[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


                         [H.A.S.C. No. 110-32]
 
                  OVERVIEW OF MILITARY RESALE PROGRAMS

                               __________

                                HEARING

                               BEFORE THE

                    MILITARY PERSONNEL SUBCOMMITTEE

                                 OF THE

                      COMMITTEE ON ARMED SERVICES

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD

                             MARCH 13, 2007




                                     
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37-318 PDF                 WASHINGTON DC:  2007
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                    MILITARY PERSONNEL SUBCOMMITTEE

                     VIC SNYDER, Arkansas, Chairman
MARTY MEEHAN, Massachusetts          JOHN M. McHUGH, New York
LORETTA SANCHEZ, California          JOHN KLINE, Minnesota
SUSAN A. DAVIS, California           THELMA DRAKE, Virginia
NANCY BOYDA, Kansas                  WALTER B. JONES, North Carolina
PATRICK J. MURPHY, Pennsylvania      JOE WILSON, South Carolina
CAROL SHEA-PORTER, New Hampshire
               Michael Higgins, Professional Staff Member
                 John Chapla, Professional Staff Member
                     Joseph Hicken, Staff Assistant


                            C O N T E N T S

                              ----------                              

                     CHRONOLOGICAL LIST OF HEARINGS
                                  2007

                                                                   Page

Hearing:

Tuesday, March 13, 2007, Overview of Military Resale Programs....     1

Appendix:

Tuesday, March 13, 2007..........................................    31
                              ----------                              

                        TUESDAY, MARCH 13, 2007
                  OVERVIEW OF MILITARY RESALE PROGRAMS
              STATEMENTS PRESENTED BY MEMBERS OF CONGRESS

McHugh, Hon. John M., a Representative from New York, Ranking 
  Member, Military Personnel Subcommittee........................     1
Snyder, Hon. Vic, a Representative from Arkansas, Chairman, 
  Military Personnel Subcommittee................................     1

                               WITNESSES

Cowley, Rear Adm. Robert E., III, Commander, Navy Exchange 
  Service Command, U.S. Navy.....................................     5
Dominguez, Hon. Michael L., Principal Deputy Under Secretary of 
  Defense (Personnel & Readiness)................................     2
Downs, Michael P., Director, Personal and Family Readiness 
  Division, Manpower and Reserve Affairs Department Headquarters, 
  U.S. Marine Corps..............................................     9
Essex, Maj. Gen. Paul W., Commander, Army and Air Force Exchange 
  Service, U.S. Air Force........................................     3
Nixon, Patrick B., Director, Defense Commissary Agency...........     6

                                APPENDIX

Prepared Statements:

    Cowley, Rear Adm. Robert E., III.............................    64
    Dominguez, Hon. Michael L....................................    40
    Downs, Michael P.............................................    96
    Essex, Maj. Gen. Paul W......................................    54
    McHugh, Hon. John M..........................................    37
    Nixon, Patrick B.............................................    80
    Snyder, Hon. Vic.............................................    35

Documents Submitted for the Record:
    [There were no Documents submitted.]

Questions and Answers Submitted for the Record:

    Mr. McHugh...................................................   124
    Dr. Snyder...................................................   121
                  OVERVIEW OF MILITARY RESALE PROGRAMS

                              ----------                              

                  House of Representatives,
                       Committee on Armed Services,
                           Military Personnel Subcommittee,
                           Washington, DC, Tuesday, March 13, 2007.
    The subcommittee met, pursuant to call, at 10:03 a.m. in 
room 2212, Rayburn House Office Building, Hon. Vic Snyder 
(chairman of the subcommittee) presiding.

  OPENING STATEMENT OF HON. VIC SNYDER, A REPRESENTATIVE FROM 
      ARKANSAS, CHAIRMAN, MILITARY PERSONNEL SUBCOMMITTEE

    Dr. Snyder. The hearing will come to order.
    Today, the subcommittee turns attention to a topic that is 
of great value to the members of this committee, the military 
retail stores. These stores have been so important to our men 
and women in uniform and their families, and each year, we look 
forward to getting an update on the status of how we see these 
military retail facilities.
    Without objection, all of your opening statements will be 
made part of the record, and I hope in this hearing today that 
you all take this opportunity to let us know of any problems or 
issues that you think we need to deal with in this year's 
Defense Bill or in any kind of a funding issue.
    Before introducing the panel, I will yield to Mr. McHugh, 
who has also been a champion of this cause, for any comments he 
may want to make.
    [The prepared statement of Dr. Snyder can be found in the 
Appendix on page 35.]

