General Services Administration: Information on Pricing Retail Packaging
Products (Letter Report, 07/07/1999, GAO/GGD-99-116).

The General Services Administration (GSA) sells 27 retail packaging
products, which include boxes, envelopes, and shipping sacks, to federal
agencies. The Postal Service is its largest customer. GSA is not
required to, nor does it set prices to, recover all estimated costs
associated with selling retail packaging products on an item-by-item
basis. GAO's analysis of the 27 retail packaging products shows that
GSA's prices for most of these products fell short of recovering all
estimated costs associated with each item. GAO agrees with GSA that the
method it has chosen to achieve full cost recovery is within its
discretion as long as the money obtained from all the products and
services sold under the General Supply Fund covers the fund's operating
expenses. On the other hand, a question that remains unanswered is
whether GSA should be selling the majority of its products at prices
that do not recover all selling costs. GSA's ongoing study of its stock
program may shed some light on this issue.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-99-116
     TITLE:  General Services Administration: Information on Pricing
	     Retail Packaging Products
      DATE:  07/07/1999
   SUBJECT:  Prices and pricing
	     Federal supply systems
	     Cost analysis
	     Cost control
IDENTIFIER:  GSA Retail Packaging Program
	     General Supply Fund
	     Federal Supply System

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    United States General Accounting Office GAO               Report
    to the Subcommittee on Treasury and General Government Committee
    on Appropriations U. S. Senate July 1999         GENERAL SERVICES
    ADMINISTRATION Information on Pricing Retail Packaging Products
    GAO/GGD-99-116 United States General Accounting Office GAO
    Washington, D.C.  20548 General Government Division B-281901 July
    7, 1999 The Honorable Ben Nighthorse Campbell Chairman The
    Honorable Byron L. Dorgan Ranking Minority Member Subcommittee on
    Treasury and General Government Committee on Appropriations United
    States Senate This report responds to Senate Report 105-251 on the
    fiscal year 1999 Treasury and General Government Appropriations
    Act, which directs us to examine the General Services
    Administration's (GSA) retail packaging products program.  Retail
    packaging products include items such as boxes, envelopes, and
    shipping sacks.  GSA sells 27 of these products to federal
    agencies, with the Postal Service being its largest customer.  As
    agreed with the Committee, our objectives were to determine
    whether (1) GSA is required by law to set its prices for retail
    packaging products at levels sufficient to ensure that all selling
    costs are recovered on each item and (2) GSA's selling prices for
    these items do recover all costs. GSA is not required to, nor does
    it set prices to, recover all estimated costs Results in Brief
    associated with selling retail packaging products on an item-by-
    item basis. The statutory provision related to product pricing and
    cost recovery, 40 U.S.C. 756, specifically identifies the purchase
    price, transportation, and the direct and indirect costs
    associated with contracting, handling, and distributing products
    as the costs that GSA should recover, so far as practicable,
    through its selling prices.  However, the law does not require GSA
    to use a specific method in recovering its costs or require GSA to
    establish a price for an individual product that will recover all
    of the costs associated with selling that product.  Accordingly,
    GSA officials believe that they are complying with the full cost
    recovery requirement mandated in 40 U.S.C. 756, if the revenues
    for all products and services sold through its General Supply Fund
    are at least equal to the total cost of operating the Fund.1  In
    fiscal years 1997 and 1998, GSA's audited financial statements
    showed that the Fund's revenues exceeded its operating expenses.
    Because the statute does not specify how GSA should implement full
    cost recovery, does not require that GSA must recover cost on an
    item-by-item 1 The General Supply Fund, under the control and
    direction of the GSA Administrator, is used to finance, on a
    reimbursable basis, a national supply system for federal agencies.
    This system includes four business lines, under one of which
    retail packaging products are sold. Page 1
    GAO/GGD-99-116 Retail Packaging Products B-281901 basis, and
    states that cost should be recovered so far as practicable, we
    believe the method GSA is using to achieve full cost recovery is
    within its discretion. Our analysis of the 27 retail packaging
    products indicates that GSA's selling prices for the majority of
    these products were not sufficient to ensure that all estimated
    costs associated with selling each individual item were recovered
    from the sale of these products.  Specifically, we found that the
    actual pricing markups applied to these products were usually
    lower than the individual product markups calculated by GSA's cost
    allocation model, which, according to GSA officials, is the most
    accurate estimate of how much it costs GSA to sell each item
    individually.  For example, in fiscal year 1999, the markups used
    to determine selling prices for 23 of the 27 retail packaging
    products were less than the markups calculated by the cost
    allocation model.  GSA officials told us that this is not unusual
    because their objective is to recover cost on a business line
    level and not on an item-by-item basis.  They said that they do
    not use individual product markups when establishing selling
    prices, and it is not their objective to ensure that all costs
    associated with selling each individual product are recovered from
    the sales of those products. Instead, GSA groups similar products
    into what it calls a federal supply class and applies a single
    markup to each class to determine its product selling prices. The
    federal supply class markups are determined through the use of the
    cost allocation model and the professional judgement of supply
    officials. Also, GSA officials said that even after the federal
    supply class pricing markup has been determined and the
    recommended selling price has been calculated, officials in the
    commodity center responsible for purchasing and managing a
    particular item can adjust the selling price in order to remain
    competitive.  Given this situation, the thousands of products in
    its inventory, and the needed flexibility to manage its diverse
    products, GSA pricing officials said that it would be burdensome
    and impractical to implement a system that tracks each product and
    ensures full cost recovery on an item-by-item basis. A primary
    mission of GSA's Federal Supply Service (FSS) is to ensure that
    Background    the service and supply needs of federal agencies are
    efficiently and effectively met at the least cost to the taxpayer.
