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Delivering For The Changing

World of Commerce: Economic and Network Considerations

Tim Walsh

Vice-President

Corporate Affairs

Pitney Bowes Inc.

Conference of Commonwealth Postal Administrations

London

25th October 2014

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• Huge diversity of 53 universal postal services providers spanning Africa, Asia,

Caribbean, Americas and Europe – fully 25% of all UPU members;

• Commonwealth Posts range from the very largest (Royal Mail, Canada Post,

Australia, New Zealand…) to the smallest (St Lucia, Tuvalu, Malta… ) with per

capita mail volumes varying from fewer than 10 to around 300 items p.a.;

• The 53 Posts serve the needs of business (micro, SME and large), government and

citizens, providing services to 2.2 billion people in developed and developing

economies valued at over $12 trillion;

• Over last 50 years The Commonwealth has transformed from a group of former

colonies into a modern international association of states with a focus on a joint

political, economic and social development agenda – CCPA, too, has modernised

under the leadership of David Roberts and Royal Mail to address current postal

challenges and opportunities;

A Commonwealth of Diverse Posts

How do posts remain relevant in the new world of digital

commerce and continue to contribute to the economic and

social development of the countries that they serve?

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Agenda

Economics of Commerce

The Changing Face of Postal Commerce:

Letters Commerce: 11th - 20th Century;

Parcel Commerce: 19th Century;

Automating Postal Commerce;

Digital Commerce and Network Implications

Conclusion

Key focus is how networks were shaped, and reshaped, as the

nature of commerce changed and the challenge that digital

commerce represents for future network evolution functionalities;

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Economics of Commerce

Industry is about the production of goods, commerce about their exchange (“the

superfluous for the necessary”);

There is profit in production, and in commerce or exchange:

efficient matching of units to needs in timely manner (also, in use e.g. water);

Business and trade is determined by costs of production and the costs of exchange:

bringing goods to right place, time and person in the market:

Postal services are intermediate inputs to production and any reduction in the cost of these

will increase the effectiveness and efficiency of commerce overall;

Economists characterize commerce as operating in “two-sided markets”: where the

volume of transactions is sensitive to the distribution of value (costs) between the two

sides of the exchange: merchant/sender and buyer/recipient (Rochet and Tirole, 2004);

Commerce serves two distinct types of customers whose joint participation both forms

the exchange, and makes the platform on which the exchange takes place, valuable:

Posts now compete with multiple platforms for commerce;

Commerce: “exchange of merchandise or services, especially on a large scale” (Oxford

English Dictionary), informed by common principles irrespective of the nature platform that

commerce is forged….

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Principles of Commerce: Customer and Merchant Perspectives

Dimension Customer Perspective Merchant Perspective

Integrity Has information I transmitted or

received been altered? Is the

information correct up to date? Can I

trade based on this information?

Is my data on the network (post, website)

unalterable, without authorisation? Is data

being received from customer valid? Is the

information current?

Non-

repudiation

Can a party to an action with me deny

having taking that action?

Can a customer deny ordering products?

Authenticity Who am I dealing with? How can I be

assured that the person or entity is who

they claim to be?

What is the real identify of the customer?

Confidentiality Is the transaction safe. Can someone,

other than the intended recipient, read

my messages? Inviolability principle

Are messages or confidential data accessible

to anyone other than those authorised to

view them?

Privacy Can I control the use of information

about myself transmitted to a merchant?

What use, if any, can be made of personal

data collected as part of the transaction? Is

the personal information of customers being

used in an unauthorised manner?

Availability Can I get predictable access to the

goods, domestic and cross-border

Is my information available to customers

(postal QofS, operational website)?

End-to-end Are all steps of the transaction

controlled. Am I assured that I will

receive the order in a timely and

affordable manner?

How do I integrate physical delivery options

to my offer and what other solutions to I need

to support despatch and receipt processes?