  STATEMENT OF HON. JOHN M. MCHUGH, A REPRESENTATIVE FROM NEW 
     YORK, RANKING MEMBER, MILITARY PERSONNEL SUBCOMMITTEE

    Mr. McHugh. Thank you very much, Mr. Chairman.
    I would ask unanimous consent----
    Dr. Snyder. Without objection.
    Mr. McHugh [continuing]. That my opening statement be 
submitted in its entirety.
    [The prepared statement of Mr. McHugh can be found in the 
Appendix on page 37.]
    Mr. McHugh. Thank you, sir. Just a few comments.
    First of all, welcome to our witnesses--friendly faces, 
familiar faces--all to this subcommittee, and gentlemen, let me 
say, we continue to appreciate your efforts on behalf of the 
important interest that you represent.
    I think, Mr. Chairman, if you will look at the testimony 
that has been submitted here today, we are reminded once more 
of how amazingly successful these good folks have been in 
satisfying customer expectations and providing substantial 
savings to their patrons, accommodating organizational and 
financial challenges. They have found efficiencies to do more 
with less. As Pat Nixon notes in his testimony, when you 
measure in constant dollars what the Commissary benefit and its 
Administration costs today, it really remains below what it 
cost in the year 2000, and all of that has happened not at the 
expense of the customers, but because of those efficiencies and 
the expertise and the hard work of the folks who are scattered 
throughout the agency.
    I would just say, Mr. Chairman, I would hope our witnesses 
today will help us understand the significant challenges that 
they are facing right now. They are beginning to form, those 
who are looking out on the horizon toward--there are many. 
There is base realignment and closure (BRAC). There is global 
rebasing, pressure on appropriative funds, support, the 
skyrocketing costs of construction, the commercial competition 
that is ever present, declining Morale, Welfare, and Recreation 
(MWR) dividends. It sounds depressing, but there are those and 
others, and we want to make sure that they are not left 
unaddressed, and we welcome their comments as to how they plan 
to go forward and, of course, most importantly, Mr. Chairman, 
how we can be supportive in that effort.
    So, with that, Mr. Chairman, I thank you for convening this 
hearing, and I look forward to our discussions.
    Dr. Snyder. Thank you, Mr. McHugh.
    Our panel today is the Honorable Michael Dominguez, the 
Principal Deputy Under Secretary of Defense for Personnel and 
Readiness; Major General Paul Essex, Commander, Army and Air 
Force Exchange Service; Rear Admiral Robert Cowley, III, 
Commander of the Navy Exchange Service Command; Mr. Patrick 
Nixon, the Director and Chief Executive Officer (CEO) of the 
Defense Commissary Agency; Mr. Michael Downs, Director of 
Personal and Family Readiness Division Headquarters, United 
States Marine Corps.
    Gentlemen, we appreciate your being with us. As I said 
before, your written statements are going to be made a part of 
the record. You all are well-known to us, and we appreciate 
your patriotism and support of our men and women in uniform.
    Mr. Secretary, we will begin with you and then go right 
down the line.

STATEMENT OF HON. MICHAEL L. DOMINGUEZ, PRINCIPAL DEPUTY UNDER 
         SECRETARY OF DEFENSE (PERSONNEL AND READINESS)