    To accomplish this mission, FSS operates four business lines--
    supply and procurement, vehicle acquisition and leasing, property
    management, and travel and transportation.  These business lines
    operate under the General Supply Fund, and each is composed of
    smaller components.  For example, the Page 2
    GAO/GGD-99-116 Retail Packaging Products B-281901 supply and
    procurement line consists of three methods of supply or programs--
    schedules, special order, and stock.  This report pertains
    primarily to the stock program in which FSS purchases about 19,000
    common-use products, places them into its inventory, and then
    resells the products to federal agencies and other customers.2
    Products sold through the stock program include tools, paints,
    photocopy paper, pens, pencils, cleaning products, boxes,
    envelopes, and shipping sacks. Among the boxes, envelopes, and
    shipping sacks offered through FSS' stock program are 27 types of
    these products, which collectively are referred to as retail
    packaging products.  These products are included in 7 of the 271
    classes of products sold under the stock program.  FSS' sales of
    retail packaging products began to rise several years ago after
    the Postal Service approached GSA with a proposal to buy these and
    other products from GSA when GSA offered the best value.  In
    fiscal year 1995, FSS sold $3.4 million in retail packaging
    products to the Postal Service; and by 1998 this amount had
    increased to $6.8 million, or about 73 percent of total sales for
    these products. FSS is industrially funded, which means that
    generally the costs of the products and services sold to federal
    agencies and other customers and the costs of operating FSS'
    programs are to be recouped from the prices charged.  GSA's
    consolidated financial statements, which have received unqualified
    opinions from independent auditors, demonstrate whether revenues
    exceed expenses.  As part of the product pricing process, FSS
    considers actual costs and revenues from the accounting system,
    projected budgetary costs, and other costs, such as depreciation,
    that are associated with operating the overall Supply and
    Procurement business line and then assigns these costs to each of
    the three methods of supply--schedule, special order, and stock.
    Prices for products and services sold through each supply method
    are determined differently.  In the stock program, a major part of
    the pricing process involves the use of a computer-based model
    that calculates pricing markups for groups of products according
    to their procurement, storage, handling, and transportation costs.
    FSS centrally calculates recommended selling prices on a
    semiannual basis  for products sold through the stock program.
    The prices become effective on the first day of October and April.
    However, item managers can adjust the recommended selling price
    for any product at any time. 2 For purposes of the General Supply
    Fund, the term "federal agency" is defined in 40 U.S.C. 472 as any
    executive agency or any establishment in the legislative or
    judicial branch of the government except the Senate, House of
    Representatives, and the Architect of the Capitol.  Other
    entities, such as the Postal Service, are also authorized to
    purchase products and services from GSA. Page 3
    GAO/GGD-99-116 Retail Packaging Products B-281901 GSA operates
    four major distribution centers located in Burlington, NJ;
    Palmetto, GA; Fort Worth, TX; and Stockton, CA; and three smaller
    centers located in Franconia, VA; Chicago, IL; and Auburn, WA, to
    receive, store, and ship products purchased by federal agencies
    through the stock program.  In addition, there are 19 GSA Express
    Stores located throughout the world, where customers can purchase
    and pick up products.  In fiscal year 1998 total sales for the
    stock program were $817 million.  During this same year, retail
    packaging product sales totalled $9.3 million, and about 73
    percent of these sales were made to the U.S. Postal Service. To
    accomplish our objectives, we reviewed the applicable statutory
    Scope and                        provision, 40 U.S.C. 756, and
    GSA's pricing policy and practices relating to Methodology
    products sold by GSA through the FSS Supply and Procurement
    Program. We obtained information on how the computer model was
    used to establish product prices, including how it assigned direct
    and indirect costs associated with selling each product.  We also
    discussed the pricing and management of retail packaging products
    with GSA officials from FSS' headquarters in Arlington, VA, and
    several field locations involved in pricing or distributing retail
    packaging products to customer agencies. We did our work between
    November 1998 and May 1999, in accordance with generally accepted
    government auditing standards.  Appendix I provides more details
    about our objectives, scope, and methodology.  We requested
    comments on a draft of this report from GSA's Administrator and
    the Postmaster General.  GSA officials orally provided technical
    comments, which we incorporated in the final report.  The Postal
    Service had no comments. The statutory provision related to
    product pricing and cost recovery, 40 GSA Is Not Required to
    U.S.C. 756, does not require GSA to recover its costs associated
    with Recover Costs on an              selling products on an item-
    by-item basis and does not specify how GSA should implement full
    cost recovery.  The statute gives GSA wide latitude Item-by-Item
    Basis               in how to recover its costs.  It is GSA's view
    that as long as the revenues obtained from all products and
    services sold under the General Supply Fund cover the expenses of
    operating the Fund, GSA is complying with the law. The full cost
    recovery requirement became effective in 1988, after Congress
    amended 40 U.S.C. 756 (a) by adding language that provides for
    industrial funding of FSS and authorizes full cost recovery of the
    products and services purchased by federal agencies and other
    customers.3 3 Public Law 100-202, 101 Stat.1329-427 (1987) amended
    40 U.S.C. 756(a) by adding subsection (a)(3), which states that
    the general supply fund shall be available for paying other direct
    costs and indirect Page 4
    GAO/GGD-99-116 Retail Packaging Products B-281901 Subsection (b)
    of this provision identifies the purchase price, transportation,
    and direct and indirect costs associated with contracting,
    handling, and distributing products as the costs that GSA should
    recoup through its selling prices.4  However, the law does not
    require that GSA use a specific method in recovering its costs or
    require GSA to establish a price for individual products that will
    recover all of the costs associated with selling each product on
    an item-by-item basis.  The statute provides that GSA is to fix
    its product prices at levels to recover, so far as practicable,
    the applicable purchase price, transportation, and other direct
    and indirect costs associated with selling the products. Since the
    inception of industrial funding GSA has interpreted the statute as
    providing it with considerable discretion in determining how to
    achieve full cost recovery.  GSA's 1988 Industrial Funding
    Implementation Plan5 recognized that the legislation provided a
    great deal of flexibility.  GSA officials said that the language
    of the statute, which provides that prices should be fixed at
    levels to recover so far as practicable all applicable purchase
    price and transportation and other direct and indirect costs
    associated with the products it sells, suggests that Congress
    recognized GSA should have latitude in establishing product prices
    and could not, in all cases, recover the costs associated with
    selling each product. Officials from GSA's Office of General
    Counsel also told us that a private company challenged GSA's
    interpretation of the full cost recovery statute in federal
    district court and they said GSA won this lawsuit.6 It should be
    noted, however, that the court did not address the claim that
    GSA's pricing methodology failed to comply with 40 U.S.C. 756(b).