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Communications

Goods (Parcels)

Payment (Funds)

Business Household/

Delivery

Point

Postal Infrastructure Services and Physical Commerce

• Postal networks opened under pressure from merchants to access the intermediary

functions performed by letter mail services, linking businesses to consumers;

• Over time, posts evolved to match the changing needs of physical commerce – local,

national, cross-border; mail and parcels; payments and basic financial services;

• As the nature of commerce evolved so too did the shape and functionality of postal

networks - where state networks didn’t perform in terms of reliability or efficiency

policy-makers typically intervened to set standards and drive up performance;

• As a platform for commerce, focus was historically only on one-side of the market

(senders or the paying customer only);

Origin of modern postal networks lie in its state-sponsored

communications and intelligence functions;

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Geniza Letters: Commerce Across 11th Century Medieval Islam

30,000 Geniza letters record the dependence of 11th century

Medieval Islamic commerce upon mail across the Mediterreran

and modern-day Egypt, Israel, Palestine, Syria and the Levant

Letters, were “ephemeral but central” to intra-regional

commerce;

Projected merchant’s authority over goods and money that travelled

independently across geographies;

Functions of commerce on the face of the letters: maintaining

relationships, building trust, access to market information, selling,

record of commitments, agent management, and payment;

While the “broad boundaries” of commerce were defined by the

letter, its effectiveness was limited by distribution (shipping)

constraints - commerce was only as vibrant as the networks on

which it operated (2012:91) ;

Merchants had more confidence that their letter would arrive

than their goods – and preferred parcel networks characterised

by direct despatch and receipt;

Goldberg, J.L. (2012). Trade and Institutions in the Medieval Mediterreran, CUP

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Waves of Network Innovation to Support Letters Commerce

*In 1702 merchants were advised to cut bank notes in half with each half sent by a separate post. Only one robbery was

attempted on the new mail coaches.** The regularity of despatch ensured that economic news was never delayed, preventing

abusive arbitrage by merchants trading at old prices.

1500s: commercial news letters for inland trade used the mail; Dover became a key

post-road for international reach as trade with Europe grew;

1635: Charles I opened Royal Mail to the public, stimulating commerce but also driving

change to the network on which it depended:

1660: media distribution spread economic news at high speed, including exchange

rate and commodity prices (Starr, 2004:31);

1661: First date stamp to assure that mails were passed on promptly;

1680: Dockwra Penny Post grew in the major towns such was demand from

business - mail had become a key channel for remittances;

1720s: More frequent despatches; better reliability by removing errant “postboys”;

Ralph Allen’s 1720 “cross-post” reform to enhance network ubiquity & standards;

1760s: Regular packet service between England and USA for cross-border trade;

1784: When highway robbery threatened the security of commerce* mail coaches were

introduced to increase speed/security (including an armed guard):

Merchants’ trust in the network was critical to its growth (John, 1995:84)**;

1794: Bulk business mail growth: on one day in Oct 100,000 bankers’ letters passed

through the London PO – putting pressure on revenue collection….

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The Emergence of Parcel Commerce

Outdated payment methods impeded trade and business (Hey, 1989:68) leading to

1840 Penny Black, and introduction of PPI for commercial mail in 1850s:

Hill’s Penny Black stimulated advertising by merchants in the post (circulars)

such that by 1883 there was strong demand for a Parcel service;

Blind PMG of the British Post Office, Henry Fawcett saw that Royal Mail could be

an engine for “expanding trade” through mail order, not just correspondence:

fierce resistance from those who viewed the Post Office’s “honourable” role in

delivering letters threatened by “puffing tradesmen”, and feared he was converting The Post Office into “… a kind of flying bazaar”;

Fawcett made operational investments to compete with the balkanised railway

companies:

• improve delivery service levels;

• focused on the needs of merchants;

• adapted operational networks to support the upstream dispatching businesses;

• As a result, in the UK (though not in USA where UPS created Parcel commerce in

1907) “letter carriers” became “postmen”;

• Throughout 20th century posts moved to “hub and spoke” networks allowing the

automation of concentrated volumes, and approval of technology to aid mail

preparation/payment by mailers;

• Posts were early adopters of computers - but it was US companies which

exploited jet engine developments in 1960s to create express segment ;

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Scale of Digital Globally:

3.7bn people have access to the internet; 1 billion e-shoppers globally, spending

$1.5 tr in digital purchases of goods physically shipped; $140bn digital advertising

spend (Google 30% share);

Commerce is Mobile:

75% of mobile users shop with their mobile device; 15% of all online sales is m-commerce;

74% of smartphone owners use location-based services;

Physical and Digital Are Complementary:

86% of marketers say that online combined with offline as part of one integrated campaign is

critical to long term success; Top 2 actions consumers take after receiving DM from a brand

they’re interested in: 44% visit a brand’s website; 34% search online for more information;