    Secretary Dominguez. Thank you, Mr. Chairman, 
Representative McHugh and distinguished members of the 
subcommittee. I am honored to appear before you today to 
discuss the Military Commissary and Exchange Program.
    The President's budget submission for fiscal year 2008 
continues the Department's strong support for service members 
and their families. Commissaries and exchanges are an essential 
component of our quality-of-life programs, and I would like to 
thank the subcommittee for its support in helping the 
Department sustain the commissary and exchange benefits for our 
soldiers, sailors, airmen, and Marines.
    The road ahead is a challenging one for our military 
families and the resale institutions that serve them. Our 
commissaries and exchanges are supporting military personnel 
and their families as the force mobilizes, deploys and rotates 
in large numbers. Access to the benefit is a pressing concern 
as we bring thousands of military families home from overseas 
and close and realign bases. Finally, our resale activities 
must respond to rising customer expectations and the reality of 
competition in the global and networked marketplace.
    Our success in meeting these challenges requires that we 
set and achieve ambitious goals in cost reduction, improved 
customer value and improved access to these benefits. We must 
continue to enable and encourage creativity, experimentation 
and imagination in adapting to the challenges we face. We do 
not believe, however, the challenges we face warrant 
consolidation or merger of our various resale activities.
    With respect to the exchanges, we reported last year that, 
instead of proceeding with the recommendations of the Unified 
Exchange Task Force, the individual exchange boards assumed 
responsibility for deciding the way ahead. I am pleased to 
report that the exchange boards completed their review of the 
future of the retail industry and their exchange strategic 
plans. The exchange boards have set a course of action for the 
exchange commanders to develop cooperative efforts to maximize 
efficiencies in systems, logistics and supply. To maintain 
momentum, I will ensure we create strong performance goals and 
effective oversight mechanisms. With the individual and 
collaborative efforts underway, I have every confidence that 
our exchange programs will successfully transform to the new 
defense environment, and I want to echo Congressman McHugh's 
accolades to these gentlemen for leading that way and to Pat 
Nixon for the extraordinary stewardship of the Commissary 
Agency.
    In conclusion, the Department of Defense (DOD) is committed 
to seeing our commissaries and exchanges meet the challenges of 
changing expectations, a changing marketplace and a global 
repositioning of U.S. Forces. We thank you for continued 
congressional support, and I look forward to answering your 
questions.
    [The prepared statement of Secretary Dominguez can be found 
in the Appendix on page 40.]
    Dr. Snyder. Thank you, Mr. Secretary.
    Let us go to General Essex.

 STATEMENT OF MAJ. GEN. PAUL W. ESSEX, COMMANDER, ARMY AND AIR 
             FORCE EXCHANGE SERVICE, U.S. AIR FORCE

    General Essex. Thank you, sir.
    Mr. Chairman and members of the subcommittee, as Commander 
of the Army and Air Force Exchange Service (AAFES), it is my 
privilege to once again appear before this subcommittee. On 
behalf of the military community we serve, I thank this 
subcommittee for its continued support of the exchange benefits 
and quality-of-life programs.
    AAFES has a long and proud history of service and support 
to America's armed forces, and 2006 was no exception. We 
continue to fulfill our mission to provide quality merchandise 
and services at competitively low prices and to generate 
earnings for the Army and Air Force morale, welfare and 
recreation programs. This foundation of service and support is 
at the center of all we do at AAFES.
    No matter where military members serve, AAFES provides a 
comprehensive and customer-focused benefit either online, by 
catalog, or in the more than 3,100 facilities around the globe. 
Many, if not all, members of this subcommittee have visited our 
deployed troops and witnessed the AAFES team in action. AAFES 
operates more than 50 field exchanges, well over 100 name-brand 
