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Outlook 2020: Mail and the New Marketing Economy

Jonathan Margulies, Managing Partner

19 February 2020 Universal Postal Union, Berne

About Winterberry Group

• A specialized management consultancy with deep intersecting experience in advertising, marketing, data, technology and commerce

• Helps brands, publishers, marketing service providers, technology developers, information companies and financial investors understand emerging opportunities, create actionable strategies and grow their impact and value

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Outlook 2020: Mail and the New Marketing Economy

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The Opportunities to Unlock

The Obstacles Ahead

The State of Marketing Mail

In the U.S., Direct Mail Continues to Represent One of the Largest “Traditional” Advertising/Marketing Channels

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$64.31

$47.02 $41.24

$17.33 $13.84 $12.94 $10.83 $8.59

2019 U.S. Advertising/Marketing Expenditures, By Channel (US$BB)

Linear TV Experiential/ Sponsorship Direct Mail Shopper Marketing Radio Newspaper Magazine Traditional Outdoor

Mail’s Resilience Is Grounded in Several Intersecting Factors

Highly effective in supporting new customer acquisition—particularly when scale of response is important

Deep understanding/familiarity with the channel in marketing departments

General embrace of data-driven targeting, which has served to reinforce interest in all addressable channels (especially those where audience insight is plentiful)

Proximity to the e-commerce delivery point, reinforcing consumers’ likelihood to regularly check mailboxes

Supportive demographic shifts; seniors rely on mail and represent growing share of population; millennials more likely to be “surprised and delighted” by unexpected deliveries

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Nevertheless, Direct Mail Volumes and Spending Are in Secular Decline

83.8285.53

81.1882.29

76.20 76.78$44.79 $45.05

$42.52 $42.69

$41.24 $41.48

$40.00

$41.00

$42.00

$43.00

$44.00

$45.00

$46.00

$47.00

$48.00

$49.00

$50.00

70.00

72.00

74.00

76.00

78.00

80.00

82.00

84.00

86.00

88.00

2015 2016 2017 2018 2019 2020E

Direct Mail in the United States:Volume (BB of Pieces) and Expenditures (US$BB),

2015-2020EVolume Spend

Volume CAGR-1.74%

Spend CAGR:-1.52%

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Many Factors Have Contributed to DM’s Decline;“E‐substitution” Represents Only a Modest Concern

The growth and proliferation of competing digital channels, particularly with respect to retention, loyalty, cross-promotional and transactional communications

High upfront costs associated with DM deployment (coupled with slow response cycles and disjointed attribution methodologies)

Growing sophistication with respect to use of data/targeting serving to help brands cut back on volume that would otherwise perform poorly (or be undeliverable)

General sense that “mail is dead” (even though it’s not)

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How do we make mail “digital”?

How do we make mail “digital”?

How long will mail remain

relevant as a marketing channel?

How long will mail remain

relevant as a marketing channel?

Why should we trust that younger

consumers will engage with a channel they

have not come to rely on?

Why should we trust that younger

consumers will engage with a channel they

have not come to rely on?

How long should we

expect mail to continue

delivering the ROI that it does

now?

How long should we

expect mail to continue

delivering the ROI that it does

now?

Questions from Brands, Investors Mirror Those of the Mail Community; Answers Remain Unclear

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Outlook 2020: Mail and the New Marketing Economy

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The Opportunities to Unlock

The Obstacles Ahead

The State of Marketing Mail

Competition From Digital Media May Threaten DM’s Primacy in Supporting “Targeting at Scale”

$45.05 $42.52 $42.69 $41.24 $41.48

$75.84 $96.72

$122.02 $145.28

$166.40

2016 2017 2018 2019 2020E

U.S. Direct Mail vs. Digital Advertising/Marketing Expenditures1, 2016-2020E (US$BB)

Direct Mail Expenditures Digital Advertising/Marketing Expenditures

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Digital Digital CAGR: 21.71%

DM CAGR: -2.04%

Note: 1) U.S. Digital Advertising/Marketing Expenditure includes marketer spend on Email/SMS, Display, Search, Digital-Out-of-Home, Digital Audio (Radio/Podcasts), Digital Video (OTT/Streaming, beginning in 2018), Paid Social and Influencer (beginning in 2018)

One Looming Threat: The Coming of Advanced TV/Video

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What might marketers find attractive about OTT platforms, streaming servicesand other advanced TV applications?

Access to audiences of scale

Rich, compelling content

Potential ability to segment audiences and target with rich granularity

Labor challenges stemming from a robust U.S. economy• Low unemployment and higher

minimum wage standards• Intensified competition for labor

from new industries (e.g. cannabis)

Labor challenges stemming from a robust U.S. economy• Low unemployment and higher

minimum wage standards• Intensified competition for labor

from new industries (e.g. cannabis)

The U.S. Direct Mail Services Ecosystem is Also Under Significant Stress, Owing To…

Financial struggles of largest service providers, grounded primarily in challenges associated with their non-mail commercial printing businesses

Financial struggles of largest service providers, grounded primarily in challenges associated with their non-mail commercial printing businesses

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Poisonous political climate that punishes efforts at cross-border collaboration/ manufacturing and sourcing

Poisonous political climate that punishes efforts at cross-border collaboration/ manufacturing and sourcing