28% more spend on websites by those customers who have received a catalogue than those

who did not; globally, each day customs’ officers clear 1 bn international mail items;

Physical Processes Remains a Constraint:

68% of shopping baskets abandoned due to delivery related concerns (price, choice, security);

22% average returns across all e-commerce merchandise categories; Only 9% of EU

consumers and 18% of retailers use cross-border e-commerce; Only 35% of cross-border

postal parcel services are tracked (premium products only)

Today: Growth of Digital Commerce

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Digital Commerce Technologies and Implications

Technology Dimensions Significance and Issues

Ubiquity – internet/web and mobile

technologies available everywhere, anytime:

work/home;

Market extended beyond traditional boundaries, temporal,

geographic, cultural, enhancing customer convenience

and reducing shopping costs. Location critical commerce

manage friction at border issues e.g. taxes;

Global Reach – across national boundaries; Seamless shopping worldwide; enabled

Universal Standards – internet standards

Common, inexpensive and global technology platform for

businesses; cyber-security, crime…

Richness – video, audio, text; social

technology enabling user content generation

and social networking

Formats integrated to provide single marketing message

and powerful customer experience; profiling and

targeting;

Interactivity – user can interact through

technology;

Consumer dialogue enhances their engagement and

makes them a co-participant in the process;

Information Density – technology reduces

information costs and raise quality;

Information processing, storage and communications

costs reduced while relevance, accuracy and timeliness

improved. Information plentiful, cheap and accurate;

Information overload; automate

Personalisation/Customisation – technology

allows targeted message to specific

groups/individuals;

Personalisation of marketing message and customisation

of products/services based on individual characteristics;

Fair use and privacy issues;

Logistics and distribution technologies to

support transaction integrity to the point of

delivery

Physical process effectively integrated to digital

technologies from the point(s) of despatch to the point(s)

of delivery; GPS, mapping etc. to optimise delivery

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Digital Commerce and Physical Integration: Five Principles To

Guide Postal Services

• View the postal service as a platform, with interfaces/access for

complementary components, to add-value to exchanges on the core

platform;

• Recognise the stronger dependency between supply and physical

distribution via deeper collaboration/integration with shippers (than ever

happened with mailers): posts as solution-providers to shippers, not

sellers of transport services;

• Greater integration across and between physical, data and payment

processes (on both outbound, inbound and returns) from shipper,

through post and their agents/partners to the recipient;

• Investment in each side of the market: Ask: what additional partners do

I need to solve sender and recipient needs?

• Competitive advantage understood product by product: apparel, books,

white goods etc. as needs (e-merchant and recipient) and costs vary

significantly – lane-based network competitiveness…;

It may not be the best network that wins, but rather the

network with the best eco-system that will win;

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Digital Commerce Likely to Shape Different Network Economics

Zero concentration Zone concentration Lane concentration

• Success in B2C delivery requires a greater understanding of the trade off between the network’s value

to shippers or parts thereof and network costs which can be highly concentrated in specific

geographies.

• Network strategy (Who are you targeting, What’s the value-proposition, how does operations support

this) and competitive advantage understood with reference to SKU product categories: apparel,

books, white goods etc. as needs (e-merchant and recipient) and costs vary significantly;

• Merchants increasingly streaming volume between two or more operators depending on the nature of

item and delivery destination, and not just the origin of the goods: shift from zero concentration to

zone or lane based delivery procurement, driven by digital Big Data…

In the old world of high per capita letter volumes, there was no serious trade off between the ubiquitous

nature of the network (everything, everywhere, everyday) and the value of specific outlets or

geographies. Scale and delivery drop density obviated the need for such a choice

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Big Digital Data Creates Real Time Network Visibility

Sensors and “internet of things” enable physical objects to collect and

communicate data via the web in real time: e-retailers have the tools to

manage carrier performance at the postcode level

Source: Metapack

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Supply Chain Innovation Is Further Driving Different Ways of

Shopping and Greater Network Competition For B2C Delivery

Ship to recipient (e.g. home delivery, PO

collection point)

Downstream Ship to

recipient (e.g. home delivery, PO

collection point)

Freight To Store (Click&Collect/BOPS)

Freight to Store (local delivery; same day)

Ship/Freight

To New Outlets

Merchant’s

Warehouse

Warehouse

Warehouse

Supplier’s

Warehouse

Message to store holding merchandise

(same day)