fast-food operations, 69 phone centers and hundreds of 
concession activities throughout Iraq, Afghanistan, Kuwait and 
the Horn of Africa. This is one of the most important jobs 
AAFES will ever do.
    All of this would be impossible without the dedicated and 
enthusiastic AAFES workforce. About 450 devoted AAFES 
volunteers are deployed in support of Operations Enduring 
Freedom and Iraqi Freedom, and I would add that we have more 
volunteers than we have requirements to send them, so it has 
been a particularly heartwarming experience for me to lead 
these folks.
    In 2006, AAFES embarked upon one of its most challenging 
years in recent history. Remarkably, we project AAFES revenues 
for 2006 will reach $8.9 billion and an increase of $257 
million over 2005, and we expect to provide contributions to 
MWR in excess of $221 million. AAFES receives minimal indirect 
appropriated funds to support exchange operations. The largest 
component, $136 million, was applied to Second Destination 
Transportation (SDT) expenses, which enables AAFES to provide 
balanced pricing for soldiers and airmen stationed overseas. 
This funding also fulfills congressional intent to provide the 
staples of an American lifestyle and improve the quality of 
life for military families serving abroad.
    I want to personally thank this subcommittee for its 
leadership and for the support of the AAFES SDT funding. We 
take our role as stewards of these appropriated funds very 
seriously. AAFES implemented a number of initiatives that 
avoided $18.6 million in SDT costs last year. We must not 
forget that there are significant challenges, which inhibit our 
ability to remain responsive to the needs of those we serve. 
AAFES will continue to advocate for the repeal of merchandise 
restrictions that deny the Army and Air Force families the 
ability to buy a more extensive range of products and services. 
If they cannot purchase what they want, when they want it from 
their exchange, they will look elsewhere.
    Another challenge for AAFES is the impact of the Base 
Realignment Closure, BRAC, and global posture and realignment. 
In gaining locations, military construction appropriated funds 
are authorized. Unfortunately, AAFES will be required to expend 
the service members' dollars in lieu of appropriated funds 
(APF) because the services have not programmed funds for these 
projects. We recognize the intense budget pressures of a 
wartime environment. However, it is a fact that every 
nonappropriated dollar spent on authorized APF functions 
negatively impacts quality-of-life programs.
    For many years, the military exchange services--may I 
finish?--have participated in cooperative efforts, 
collaborating on projects of common value. In 2006, the 
Exchange Cooperative Efforts Board chartered four cross-
functional teams to focus on efficiencies in logistics, 
procurement, gift cards and information technology. We have 
made great progress in strengthening these relationships and in 
defining our common objectives.
    Discussions on mutually beneficial cooperation are not 
limited to the exchanges. AAFES recently began exploring 
initiatives with Defense Commissary Agency (DeCA) that focus on 
win-win opportunities for both organizations. These combined 
efforts should result in benefits for AAFES, DeCA and, most 
importantly, for the military community.
    In summary, while AAFES continues to meet the unique and 
diverse needs of service members and their families, the road 
ahead is a difficult and challenging one. The actions we take 
together today will ensure the long-term fiscal viability of 
AAFES tomorrow with the focused and dedicated effort on our 
mission of serving the best customers in the world.
    Thank you, and I look forward to your questions.
    [The prepared statement of General Essex can be found in 
the Appendix on page 54.]
    Dr. Snyder. Mr. McHugh and I would like to be able to claim 
credit that we run the clocks around here, but we do not. That 
was actually the 15-minutes notice that the House will be going 
into session at 10:30, and we are not anticipating, I do not 
think, any interruptions in this hearing today from votes. 
Although, having said that, I will probably be surprised. In 
another 15 minutes, we will hear the votes go off, announcing 
we are going into session.
    Admiral Cowley.