    The Court dismissed the complaint on the grounds that the
    plaintiff had failed to establish that it had suffered an injury
    or that it was an intended beneficiary of the statute. The United
    States Court of Appeals affirmed the lower court's finding. costs
    that are reasonably related to contracting, procurement,
    inspection, storage, management, distribution, and accountability
    of property and nonpersonal services provided by the General
    Services Administration. 4 Because 40 U.S.C. 756 identifies the
    specific costs that GSA should recover when selling products and
    services under the General Supply Fund, the statute takes
    precedence over OMB Circular No. A-25, which establishes federal
    policy regarding fees assessed for government services and for
    sale or use of government goods and resources. 5 The 1987
    amendment to 40 U.S.C. 756 required that GSA prepare by Feb. 15,
    1988, an Industrial Funding Implementation Plan that (1) fully
    described and explained the accounting system (including the
    pricing and cost allocation methodology for products and services)
    to be used for such implementation and (2) contained a schedule
    for completing implementation of full cost recovery. 6 T & S
    Products, Inc. v. United States Postal Service, General Services
    Administration, No. 94-896, 1994 U.S. Dist. Lexis 20751 at *1
    (D.D.C.  May 26, 1994;) aff.d 68 F. 3d 510 (D. C. Cir. 1995). Page
    5
    GAO/GGD-99-116 Retail Packaging Products B-281901 GSA asserts that
    it is complying with the full cost recovery requirement mandated
    in the law as long as the revenues for all products and services
    sold through the General Supply Fund are at least equal to the
    costs of operating the Fund.  In the two most recently completed
    fiscal years--1997 and 1998--GSA's audited financial statements,
    which FSS officials said were prepared in accordance with Federal
    Accounting Standards Advisory Board accounting principles, show
    that the General Supply Fund revenues exceeded operating expenses
    by $119 million and $133 million, respectively.7  These revenues
    resulted from total sales of $2.8 billion in fiscal year 1997 and
    $2.7 billion in fiscal year 1998.  Because 40 U.S.C. 756 does not
    specify how GSA should implement full cost recovery, does not
    require GSA to recover costs on an item-by-item basis, and states
    that costs should be recovered so far as practicable, we believe
    the method GSA is using to achieve full cost recovery is within
    its discretion. Notwithstanding GSA's discretion under the
    statute, it is GSA's objective to GSA Does Not Set         recover
    costs on each of the four business lines--supply and procurement,
    Prices to Recover the    vehicle acquisition and leasing, property
    management, and travel and transportation--under the General
    Supply Fund from the activities within Costs of Selling Each
    each line.  For example, FSS strives to recover the overall costs
    of Product Individually     operating the supply and procurement
    business line, which includes retail packaging products, from the
    sales of products and services provided under this line.
    However, it is not FSS' goal to recover costs on each of the
    programs that are operated under this business line--schedules,
    special order, and stock--or to recover costs on an item-by-item
    basis.  According to FSS officials, if the revenues produced by
    the schedules, special order, and stock programs are at least
    equal to the total cost of operating the supply and procurement
    business line, FSS has achieved its objective.  In fiscal year
    1998, net income from the supply and procurement business line was
    $22 million. Because FSS focuses on recovering costs at the
    business line level and not at the program or product level, FSS
    officials said that it is not surprising that the price charged
    for a given product will not always cover all costs associated
    with providing that product.  On the contrary, the officials said
    that the price charged for many products sold through the stock
    program might not be sufficient to ensure that all costs
    associated with providing a 7 According to FSS officials, 40
    U.S.C. 491 authorizes FSS to retain revenues from the General
    Supply Fund generated from agencies participating in the
    interagency fleet management system for the purpose of replacing
    such motor vehicles and related equipment and supplies.
    Accordingly, FSS estimated that it needed to retain $135 million
    and $124 million of the revenues generated in 1997 and 1998,
    respectively, for these purposes.  Consequently, there was a
    revenue deficit of $16 million ($119 million minus $135 million)
    in 1997 and a revenue surplus of $9 million ($133 million minus
    $124 million) in 1998. Page 6
    GAO/GGD-99-116 Retail Packaging Products B-281901 given product
    are recovered from the sales of those products.  Our analysis
    found that this was true for most of the retail packaging products
    sold at the prices that were in effect at the beginning of fiscal
    years 1997 through 1999. We compared the actual markups that FSS
    used to establish selling prices for retail packaging products
    with the individual product markups calculated by FSS' cost
    allocation model.  The results of our analysis show that the
    selling prices established at the beginning of fiscal year 1997
    for all of the 22 retail packaging products for which we could
    calculate full cost recovery prices were insufficient to fully
    recover FSS' estimated costs of selling these products.  At the
    beginning of fiscal year 1998, 18 of the 27 retail packaging
    products, 67 percent, were priced at amounts insufficient to
    recover all associated selling costs.  At the beginning of fiscal
    year 1999, 23 of 27 (85 percent) product prices were initially
    established at levels that would not fully recover all estimated
    costs. Our analysis also showed that both the dollar and
    percentage differences between the selling prices and the
    estimated full cost recovery prices for retail packaging products
    were generally greater in 1997 than in the next 2 years.  A
    dramatic example was the video cassette mailer.  In dollars, the
    full cost recovery price was higher than the selling price at the
    beginning of each fiscal year for this product by $356.26 in 1997,
    $0.94 in 1998, and $2.72 in 1999.  FSS officials told us that the
    difference between a product's selling price and its full cost
    recovery price is influenced by several factors, including the
    cost price8 of the product, historical sales, and projected sales.
    These officials explained that if a product has low projected
    sales, the cost allocation model calculates a higher recommended
    markup than it would if that product had higher projected sales.
    This occurs because a product with low projected sales has fewer
    units sold to help absorb the assigned costs.  The FSS officials
    also said that in 1997, some retail packaging products may have
    had low projected sales and this, in turn, could have caused the
    products' estimated full cost recovery prices to be significantly
    higher than the products' selling prices. Appendix II provides the
    selling prices for each of the retail packaging products offered
    at the beginning of the 3 fiscal years and the prices that would
    have resulted if FSS had used the individual product markups in
    determining product prices. 8 An item's cost price is the weighted
    average cost of that item.  The weighted average cost is
    calculated on the basis of the cost and quantity of a product in
    inventory or on order and the additional quantities expected to be
    ordered during the pricing period. Page 7
    GAO/GGD-99-116 Retail Packaging Products B-281901 According to FSS
    officials, the price that FSS pays for each product, referred to
    as the cost price, is the beginning point of the pricing process.