Store

Store

Locker or

PUDO

network

Customer

Doorstep or

delivery box

Customer

Doorstep or

delivery box

Customer

Pick Up

Customer

Doorstep

Customer

Postal routing

Best carrier service by SKU, region and lane based on

retailers’ preferences

All warehouses and drop shippers in system

Recipient collect Best option to store

B2B-Supply route (overnight)

Courier pick-up at

store (same day)

RFID enabled order management systems Message

Plus variations on the structures Message drives

pick-up

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Volume v Volatility Planning

• Unanticipated spikes in volume drive costs for the operator and risks

negative quality impacts;

• Commercial strategy and e-merchant relationships to smooth

demand and increase predictability:

• High volume, low volatility;

• High volume, high volatility;

• Low volume, low volatility;

• Low volume, high volatility;

• More effective parcel volume forecasting, including operational links

to base-load customers, and strict rules about accepting one-off peak

volumes: partnership, not a blame game;

• On both outbound and returns the coupling of IT and real-time information

to physical processes can reduce volatility and enhance the richness

(customisation, interactivity, reliability and trust) of the networks for

merchants, partners and buyers – DPD’s Predict service originally

designed as a route optimisation tool;

• Value resides in the richness of the network, not the reach/size;

How Many of These

Customers Can Your

Network Manage?

Avoid These

Flows or find

eco-system

partners which

can efficiently

consolidate

these flows for

your network

Low

High

Volatility Low High

Vo

lum

e

::::::::

::::::::

::::::::

:::::::.

: .

. .

.

. . .

Fundamental differences in economic characteristics

between mail and parcels-commerce must drive different

behaviours and mind sets;

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How Should Posts Evolve To Serve Commerce Today?

Postal/Parcel Networks Sender/

Shipper Collection Delivery Recipient

Fir

st M

ile

Bro

kers

Postal/Parcel Networks

Sorting

Delivery:

• Address availability

• Options/choice: PUDO,

boxes, doorstep;

safedrop;

• Cost variability

• GPS and data services

to merchants

Value-added delivery:

• Signature/ tracked products

• SMS pre-alert

• Confirmation

• Place

Cross-Border Frictions:

• Solutions to mitigate cross-

border barriers: customs,

info, landed costs,

Product innovation for

ecommerce streams:

• Speed

• Reliability

• Item coding for

downstream value-add

Pricing

• Pricing in elastic

markets

IT integration To Shipper Supply-Chains:

• Flexibility in collection services

• Control status/data;

• Returns management

• Open APIs, RFID, EDI messaging

Data and Predictive Analytics

• Network control

• Sender/recipient advice

Returns

• Physical item

• Data services to shippers

Demand Management

• Understand shippers’ usage

patterns, by zone, by lane;

• Network needs by SKU

categories Partnerships

• With eco-system participants

e.g. parcel brokers

Pricing Products

Physical processes integrated to ICT and real-time information from the point(s) of

despatch to the point(s) of delivery - enhance network’s richness (customisation,

interactivity, reliability and trust)

Security

Returns

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Conclusion: The Changing Face of Commerce and Postal Networks

Physical

Direct

Despatch

Electronic and

Digital Options Physical & Digital

Integration: Lane

Based

17th/ 19th Century Early 20th Century Today and Tomorrow

Hub and Spoke:

Automating The

Physical

11th Century Geniza

Cross Road

Network

and Standards

Late 20th century

Posts provide essential two-way platforms that bring buyers and sellers together to facilitate and

complete transactions, embracing a variety of physical flows – items, information and funds:

Throughout history posts have built and re-configured networks, and the functions provided to

merchants, to satisfy the key principles for effective commerce: security; regularity and

predictability of services; reach, including cross-border; trust and inviobility;

The world of commerce is changing again: Digital Commerce and its integration to physical

processes bring new challenges and opportunities:

If posts missed commerce’s need for express services in the late 1960s - losing that market

almost entirely - how should posts respond to the growth of digital commerce and its

convergence with physical processes;

Think “richness” of the network for particular SKU categories and eco-system partners;

As important as the economic issues are so to is the ability of posts to continue to fulfil the wider

social role in terms of employment, rural areas, training and development;

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Smart Secure Connected

Tim Walsh 00 44 (0)7743 840 396

tim.walsh@pb.com