 STATEMENT OF REAR ADM. ROBERT E. COWLEY, III, COMMANDER, NAVY 
              EXCHANGE SERVICE COMMAND, U.S. NAVY

    Admiral Cowley. Good morning, Mr. Chairman, Representative 
McHugh and distinguished members of the subcommittee. It is my 
privilege to represent Navy Exchange and our dedicated 
associates worldwide. Navy Exchange and the Navy family thank 
you for your steadfast support of the Navy Exchange benefit. I 
provided my written statement for the record, and I will take 
this opportunity to briefly report on Navy Exchange.
    Research shows quality-of-life programs positively and 
directly affect recruitment, retention and the performance of 
service members. The Navy's Spouse Survey, recently published 
in February 2007, revalidated this. When asked to identify the 
top 10 most important support programs, both enlisted and 
officer spouses ranked the Navy Exchange within the top five. 
Our Navy families clearly recognize the importance of the 
exchange benefit.
    Navy Exchange is integral to the Navy's quality-of-life 
mission. We directly support the Chief of Naval Operations Navy 
Professional Reading Program. We support and participate in the 
Navy's wellness and healthy lifestyle programs. We support Task 
Force Financial Health in helping junior enlisted members 
better manage credit. We provide spousal employment with 24 
percent of our associates' military spouses. Further, we 
provide for continuity of employment for spouses as members 
transfer, and we assist in the Navy's Disaster Relief mission, 
and these are just a few of the areas where we participate. All 
of these initiatives leverage our mission of service to our 
members.
    Navy Exchange operates under a balanced scorecard using 
commercial performance metrics. We use a commercial firm to 
validate customer savings that average 26 percent, including 
sales tax. Our Customer Satisfaction Index, also reported by a 
commercial firm, continues an 8-year improving trend with a 
score of 79 for 2006. This score places us in the top quartile 
of commercial retailers that participate. This year's survey 
shows savings as the single most important factor to our 
customers. The commercial retailers measure our financial 
performance through sales and profit execution to plan. Our 
total sales have been on a continuing upward trend since fiscal 
year 2001, meeting or exceeding our board of directors' 
approved targets. Likewise, our profit execution has 
consistently met the board's identified requirements for MWR 
dividends and recapitalization, and we are continuing to 
improve the viability of future exchange benefits.
    I am pleased to report that our integrated commercial 
Enterprise Information System, Oracle Retail, is deployed and 
operational. Together with the other exchanges, Navy MWR and 
the Defense Commissary Agency, we are seeking and discovering 
efficiencies across combined operations to further improve the 
quality of life for military members. Our passion is caring for 
sailors and their families, and we do this through over 1,300 
stores and outlets. We do this afloat for our Ships Store 
Program on 192 Navy and military sea-land command ships. We 
keep sailors in touch with family through our 
telecommunications programs. Our Navy Lodge Program supports 
sailors and families with clean, affordable accommodations. The 
Navy Lodge Program continues to support wounded service members 
returning from Operations Iraqi Freedom and Enduring Freedom. 
Navy Lodge has provided over 13,000 room nights in 2006 to 
families of injured service members as well as to the service 
members themselves.
    Bottom line, we are a touch of home when our sailors are 
overseas or afloat. We are a safety net for their families when 
they are deployed.
    In closing, I would like to say how proud I am of our Navy 
Exchange teams who take care of our sailors and their families 
who serve worldwide every day with great dedication. Together 
with help from our many industry and government partners as 
well as the strong support from this subcommittee, we are able 
to do more for our deserving military families.
    On our sailors' behalf, I thank you, and I stand ready to 
take your questions.
    [The prepared statement of Admiral Cowley can be found in 
the Appendix on page 64.]
    Dr. Snyder. Thank you, Admiral.
    Mr. Nixon.

