# Presentation: 842740

## “The Future Of Packages”

Jim Cochrane
Manager, Package Services

***Jim Cochrane***
***Manager, Package Services***

## Agenda

**The New Law **
**Re-Designing Products**
**Transformation Strategies**

**Agenda**

## Market is generally soft both domestically and internationally

- “It seems to us that the economy is headed for a soft landing”
-  — Rosalind Wells, Chief Economist for the Retail Federation
- “We anticipate another good year despite a slowing U.S. economy,"
** **—  UPS' Chief Financial Officer Scott Davis.
- “The outlook among the parcel carriers is that domestic  economic growth is slowing in the first half of 2007”
- — William Greene, Financial Analyst for Morgan Stanley

- Market Update

## Highest Published Increases In Over 10 Years

- Lightweight And Residential Continues To get Hit Heavier Than Published Rate Increase
- Subtle But Significant Changes In Discount Methodology
- Surcharges, New Ones And How They Are Enforced Continues To Drive Revenue
- Elimination Of On-Demand Rates
- Adjusted Net Minimum

- Market Update

## B2C Shipments On The Rise

**B2C Shipments On The Rise**

- Market Update

## B2B Is Stagnant

As Noted - B2C Is Growing

Packages Are Getting “Lighter”

Online Retail Growth Is Replacing Manufacturing Segment Decline

- As Noted - B2C Is Growing
- Packages Are Getting “Lighter”
- Online Retail Growth Is Replacing Manufacturing Segment Decline

- What’s Fueling The Growth?

- Market Update

## Over 70% Of Packages Travel Less Than 700 Miles

Significant Shift From Air To Ground

Accessorial Surcharges Are A Strategy To Generate Revenue As Well As Yield

It Also Allows Our Competitors To Suppress Their Actual Rate Increases

- Significant Shift From Air To Ground
- Accessorial Surcharges Are A Strategy To Generate Revenue As Well As Yield
- It Also Allows Our Competitors To Suppress Their Actual Rate Increases

- Market Update

## Total Express Mail Volume 

- The Right Products & Features

- Total Express Mail Volume

**FY 2002**

**2003**

**2004**

**2005**

**2006**

**2007**

## Total Priority Mail Volume 

**FY 2002**

**2003**

**2004**

**2005**

**2006**

**2007**

- Total Priority Mail Volume

- Market Update

## Total Package Services Volume 

- Total Package Services Volume

**FY 2002**

**2003**

**2004**

**2005**

**2006**

**2007**

##  Service
 Convenience
 Price
 Visibility

-  Convenience
-  Price
-  Visibility

| Segment | Service | Convenience | Price | Visibility |
| --- | --- | --- | --- | --- |
| National/Strategic | 1A | 4 | 1 | 3 |
| Premier/ Large | 1A | 3 | 1 | 4 |
| Consumer/SMBS | 1A | 1 | 4 | 3 |

- Customer Buying Criteria

- Market Update

## Reasons Shippers Change Carriers

- * Morgan Stanley/ Parcel 2006 Annual Best Practices Survey

- Market Update

## Shippers Rated Carriers Less Favorably

| Biggest Complaint About Primary Carrier * |  |
| --- | --- |
| 1 | Pricing |
| 2 | Surcharges |
| 3 | On-Time Delivery |
| 4 | In-Transit Damage |
| 5 | Difficulty Working With The Carrier |

- * Morgan Stanley/ Parcel 2006 Annual Best Practices Survey

- Market Update

## In Addition To Base Rate Increases, Competitors Continue To Add And Raise Rates On Surcharges

- Note: The table above does not include fuel surcharges.
- 1 Based on Competitor’s accessorial charges published before each rate change.

