U.S. Postal Service: Newly Designed Retail Store Revenues Exceed
Operating Costs (Letter Report, 02/04/94, GAO/GGD-94-85).

In response to customer complaints about long lines at post offices and
the lack of self-service areas for stamps and other items, the U.S.
Postal Service has opened 23 retail stores since 1989 and has plans to
open 20 more in 1994.  These retail stores offer the same services as
found at traditional post offices but boast more business and
communication services, such as fax, E-Mail, and word processing,
provided by commercial parcel and retail mail services.  Fourteen of the
16 retail stores that had been in operation for at least a year were
profitable at the end of fiscal year 1993; overall revenues were 2.5 to
6 times greater than operating costs.  Not enough data were available to
estimate revenues and costs for the other two stores.  New store
locations are chosen on the basis of customer need and convenience--the
same criteria used to select traditional post office sites.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-94-85
     TITLE:  U.S. Postal Service: Newly Designed Retail Store Revenues 
             Exceed Operating Costs
      DATE:  02/04/94
   SUBJECT:  Postal rates
             Budget receipts
             Postal service contracts
             Cost control
             Public administration
             Postal service
             Mail transportation operations
             Productivity
             Cost analysis
             Administrative costs
IDENTIFIER:  National Performance Review
             
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Cover
================================================================ COVER


Report to the Subcommittee on Postal Operations and Services,
Committee on Post Office and Civil Service, House of Representatives

February 1994

U.S.  POSTAL SERVICE - NEWLY
DESIGNED RETAIL STORE REVENUES
EXCEED OPERATING COSTS

GAO/GGD-94-85

Postal Service Retail Store Revenues


Abbreviations
=============================================================== ABBREV

  MBE - Mail Boxes Etc. 

Letter
=============================================================== LETTER


B-256317

February 4, 1994

The Honorable Barbara-Rose Collins, Chairwoman
The Honorable Don Young, Ranking Minority Member
Subcommittee on Postal Operations and Services
Committee on Post Office and Civil Service
House of Representatives

This report responds to your August 4, 1993, request that we
determine (1) if United States Postal Service retail stores recovered
operating costs, (2) whether the stores offered any services not
customarily offered in regular post offices, and (3) what procedures
and criteria the Postal Service established for siting the stores. 
Your request was made based on concerns raised by Mail Boxes Etc. 
(MBE) that the Postal Service may be engaging in unfair business
practices against commercial parcel and retail mail establishments by
operating retail stores at a loss, offering services not found in
regular post offices, and locating these stores in the same vicinity
as MBE and other private retail stores. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Fourteen of the 16 retail stores that had been operational for 1 year
or longer at the end of fiscal year 1993 reported annual gross
revenues that exceeded operating costs.  Gross revenues for these 14
stores ranged from $458,000 to $9.3 million.  Overall the revenues
were 2.5 to 6 times greater than operating costs.  Sufficient revenue
and cost data were not readily available to estimate revenues and
costs for the other two stores. 

The Postal Service's retail stores offer the same services as those
offered by traditional post offices.  The retail stores do not offer
many of the business and communication services that are provided by
private sector establishments, such as electronic mail messaging. 
The differences between traditional post offices and the new retail
stores are only in physical layout and appearance. 

The procedures and criteria for selecting new store locations are
based on customer need and convenience.  According to Postal Service
officials, these are the same procedures and criteria the Postal
Service has used in selecting sites for traditional post offices. 


   BACKGROUND
------------------------------------------------------------ Letter :2

Under the Postal Reorganization Act of 1970, the Postal Service is
required to provide a prompt, reliable, and efficient universal mail
service.  The Postal Service operates in an increasingly competitive
environment and it rates lower in customer satisfaction than some of
its direct competitors.\1

Postal Service officials recognize that they must do a better job of
increasing customer satisfaction by improving service operations.  As
part of its operational improvement efforts, the Postal Service
reexamined its retailing efforts in the late 1980s to address
customer concerns about increasingly long lines at post offices and
about the lack of self-service areas to select available postal
merchandise. 

In September 1989, the Postal Service opened its first two prototype
retail stores (initially called "Postal Store of the Future") in the
Washington, D.C., area.  The purposes of the prototype retail store
were to test a new post office retail design that had a more
appealing interior appearance than traditional post offices and to
make postal services and products more readily accessible to the
customer.  (See app.  I for a description and pictures of the store
layout.) The postal store of the future concept responded to the
Postal Service's desire to improve post office service time--the
current goal being that customers should not have to wait in line
more than 5 minutes.  The retail store concept is also in accord with
Vice President Gore's National Performance Review report,\2 which was
intended to identify ways of providing federal services in a more
timely and businesslike manner. 