    Once the cost price for each product is known, FSS pricing
    officials use the cost allocation model to assign program costs to
    each product and calculate an individual product markup.  FSS
    officials explained that although the individual product markups
    represent the most accurate estimate of how much it costs to sell
    each product individually, these markups are not used to determine
    final product prices.  Instead, similar products are grouped into
    a federal supply class, and the cost allocation model calculates
    an average markup for all items included in each class. These
    markups are then adjusted on the basis of the professional
    judgment of FSS pricing and supply officials, and the resulting
    markups become the recommended pricing markups.  The recommended
    markups are applied to FSS' cost prices to determine the
    recommended selling prices. The list of recommended product
    selling prices, which are set semiannually, is then sent to the
    appropriate commodity centers responsible for purchasing and
    managing the products.  Item managers within each commodity center
    can adjust the recommended selling price for any product in order
    to be able to offer competitive prices. Furthermore, item managers
    can change the selling price for any product at any time between
    the semiannual pricing cycles in order to remain competitive with
    the private sector.  According to a commodity center official,
    item managers typically reduce the selling price to stay
    competitive and raise the selling price to cover an increase in
    costs resulting, for example, from a higher cost charged by an FSS
    supplier. According to FSS officials, although several pricing
    alternatives were considered when the Industrial Funding
    Implementation Plan was completed in 1988, FSS determined that
    applying a pricing markup to each federal supply class would
    provide the preferred pricing solution.  FSS officials said
    because they offer thousands of products, prices on these products
    can change throughout the year, and FSS needs flexibility to
    manage its diverse product lines; it would be impractical and
    burdensome to monitor each product to ensure that all associated
    selling costs were recovered on an item-by-item basis.  In 1996,
    GSA's Office of Inspector General completed a review of the
    process FSS used to price products sold through the stock program.
    The study concluded that FSS was generally pricing products in an
    efficient and effective manner, and no alternative pricing methods
    were identified.9 9 Advisory Review on Pricing of FSS Stock
    Program Items, GSA OIG, Audit Report A51844/F/6/V96012 (Mar. 19,
    1996). Page 8
    GAO/GGD-99-116 Retail Packaging Products B-281901 The fact that
    many retail packaging products were priced at amounts that do not
    recover all of FSS' selling costs is not unique or unusual under
    the stock program.  FSS pricing officials with whom we spoke
    estimated that two-thirds of the approximately 19,000 products
    sold through the stock program are priced below full cost
    recovery.  To test this estimate, we requested that FSS query its
    pricing data pertaining to the stock program in February 1999.
    The results showed that on 78 percent of the 18,946 products, the
    individual product markups--which FSS officials said is the most
    accurate estimate of how much it costs FSS to sell each product--
    were higher than the markups that were actually used to determine
    selling prices.  In 1992, we reported a similar situation in which
    many orders for low-value products that GSA was selling through
    its stock program depots were being subsidized by revenues from
    other products.10 FSS management recognizes that the stock program
    is facing difficult challenges, including declining sales and
    changes in customers' shopping habits.  Therefore, beginning in
    January 1999, GSA initiated a study to explore strategic options
    for the stock program.  The study group, which includes senior
    managers, is focusing on several issues regarding the future of
    its distribution centers' operations.  One option is to explore
    the possibility of having a new FSS business model for the 21st
    century.  As of May 1999, no decisions had been made on what
    changes should be made to the stock program, and time frames for
    making these decisions had not been established.  In our prior
    work, we reported that the Department of Defense (DOD) also has
    examined its distribution system and achieved some success in
    reducing the costs of providing medical and food products to its
    customers and in reducing the quantities of these products in its
    supply and distribution depots.  DOD achieved this success by
    implementing inventory management best practices developed by the
    private sector.  Among these best practices was the use of direct
    delivery, whereby the private vendor delivers products directly to
    the customer instead of to a DOD warehouse.11 Although the costs
    FSS incurs in transporting products to its customers FSS Applies
    an Additional    are included in the pricing process described
    above, FSS applies an Transportation Markup to     additional 7-
    percent charge to retail packaging products to cover the Retail
    Packaging Products    increased transportation costs incurred on
    these products.  According to FSS officials, FSS sometimes incurs
    increased transportation costs 10 General Services Administration:
    Increased Direct Delivery of Supplies Could Save Millions
    (GAO/GGD-93-32, Dec. 28, 1992). 11 Inventory Management: Greater
    Use of Best Practices Could Reduce DOD's Logistics Costs (GAO/T-
    NSIAD-97-214, July 24, 1997). Page 9
    GAO/GGD-99-116 Retail Packaging Products B-281901 because many of
    the retail packaging products ordered by the Postal Service are
    shipped via the mail, and this mode of transportation is not
    generally the most economical available to FSS.  FSS uses the mail
    because a written agreement between GSA and the Postal Service
    stipulates that, when possible, orders shipped to Postal
    installations will be mailed. Because the Postal Service was
    buying most of FSS' retail packaging products, officials became
    concerned that the prices charged for these products were not
    sufficient to cover the increased cost of shipping them via the
    mail.  Consequently, a one-time limited study of the
    transportation cost on retail packaging products was completed in
    March 1995.  On the basis of this study, FSS began to apply an
    additional 7-percent markup to retail packaging products sold in
    fiscal year 1997 and thereafter. We attempted to verify the basis
    for this surcharge by reviewing the FSS transportation cost study.
    However, we found that there was insufficient documentation to
    allow us to determine the specific time period of the study, the
    sample size, or the methodology that was used.  Given that we
    could not independently verify the merits of the 7-percent
    surcharge, we did a limited analysis of the costs of shipping
    retail packaging products using FSS-supplied data on orders that
    were shipped from three distribution centers. On these orders, we
    compared the actual shipping costs of retail packaging products
    with the costs that FSS would have incurred if a more economical
    mode of transportation had been used.  Our analysis showed that at
    two of the three locations the 7-percent surcharge used by FSS
    exceeded the added transportation costs associated with retail
    packaging products.  Specifically, at the Fort Worth and Franconia
    distribution centers, we found that a 4-percent and 6-percent
    surcharge, respectively, would have covered the additional
    transportation costs for the retail packaging products included in
    our analysis.  However, at the Burlington Distribution Center, we
    found that a surcharge of approximately 10 percent would have been
    necessary to fully cover the additional transportation costs on
    the products we reviewed.  As noted above, our analysis of
    transportation costs was limited and was conducted only to get a
    rough idea about the accuracy of FSS' 7-percent surcharge.