  STATEMENT OF PATRICK B. NIXON, DIRECTOR, DEFENSE COMMISSARY 
                             AGENCY

    Mr. Nixon. Thank you, Congressman Snyder.
    Congressman McHugh, Congresswoman Drake, thank you.
    It is my pleasure today to provide an update on the 
performance of the Defense Commissary Agency this past year.
    In 2006, we have seen the commissary benefit grow in 
importance in the eyes of our customers as we serve the 
families of service members deployed around the world, many in 
harm's way. The commissary is truly the rallying point for 
military families and provides those deployed with a sense of 
security that their loved ones are being taken care of while 
they are away from home. The 18,000 employees who operate the 
commissary system continue to be a source of personal pride as 
they rise again and again to deliver astonishing business 
results in the face of significant resource challenges. Once 
again, DeCA reached new highs in sales performance and customer 
service. Our customers continue to express their satisfaction 
with our service, giving us the highest scores ever on the 
Commissary Customer Satisfaction Survey. In addition, the 
external independent evaluation provided by the American 
Customer Satisfaction Index ranked DeCA second in customer 
satisfaction among the largest private-sector supermarket 
chains in the United States. At the same time, we have 
maintained the level of savings our customers enjoy at 32 
percent, providing the average family of four almost $3,000 a 
year in additional disposable income.
    Finally, the cost of providing the commissary benefit when 
measured in constant fiscal year 2000 dollars continues to 
decrease, vividly demonstrating that we have increased the 
value of the benefit without increasing the cost.
    On the governance front, DeCA continues to demonstrate the 
attributes of a model governmental entity. DeCA received its 
fifth clean audit opinion on its financial records from its 
commercial audit firm. Further, not only was DeCA's Fiscal Year 
2006 Annual Statement of Assurance Scorecard rated the highest 
in DOD, but the Department's comptroller consistently holds 
DeCA up as a model for other DOD activities to emulate in 
implementing their internal control programs. We continue to 
focus on reengineering our organization and operations to 
remain recognized, responsive and relevant to the military of 
today and of the future. Our key initiatives remain on track as 
well.
    The DeCA/TRICARE partnership for the ``It's Your Choice, 
Make it Healthy'' program, highlighting healthy foods available 
in military commissaries, has been extremely successful in 
informing military families about eating healthier and 
promoting concepts such as weight management and fitness. With 
the addition of a dietitian to the DeCA staff, we have 
increased our ability to educate customers on how to make 
healthier meal choices at the commissary.
    Our change in produce procurement also remains on track. 
While we are working through some award challenges and minor 
start-up problems, we continue to push forward with this 
initiative. Adopting the best supermarket industry practices 
resulted in shoppers buying more produce. With higher quality 
and lower prices, we have seen patrons return to the commissary 
more often to do their fill-in shopping as a direct result of 
this program, raising their level of financial fitness as well.
    At the same time, DeCA is expanding its organic food 
offerings as another healthy eating alternative. Of course, 
food safety is also on everyone's mind. Thus, to provide an 
additional level of food security, which I believe commissary 
patrons deserve, I recently directed that the food products we 
buy for resale come from suppliers that observe the good safety 
guidelines established under the DOD-Approved Source Program.
    DeCA's biggest challenge today is the strain placed on the 
surcharge account. The surcharge account was established during 
a time with predictable force structure, construction costs and 
investment models. BRAC and restationing actions are projected 
to impact 16 installations where DeCA operates commissaries and 
further compounds the strain on the surcharge account. There 
will be significant personnel increases at those locations, and 
our existing facilities will not be able to accommodate the 
increased patron demand. The requirements to build new or to 
renovate existing stores to serve those locations not only 
further taxes the surcharge account, but also will require 
deferring those projects that would have been next in line for 
replacement or for renovation under our planned construction 
program. In essence, it has negated the existing methodology of 
ranking and setting priorities for the investment of surcharge 
dollars. At this point, it appears the only solution is that we 
begin placing more emphasis on the repair and the renovation of 
existing stores in the future rather than building new.
    We at DeCA are proud of the contribution we make in 
operating the 263 commissaries worldwide that provide 
tremendous savings on groceries for military personnel, 
retirees and their families. We recognize that commissaries 
deliver a highly valued component of military compensation, and 
they bring a morale-building taste of home by providing 
familiar American food products in overseas locations. Simply 
stated, commissaries contribute to family readiness, but we do 
not do it alone. It is a team effort.
    Mr. Chairman, thank you for your support, and my thanks to 
all of you on this subcommittee for the continued emphasis that 
you place on the value of the commissary benefit. We also 
recognize our industry partners in their support of the 
commissary system, both through their excellent prices that 
they offer on commissary products and the direct contribution 
they make in supporting a number of activities designed to 
improve quality of life.
    Once again, it has been my pleasure to have the opportunity 
to tell you about the great things at DeCA and the great 
accomplishments we have achieved over the last year. When all 
is said and done, it comes down to people taking care of 
people, and no one does that better than those at DeCA.
    I look forward to answering your questions, sir.
    [The prepared statement of Mr. Nixon can be found in the 
Appendix on page 80.]
    Dr. Snyder. Thank you, Mr. Nixon.
    Mr. Downs.