As of January 1, 1994, the Postal Service had 23 retail stores in
operation (see app.  II).  Thirteen were new retail stores, four were
post office renovations, and six were post office replacements. 
Twenty additional stores are under construction and scheduled to open
in 1994 (see app.  III). 

Commercial parcel and retail mail services were developed by the
private sector in the 1980s as an alternative to the Postal Service. 
These private establishments rent private mailboxes; sell stamps; and
forward, pack, as well as send and receive letters and packages.  In
addition, many have electronic mail (E-Mail) and facsimile (Fax)
machines and offer telephone answering, photocopying, and word
processing services.  Although these private operations may charge
more than the Postal Service for comparable services, they usually
offer longer business hours and other convenient services not offered
by the Postal Service-- such as a customer call-in service to check
if mail has been received. 

Commercial parcel and retail mail services are either (1)
independently owned and operated local establishments or (2) branches
and franchises of larger organizations.  A 1991 industry survey of
commercial parcel and retail mail establishments reported that most
of these businesses have annual gross sales ranging from $100,000 to
$250,000.  According to MBE officials, about 7,000 commercial stores
exist across the country and about 2,000 of these stores are MBE
franchises.\3


--------------------
\1 In our report to Congress entitled U.S.  Postal Service:  Pricing
Postal Services in a Competitive Environment (GAO/GGD-92-49, Mar. 
25, 1992), we discussed the direct competition the Postal Service
faces from various private businesses in its parcel post, overnight
delivery, and other postal markets (see chs.  2 and 3).  Our report
did not address the competition the Postal Service is facing in its
retail operations. 

\2 From Red Tape to Results:  Creating a Government That Works Better
& Costs Less, report of the National Performance Review, Vice
President Al Gore, September 7, 1993. 

\3 Other franchises include Handle With Care Packaging Store; Postal
Annex +; Pak Mail Centers of America, Inc.; Parcel Plus; AIM Mail
Centers; Pony Mailbox and Bus.  Ctr.  Inc.; Shipping Connection; and
Express Postal Centers. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3

To determine whether Postal Service retail stores were recovering
operating costs, we focused our analysis on 16 stores that had
operated for 1 year or longer as of the end of fiscal year 1993.  The
other seven stores were opened during fiscal year 1993.  All 16
stores were designated as stations or branches of a city post office. 
The Postal Service did not keep separate financial records for 4
retail stores, but did have separate records for 12 of the stores. 
These 12 stores were consolidated under city post offices that had
been utilizing a system called the Standard Field Accounting System. 
This system records separately all revenue data produced by each
station, branch, and post office, but did not record complete expense
data for these units.  For these 12 stores, we used revenue data
generated from the financial system for fiscal year 1993.  Revenue
data for two of the other four stores had been manually compiled by
Postal Service officials who had helped design and implement the
retail store program.  Data for the remaining two stores had not been
manually compiled, and thus, were not available for our review.  We
did not verify the revenue data reported for any of the 14 stores,
and we did not evaluate the adequacy of internal controls at the
stores. 

Because we could not readily retrieve complete data on operating
costs for each retail store, we obtained from the Postal Service the
number of total work hours reported in fiscal year 1993 by the 14
stores for which we had revenue data.  We calculated that, on
average, the cost of a work hour at a retail store was $34.53.  This
amount includes the salary and benefits of full-time clerks who
operate the stores, which averaged $25.22 per work hour in fiscal
year 1993 according to the year end National Payroll Hour Summary
Report.  We applied a 36.9-percent overhead rate to both salary and
benefits.\4 The calculated overhead amount of $9.31 represents other
personnel costs, such as workers' compensation and retirees'
retirement and health benefit costs, and other operating and
maintenance costs, such as rent, utilities, training, and supplies. 
We estimated the operating costs by mutiplying the cost of labor and
overhead by the total number of work hours at each of the 14 stores. 
Based on this information, we estimated net revenue (gross revenue
less estimated labor costs and overhead) to determine whether each
store covered estimated labor and overhead expenses. 