    Therefore, the results of our analysis cannot be projected to the
    universe of retail packaging products shipped by each center or
    sold by FSS.  Appendix I provides more details on our methodology
    for analyzing transportation costs and the orders that we
    reviewed. Page 10                                   GAO/GGD-99-116
    Retail Packaging Products B-281901 The applicable federal statute
    gives GSA considerable discretion in Conclusions
    determining how it is to achieve full cost recovery on products
    and services sold through the General Supply Fund.  Consequently,
    GSA is not required to, nor does it, price all of its products at
    levels that will ensure that all costs associated with selling
    each item individually are recovered from the sale of the product.
    The prices that GSA set centrally for most of the retail packaging
    products it sold in fiscal years 1997, 1998, and 1999 were not
    sufficient to recover all estimated costs associated with selling
    each individual product.  Nevertheless, we agree with GSA that the
    method it has chosen to achieve full cost recovery is within its
    discretion under the statute as long as the revenues obtained from
    all the products and services sold under the General Supply Fund
    cover the expenses of operating the fund. On the other hand, a
    question that remains unanswered is whether GSA should sell the
    majority of its products at prices that do not recover all
    associated selling costs.  GSA's ongoing study of its stock
    program may shed some light on this issue, if the study
    specifically addresses the costs and benefits of the stock program
    to GSA and its customers. On June 9, 1999, FSS Assistant
    Commissioners for Business Management Agency Comments    and
    Marketing and the Office of Distribution Management, their related
    staff, and the Special Assistant to the FSS Controller provided
    oral comments on a draft of this report.  They agreed with the
    results of our analysis and the message of the report.  They also
    provided technical comments, which we incorporated into this
    report to improve the clarity of our description of the General
    Supply Fund and the cost allocation model. On June 15, 1999, the
    U.S. Postal Service's liaison to GAO said that the Service had no
    comments on a draft of this report. We are sending copies of this
    report to Senator George V. Voinovich, Chairman, and Senator
    Richard Durbin, Ranking Minority Member, Subcommittee on Oversight
    of Government Management, Restructuring, and the District of
    Columbia, Senate Committee on Governmental Affairs; Representative
    Jim Kolbe, Chairman, and Representative Steny H. Hoyer, Ranking
    Minority Member, Subcommittee on Treasury, Postal Service and
    General Government, House Committee on Appropriations;
    Representative Steve Horn, Chairman, and Representative Jim
    Turner, Ranking Minority Member, Subcommittee on Government
    Management, Information and Technology, House Committee on
    Government Reform; Senator Kay Bailey Hutchinson; the Honorable
    David J. Barram, Administrator, General Services Administration;
    and Mr. William J. Henderson, Postmaster General.  We will also
    send copies to other interested congressional Page 11
    GAO/GGD-99-116 Retail Packaging Products B-281901 committees and
    subcommittees and make copies available to others on request.
    Major contributors to this report are acknowledged in appendix
    III.  If you or your staffs have any questions, please contact me
    on (202) 512-8387 or at [email protected]. Bernard L. Ungar
    Director, Government Business Operations Issues Page 12
    GAO/GGD-99-116 Retail Packaging Products Page 13    GAO/GGD-99-116
    Retail Packaging Products Contents 1 Letter 16 Appendix I
    Objectives, Scope, and Methodology 19 Appendix II Comparison of
    Retail Packaging Products' Selling Prices With Prices Calculated
    Using Full Cost Recovery Markups 22 Appendix III GAO Contacts and
    Staff Acknowledgments Table II.1: GSA's Fiscal Year 1997 Selling
    Prices vs. Full                      19 Tables
    Cost Recovery Prices Table II.2:  GSA's Fiscal Year 1998 Selling
    Prices vs. Full                     20 Cost Recovery Prices Table
    II.3: GSA's Fiscal Year 1999 Selling Prices vs. Full
    21 Cost Recovery Prices Abbreviations FSS            Federal
    Supply Service GSA            General Services Administration USPS
    U.S. Postal Service DOD            Department of Defense Page 14
    GAO/GGD-99-116 Retail Packaging Products Page 15    GAO/GGD-99-116
    Retail Packaging Products Appendix I Objectives, Scope, and
    Methodology Our objectives were to determine (1) whether the
    General Services Administration (GSA) is required by law to set
    its prices for retail packaging products at levels sufficient to
    ensure that all selling costs are recovered on each item and (2)
    whether GSA's selling prices for these products do recover all
    costs. In doing our work, we primarily performed audit work at
    GSA's Federal Supply Service (FSS) headquarters located in
    Arlington, VA. We also performed audit work at the FSS Office
    Supplies and Paper Products Center in New York, NY; the
    Southwestern Distribution Center in Fort Worth, TX; the Northeast
    Distribution Center in Burlington, NJ; and a Forward Supply Point
    in Franconia, VA. In addition, we interviewed an official from T&S
    Products, a private company that competes with GSA to supply
    retail packaging products to the United States Postal Service
    (USPS). To meet the first objective, we reviewed the applicable
    statutory provision, 40 U.S.C. 756, relating to the pricing of
    products and services that FSS sells to federal agencies and other
    customers under the General Supply Fund. We also reviewed a court
    case in which a private company sued GSA alleging that GSA's
    pricing of retail packaging products was in violation of 40 U.S.C.
    756. Additionally, we met with officials from GSA's Office of
    General Counsel to discuss the statutory requirements pertaining
    to product pricing. Finally, we reviewed and summarized a prior
    GSA Office of Inspector General report dealing with the subject of
    product pricing. To meet our second objective, we assessed FSS'
    pricing policy and procedures pertinent to retail packaging
    products and other items sold through the stock and procurement
    business line. We determined whether the pricing policy and
    procedures were within GSA's discretion under 40 U.S.C. 756(b),
    which provides that product prices be fixed at levels so as to
    recover, so far as practicable, the applicable purchase price, and
    transportation and other direct and indirect costs associated with
    selling the products. We examined how FSS determined prices for
    retail packaging products in fiscal years 1997, 1998, and 1999. In
    completing our examination, we reviewed how the cost allocation
    model was used in the product pricing process and the assumptions
    and data that were used in determining the final product prices.
