers because they generate additional revenue at a low, or near-zero,
incremental cost: in effect, the cost of delivering the flyer inserts is shared--or
subsidized--by the cost of distributing the newspaper itself, which generates its own
revenue and profit stream from the sale of advertising and from subscription and newsstand
revenues.
One competitive disadvantage that newspapers have in flyer distribution is that, although
they distribute newspapers to high-rise apartments, only a portion of all households in a
given urban area subscribe to the newspaper or receive it from a fixed distribution point.
Roughly speaking, newspapers have about one-third of the flyer market across Canada,
except that they maintain a lower share in the province of Quebec. In Quebec there is
stiff competition for CPC, newspapers and other distributors in the flyer market from GTC
Transcontinental, a major North American printer headquartered in the province. GTC
markets its flyer distribution service under the trade names "PubliMaison" and
"PubliSac." Flyers are inserted into clear plastic bags which are hung on the
doorknobs of homes and on pegs at neighbourhood or group mailboxes.
GTC's competitive angle is that it also prints all of the flyers which it distributes.
Therefore, the firm provides a worthwhile degree of "one-stop shopping" for
flyer customers and, in part through this device, maintains a dominant, or nearly
dominant, share of the flyer distribution market in Quebec. Although GTC does not have the
same shared distribution economies which newspapers have, it nevertheless has the same
strong incentive that other distributors have to increase volumes, and an even stronger
incentive than CPC to attract additional volumes, because it also realizes revenues and
profits from printing those volumes.
The net result of all of this is that the price of distributing a flyer is constantly
being driven ever downward by all distributors. Given that CPC has the highest basic cost
structure of all distributors, and no other contributing interests in flyer distribution,
it defies imagination that it could profit from the enterprise.
Flyers distributed by CPC's competitors are no less odious privately or environmentally
than flyers distributed by CPC, but at least in the case of newspapers, one is able to
choose to subscribe to the newspaper and suffer the attendant indignity of flyer inserts,
which a reader may abhor, or one may choose not to subscribe to the newspaper.
It is worth noting that a significant portion of the public resentment and dislike of
flyers is stirred up by newspapers and their editors, who bleat on about the postal flyer
pestilence in a pot-calling-the-kettle-black attempt to whip up a public frenzy in order
to convince politicians to mandate that CPC not be allowed to distribute flyers, prompting
mandate review exercises such as this one, where the issues should receive more balanced
treatment.
It is likely, in any event, that there would be just as many flyers distributed with or
without CPC in the business, particularly in view of the low barriers to entry, including
low investment in fixed capital, and of the incentives which all distributors have to
absolutely maximize volumes.
In response to the extreme aversion which many households have to Unaddressed Admail, CPC
unofficially recognizes "No Flyers Here" stickers or messages. However, the
number of households on a given letter carrier walk who do not receive flyers is neither
recorded nor advertised. The reason for this of course is that information of this sort
would create serious marketing problems for CPC, whose vested interest lies in convincing
advertisers that flyers are beloved by all who receive them.
Flyers destined for delivery to households who refuse to accept them are simply trashed en
bulk by CPC--from any perspective, a perfect form of complete waste.
One is left seriously wondering what the Government of Canada is doing in the business of
distributing flyers to households. The service annoys many households; many consider
flyers to be wasteful and environmentally detrimental; and the service interferes with the
legitimate interests of private entrepreneurs who are fully capable of meeting
advertisers' needs for flyer distribution without the financial backstop that CPC has by
virtue of its exclusive privilege on the distribution of letters in Canada.
Recommendation
The Fraser Institute therefore recommends:
4 That CPC be directed to prepare, announce and execute a plan whereby it divests
itself of its flyer operations in a way that produces a reasonable return to the federal
treasury in exchange for CPC's limited flyer delivery infrastructure, its related
information systems, and its extensive customer base.
To maximize the return from exiting this business, CPC and the federal government should
utilize a form of auction procedure in which interested purchasers can bid for the
business in selected regions or for the entire national operation.