It should be noted that attempting to determine whether any
particular segment of postal operations such as retail stores and
post offices are generating revenues greater or less than their
operating costs can be misleading.  Each operation is but one,
indistinguishable part of a universal service from which all other
operations derive benefits.  Thus, the Postal Service's retail
stores, post offices, and other revenue-generating entities need to
not only cover more than their direct labor costs and contribute to
overhead but also must cover the vast operating costs of mail
processing, transportation, and delivery operations, which support
the universal mail service.  The Postal Reorganization Act of 1970
requires the Postal Service to break even overall in the long term. 
It does not require each postal facility to be self-sustaining in
order to operate.  If this were the case, many rural post offices,
stations, and branches would have to be closed because some of them
do not generate sufficient revenues to recover their operating
expenditures. 

To respond to the second part of the request, we visited retail
stores and post offices located in the Washington, D.C., area to
observe and obtain listings of services offered.  We reviewed the
Postal Retail Store Design Guide to understand the planned layout of
the stores and their services. 

To address the last part of the request, we reviewed and discussed
with Postal Service officials the siting procedures and criteria for
the retail stores.  We also asked the Postal Service for retail store
opening dates and asked them to provide the distances between the 23
retail stores and the closest MBE stores.  We used these data to
address MBE's concern about Postal Service retail store siting
policy.  In addition, we interviewed an MBE corporate official and
visited three MBE stores in the Washington, D.C., area to observe
their operations and services offered.  Furthermore, we obtained data
from MBE corporate headquarters on the proximity and opening dates
for franchise stores located near the Postal Service's retail stores
for comparison with related Postal Service data. 

We did our work from October to December 1993 in accordance with
generally accepted government auditing standards. 


--------------------
\4 Nationally, data from the Postal Service's Financial Reporting
System show that nondirect operating costs (overhead) are about 37
percent of total salaries and benefits of the workforce. 


   POSTAL RETAIL STORES RECOVERED
   OPERATING COSTS
------------------------------------------------------------ Letter :4

In fiscal year 1993, 14 of the 16 retail stores that operated the
entire year had gross revenues that were 2.5 to 6 times greater than
estimated operating costs.  (Complete revenue data were not available
for the other two stores.) Gross revenues for the 14 stores ranged
from $458,000 to $9.3 million as shown in table 1. 



                           Table 1
           
              Range of Gross Revenues for Postal
                    Service Retail Stores

                                                   Number of
Dollar range                                          stores
--------------------------------------------  --------------
$458,000 to $749,999                                       4
$750,000 to $999,999                                       2
$1 million to $1.9 million                                 5
$2 million to $9.3 million                                 3
------------------------------------------------------------
By far, the single greatest sales item at the stores was postage
stamps, followed by post office metered mail (this does not include
customer meter setting).  These items typically accounted for over 90
percent of total sales. 

Net revenues (gross revenues less estimated operating expenses, which
averaged $443,000) ranged from $290,000 to $7.8 million.  Five stores
had net revenues of over $1 million (see table 2).  Seven stores for
which construction/renovation data were available generated
sufficient net revenue that would have enabled the Postal Service to
recover all construction/renovation costs in fiscal year 1993.\5
These costs ranged from $116,000 to $484,000. 



                           Table 2
           
           Range of Net Revenues for Postal Service
                        Retail Stores

                                                   Number of
Dollar range                                          stores
--------------------------------------------  --------------
$290,000 to $749,999                                       6
$750,000 to $999,999                                       3
$1 million to $1.9 million                                 3
$2 million to $7.8 million                                 2
------------------------------------------------------------

--------------------
\5 Under Postal Service accounting procedures, construction and
renovation costs are not written off in 1 year, but are depreciated
over a period of years. 


   SAME SERVICES WERE OFFERED IN
   POSTAL RETAIL STORES AND POST
   OFFICES
------------------------------------------------------------ Letter :5

Postal Retail Stores provided the same basic services that are
available in traditional post offices.  These included postage sales
(stamps and metered mail); overnight, second-day, and parcel
delivery; packaging supplies; mailbox rentals; and money orders.  The
stores did not offer any electronic communication services.  As shown
in appendix IV, MBE offered a greater choice of products and services
than are offered by post offices and retail stores.  MBE core
services included mailbox rentals and photocopying services with
24-hour access, shipping supplies and packaging service, postage
sales (stamps/metered mail), Fax, money transfers, and ground and air
shipping through the major express and parcel shippers, including the
Postal Service.  Other MBE services included money orders, greeting
cards/post cards, notary, passport photos, and electronic mail
messaging (telex, cablegrams, telegrams, mailgrams). 