    We then determined whether the prices set for retail packaging
    products at the beginning of fiscal years 1997, 1998, and 1999
    were sufficient to recover, so far as practicable, the estimated
    costs associated with selling each item. We did this by using FSS
    accounting and cost data, including the weighted average cost
    price for each product, individual product markups Page 16
    GAO/GGD-99-116 Retail Packaging Products Appendix I Objectives,
    Scope, and Methodology calculated by FSS' cost allocation model,
    and the actual product selling prices, as of the beginning of each
    fiscal year. Specifically, we compared the selling prices for each
    of the retail packaging products with the prices that would have
    been charged if FSS officials had applied the individual product
    markups. Our analysis assumed that the individual product markups
    represent the most accurate estimates of what it actually costs
    FSS to sell each product. We used the individual product markups
    and selling prices for products ordered through FSS' Customer
    Supply Centers because a large majority of retail packaging
    products were ordered through these centers. While performing our
    price analyses, we conducted limited testing on a sample of the
    FSS cost and pricing data to determine the age, accuracy, and
    reasonableness of these data. We also verified FSS' cost prices
    for retail packaging products by reviewing samples of contracts
    and inventory information. In examining the transportation costs
    associated with retail packaging products, we attempted to
    evaluate the FSS study that was completed in 1994 and its
    corresponding conclusion that an additional 7-percent markup
    should be applied to these products. Our evaluation of this study
    was, however, severely limited because we could not independently
    determine the specific time period, sample size, or methodology
    that was used in the study. Consequently, we tested the accuracy
    of the additional markup by analyzing orders provided to us by FSS
    officials that included retail packaging products. These orders
    were shipped from distribution centers located in Burlington, NJ;
    Fort Worth, TX; and Franconia, VA. We verified the accuracy of
    these orders before conducting our analyses. We examined 57 orders
    from Fort Worth that were shipped from January 28 through January
    31, 1999, and 50 orders shipped from Franconia, VA, from January 4
    through January 29, 1999. We also examined 436 orders placed with
    the Burlington center from February 1 through February 5, 1999. We
    used the placement date in analyzing the Burlington data because
    some files provided by FSS for this location did not specify
    shipping dates for the orders. Using the data from each
    distribution site, we determined the total dollar value of sales,
    transportation costs, and the costs of using an alternative
    transportation method for retail packaging products. We used this
    methodology because GSA has an agreement with USPS that it will,
    when possible, ship all mailable items to Postal facilities by the
    U.S. mail. According to GSA officials, this method of
    transportation was frequently used for retail packaging products,
    and it is often more expensive than other methods of
    transportation. In analyzing the Fort Worth and Page 17
    GAO/GGD-99-116 Retail Packaging Products Appendix I Objectives,
    Scope, and Methodology Burlington shipments we allocated the total
    actual and alternative transportation costs to each item on a per
    pound basis. For the orders shipped from Franconia, we did not
    have to complete this allocation because the actual transportation
    costs could be reconstructed from existing data. To enable us to
    calculate the alternative transportation cost, FSS officials
    provided the lowest transportation cost that FSS would have
    incurred if the USPS shipping requirements did not apply. We then
    determined the difference between the actual and alternative
    transportation costs and calculated the markup needed to recover
    the additional transportation costs for each distribution center.
    Because of the way the locations were selected and orders were
    obtained, we could not combine the results of our analysis or
    project them to the population of retail packaging products sold
    by each center or by FSS overall. We did our work between November
    1998 and May 1999, in accordance with generally accepted
    government auditing standards. We did not, however, validate the
    accuracy of all data that are included in the FSS cost allocation
    model, and the results of our price analysis are not projectable
    to all products sold by GSA. We requested comments on a draft of
    this report from GSA's Administrator and the Postmaster General.
    GSA officials orally provided technical comments, which we
    incorporated in the final report. The Postal Service had no
    comments. Page 18                                 GAO/GGD-99-116
    Retail Packaging Products Appendix II Comparison of Retail
    Packaging Products' Selling Prices With Prices Calculated Using
    Full Cost Recovery Markups Table II.1: GSA's Fiscal Year 1997
    Selling Prices vs. Full Cost Recovery Prices
    Full cost                          Percent National stock number
    Item description--quantity                        FSS sell pricea
    recovery  priceb             Differencec differenced 7510-01-383-
    7967          Tape, with dispenser 2"X22'-6/package
    $7.37                  $8.40          $(1.03)               (14)
    7520-01-368-3499          Stamp dispenser, plastic-25/box
    3.51                   3.92            (0.41)              (12)
    7530-01-372-3098          White envelope 6"X9"-50/box
    4.51                  10.25            (5.74)             (127)
    7530-01-372-3099          White envelope 9"X12"-50/box
    5.47                   9.78            (4.31)              (79)
    7530-01-372-3100          Green border envelope 10"X13"-50/box
    5.66                  14.37            (8.71)             (154)
    7530-01-372-3104          White envelope 6"X9"-250/box
    14.97                  22.46            (7.49)              (50)
    7530-01-372-3113          White envelope 9"X12"-250/box
    18.14                  21.64            (3.50)              (19)
    7530-01-372-3114          Green border envelope 10"X13"-250/box
    22.54                  24.72            (2.18)              (10)
    8105-00-281-1169          Shipping sack 14-1/4"X20"-50/package
    17.93                  21.79            (3.86)
    (22) 8105-00-281-1436          Shipping sack 10-1/2"X16"-100 sacks
    23.12                  28.03            (4.91)
    (21) 8105-01-385-7246          Shipping sack 6"X10"-50/package
    8.60                258.18          (249.58)          (2,902)
    8105-01-385-7396          Shipping sack 8-1/2"X12"-100/package
    19.79                112.03           (92.24)              (466)
    8105-01-385-7584          Shipping sack 10-1/2"X16"-50/package
    16.58                  67.22          (50.64)              (305)
    8105-01-386-2181          Video cassette mailer-25/package
    15.16                371.42          (356.26)          (2,350)
    8105-01-386-2189          Audio cassette mailer-25/package
    5.66                102.57           (96.91)          (1,712)
    8105-01-386-2202          Diskette mailer-25/package
    9.65         Not available Not available Not available 8105-01-
    386-2209          Shipping sack 6"X10"-250/package
    37.20                115.37           (78.17)              (210)
    8105-01-386-2217          Shipping sack 8-1/2"X12"-50/package
    10.48                270.45          (259.97)          (2,481)
    8105-01-434-3492          Photo mailer 9-3/4"X12"-25/package
    Not available          Not available Not available Not available
    8110-01-386-2192          Square mailing tube 24"X3"X3"-15/bundle
