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There is no such business today; it was forced out several years ago by the high cost of postage and the materials we had to buy to convert and mail to our customers.

The CHAIRMAN. You were forced out of business, were you?

Mr. TILLOTSON. As to that particular phase, we were forced out entirely, sir.

Each time our costs increased, we had to cut back the business to the point that it could remain profitable at the higher costs. After several steps of this nature we had to discontinue this business altogether.

Concurrent with the development of the merchandise business, a publication was started, and it grew gradually by the same means of advertising; that is, direct mail. We developed the business to where we had a regular employment of 250 people, and during peak season we reached a high of 325. At the present time we have about 130 regular employees, and our peak season takes us to about 200-225. Our regular employment is just about half what it was a few years ago.

The Workbasket magazine was built to slightly over 1,500,000 circulation. Today it has about 1 million. It has been cut down about one-third. The reduction in Workbasket circulation was done in two steps. Our first reduction took it down to 1,250,000; the most recent reduction took it down to 1 million. If postage goes up again, the next reduction will probably take us down to 750,000 to 800,000 copies.

The CHAIRMAN. What about other increases in your cost of operation besides your postage bill?

Mr. Tillotson. They have been going up, but not to the same degree.

The CHAIRMAN. Do not blame everything on postal rates, now.

Mr. Tillotson. I am not, sir. The postage rates have increased at a greater degree, and for our particular business they are a major portion of our costs.

Mr. Rees. Let me interrupt there.
What percentage of your cost of operation is the postage?

Mr. Tillotson. I will get to that. Roughly, of our advertising cost, sir, it is 50 percent, today.

The CHAIRMAN. That is just advertising costs; that is not total cost?

Mr. Tillotson. In our particular type of operation, the advertising costs are a major portion of it. The direct mail advertising we send out to secure circulation is comparable to our sales force.

The CHAIRMAN. In other words, the Post Office Department is conducting your business, largely, as I see it.

Mr. TillorSON. We use the services of the Post Office Department to conduct our business; yes, sir.

The CHAIRMAN. That is right.

Mr. TILLOTSON. During the time the Workbasket circulation was at 1,500,000, we were mailing about 30 million pieces of third-class mail a year. The receipts of the Post Office from this mail and the first-class order mail that it created amounted to $495,000. Today with our reduced volume we are mailing about 14 million pieces of third-class mail per year. The Post Office revenue from this postage and the postage of the first-class order mail that this generates is about $375,000, a reduction of $120,000, a loss of revenue to the Post Office of $120,000.

This

This loss of revenue to the Post Office was only part of the loss to the Government. As our production payroll has decreased with this mailing reduction, this means a loss of income taxes paid to the Government. During our peak circulation our production payroll amounted to $400,000 per year; today it is $270,000 per year.

The minimum tax rate paid by the employees at the former level was about $80,000 per year; today it is about $54,000.

In addition to these reductions, our payments to our suppliers for materials changed considerably also. Our advertising material cost during our peak time were $514,000 per year; today it is $254,000 per year.

The loss of revenue to the Government of postage and our employees' income tax alone amounts to a total of $156,000. This does not take into consideration any of the corporate income tax paid by our company and our suppliers, at the 52 percent rate, nor the income taxes paid by our suppliers' employees.

About half of our employees have been required to seek other work or to drop out of the labor force.

A significant portion of our advertising material cost is payroll of our suppliers. Their employees pay a sizable amount of money to the Government from their earnings on work performed for us. has been reduced just as our purchasing has been reduced. As our business was reduced, our suppliers had to secure other business or in turn reduce their employment with a further reduction in Government revenue.

This has been the pattern through the years as postage has gone up. From these figures it is easily seen that this publishing phase of our business followed the same pattern as the merchandise business. Each time our costs were increased, it reduced volume of business and the amount of advertising done.

As we are gradually being forced out of the mail order business, we have tried other media such as radio, newspapers, magazines. None of these worked.

Direct mail remains the only medium that we can use to secure circulation satisfactorily.

As our cost of using it continues to increase, the volume of business done will necessarily be reduced further, with a further reduction of employment and purchasing of materials from others.