- Surcharges Are Intended To Increase Package Contribution - They Are Rarely Discounted

**Calendar Year**

**Approximate **

**Percent Change**

**In Competitor’s Total **

**Average **

**Surcharge **

**Amounts**

**Increase In **

**Reported Number **

**of Competitor’s**
** ****Surcharges**

**1**

- 2003/2002

- 2.48%

- 3

- 2004/2003

- 18.94%

- 7

- 2005/2004

- 14.87%

- 3

- 2006/2005

- 15.46%

- 3

| 2007/2006* | 19.34% | 4 |
| --- | --- | --- |
| 2007/2002 | 109.29% | 20 |

- * Estimate

- Market Update

## Competitive Prices

| Competitor’s Rate Increases 2002 - 2007 |  |  |  |
| --- | --- | --- | --- |
|   | Published | Actual
Commercial | Actual
Residential |
| YEAR | Increase |  1 - 5 lbs. |  1 - 5 lbs. |
| 2002 | 3.50% | 3.90% | 4.08% |
| 2003 | 3.90% | 4.67% | 4.64% |
| 2004 | 1.90% | 1.91% | 6.06% |
| 2005 | 2.90% | 4.71% | 5.80% |
| 2006 | 3.90% | 4.57% | 7.57% |
| 2007 | 4.9% | 5.50% | 5.56% |
| TOTAL | 22.89% | 28.02% | 37.85% |
| AVERAGE | 3.82% | 4.67% | 6.31% |

**Notes:**
In order to set competitive prices, you need to understand how the market is actually pricing. As part of that effort, we have researched the “real” pricing trends in the market. 
The first column reflects the “headline” increase that have been published every December. For 2005 the “headline” was: “UPS raises rates 2.9%, other carriers expected to follow.” The next two columns reflect the reality of the increase. As you can see this is not an isolated year, but a 4 year trend, that we do not expect to change. 
At the same time this was happening the number of surcharges has increased from 21 to 42, and the surcharge for a residential package going to an extended rural area has gone from $2.00 in 1999 to $3.50 in 2004.

## Net Minimums Reduce Discount & Drive Up Cost

| 2007 Competitor Ground Commercial with 20% Discount - Actual Discounts |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
| Wgt | Zone 2 | Zone 3 | Zone 4 | Zone 5 | Zone 6 | Zone 7 | Zone 8 |
| 1 | 0% | 2% | 5% | 9% | 13% | 15% | 17% |
| 2 | 1% | 7% | 15% | 17% | 20% | 20% | 20% |
| 3 | 2% | 11% | 19% | 20% | 20% | 20% | 20% |
| 4 | 5% | 14% | 20% | 20% | 20% | 20% | 20% |
| 5 | 11% | 15% | 20% | 20% | 20% | 20% | 20% |