The CPC Mandate Review may hear arguments from some intervenors to the effect that CPC
should simply retreat from the Unaddressed Admail business, that there are no assets of
any value that exist to be sold. Any such argument should be treated with a degree of
scepticism because it may merely reflect the interests which newspapers have in acquiring
CPC's flyer volumes, without having to compete as intensively on price as they now do.
Other parties, such as national printing operations, may put considerable value on CPC's
Unaddressed Admail operations and customer base, in order to attempt to competitively
acquire the business of printing those same flyers, which number in the many billions per
year.
Two competitive advantages of CPC's flyer operation were discussed above--a superior
ability to target the product somewhat (which is both privately and socially beneficial)
and the ability to provide a service which has wide, if not national, geographic reach
(which has primarily commercial value). For the purpose of gaining access to the enormous
flyer volumes which CPC distributes, a business, or perhaps a regional consortium of
businesses--perhaps a consortium of newspaper chains--may be willing to bid and pay a
hefty price.
Parcels
Markets
Canada Post provides an array of parcel delivery options, each with its own features in
terms of speed of delivery, security, tracking, and price. Private sector entrepreneurs
widen the range of options in the marketplace even further. For example, one may send a
parcel via: inter-city bus; major courier operators who also provide international
service; a large number of smaller local and regional courier operations; taxis; and even
speedy bicycle couriers.
Although Canadians post a healthy number of parcels at Christmas, these are but a small
proportion of CPC's total volumes, which mostly originate in small- and medium-sized
businesses. However, most businesses are loathe to use the postal system for international
parcel shipment, even to the United States, because a parcel gets seriously entangled in
the postal system of the country of destination, after having become seriously entangled
in the postal system of the country of origin, before it can be delivered to the
recipient. International parcel post delivery performance is truly dismal.
Indeed, many mail order houses in Canada, the United States and elsewhere do not even
permit their customers the option of shipment via the postal system, because delivery
times are pathetic and cannot be guaranteed. Postal systems also lack the sophisticated
tracking and delivery verification systems which privately-owned, international courier
operations provide. CPC does have an international package delivery system of sorts, but
it lacks reliable partners in other countries.
Although CPC claims to offer a parcel delivery service, it rarely delivers all but the
smallest packages to households in Canada, although it sometimes attempts to do so. In
areas which receive service via neighbourhood or group mailboxes, only small packages can
be left for recipients. In rural areas, packages are not left in rural mailboxes for
security reasons. In urban areas, CPC may attempt delivery at an unspecified time, but the
typical recipient usually finds a notice in his or her mailbox, to the effect that the
parcel may be picked up at a postal outlet, before a specified date, after which it will
be returned to the sender.
However, of all the available parcel delivery services, only Canada Post makes it easy for
an ordinary individual to post the item because it maintains a widespread retail counter
network throughout the country. This network is indeed one of the strongest commercial
assets that CPC has, as discussed in an earlier section of this submission.
Production
CPC's parcel operations share some equipment, facilities, and work force with Lettermail
and Addressed Admail but any shared production in these operations is in fact minimal. The
same urban postal vans and drivers who distribute mail to letter carrier staging boxes in
the morning, thereafter deliver parcels and pick up shipments from commercial customers
who in some cases pay a fee for the service. Parcels mailed by households and businesses
at CPC counters are also picked up with mail posted at these locations and delivered to
the local parcel processing facility.
Mechanized handling and sorting of parcels and packages has not proven to be economical,
at least not for CPC, which discovered to its horror that a state-of-the art,
highly-mechanized plant that it built several years ago in Edmonton turned out to be an
expensive fiasco. Parcels and packages are sometimes processed under the same roof as
Lettermail and Addressed Admail, but no particular economies result from this shared
production. Parcels and packages could more economically be sorted under the roof of an
independent, privately-owned parcel and courier operation. Some privately-owned operators
currently have excess plant capacity in Canada.
