Streamlite Closes

Streamlite Closes Doors - (Very Slight) Net Positive for FDX/UPS

Parcel consolidator, Streamlite, Inc., has shut down operations, which is a net positive for both FedEx (FDX:$86.84; Buy) and UPS (UPS: $77.37; Hold), but more so for FedEx, in our view, given its stronger market position in the parcel consolidator market with industry-leader FedEx SmartPost. From our prior meetings with Streamlite management, we estimate it had ~$200mm of annual revenue and delivered roughly
200,000-250,000 packages per day. The company's (price-sensitive) customers should find their way first into the networks of FedEx SmartPost, DHL Global Mail, and Newgistics, in our view, as those are the main
remaining small package consolidator options (vs. the faster and more expensive FedEx Ground or UPS
Ground products). It is good for the remaining players, in our view, when a competitor shuts its doors, but due to the relative size of Streamlite, we believe EPS accretion to FedEx from additional volume should be
minimal and practically immaterial.

The parcel consolidator industry [note: parcel consolidators use the U.S. Postal Service for last-mile delivery and try to feed as many packages as they can as deep as they can into the USPS network to lower costs - also known as zone-skipping] is littered with failures, and we now add Streamlite to the list that includes APX Logistics, Parcel Corporation of America, and DDU Express. There is significant density required to run the business (even if it's an asset-light operation) to make money, and most companies struggle to grow profitably. Of the $200mm in business going back out to the market, we estimate anywhere from 20%-50% should find its way to FedEx SmartPost (likely toward the lower end of that range). Even at the high end of that range, assuming an 85% operating ratio on the business, it would mean an incremental $15mm in EBIT, or an incremental $0.03 per share, which would be <1% accretive on our current $7.41 EPS estimate for 2013. Still, more EBIT is better than less EBIT. For UPS, the volume gains are less likely, as the company does not have a stand-alone consolidator product offering (a shipper has to use other UPS products to access its SurePost option) and the accretion potential is even less than at FedEx, as UPS handles many more packages than FedEx already and one would have to (at best) round up to get $0.01 of EPS accretion, which is immaterial on our 2013 EPS estimate of $5.50. Price is as of the close, June 14, 2012.

Fed may cut mail spend significantly

USPS concerns with bid to cut government’s $1bn mailing spend

Tuesday, June 5th, 2012

The US Postal Service will be helping one of its largest customers – the federal government – to reduce its use of the mail, but said today it is concerned about the loss of revenue associated.

Altogether, federal government agencies spend more than $1bn a year mailing out communications, but last month the General Services Administration issued instructions for government bodies to make an effort to cut down on their mailing costs.
The GSA, the federal procurement agency, wrote to the heads of federal agencies to encourage various practices to reduce mailing costs.
Suggestions included consolidating mail with other agencies to benefit from bulk mail discounts, presorting mail to access work share discounts, and use flat-rate USPS boxes and envelopes where possible. The GSA also recommended training with USPS address management tools to reduce the frequency of mail being returned as undelivered.
And, the agency urged a general switch to electronic mail.
Commenting on the new GSA policy bulletin, USPS spokesman Dave Partenheimer told Post&Parcel today that the Postal Service was working with government agencies to help reduce their overall mailing costs.
But, he said it was also working “aggressively” to retain and grow the federal business.
“While mail may be declining, we are growing the package business and showing how the value of direct mail can enhance their other communications efforts,” said Partenheimer.

“Flawed concepts”

The USPS spokesman was critical of the GSA recommendations, particularly when it came to aspects like use of electronic mail as an alternative to physical mail.
Saying USPS “does not concur with all suggestions of the GSA” in the new policy bulletin, he stated: “Several of the suggestions in the bulletin are based upon flawed concepts and information.”
Among the misconceptions he said the GSA policy promoted were the ideas that using email and faxes instead of mail would improve the sustainability – pointing to the electricity consumption involved – and that switching to electronic communications could risk exposure to cyber-security threats and data security breaches.

“While a ‘paperless office’ is a wonderful vision, it is not typically a reality”

The USPS spokesman also said GSA recommendations that staff should scan hardcopy items to deliver electronically could prove a false economy taking account of additional staff time to scan items.
“Most importantly, each agency must assess the value proposition offered by each communication strategy and determine its strengths and weaknesses before making a reasoned decision concerning the best method of communications,” Partenheimer said.
“While a ‘paperless office’ is a wonderful vision, it is not typically a reality. Hardcopy scanned and sent electronically may, in many cases, simply turn into another printed copy by the recipient.”

Moving forward

Last month GSA officials visited the US Postal Regulatory Commission to discuss work with government agencies to reduce the costs of using the mail.
During a public meeting of the Commission, the officials said new developments within government organisations included use of sorting software within the Internal Revenue Service that cuts the need for mechanical sorting by 80%, and a pilot project by the Department of Defense in which hardcopy mail is converted to a digital delivery format so that officials can sent items electronically.
GSA mail management policy program manager Derek Miliner said agencies were now required to presort mail and consolidate mail under the new policy, and said agencies were now coming together to consolidate mail.
“I did a small survey, asking 28 large agencies that spend over $1m on mail – there’s already nine of them consolidating,” he said. “We are moving forward with the consolidation, the Postal Service is helping.”
Commission chairman Ruth Goldway said she believed the new GSA policy could prove a “win-win situation” for the Postal Service and in reducing government spending, particularly by increasing the amount of mail undergoing presorting.
While most federal government agencies do already carry out some presorting of their mail, a Commission white paper published last year suggested that more widespread presorting could save $100m a year on mail costs.
“The Postal Service actually makes more money per piece on First Class Mail that’s processed and presented workshared than it does single piece,” Goldway said. “And the taxpayers and the rest of the government would be paying less.”
The USPS spokesman said workshare discounts do help achieve overall operational savings, but he said of the GSA recommendation to presort mail: “The new directive to presort will have a slight impact on our revenue as currently over 90% of federal agencies presort. However, we are concerned that any reduction in hardcopy mailing will affect our bottom-line.”

Source: James Cartledge, Post&Parcel