- Competitive Prices

## Competitive Prices

| Weight/ Zone | L,1,2 | 3 | 4 | 5 | 6 | 7 | 8 |
| --- | --- | --- | --- | --- | --- | --- | --- |
| Flat |  $       (2.00) |  $        (2.10) |  $        (2.23) |  $       (2.41) |  $       (2.65) |  $       (2.73) |  $        (2.84) |
| 1 |  $       (2.00) |  $        (2.10) |  $        (2.23) |  $       (2.41) |  $       (2.65) |  $       (2.73) |  $        (2.84) |
| 2 |  $       (1.90) |  $        (2.15) |  $        (2.00) |  $       (1.73) |  $       (1.95) |  $       (1.68) |  $        (1.65) |
| 3 |  $       (1.14) |  $        (1.56) |  $        (0.65) |  $       (0.01) |  $       (0.06) |  $        0.45  |  $         0.66  |
| 4 |  $       (0.65) |  $        (1.13) |  $          0.11  |  $        0.93  |  $        1.01  |  $        1.80  |  $         2.14  |
| 5 |  $       (0.40) |  $        (0.66) |  $          0.85  |  $        1.97  |  $        2.18  |  $        3.12  |  $         3.63  |
| 6 |  $         0.03  |  $        (0.37) |  $          1.66  |  $        2.44  |  $        2.18  |  $        3.15  |  $         3.53  |
| 7 |  $         0.26  |  $        (0.02) |  $          2.52  |  $        3.02  |  $        2.94  |  $        4.25  |  $         5.04  |
| 8 |  $         0.66  |  $          0.40  |  $          3.36  |  $        3.68  |  $        3.71  |  $        5.20  |  $         6.30  |
| 9 |  $         1.11  |  $          0.85  |  $          4.24  |  $        4.31  |  $        4.53  |  $        6.10  |  $         7.61  |
| 10 |  $         1.42  |  $          1.30  |  $          5.03  |  $        4.97  |  $        5.38  |  $        6.89  |  $         8.80  |
| 11 |  $         1.83  |  $          1.64  |  $          5.67  |  $        5.60  |  $        6.26  |  $        7.59  |  $         9.92  |
| 12 |  $         2.22  |  $          1.99  |  $          6.27  |  $        6.21  |  $        7.16  |  $        8.29  |  $       10.97  |
| 13 |  $         2.57  |  $          2.34  |  $          6.91  |  $        6.90  |  $        8.02  |  $        9.03  |  $       12.04  |
| 14 |  $         3.00  |  $          2.70  |  $          7.52  |  $        7.48  |  $        8.69  |  $        9.69  |  $       13.09  |
| 15 |  $         3.39  |  $          3.04  |  $          8.15  |  $        8.16  |  $        9.42  |  $      10.38  |  $       14.22  |
| 3.50% | FUEL SURCHARGE INCLUDED |  |  |   |   |   |   |
| $1.85  | RESIDENTIAL SURCHARGE INCLUDED / NO DISCOUNT |  |  |  |   |   |   |
|   |  USPS Rate Advantage  |  |   |   |   |   |   |
|   |  Competitors Rate Advantage of $1.00 or Less  |  |  |   |   |   |   |

- 2006 Priority Mail Vs 2007 Competitor’s Ground Residential

## Competitive Prices

| Weight/ Zone | L,1,2 | 3 | 4 |  | 5 |  | 6 | 7 | 8 |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Flat |  $ (1.40) |  $  (1.50) |  $  (1.63) |  |  $   (1.81) |  |  $  (2.05) |  $   (2.13) |  $  (2.24) |
| 1 |  $ (1.40) |  $  (1.50) |  $  (1.63) |  |  $   (1.81) |  |  $  (2.05) |  $   (2.13) |  $  (2.24) |
| 2 |  $ (1.45) |  $  (1.30) |  $  (1.40) |  |  $   (0.73) |  |  $  (0.69) |  $   (0.53) |  $  (0.40) |
| 3 |  $ (0.99) |  $  (0.66) |  $  (0.50) |  |  $     0.89  |  |  $   1.19  |  $    1.55  |  $   1.81  |
| 4 |  $ (0.35) |  $    0.17  |  $    0.56  |  |  $     2.43  |  |  $   3.06  |  $    3.55  |  $   4.09  |
| 5 |  $ (0.00) |  $    0.79  |  $    1.50  |  |  $     3.77  |  |  $   4.68  |  $    5.37  |  $   6.13  |
| 6 |  $   0.48  |  $    1.23  |  $    2.56  |  |  $     4.94  |  |  $   4.68  |  $    6.00  |  $   6.63  |
| 7 |  $   0.76  |  $    1.68  |  $    3.47  |  |  $     5.72  |  |  $   5.69  |  $    7.40  |  $   8.54  |
| 8 |  $   1.01  |  $    2.25  |  $    4.26  |  |  $     6.53  |  |  $   6.71  |  $    8.65  |  $ 10.25  |
| 9 |  $   1.26  |  $    2.85  |  $    4.69  |  |  $     7.36  |  |  $   7.78  |  $    9.85  |  $ 12.01  |
| 10 |  $   1.42  |  $    3.40  |  $    5.13  |  |  $     8.22  |  |  $   8.88  |  $  10.99  |  $ 12.40  |
| 11 |  $   1.58  |  $    3.89  |  $    5.62  |  |  $     9.05  |  |  $ 10.06  |  $  11.14  |  $ 12.72  |
| 12 |  $   1.77  |  $    4.34  |  $    6.02  |  |  $     9.66  |  |  $ 11.26  |  $  11.34  |  $ 13.07  |
| 13 |  $   1.97  |  $    4.69  |  $    6.51  |  |  $   10.30  |  |  $ 11.72  |  $  11.63  |  $ 13.19  |
| 14 |  $   2.20  |  $    5.00  |  $    6.97  |  |  $   10.98  |  |  $ 11.99  |  $  12.39  |  $ 13.74  |
| 15 |  $   2.39  |  $    5.34  |  $    7.45  |  |  $   11.21  |  |  $ 12.07  |  $  11.98  |  $ 13.67  |
| 3.50% | FUEL SURCHARGE INCLUDED |  |  |  |   |  |   |   |   |
| $1.85  | RESIDENTIAL SURCHARGE INCLUDED / NO DISCOUNT  |  |  |  |  |  |   |   |   |
|   |  USPS Rate Advantage  |  |  |   |  |   |   |   |   |
|   | Competitors Rate Advantage of $1.00 or Less  |  |  |  |  |   |   |   |   |

