From the October 1996 issue of Entrepreneur

Mail Boxes Etc. franchisees Dan and Vicki Van Grol seemed cut out for franchise success, rising to the No. 10 location in the San Diego area three years after they opened. Yet, in a matter of six months, they've dropped down the list to the low 20s. What's the problem? Since the U.S. Postal Service (USPS) opened a Pack and Send service across the street from the Van Grols' store, "our shipping has dropped off, our stamp sales have dropped off, our packing service and supplies have dropped off," says Dan Van Grol, who feels the USPS is to blame. "It was kind of a shock."

Meanwhile, the Van Grols must deal with the personal indignation of helping the competition reach their customers. "I receive fliers advertising their service," Dan says. "It breaks my heart to put those fliers in the boxes of my 180 box holders, but I have to. That's the law."

Many mail and parcel franchisors as well as franchisees see a clear irony in the situation. "We're a customer of the Postal Service, not a competitor," says Evan Lasky, executive vice president of Aurora, Colorado-based Pak Mail Centers of America Inc.

The 214 Pack and Send services that the USPS is testing in post offices nationwide--mostly in San Diego; Orlando, Florida; Las Vegas; and Atlanta--have industry insiders like Lasky up in arms. "On a level playing field, we have no problem whatsoever," says Lasky. "But we're really concerned when the government comes in as an afterthought and attempts to service a market that's already being serviced by the private sector."

In fact, the perceived threat motivated the usually fiercely competitive mail and parcel franchises to band together and form the Coalition Against Unfair USPS Competition. The coalition, created in January, represents the interests of about 10,000 mail and parcel centers, many of which are franchises. "When the free market is providing a product efficiently at a fair price, the government has no business offering the same service," says Rachel Southworth, the coalition's executive director.

Southworth points out that the USPS enjoys certain unfair advantages over private mail and parcel centers. It doesn't, for example, pay any federal, state or local income taxes or sales taxes. By law, it operates to break even rather than make a profit. And it commands a monopoly on first-class mail, which provided almost $32 billion of its $54.3 billion in revenues last year, as well as a virtual monopoly on third-class mail, which brought in $11.8 billion.

But the USPS doesn't feel the playing field is quite as unbalanced as the coalition might portray. "The Postal Service has been in the retail business for a number of years, certainly long before the private sector got involved," says Jim Mruk of the USPS, who adds the decision to offer the service "was based on what was best for our customers and what made sense for us as a business."

While Mruk admits that the Postal Service doesn't pay certain taxes, he points out it is also subject to costs that private companies are spared. "We pay more than $50 million in real estate taxes for approximately 13,000 of our facilities, and cover the costs of theft and mail fraud services and of forwarding mail," says Mruk. "And I don't think any of [the private companies] have had to make payments to the federal treasury to try to reduce the budget deficit."

Ready For Battle

Some wonder why, after 20 years of sitting on the sidelines watching private industry make inroads into its market, the government would choose to enter the fray now. "We did some market research that indicated this is a convenience our customers would appreciate," says Mruk. "Our main focus is how we can better serve our customers because we're in a competitive situation as well."

The competitive situation Mruk refers to is the advent of faxes, the Internet and other forms of electronic communication. "Americans have many options as far as communications services," says Mruk. "They don't have to use the mail. So we have to continually look at our business and offer good value and services. Otherwise, [customers] are going to go elsewhere."

However, some charge that the USPS' new foray presents a conflict of interest with its current functions, and that the ultimate loser will be the American public. "We believe the Postal Service is getting away from its core mission, which is universal mail delivery six days a week," says Southworth. "This expansion into other products and services simply strains their revenue and makes them less productive."

"Absolute nonsense," responds Mruk, who claims operations at the Postal Service have never been smoother: "The service performance is at record levels. Our last external measurement showed a 92 percent on-time delivery average for first-class mail. And last year we had a record financial performance. If anything, right now the Postal Service's performance is the best it's ever been."

In fact, Mruk believes the new face of the USPS will improve its delivery. "The Postal Service is not tax-supported. We rely entirely on the sale of our products and services to generate the revenues we need to cover our operating costs and maintain the nation's mail system," he says. "So when we can find new sources of revenue, this helps us extend the intervals between [postal] rate increases and puts us in a better position to continue providing Americans with the level of service they expect and deserve."

New Routes

No matter what the motives, cages are being rattled as rumor spreads that the USPS intends to open thousands of Pack and Send services over the next three years. "It's still in the test phase," Mruk counters. "We haven't made a decision on expanding the program yet, and to say anything else at this time would be pure speculation."

Yet Anthony DeSio, president and CEO of Mail Boxes Etc., believes this move by the Postal Service is no casual testing of the waters but rather "the tip of an iceberg. In addition to packaging services and supplies, they are offering telephone debit cards, engaging in discussion with copy machine manufacturers about offering high-volume copy service, and planning to go into banking services and the office-supply business."

Mruk confirms that the USPS is experimenting with debit phone cards and financial services such as money wiring to Mexico, but he says these are "still in the test stages. We haven't made plans to expand beyond that."

Meanwhile, some believe the USPS may be indirectly going after overnight delivery competitors, such as FedEx and United Parcel Service, that rely on private mail and parcel centers as distribution points. And Lasky points out the USPS even has the power to pursue predatory pricing to move everyone else out of the way.

To ensure these "what ifs" don't come true, the Coalition Against Unfair USPS Competition has drafted legislation, introduced by Rep. Duncan Hunter (R-CA) in late June, which essentially limits the Postal Service from providing any commercial, nonpostal services that it did not offer nationwide prior to January 1, 1994.

The bill sits before the House Postal Service Subcommittee, awaiting hearings. "Congress will take into consideration what we need to do to stay competitive," says Mruk. "There are two sides to every argument. And we're offering Americans more choice. The Pack and Send service is a benefit for the American people."

Yet those words don't soothe postal franchisors and franchisees, who send a word of warning to other industries. "The Post Office needs to be in the business long term," says DeSio. "They're looking to maintain the size of their organization, and they're looking to find some other business besides the delivery of mail. Today, it may be us, but tomorrow it'll be somebody else."

Contact Sources

Blimpie International Inc., 1775 The Exchange, #600, Atlanta, GA 30339, (800) 447-6256;

Coalition Against Unfair USPS Competition, 9450 Scranton Rd., #111-186, San Diego, CA 92121, (619) 623-1773;

Mail Boxes Etc., 11835 Carmel Mountain Rd., #1304, San Diego, CA 92128, (619) 487-5260;

Mail Boxes Etc. (headquarters), 6060 Cornerstone Ct. W., San Diego, CA 92121, (619) 455-8800;

Pak Mail Centers of America Inc., 3033 S. Parker Rd., #1200, Aurora, CO 80014, (303) 752-3500.