The Post Office Department recently hired a firm to make a survey for them. Some of the conclusions arrived at by McKinsey & Co. in this survey border on the ridiculous. It was stated that postage seldom is a factor that is taken into consideration when a decision is being made to use direct mail advertising. Nothing could be further from the facts in the case of businesses such as ours—and there are thousands like us--that use direct mail as their principal selling tool.

At the present time postage amounts to 50 percent of the total sales cost. The reduction in volume done by our company is directly related to this postage increase, as well as the slight increases of other materials.

Mr. Rees. Now, you say that is 50 percent of your total sales cost.
Mr. Tillotson. Yes, sir.
Mr. REES. What share of your total operation is it?

Mr. TillotsON. I do not have those figures available at the moment, sir. I could get them for you.

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Mr. REES. What does it cost to operate your business? And then tell us what percentage is postage.

Mr. Tillotson. At the present time, third-class advertising postage is roughly 15 percent of our gross volume. Our expenses for thirdclass postage are roughly 15 percent of our gross revenues.

The CHAIRMAN. What about your entire postage bill? How does it compare to your total costs?

Mr. Tillotson. I do not have the figures on our entire postage bill, but it would not be substantially more than that. It would be a little bit more than that.

There is a distinction between direct mail advertising and selling by direct mail. Some of our country's giant corporations use a fair amount of direct mail advertising. Automobile companies, for example, don't try to sell cars directly from their mailing. Instead, they try to get a prospect interested in going into a dealer's showroom, where a sale may be made. Companies such as ours that sell directly from the mailing piece are generally selling merchandise with a low unit of sale, usually that which has a repeat business possibility. It is the repeat business from this that is so essential if the company is to continue in existence.

The McKinsey report, among many other inaccuracies, stated: “The direct mail advertiser deals with two chief variables the: accuracy of his mailing list and the power of his mailing piece." This section of the study goes on to imply that it is only necessary for a direct mail advertiser to use better list selection and improve his mailing pieces to offset postage increases.

Most direct mail advertisers are constantly doing everything they can to improve the effectiveness of their mailing pieces and to insure that the mailing lists they use are as accurate as possible.

This McKinsey & Co. study also states postage rates are not a significant enough factor to control an advertiser's decision to use the medium. Postage is of considerable importance in deciding to use direct mail. Where it now equals about 50 percent of the cost of mailing, and soon may be more than 50 percent, it has a good deal of bearing, when it is this portion of your total costs, on whether or not direct mail can be used.

If all controllable costs of a mailing are as low as they can be and still do a proper sales job, increases in postage can change the cost per thousand mailings to the point that this sales job can no longer be done.

It is this very fact, that postage is such a major factor in the decision to use direct mail, that the business of our company has been reduced and that our merchandise business no longer exists. Since we are so vitally concerned with these cost elements of direct mail, many people would naturally ask why we don't increase our subscription rate to cover these additional costs. On the surface, this seems like an ideal solution—until it is tried.

We have for years tried everything under the sun we could think of to secure orders at a higher rate. We have tried $2, $5, $1.10, $1.19, $1.25—most any price and term combination you can think of. We have always, without exception, ended up with more net revenue per dollar spent when we are asking for $1 trial subscription than with any other combination.

Because of this, we are unable to absorb the higher costs. Our only choice is to reduce volume, as we have done in the past.

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We have reduced our employment by 50 percent, we have cut our circulation one-third, and we pay into the Government considerably less money today than we have in the past-all of this because of past increases.

Future increases won't change things.
The CHAIRMAN. Are there any questions of Mr. Tillotson?
If not, we thank you very much, Mr. Tillotson.

The CHAIRMAN. The next witness is Mr. H. W. Schlosser, Western Auto Supply Co., of Kansas City, Mo.

STATEMENT OF HARRY W. SCHLOSSER, VICE PRESIDENT, WESTERN

AUTO SUPPLY CO., KANSAS CITY, MO.

Mr. SCHLOSSER. Mr. Chairman and members of the committee.

I am Harry W. Schlosser, vice president of Western Auto Supply Co., Kansas City, Mo.

Western Auto Supply Co. acts as a wholesaler for more than 3,680 independently owned and operated Western Auto dealer stores in 48 States, including Alaska and Hawaii.