## The New Law & Package Business

## 
First-Class Mail 
Periodicals
Standard Mail
Single-Piece Parcel Post
Media Mail
Bound Printed Matter
Library Mail
Special Services
Single-Piece International

- First-Class Mail
- Periodicals
- Standard Mail
- Single-Piece Parcel Post
- Media Mail
- Bound Printed Matter
- Library Mail
- Special Services
- Single-Piece International

- Priority Mail
- Expedited Mail
- Bulk Parcel Post
- Bulk International Mail

** ****Competitive – 11%**

**Market-Dominant – 89%**

***FY 2005 Revenues***

**Two Product Categories**

- The New Law & Package Business

**Notes:**
 International mail now subject to PRC regulation
 Commission has the power to move products between the two categories

## Pricing- Market Dominant Products

- Future Price Increases Tied To Consumer Price Index (CPI) By Class
- USPS To File With PRC 45 Days Before New prices Become Effective
**Implications:**
- Annual, predictable Increases
- Productivity Improvements Are critical, Since Costs Like Fuel And Health Benefits May Rise At Rates Above CPI

- The New Law & Package Business

## Pricing- Competitive Products

- New World- Allows The Postal Service To Compete Fairly In The Market Place.
- Must Cover Costs
- PRC Decides Cost Coverage & target Contribution To USPS
- Governors Set Prices
- Implied Income Tax To Postal Service MD Fund
**Implication:**
- Ability To Respond To The Marketplace By Creating Products And Pricing That Better Meet Customer Needs.

- The New Law & Package Business

## Re-Designing Products

## Japan Shipping Options – 3 lbs.

| Services (today) | Range (Days) | Weight | Price | Features |
| --- | --- | --- | --- | --- |
| GXG (Doc) | 2-3  | Up to 70 lbs | $55.75 | Guaranteed
 Track and Trace
Insurance - $100.00 |
| GXG (Non-Doc) | 2-3  | Up to 70 lbs | $61.25 | Guaranteed 
Track and Trace
Insurance - $100.00  |
| Global Express Mail |  3-5  |  Up to 70 lbs | $31.15 | Guaranteed – 5 Countries
Tracking (major countries)
Insurance $100.00 |
| Airmail Parcel Post | 4-10 | Up to 70 lbs | $25.80 | Indemnity up to $270.00
Insurance available
Limited Visibility |
| Economy Parcel Post | 28-42 | 5 to 70 lbs | $24.50 | Indemnity up to $270.00
Insurance available 
No Visibility |
| Global Priority Mail | 4-6 | Up to 4 lbs | $23.25 | <24 inches
No Insurance
No Visibility |
| Airmail Letter Post | 4-7 | Up to 4 lbs | $21.40 | < 24”
No Insurance 
No Visibility |
| Economy Letter Post | 28-42 | 1 lb to 4 lbs | $9.55 | < 24”
No Insurance 
No Visibility |