Parcel receiving, processing, shipment and delivery is therefore a quite different
operation from the letter business. Any economies resulting from the shared use of postal
vans and drivers in urban areas are inconsiderable, particularly if, from a social
perspective, one recognizes that this function is duplicated by large private parcel and
courier operators and by a host of smaller local and regional businesses, who provide
delivery services on city streets, and often unique delivery services in rural areas as
well. Therefore, from a social and even a private perspective, there is nothing
particularly optimal about the current modus operandi in the provision of the important
parcel post service in Canada.
CPC recognized the short-comings of its own suite of commercial parcel services and
inferior parcel tracking capabilities a few years ago. To try to rectify the problem, it
bought the Purolator operation from a private holding company. The acquisition happened
because CPC had lots of cash at the time, and Purolator was available to be purchased.
Having expanded their fiefdoms with the acquisition of Purolator, senior executives at
Head Office met for months to figure out what to do with their new corporate toy.
The Purolator operation should be reprivatized as part of the overall transfer of CPC's
commercial courier and parcel operations to an independent, private sector enterprise. The
reconstituted, Lettermail-Addressed-Admail-Retail-Counter-Operation should have an equal
opportunity to bid for the parcel entity to be privatized.
Recommendation
Consolidation of CPC's parcel post operations with those of a private courier operation is
a good idea, provided it is done by a private sector entrepreneur. The Fraser Institute
recommends:
5 That CPC's parcel, package, and courier operations--including Purolator--be
physically and financially segmented from the remainder of the corporation's operations
and be put up for bid.
Electronic Postal Services
Over the past several years CPC has developed new electronic messaging services, partly in
a vain attempt to take advantage of expected growth in those markets and partly to satisfy
the ambitions of the Head Office computer-guru-mandarins who have an obvious vested
interest in massive systems development.
One such service is Omnipost, which was developed at great expense and proved to be a
massive failure. The rationale behind the development of this service was that it would
allow customers to send a message from their medium of choice to the medium of choice of
the recipient, as specified by the sender. Thus someone at a computer terminal was able to
relay his or her message to Canada Post, which then delivered the message electronically,
by fax, or printed it for delivery in hard copy format, the choice of mode of delivery
being up to the sender. This service was an offshoot of a similar "hybrid"
service which CPC had been unsuccessful at marketing over a long period of time.
The argument about multi-mode choice of delivery may sound good but businesses for
understandable reasons have a considerable aversion to any electronic service in which the
post office seeks to insert itself as a middleman. No one needs or wants the post office
to help them sign on to and use the Internet, for example.
CPC's electronic postal mandarins further fancy that CPC could at some point offer an
international electronic/hybrid communication network for large and small businesses and
households alike. To do this would require that CPC construct a directory containing all
recipient names, physical and electronic addresses (including telephone and fax numbers),
available or preferred mode of message delivery for each recipient, and postal codes for
hard copy delivery.
It is inconceivable CPC would ever be able to assemble such a directory, much less become
capable of providing the proposed service. As it now stands, the corporation does not even
have a list of all physical addresses, with postal codes, to which it delivers mail in
Canada, neither in hard copy nor digital form. All it has is a bulky directory which gives
the postal code corresponding to a range of addresses, generally those on a block face,
and some cards in letter carrier depots which can be used to tell a substitute letter
carrier the locations to which he or she must deliver mail.
A useful directory of names, addresses, telephone numbers, and postal codes may, however,
be purchased on CD-ROM from your nearest computer store. It is published by a
privately-owned enterprise unrelated to the post office.
The arguments that CPC advances in support of its expensive initiatives in the
hybrid/electronic postal communication arena are therefore specious in the extreme. CPC's
failures in this arena have cost the corporation dearly both in terms of wasted financial
investment in software and hardware and in terms of the opportunity costs of the
incredible machinations, involving time and effort, which were required in order to
convince the gullible to comprehend. CPC should never have allowed itself to get into such
a mess, nor should politicians have allowed this to happen. The corporation should limit
itself to doing what it does best, which is moving hard copy, addressed mail.
Recommendation
The Fraser Institute's final recommendation to the CPC Mandate Review is
therefore:
That CPC forever disabuse itself of the notion that it should develop and market
electronic communication and messaging services, in the provision of which the corporation
has utterly no competitive advantage.