   SITE SELECTION PROCEDURES AND
   CRITERIA FOR RETAIL STORES AND
   POST OFFICES WERE THE SAME
------------------------------------------------------------ Letter :6

Of the 23 operating retail stores, 13 are new facilities; the other
10 are post office renovations or replacements.  Six of the 13 new
stores are located close to an MBE store (one-half mile or less) and
opened after the nearest MBE store.  The other seven new stores were
either opened before an MBE franchise opened or were located more
than one-half mile from the closest MBE store.  Of the 10 existing
post offices that were converted to retail stores, MBE had 6 of its
franchises within one-half mile of these postal facilities (see app. 
II).  Proximity of commercial outlets to postal facilities is common
in this industry.  A recent survey by the commercial parcel and
retail mail industry reported that over 50 percent of the private
retail outlets were located within one mile, and 35 percent were less
than one-quarter mile, from a U.S.  post office. 

According to Postal Service officials, site selection procedures for
retail stores are the same as for any post office retail operation. 
Site selection proposals are made by the local customer service
district with input from headquarters facilities.  Postal design
guidelines emphasize that retail stores should be opened in
commercial/retail locations where there is a concentration of general
office, retail, medical, and small business establishments because
they use postal services more often than government or manufacturing
enterprises.  For example, six of the new stores are located in
shopping malls.  The preferred customer mix for location of a retail
store is 50 percent or greater business customers and the remainder
residential customers. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :7

On January 18, 1994, we discussed a draft of this report with the
Postal Service's Manager of Retail Support who is responsible for the
retail stores program.  The comments provided included the views of
the Vice President for Customer Services and Sales and other Postal
Service executives who reviewed the draft report.  Their comments
were considered in preparing the final report.  In general, they said
that they agreed with the report analysis.  They added that the
Postal Service, much like any other business, will be looking at new
products and services to meet its customers' needs; and pursuant to
customer demand, some products and services may be offered in some
locations and not others. 


---------------------------------------------------------- Letter :7.1

As arranged with the Committee staff, we will distribute copies of
this report to the Postmaster General, the Board of Governors of the
U.S.  Postal Service, the House and Senate Postal Oversight
Committees, and other interested parties.  Copies will also be made
available to others upon request. 

The major contributors to this report are listed in appendix V.  If
you have questions about this report, please call me on (202)
512-8387. 

J.  William Gadsby
Director, Government Business
 Operations Issues


POSTAL SERVICE RETAIL STORE DESIGN
=========================================================== Appendix I

   Figure I.1:  Postal Service
   Retail Store Entrance Lobby

   (See figure in printed
   edition.)



(See figure in printed edition.)


The retail stores are designed into four primary areas configured in
a diamond pattern (see bottom left).  Figures I.1 and I.2 show the
entrance lobby, mailbox rentals, retail store, and full-service
areas. 

The entrance lobby (see photo 1A) is a self-service area that
contains postage stamp vending machines, mail drops, and weighing
devices.  A second area, either on the right or left side of the
store (see photo 2B), contains the mailbox rentals.  A third area at
the rear of the store (see photo 3C) is the full-service counter
available for more complex and time-consuming transactions, such as
mailing packages, certifying and registering mail, and buying other
mail services.  The last area opposite the mailbox rentals (see photo
4D) offers a variety of postal products including sheets and books of
postage stamps, stamp collecting kits, and mailing supplies that are
displayed on the walls for self-selection. 

   Figure I.2:  Mailbox Rentals,
   Full-Service Counter, and
   Retail Store Areas

   (See figure in printed
   edition.)



   (See figure in printed
   edition.)


POSTAL SERVICE RETAIL STORES AND
PROXIMITY OF THESE STORES TO MBE
FRANCHISES
========================================================== Appendix II