- The Right Products & Features

**Notes:**
If you had a three pound package to send to Japan,...we would offer you the following choice:

## Product Enhancements 

| Old Services |
| --- |
| Global Express Guaranteed (doc) |
| Global Express Guaranteed (non-doc) |
| 
 |
| Global Express Mail |
|  |
| Airmail Parcel Post |
| Economy Parcel Post |
| Global Priority Mail |
|  |
| Airmail Letter Post |
| Economy Letter Post |

| Services Today |
| --- |

- Global Express Guaranteed

- Express Mail International

- Priority Mail International

- First Class Mail International

- Product Enhancements

- The Right Products & Features

## Simple, Relevant Product Offering 

- Simple, Relevant Product Offering

- Leverage Domestic Supplies
- New Flat Rates
- Express Mail International Flat Rate Envelope
- Priority Mail International Flat Rate Envelope
- Priority Mail International Flat Rate Boxes

- Picture of new boxes

- The Right Products & Features

## Simple Relevant Product Offering

| Service | FY2005 Revenue | FY 2005 Volume | Strategy (Migration Flow) |
| --- | --- | --- | --- |
| Economy Parcel Post | $80M | 3M | Eliminate
Migrate to Air Parcel Post |
| Economy Publishers | $18M | 14M | Eliminate
Migrate to ISAL or Air Letter Post |
| Economy Books and Sheets | $1.9M | 493K | Eliminate
Migrate to ISAL or Air Letter Post |
| Economy Letter Post | $23M | 4M | Eliminate
Migrate to air letter post
Global Priority Mail and Air Surface Lift |
| Economy Registered Service | $225K | 30K | Migrate to air registered service |
| Recorded Delivery | $3K | 1K | Eliminate |
| Aerogrammes | $174K | 246K | Migrate to Air Letter Post
 |

- The Right Products & Features

**Notes:**
Economy products are dropping like a rock, we probably have 10 countries that when you add up all the economy volume, generate enough volume for a weekly sail, at 10k lbs. per day. They are neither profitable or customer friendly. A true slippery slope, the more we lose the more cost the items left carry. We have 2 bldgs, that do nothing but these products (JC and OAK) . Go thru chart.

## 
Flat Rate Box
$577 Million Since Launch
$227 Million In Sales FY 07
Flat Rate Prepaid Envelope
 Growing Adoption
Over $34 Million Since Launch
Priority Mail Shoebox
Growing Mid-Market Segment
 Regular And eBay Versions

- Flat Rate Box
- $577 Million Since Launch
- $227 Million In Sales FY 07
- Flat Rate Prepaid Envelope
-  Growing Adoption
- Over $34 Million Since Launch
- Priority Mail Shoebox
- Growing Mid-Market Segment
-  Regular And eBay Versions

- The Right Products & Features

**Notes:**
2.5 Million Shoeboxes from launch on May 1 through July 3

## Customized & Co-Branded Packaging

- New Parameters Are Being Set:
- Customized Packaging-  Was $500,000  Will Be lowered To $250,000
- Co-Branded Packaging-  Was $500,000 Will Be Lowered To $250,000
- Example: Flat Rate Box #2  Minimum Quantity Would Be 12,000 Boxes Equivalent To Around 8 Pallets

- Minimum Acceptance Amounts For Co-Branding Any Of The Standard Priority Mail and Express Mail Products

## The Last Major Change Was in 1995

Changed the Eagle on the Logo

4 Color Process to 2 Colors

We’ve Changed 

Fresher, Cleaner Look 

Dual Use: Domestic and International

Reduced Supply Chain Management Costs

Certified Cradle to Cradle

- Changed the Eagle on the Logo
- 4 Color Process to 2 Colors
- We’ve Changed
- Fresher, Cleaner Look
- Dual Use: Domestic and International
- Reduced Supply Chain Management Costs
- Certified Cradle to Cradle

- The Right Products & Features

**Notes:**
We partnered with Joanne Giordano and Thad Dilley from Public Affairs and Communications...

## Significant Steps Were Taken To Improve Environmental Characteristics

- Worked with Vendors to Analyze our Packaging Composition
- Changed Inks, Chemicals and Adhesives Used in Manufacturing
- Redesign for Simplicity and to Minimize Ink
- Reduced Label Dependence
- Significantly Reduced Toxins, with No Increase in Cost.