The U.S. Direct Mail Services Ecosystem is Also Under Significant Stress, Owing To… (cont’d)

Intense competition for investment capital—particularly with respect to supporting technology—from higher-margin digital media

Intense competition for investment capital—particularly with respect to supporting technology—from higher-margin digital media

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"Our international footprint was a benefit at one time, but perceptions of a crisis made it difficult and a challenge over the past couple of years [to maintain Mexican operations]“*

— Rob Herman, former President, NAC

*Source: Printing Impressions (2019)*Source: Printing Impressions (2019)

“Since 2007, we have suffered 13 years of consecutive net losses, totaling $77.8 billion. Our financial challenges reflect the simple dynamic that our largely fixed and mandated costs continue to rise at a faster rate than the revenues we are able to generate in the competitive marketplace… the combination of unfavorable market dynamics, legal restrictions on price increases and cost reductions, an expanding universal service requirement and growing employee pension and health benefit funding requirements have put the Postal Service in an unsustainable financial condition.”

— United States Postal Service, 2020

“Since 2007, we have suffered 13 years of consecutive net losses, totaling $77.8 billion. Our financial challenges reflect the simple dynamic that our largely fixed and mandated costs continue to rise at a faster rate than the revenues we are able to generate in the competitive marketplace… the combination of unfavorable market dynamics, legal restrictions on price increases and cost reductions, an expanding universal service requirement and growing employee pension and health benefit funding requirements have put the Postal Service in an unsustainable financial condition.”

— United States Postal Service, 2020

Mailers Are Closely Monitoring the USPS and Its “Unsustainable Financial Condition”

Source: United States Postal Service Five-Year Strategic Plan (2020)14

The Central Dilemma: Low Postage Is Key to DM’s High ROI, But Are Current Rates Financially Sustainable?

$0.55

$0.70

$0.75

$0.79

$0.79

$1.03

United States

Australia

Canada

Germany

United Kingdom

France

Source: United States Postal Service Five-Year Strategic Plan (2020)Note: 1) Exchange rates as of 5/10/19; PPP adjustment from International Monetary Fund indexed to USD; 2) EBT margin is presented on a 5-year trailing average basis; 3) Implied contribution to pre-tax earnings per piece of mail, calculated as postage rate multiplied by 5-year average EBT margin

Any material rise in postage rates could decimate the ROI of many DM programs, accelerating a shift in spend to competing channels

3.0% $0.03

3.7%

3.7%

1.5%

(0.1%)

(6.6%) ($0.03)

$0.03

$0.03

$0.01

($0.00)

EBT Margin2Implied

Gain (Loss) Per Piece3

Cost of Postage for a Domestic Standard Letter—Adjusted for Purchasing Power Parity1 ($US)

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Outlook 2020: Mail and the New Marketing Economy

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The Opportunities to Unlock

The Obstacles Ahead

The State of Marketing Mail

Industry‐Driven Tools Emerging to Support Alignment of Mail With Digital, Other Consumer Touchpoints 

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New commercial solutions offer potential to ”retarget” consumers using direct mail, based upon observed online behaviors

Most of these tools have yet to establish large-scale proof-of-concept/profitability, but interest levels are growing

Will these tools gain critical mass?Will they be viable in a world of heightened data privacy regulation?

Informed Delivery linked to

mailer landing pages

Informed Delivery linked to

mailer landing pages

Grow use cases of centralized

portals for bill payment,

government services, etc.

Grow use cases of centralized

portals for bill payment,

government services, etc.

Products that provide for more predictable in-

home dates

Products that provide for more predictable in-

home dates

Products that expand support

for unique formats

Products that expand support

for unique formats

Post‐Driven Products Could Help Commercial Customers Better Link “Awareness” to Action

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Will these products help drive commercial outcomes?What will posts have to do to drive consumer adoption?

Mail’s Basic Appeal to Marketers is Rooted in Elements That Shouldn’t be Reconsidered…

TactilityTactility Proximity to Ecommerce

Delivery Points

Proximity to Ecommerce

Delivery Points

“Element of Surprise”

“Element of Surprise”

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… Though Incremental Improvement is Always Welcome

MeasurabilityMeasurability

What mailers seek:Solutions to help better attribute the value and efficacy of their DM efforts (ideally integrated with other measurement tools)

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For the First Time in Years, Mail May Be Well Positioned to Capitalize on Threats to DigitalMedia Deployment

Established best practices with respect to data collection, usage and sharing• Particularly important as data privacy

regulation plays a more prominent role in dictating how digital marketing communications are orchestrated

Established best practices with respect to data collection, usage and sharing• Particularly important as data privacy

regulation plays a more prominent role in dictating how digital marketing communications are orchestrated

Marketer concerns about the dominance and outsize influence of digital “Walled Gardens” such as Google and Facebook

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Despite challenges, still supported by a well-established and (generally) trustworthy mailing industry/supply chain

Ultimately, Mail’s Role in an Evolving Marketing Economy Will Be Grounded in Most Important Intangible Asset: Trust

Consumers are highly familiar with the channel

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Thank you.Jonathan Margulies, Managing Partner

jmargulies@winterberrygroup.com

+1 (212) 842 – 6031

winterberrygroup.com115 Broadway, 5th Floor

New York, NY 10006 USA

@WinterberryGrp