                                     Store
                                  opening/
                               renovation/                                   MBE
                               replacement  Facility     Nearest MBE     opening
Postal Service retail stores          date  type             (miles)        date
----------------------------  ------------  ----------  ------------  ----------
Martin Luther King, Jr.               9/89  New                 < .1        5/92
 Washington, D.C.
White Flint Post Office               9/89  Renovation          < .1        8/93
 Kensington, Maryland
Golden Triangle Finance              12/90  New                   .3       11/86
 San Diego, California
Tierrasanta Post Office               7/91  Replacemen           1.0        9/82
 San Diego, California                       t
Southpoint Station                    9/91  New                  8.0        4/92
 Jacksonville, Florida
Martine Station                      10/91  New                 < .1       11/89
 White Plains, New York
Middlesex Essex Center               10/91  Replacemen          < .1        9/89
 Woburn, Massachusetts                       t
Ingleside Station                    11/91  New                  5.0       11/86
 Holyoke, Massachusetts
South County Mall                     1/92  Replacemen            .5       11/86
 Saint Louis, Missouri                       t
Harvard Square Station                3/92  Renovation          < .1       11/88
 Cambridge, Massachusetts
Alton Square Mall                     5/92  New                 20.0       11/87
 Alton, Illinois
Crestwood Retail Unit                 5/92  New                  1.0        6/86
 Saint Louis, Missouri
Saint Louis Galleria                  5/92  New                  1.5        9/86
 Saint Louis, Missouri
Grand Central Station                 8/92  Renovation          < .1        8/88
 New York, New York
Horton Plaza Post Office              8/92  New                 < .1       11/83
 San Diego, California
Union Station Retail Unit            10/92  New                   .5        5/93
 Washington, D.C.
Arcadia Creek Station                 3/93  Replacemen           3.0        9/89
 Kalamazoo, Michigan                         t
Lyons Station                         4/93  Replacemen           1.0       12/89
 Newhall, California                         t
Burlington Post Office                7/93  Renovation           2.9        1/94
 Burlington, Massachusetts
Escondido Post Office                 6/93  Replacemen          < .1        1/82
 Escondido, California                       t
River Road Station                    6/93  New                 < .1        4/91
 Eugene, Oregon
Postal Museum                         7/93  New                   .5        5/93
 Washington, D.C.
Braintree Post Office                 8/93  New                 < .1       12/86
 Braintree, Massachusetts
--------------------------------------------------------------------------------
Sources:  U.S.  Postal Service and Mail Boxes Etc. 


POSTAL SERVICE RETAIL STORES UNDER
CONSTRUCTION
========================================================= Appendix III

Location                       Location
-----------------------------  -----------------------------
Birmingham, Alabama            Rochester, New York

Gilbert, Arizona               Cincinnati, Ohio

Tempe, Arizona                 Columbus, Ohio

Rogers, Arkansas               Wilsonville, Oregon

Irvine, California             East York, Pennsylvania

Denver, Colorado               Pittsburgh, Pennsylvania

Ellington, Connecticut         Quakertown, Pennsylvania

Fairfield, Connecticut         Providence, Rhode Island

Chicago, Illinois              St. Thomas, U.S. Virgin
                               Islands

Buffalo, New York              Salt Lake City, Utah
------------------------------------------------------------

COMPARISON OF SERVICES PROVIDED BY
MBE AND POSTAL SERVICE RETAIL
STORES AND POST OFFICES
========================================================== Appendix IV

Service             MBE                 Retail store        Post office
------------------  ------------------  ------------------  --------------------
Express Mail,       Yes. Various        Yes. Postal         Yes. Postal Service
priority mail,      sources such as     Service only        only
parcel post         Federal Express,
                    DHL, United Parcel
                    Service, and
                    Postal Service

Stamps and metered  Yes                 Yes                 Yes
mail

Packaging supplies  Yes. Variety        Yes. Variety        Yes. Variety

Custom packaging    Yes                 No                  No

Gift wrapping       Yes                 No                  No

Photocopying (24    Yes                 Yes. Available at   Yes. Available at
hrs)                                    some locations      some locations

Fax (sending and    Yes                 No                  No
receiving)

Business cards and  Yes                 No                  No
stationary

Mailbox rental      Yes                 Yes                 Yes

Envelopes           Yes                 Yes                 Yes

Office supplies     Yes                 No                  No

Western Union       Yes                 No                  No
Service

Money orders        Yes                 Yes                 Yes

Laminating          Yes                 No                  No

Notary Public       Yes                 No                  No

Key duplication     Yes                 No                  No

Passport/ID photos  Yes                 No                  No

Mailboxes for sale  Yes                 No                  No
--------------------------------------------------------------------------------

MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix V

GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C. 

Michael E.  Motley, Associate Director, Government Business
 Operations Issues
James T.  Campbell, Assistant Director, Government Business
 Operations Issues
Barry P.  Griffiths, Assignment Manager
John R.  Van Lonkhuyzen, Evaluator-in-Charge


============================================================ Chapter 0



   (See figure in printed
   edition.)



   (See figure in printed
   edition.)