In addition to this, Western Auto owns and operates more than 400 retail stores in principal cities throughout the United States.

In this prepared statement supplied this committee, I have incorporated a list of Western Auto dealers and the towns in which they operate their own retail businesses.

While these stores operate under the name Western Auto, they sell more than 14,000 items used by the average family. Their merchandise includes a full line of private brand household appliances, such as freezers, refrigerators, washers, dryers, ranges, and so forth, as well as power mowers, housewares, toys, fishing tackle, auto parts, tires and batteries, and many other general lines.

They are family stores in every respect. In the majority of cases they are owned and operated by a man and wife team with a limited amount of extra selling help at peak periods.

Western Auto dealers operate in small towns of the United States. Sixty-four percent are in towns with a population under 5,000; 82 percent are in towns with a population of 10,000 and under. Many draw heavily on the rural trade in the farm areas surrounding these small communities.

I would like to say also that I am unofficially representing these small businesses. They are not organized in any way, and this is their only means of representation.

While they are completely independent merchants, they receive guidance from Western Auto in the form of sales aids, centrally prepared advertising, and suggestions on effective selling methods. Because of this, I am acting as their spokesman to relay to you the information they have sent to me.

Western Auto dealers compete directly with the giants of the retail selling world: Sears, Ward's, Firestone, Goodyear, and many others, small though they may be.

Their principal selling tools are sale catalogs and sale circulars distributed by third-class bulk mail.

Here are some facts revealed in a recent poll of Western Auto dealers:

with me.

We have not had time as yet to hear from all dealers. However, 1,185 have now responded to our questionnaire, indicating a very high interest in this vital subject.

The Chairman. Do you have a copy of the questionnaire?
Mr. SchlossER. Mr. Chairman, I do not have the questionnaire

I can submit it to this committee. The CHAIRMAN. Is there any accompanying letter that you sent along with the questionnaire, indicating the kind of reply? You sent a letter along with it, did you not?

Mr. SchlOSSER. Yes, sir.

The CHAIRMAN. I would like to have the letter you sent, and also a copy of the questionnaire.

Vir. SCHLOSSER. It will be provided to you, Mr. Chairman.
The CHAIRMAN. All right, sir.
(The questionnaire and letter follow :)

WARNING!

APRIL 7, 1960. MR. DEALER: Unless you act now, you may lose the right to send circulars to your customers through the U.S. mail.

It now appears that Postmaster General Summerfield wants third-class mail destroyed. "Your circulars are mailed by third-class mail. The press has certainly given them every assistance possible in their campaign against "junk mail," as they have so viciously termed third-class mail.

Five bills were introduced last week alone that would vitually "price third-class mail out of the postal service.” As you know, you already have an increase of $5 per thousand effective July 1, 1960. The new bills would skvrocket this another $5 on January 1, 1961, and still another $5 on January 1, 1962.

This would mean $35 per thousand plus the cost of mail preparation or nearly $40 per thousand mailing cost alone to mail your most effective advertising medium.

Western Auto has volunteered to testify in your behalf before the House Post Office and Civil Service Committee to carry this fight right to Washington. We are certain that this committee wants to do what is right but they must have the facts.

I urge you to act now. Drop a note to your Senators and your Representatives today. Register your protest to these outrageous rates that mean ultimate elimination of third-class mail.

Please give us some information to help in this fight. Will you drop us a note expressing the percent of your total advertising now devoted to circulars-80 percent?--70 percent?—90 percent?

Could you use a newspaper if third-class mail was abolished? What medium would replace circulars in your case? Use the back of this letter-jot it down now and mail it to the writer today. We need your help.

H. W. SCHLOSSER,

Vice President, Advertising and Promotion. Please answer and mail to: Harry W. Schlosser, Western Auto Supply Co., 2107 Grand Avenue, Kansas City, Mo.

(circle one] I estimate circulars represented 50 percent-60 percent—70 percent-80 percent-90 percent-100 percent of my advertising during 1959. Could you use a newspaper if third-class mail was abolished? Yes o

No o
What media would you use to replace circulars?
Newspaper o

Radio o Television o Other o
Comments

Dealer name

Address.

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