Going Postal: How the Germans Beat the Americans

Karl Muth looks for and finds innovation in postal services.

The story of postal services is a difficult one to tell fully, as it’s complex. I didn’t become that interested in the economics of postal services until I had a seatmate on a British Airways flight from London to New York. The man dealt in stamps and I explained that I wasn’t sure how postage worked internationally, but I do enjoy posting letters to friends and that I assumed there was some international clearing system that converted my British postage to American postage, or a portion of it, to pay the letter-carrier in New York who delivered a birthday note to my dear friend Danielle a week earlier.

My seatmate was happy to entertain my questions and knew a great deal about not only the history of postage, but the underlying economics of payment systems in this context and so on. I asked him what I suppose is a common novice question, whether stamps that have been used (and hence postmarked or cancelled or, in the harsher Continental parlance, voided) are worth more or whether the unused kind are worth more. He said that, while there are exceptions, generally the unused kind is worth more.

This brought me to an obvious question. When you buy a postage stamp, you’re basically buying an option contract that you can exercise until the price of postage goes up (or “forever” nowadays with American forever stamps and British permanent first class affixes) to post an envelope of certain dimensions and weight. If you buy this option and choose not to exercise it, by putting it in your stamp collection, you’re basically paying for a service you aren’t using. Why on earth would you do that? His answer was to take another sip of his gin and tonic and to say, “Well, I like stamps.” I’m sure he does.

But this is the secret of running a profitable postal service. Sure, you can make a tiny profit delivering things here and there. But to make a real profit, you get people to pay for services they don’t use. And the definition of a service you pay for but don’t use is… insurance.

If we look across the global landscape of sending stuff, and exclude FedEx and UPS, we see a network of postal services. These services are similar in some ways but, upon closer inspection, are often more different than similar. To study two interesting cases, we can take the disaster that is the U.S. Postal Service and contrast it with what is the success story of the German government’s Deutsche Bundespost and DHL.

The two have strikingly different histories. The U.S. Postal Service, despite asking to go into businesses like heavy freight, life insurance, and even pre-transplant organ couriering, has been time and again told “no” by the Congress. Meanwhile, the German federal postal service (Deutsche Bundespost) has been encouraged to innovate and has dabbled in everything from containerized shipping to selling advertising on the reverse flaps of its first-class mailers.

The difference has been remarkable.

Deutsche Bundespost has attracted innovative businesspeople from across the German economy, not just the transport sector (including executives from advertising, financial services, aerospace, and so on), who have contributed substantially to its success, its new lines of business, and its overall efficiency. Meanwhile, the U.S. Postal Service has become a magnet for bureaucrats and pension-seekers, a place where any remaining bits of creativity are run through the paper shredder at the end of the day.

The result is a U.S. Postal Service too beaten-down, timid, and impoverished to attempt anything new and without the management expertise or internal capability to try anything credibly. Meanwhile, Deutsche Bundespost recently announced a new partnership with DHL (which is itself 25% owned by the German government through two layers of subsidiaries) to give the German government’s lineup of shipping products a seamless spectrum from the single Christmas card to the forty-foot container.

The untold piece of this story is that a large part of Deutsche Bundespost’s business is insurance. The carrier’s customers (and DHL’s customers) insure their letters and packages to an extent unknown in the rest of the Western world. In fact, not only is the broader Deutsche Post system the largest courier service in the world at all three tiers of common carriage (in next-day express letter, which is not a tier of common carriage internationally, Deutsche Post is second to FedEx in package volume), it is the largest insurer of packages in international transit. And the float of this insurance network, though invested rather conservatively, performs well.

Meanwhile, the U.S. Postal Service cannot afford to dream long-term dreams. It has little money to invest and spends the majority of its quarterly allowance from the U.S. Congress dealing with its enormous pension and healthcare liabilities, fixing fleets of dilapidated equipment, and maintaining its over-extended network of facilities, which stretches across the United States and to every U.S. military facility overseas. Any efforts to innovate have been met with staunch resistance from both political parties, who insist it should focus on delivering mail, an activity that has required more and more subsidies on a year-on-year basis since the early 1980’s.

There may only be room in the world for one network of German mail companies, but there seems to be room for zero U.S. government-operated mail services. The U.S. Postal Service must undergo radical transformations if it is to be a business able to pay its own bills rather than a way for Congress to pay to deliver citizens’ Christmas cards.