- The Right Products & Features

## Earned Cradle to Cradle Certification

- Materials Earned Cradle to Cradle Certification for Eco-effectiveness
- First And Only Firm to Receive This Endorsement for Packaging
- Packaging to Feature Cradle to Cradle Logo

- The Right Products & Features

**Notes:**
Cradle To Cradle
About William McDonough:

Leading Thinker in the Field of Sustainable Design...
Time Magazine “Hero for the Planet”
Presidential Award for Sustainable Development (1996)
Presidential Green Chemistry Challenge Award (2003)
National Design Award (2004)
Author: Cradle to Cradle – Remaking the Way We Make Things

## The Right Products & Features

- Old Packaging Design

- New Packaging Design

## The Right Products & Features

**Old Packaging Design**

## Transformation Strategies

## Customized & Co-Branded Packaging

- New Parameters Were Set:
- Customized Packaging - Was $500,000  Will Be lowered To $250,000
- Co-Branded Packaging - Was $500,000 Will Be Lowered To $250,000
- Example: Flat Rate Box #2  Minimum Quantity Would Be 12,000 Boxes Equivalent To Around 8 Pallets

- Minimum Acceptance Amounts For Co-Branding Any Of The Standard Priority Mail and Express Mail Products

- The Right Products & Features

## Revenue Growth Online Postage

- Millions

- Improve Convenience

## Carrier Pickup Volume

**APO/FPO**

**SCAN**

**3.7 Million**

- Improve Convenience

## ONE Barcode

- Is Scanned for All
- Packages

- Shipment Confirmation Acceptance Notice

- Improve Convenience

## E-VS Update

- 9 Live Shippers
- 18,555 Manifests Submitted YTD
- 61 M Parcels
- $74.8 M Revenue
- Extended Mandatory Implementation Date
- Technical Support

- Improve Convenience

## Time In Transit

- We Know That World Class Service Is Essential
- Service Scores Are The Highest They Have Ever Been
- Parcel Select
- Service Is Already At World Class Levels.
- DHL/UPS/FedEx Last Year Trusted USPS To Deliver Over 300M Packages

- Improve Customer Service

## Package Visibility Project - Goals

- One Intelligent Bar Code On Every Package
- End To End Visibility On Every Package
- Bar Codes That Tell Us More About The Package And Shipper
- Intelligence From Bar Codes Is Used To Manage And Grow Our Business

- Improve Visibility

## Where Are We?

-  Intelligent Mail Device (IMD)
- 210,000 Of 303,000 Deployed Through April 07-Full Deployment Sept 07
-  APPS
- Completed Deployment Of 75 Machines
- Lifting Images Now – In PTS
-  60% Of PM Goes Across APPS
-  SPBS
-  44 Retrofitted With Barcode Scanners
-  Total Of 226 Will Be Installed By End Of  FY07

-  Surface Visibility Will Nest These Events in PTS

**Intelligence/Visibility**

## Make It Intelligent

- ContainerLoad

- Surface Visibility

- Data Collection

- Improve Visibility

**Notes:**
Surface Visibility tracks 5 visibility points:
The first visibility point is Container Loading. Handling Units will be tracked as they are loaded into containers. The scanner will alert the user if a unit is being placed into the incorrect container.
The second visibility point is Trailer Loading. Containers will be scanned as they are loaded onto trailers. The scanner will again alert the user if the container is mis-loaded, and will calculate actual trailer utilization levels. 
The third visibility point is Trailer Departure time. At this point, an electronic manifest will sent to the destinating plant. 
The fourth visibility point is Trailer Arrival time. This will be used to track contractor on-time performance. 
The fifth visibility point is the unloading of both USPS and Customer Trailers. This will provide the unloading time so container performance can be determined and provided to our large mailers.

## We Will Continue:

- To Design

- To Enhance

- To Research

- To Educate

- To Create A Marketplace Position That Is Compelling And Meets Customer Needs