    19.24         Not available Not available Not available 8110-01-
    386-2214          Square mailing tube 36"X3"X3"-15/bundle
    20.75         Not available Not available Not available 8115-01-
    357-9995          Shipping box 18"X12-1/2"X3"-15/bundle
    14.84                  16.93            (2.09)              (14)
    8115-01-357-9996          Shipping box 8"X8"X8"-15/bundle
    8.00                  11.64            (3.64)              (46)
    8115-01-357-9997          Shipping box 15"X12"X10"-15/bundle
    17.18                  19.26            (2.08)              (12)
    8115-01-364-9492          Shipping box 20"X14"X10"-15/bundle
    22.39                  25.29            (2.90)              (13)
    8115-01-386-2238          Shipping box 20"X20"X20"-15/bundle
    35.91         Not available Not available Not available 8135-01-
    381-6525          Bubblewrap 16"X108'X3/16"-12/package
    18.67                  23.56            (4.89)              (26)
    Note 1: The gain or loss for each individual product cannot be
    extrapolated to the total sales of that product during the fiscal
    year because each of the products may have been sold at different
    prices throughout the year, and the quantities of products sold at
    these different prices were not readily available. Note 2:
    Parentheses denote the number is negative. aSell price effective
    beginning on October 1, 1996, for products sold through the
    Customer Supply Centers.  All product selling prices are subject
    to change in April of each year and may be changed throughout the
    year by item managers. bThe full cost recovery price represents
    the cost price plus the individual product pricing markup as
    calculated by FSS' cost allocation model.  According to FSS, the
    individual product markup represents the most accurate estimate of
    how much it costs FSS to sell each item individually. cAccording
    to FSS, the higher difference between a product's sell price and
    its full cost recovery price may be due to low projected sales
    volume. The costs allocated to each unit are higher on a product
    with low projected sales than on a product with high projected
    sales because the product with low projected sales has fewer units
    sold to absorb the costs. As a result, a low sales projection for
    a product could cause that product's full cost recovery price to
    be significantly higher than its selling price. dThe difference as
    a rounded percentage of the FSS sell price. Source: GAO analysis
    of FSS' cost and sell prices and markups for retail packaging
    products. Page 19
    GAO/GGD-99-116 Retail Packaging Products Appendix II Comparison of
    Retail Packaging Products' Selling Prices With Prices Calculated
    Using Full Cost Recovery Markups Table II.2:  GSA's Fiscal Year
    1998 Selling Prices vs. Full Cost Recovery Prices Full cost
    Percent National stock number     Item description--quantity
    FSS sell pricea recovery  priceb              Differencec
    differenced 7510-01-383-7967          Tape, with dispenser 2"X22'-
    6/package                         $7.61                $6.23
    $1.38                  18 7520-01-368-3499          Stamp
    dispenser, plastic-25/box                                3.99
    6.63              (2.64)            (66) 7530-01-372-3098
    White envelope 6"X9"-50/box
    8.98                10.20               (1.22)            (14)
    7530-01-372-3099          White envelope 9"X12"-50/box
    10.18                12.20               (2.02)            (20)
    7530-01-372-3100          Green border envelope 10"X13"-50/box
    9.84                13.44               (3.60)            (37)
    7530-01-372-3104          White envelope 6"X9"-250/box
    27.30                24.58                 2.72                 10
    7530-01-372-3113          White envelope 9"X12"-250/box
    33.35                28.39                 4.96                 15
    7530-01-372-3114          Green border envelope 10"X13"-250/box
    37.69                32.60                 5.09                 14
    8105-00-281-1169          Shipping sack 14-1/4"X20"-50/package
    19.93                20.78               (0.85)
    (4) 8105-00-281-1436          Shipping sack 10-1/2"X16"-100 sacks
    28.13                28.81               (0.68)
    (2) 8105-01-385-7246          Shipping sack 6"X10"-50/package
    8.89                12.63               (3.74)                (42)
    8105-01-385-7396          Shipping sack 8-1/2"X12"-100/package
    16.46                16.67               (0.21)
    (1) 8105-01-385-7584          Shipping sack 10-1/2"X16"-50/package
    16.08                23.72               (7.64)
    (48) 8105-01-386-2181          Video cassette mailer-25/package
    11.18                12.12               (0.94)
    (8) 8105-01-386-2189          Audio cassette mailer-25/package
    5.03                  6.32              (1.29)                (26)
    8105-01-386-2202          Diskette mailer-25/package
    7.55                  8.83              (1.28)                (17)
    8105-01-386-2209          Shipping sack 6"X10"-250/package
    29.32                28.14                 1.18                  4
    8105-01-386-2217          Shipping sack 8-1/2"X12"-50/package
    10.58                16.91               (6.33)
    (60) 8105-01-434-3492          Photo mailer 9-3/4"X12"-25/package
    12.27                11.49                 0.78                  6
    8110-01-386-2192          Square mailing tube 24"X3"X3"-15/bundle
    17.49                21.35               (3.86)            (22)
    8110-01-386-2214          Square mailing tube 36"X3"X3"-15/bundle
    18.85                23.21               (4.36)            (23)
    8115-01-357-9995          Shipping box 18"X12-1/2"X3"-15/bundle
    10.82                10.78                 0.04                  0
    8115-01-357-9996          Shipping box 8"X8"X8"-15/bundle
    5.32                  7.58              (2.26)            (42)
    8115-01-357-9997          Shipping box 15"X12"X10"-15/bundle
    9.90                11.56               (1.66)            (17)
    8115-01-364-9492          Shipping box 20"X14"X10"-15/bundle
    14.05                15.27               (1.22)
    (9) 8115-01-386-2238          Shipping box 20"X20"X20"-15/bundle
    27.36                26.07                 1.29                  5
    8135-01-381-6525          Bubblewrap 16"X108'X3/16"-12/package
    17.45                16.14                 1.31                  8
    Note 1: The gain or loss for each individual product cannot be
    extrapolated to the total sales of that product during the fiscal
    year because each of the products may have been sold at different
    prices throughout the year, and the quantities of products sold at
    these different prices were not readily available. Note 2:
    Parentheses denote the number is negative. aSell price effective
    beginning on October 1, 1997, for products sold through the
    Customer Supply Centers.  All product selling prices are subject
    to change in April of each year and may be changed throughout the
    year by item managers. bThe full cost recovery price represents
    the cost price plus the individual product pricing markup as
    calculated by the FSS' cost allocation model. According to FSS,
    the individual product markup represents the most accurate
    estimate of how much it costs FSS to sell each item individually.
    cAccording to FSS, the higher difference between a product's sell
    price and its full cost recovery price may be due to low projected
    sales volume. The costs allocated to each unit are higher on a
    product with low projected sales than on a product with high
    projected sales because the product with low projected sales has
    fewer units sold to absorb the costs. As a result, a low sales
    projection for a product could cause that product's full cost
    recovery price to be significantly higher than its selling price.
    dThe difference as a rounded percentage of the FSS sell price.
