Pitney Bowes plans for future in era of declining mail usage

In dozens of countries around the world, Pitney Bowes Inc. has woven an unbreakable connection to mail.

It started as a postal meter company in 1920. Today, Stamford-based Pitney Bowes makes sorters that separate letters by postal codes. It writes and sells software that enables small and large businesses to post mail, ship packages and track where those packages have landed. Pitney Bowes even has become a post office for postal companies: collecting, sorting and organizing the shipment of outgoing mail even for United Parcel Service, FedEx and the U.S. Postal Service.

Pitney Bowes remains the No. 1 maker of postal meters in the world. And with a 62 percent share of the global market for postal meters, the company has a nearly 3-to-1 lead over its nearest rival: Neopost SA of Bagneux, France.

Through the combined sales of equipment and services, Pitney Bowes — which employs 5,000 people in Connecticut — earned $498.1 million on sales of $4.6 billion in 2003.

But a kingdom in the mailroom is not the secure throne that it once was. In just three years, annual volume of first-class letters has slipped 4.3 percent, from 103.5 billion in 2000 to 99 billion in 2003, according to the U.S. Postal Service, also a chief customer of Pitney Bowes.

Many blame e-mail, and other electronic messaging systems, for reducing the flow of traditional mail.

The mail decline has impelled Pitney Bowes to fight harder to retain old customers and attract new ones. Intensified competition has clipped profit margins — the pennies earned from each dollar in sales — by 32 percent over the last three years.

Pitney Bowes still retains a sizable fan base on Wall Street. Its core franchise is solid and its key sources of sales and earnings — for the next few years — are all but certain. But some have begun to ask how Pitney Bowes can expand if mail, as a medium for messages and cash flow, continues to shrink.

"The biggest question is how this company can grow," said Bob Goldsborough, an analyst with Ariel Capital Management in Chicago. The money management firm owns 7.7 million shares in Pitney Bowes, a 3.3 percent stake.

The company has predictable answers:

–Create more reasons to use mail as a tool to ship goods or sell services

–Add more services to mailroom operations

–Make mail faster and cheaper, especially for the largest corporate customers.

"Maintaining customer loyalty has become our core strategic objective," said Michael J. Critelli, chairman and chief executive of Pitney Bowes.

Two of the company's operations in Connecticut are part and parcel of this "customer loyalty" strategy.

At PSI Group in Hartford, Pitney Bowes has essentially created a cut-rate postal service for large corporate customers: it picks up mail, sorts it, then ships it via FedEx, the U.S. Postal Service or another mail carrier. At the 75,000-square-foot building, sorting machines — and 105 workers in three eight-hour shifts — process 2 million letters a day, enough to fill seven tractor trailers. PSI Group customers sending at least 1,000 letters a day receive a mark-down on postage, from 37 cents a stamp to 29 cents — give or take a few pennies.

"It's a good deal for all sides. Customers save money. Pitney Bowes makes money. And the postal service benefits because it encourages customers to make more frequent use of the mail," said Carl Walton, a spokesman for the U.S. Postal Service's regional headquarters in Windsor.

At Pitney Bowes Management Services in Windsor, additional mailroom chores are completed toward the same end: faster and cheaper mail. Data from bills, payrolls or benefits statements are sent to Pitney's mainframe computers in Windsor. The computers decide how to arrange that data — including which typefaces to use, and which types of paper to use — before converting it to statements, bills or paychecks mailed to customers.

About 600,000 pieces of mail pass through the Windsor building every day — about 15 percent the volume of the Hartford Post Office. Among those 600,000 pieces are 420,000 "explanation of benefits" statements from Aetna Inc. National Grid USA, parent of New England electric in Massachusetts, Rhode Island and New Hampshire, is another large customer.

"Each letter has a brain, and the brains are stored in a bar code," said Nicholas Kopernik, director of Pitney Bowes Management Services. With each bar code attached to a name or "mail recipient," mailers can learn whether a letter was sent — where it is in transit — and whether that letter reached its final destination, Kopernik said.

As a company division, Pitney Bowes Management Services generated about $1 billion in revenues in 2003. The division, with about 800 customers, bills itself as a manager of document storage, document transmission and mail flow in large corporations.

It competes with Stamford-based Xerox Corp. and IKON Office Solutions Inc. And all generally compete to serve the largest generators of mail and documents: insurers, healthcare providers, governments and utilities.

Along with two formidable competitors, Pitney Bowes must wrestle with customer inertia.

"The problem in most organizations is that there is no sponsor or champion for re-engineering mail and document flow," Critelli said. Purchasing managers receive credit only for discounts they get on supplies they purchase; they don't get credit for adopting processes that make organizations more efficient and cost effective.

And information technology departments, Critelli added, tend to focus more on customer relationship management and supply-chain functions in a corporation; mail and document flow are far down the list of priorities. This fact of life makes "document management" a hard sell, he said.

But if there is a broader market for document management, Pitney Bowes can afford to wait for that market to develop. The company still has its cash-cow postal meter business. And, by 2008, the company expects to lease or sell 600,000 digital meters to replace about half the existing Pitney Bowes meters at work in post offices around the world. Sales and leases of meters accounted for 23 percent of the company's total sales in 2003, said Christopher Whitmore an analyst who follows Pitney Bowes for Deutsche Bank.

Sales and leases of meters generally lead to sales downstream, especially for paper and ink cartridges. So even with slow year-to-year growth in sales, the Pitney Bowes franchise appears formidable and solid for years to come, Whitmore said.

The yearly sales — or checks — are still in the mail, Whitmore said.