    Source: GAO analysis of FSS' cost and sell prices and markups for
    retail packaging products. Page 20
    GAO/GGD-99-116 Retail Packaging Products Appendix II Comparison of
    Retail Packaging Products' Selling Prices With Prices Calculated
    Using Full Cost Recovery Markups Table II.3: GSA's Fiscal Year
    1999 Selling Prices vs. Full Cost Recovery Prices
    Full cost                          Percent National stock number
    Item description--quantity                        FSS sell pricea
    recovery  priceb              Differencec differenced 7510-01-383-
    7967          Tape, with dispenser 2"X22'-6/package
    $7.97                  $6.44             $1.53                  19
    7520-01-368-3499          Stamp dispenser, plastic-25/box
    4.35                   7.63             (3.28)            (75)
    7530-01-372-3098          White envelope 6"X9"-50/box
    2.44                   3.42             (0.98)            (40)
    7530-01-372-3099          White envelope 9"X12"-50/box
    4.17                   6.45             (2.28)            (55)
    7530-01-372-3100          Green border envelope 10"X13"-50/box
    5.17                   7.22             (2.05)            (40)
    7530-01-372-3104          White envelope 6"X9"-250/box
    10.66                  11.14             (0.48)
    (5) 7530-01-372-3113          White envelope 9"X12"-250/box
    16.73                  17.01             (0.28)
    (2) 7530-01-372-3114          Green border envelope 10"X13"-
    250/box                         18.96                  18.89
    0.07                  0 8105-00-281-1169          Shipping sack
    14-1/4"X20"-50/package                          20.00
    21.97             (1.97)                (10) 8105-00-281-1436
    Shipping sack 10-1/2"X16"-100 sacks
    23.66                  25.64             (1.98)
    (8) 8105-01-385-7246          Shipping sack 6"X10"-50/package
    8.57                  13.28             (4.71)                (55)
    8105-01-385-7396          Shipping sack 8-1/2"X12"-100/package
    17.25                  18.70             (1.45)
    (8) 8105-01-385-7584          Shipping sack 10-1/2"X16"-50/package
    17.09                  25.27             (8.18)
    (48) 8105-01-386-2181          Video cassette mailer-25/package
    12.34                  15.06             (2.72)
    (22) 8105-01-386-2189          Audio cassette mailer-25/package
    5.01                   7.84             (2.83)                (56)
    8105-01-386-2202          Diskette mailer-25/package
    7.58                   9.16             (1.58)                (21)
    8105-01-386-2209          Shipping sack 6"X10"-250/package
    36.24                  35.82               0.42                  1
    8105-01-386-2217          Shipping sack 8-1/2"X12"-50/package
    10.63                  18.18             (7.55)
    (71) 8105-01-434-3492          Photo mailer 9-3/4"X12"-25/package
    8.68                   9.81             (1.13)            (13)
    8110-01-386-2192          Square mailing tube 24"X3"X3"-15/bundle
    10.21                  12.41             (2.20)            (22)
    8110-01-386-2214          Square mailing tube 36"X3"X3"-15/bundle
    11.51                  13.70             (2.19)            (19)
    8115-01-357-9995          Shipping box 18"X12-1/2"X3"-15/bundle
    11.12                  12.80             (1.68)            (15)
    8115-01-357-9996          Shipping box 8"X8"X8"-15/bundle
    6.30                  10.77             (4.47)            (71)
    8115-01-357-9997          Shipping box 15"X12"X10"-15/bundle
    12.19                  14.75             (2.56)            (21)
    8115-01-364-9492          Shipping box 20"X14"X10"-15/bundle
    16.32                  18.42             (2.10)            (13)
    8115-01-386-2238          Shipping box 20"X20"X20"-15/bundle
    32.76                  36.74             (3.98)            (12)
    8135-01-381-6525          Bubblewrap 16"X108'X3/16"-12/package
    18.98                  18.02               0.96                  5
    Note 1: The gain or loss for each individual product cannot be
    extrapolated to the total sales of that product during the fiscal
    year because each of the products may have been sold at different
    prices throughout the year, and the quantities of products sold at
    these different prices were not readily available. Note 2:
    Parentheses denote the number is negative. aSell price effective
    beginning on October 1, 1998, for products sold through the
    Customer Supply Centers.  All product selling prices are subject
    to change in April of each year and may be changed throughout the
    year by item managers. bThe full cost recovery price represents
    the cost price plus the individual product pricing markup as
    calculated by FSS' cost allocation model. According to FSS, the
    individual product markup represents the most accurate estimate of
    how much it costs FSS to sell each item individually. cAccording
    to FSS, the higher difference between a product's sell price and
    its full cost recovery price may be due to low projected sales
    volume. The costs allocated to each unit are higher on a product
    with low projected sales than on a product with high projected
    sales because the product with low projected sales has fewer units
    sold to absorb the costs. As a result, a low sales projection for
    a product could cause that product's full cost recovery price to
    be significantly higher than its selling price. dThe difference as
    a rounded percentage of the FSS sell price. Source: GAO analysis
    of FSS' cost and sell prices and markups for retail packaging
    products. Page 21
    GAO/GGD-99-116 Retail Packaging Products Appendix III GAO Contacts
    and Staff Acknowledgments Bernard Ungar (202) 512-8387 GAO
    Contacts In addition to the individual named above, Gerald
    Stankosky, James Acknowledgments    Cooksey, William Dowdal, Jeff
    Kaser, Alan Belkin, and Susan Michal-Smith also made key
    contributions to this report. Page 22
    GAO/GGD-99-116 Retail Packaging Products Page 23    GAO/GGD-99-116
    Retail Packaging Products Page 24    GAO/GGD-99-116 Retail
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