 STATEMENT OF MICHAEL P. DOWNS, DIRECTOR, PERSONAL AND FAMILY 
  READINESS DIVISION, MANPOWER AND RESERVE AFFAIRS DEPARTMENT 
                HEADQUARTERS, U.S. MARINE CORPS

    Mr. Downs. Thank you, Mr. Chairman, Representative McHugh, 
Congresswoman Drake, for this opportunity to report on Marine 
Corps Exchanges.
    Over the past year, your Marines deployed to all corners of 
the globe in support of our nation's combat requirements or 
humanitarian missions. The commandant of the Marine Corps has 
made it clear that those who sacrifice so much for our nation's 
defense should not be asked to sacrifice their quality of life. 
Exchanges and the MWR programs they support are a very 
important part of the nonpaid compensation benefit, and we 
appreciate your continued efforts to protect this benefit.
    Our Marine Corps Exchange has evolved and continues to 
transform to new levels of operational excellence. In 2006, we 
achieved unprecedented sales and profits, resulting in a 
generous MWR dividend and support for a strong recapitalization 
program. While much of our efforts to date have been on back-
of-the-house efficiencies, Marines and their families will soon 
see visible improvements as the renovation and the replacement 
of Marine Corps exchanges takes center stage in our Marine 
Corps Community Services non-appropriated funds (NAF) 
Construction Program.
    Finally, I am pleased to comment on the productivity of the 
Exchange Cooperative Efforts Board. Through a spirit of 
increased trust and openness among our sister exchanges, our 
service departments and OSD, we will continue to work together 
to further initiatives designed to increase efficiencies and 
effectiveness.
    Thank you for this opportunity to be here today and to 
represent the Marines and their families.
    [The prepared statement of Mr. Downs can be found in the 
Appendix on page 96.]
    Dr. Snyder. Thank you, gentlemen, for your testimony.
    I guess our pattern here over the last few months has been 
to put us on the clock, but when you see these lights go off, 
those are for the benefit of the members here. We want all of 
you to have an opportunity to answer these questions as you 
deem appropriate.
    Mr. Dominguez, I guess the clock is running, but the light 
is not on, but I can see the time. Mr. Dominguez, let me just 
give you a softball question if I might.
    You are a zealous advocate on behalf of our men and women 
in uniform. Is there anything in these topics that are being 
talked about this morning that keeps you awake a little bit at 
night or things that you think that Congress needs to be 
focused on as we head into this year's Defense Bill?
    Secretary Dominguez. Sir, I think our progress on BRAC and 
restationing, you know, is a big deal. It is certainly the 
greatest turbulence in front of us in these areas. Associated 
with BRAC and rebasing, obviously, there are some tough things, 
I mean in particular around the closures. You know, those are 
really tough on communities, but they are necessary actions to 
take, and we will need to close bases. When the bases close, we 
need to close commissaries and exchanges.
    For both you and I, for the committee and myself, I think 
it is continuing to advocate in that context for the 
appropriated funding to make sure that--for the new 
construction associated with BRAC or rebasing so that the 
Nation, you know, is able to prioritize these things and 
decide, you know, when the money runs out, that everything 
above the line is really, really important, and unfortunately, 
we did not--we were not successful in terms of the 2008 budget 
in doing that, but the advocacy and making the issue and making 
sure people understood the choices I think was important and 
continues to be, and that certainly is a dialogue that Congress 
now should take up.
    Dr. Snyder. You are referring to the $3.1 billion in the 
BRAC account? Is that specifically what you are referring to?
    Secretary Dominguez. Yes. The $3.1 billion in the BRAC 
account, which--or another appropriated fund account in 
Military Construction in which we are authorized to build these 
new facilities through that, but we were unsuccessful. There 
just was not enough room in the budget, and there are higher 
priority things from the Administration's viewpoint.
    Dr. Snyder. And anybody can respond here.
    Again, taking off on the issue of construction, what is the 
status of the rebuilding of facilities that were damaged or 
wiped out by the hurricanes in the south? I know we had an 
issue of Keesler. Can somebody give me an update there and on 
any other facilities?
    General Essex. Yes, sir. I can speak to Keesler.
    That goes off every time I talk; doesn't it?
    Dr. Snyder. I am taking back what I said. You know, I think 
it is related to you.
    General Essex. I think it is. It is something about the 
tone or tenor of my voice.
    At Keesler, we very much appreciate the support that we got 
from the subcommittee and from Congress in the funding to 
rebuild the soldiers and airmen's exchange at Keesler Air Force 
Base. We do have sufficient funding now, and we have got the 
interim, the temporary, exchange up and operating. And the 
replacement exchange is on the books and underway.
    Dr. Snyder. But ``on the books'' is different than 
``underway,'' isn't it?
    General Essex. No.
    Dr. Snyder. Is it under construction?
    General Essex. You know, I do not know if it is actually 
under construction yet. Yes, they are going to be breaking 
ground in April.
    Dr. Snyder. An April groundbreaking for the one at Keesler. 
I have about a half a minute left.
    Any other facilities?
    Mr. Nixon. Yes, sir.
    Just as an update on commissaries, the Keesler commissary 
was destroyed. Gulfport was significantly damaged. New Orleans 
was not so much damaged, but you could not get to it. We have 
three facilities back open and running. New Orleans is back 
open and running, and it is running at about 79 percent of its 
previous capacity. Gulfport, a real success story, is running 
at pre-Katrina 159 percent. Keesler is running at about 37 
percent. We have got a great temporary facility there, some 
real ingenious folks who went into an old club and put a 
commissary in. They just added phase three of a deli operation 
there. Along with General Essex, the new store will break 
ground in April, probably, for the new facilities, and very 
thankfully, you provided the money for the replacement of the 
Keesler facility.
    Dr. Snyder. Mr. McHugh, I guess our clock is not working. I 
mean, the clock is working; the light is not working, a broken 
wire. General Essex probably did it.
    General Essex. Yes, sir, I think I did.
    Mr. McHugh. Thank you, Mr. Chairman.
    Mr. Secretary, in your written statement, you made the 
comment that your departmental goal is to sustain the 
commissary and exchange benefits without increasing 
appropriated fund support. I think you heard me in my opening 
comments allude to the fact that the cost today, as Mr. Nixon 
noted, of operating DeCA, at least, is in 2007 dollars 
virtually the same as it was in 2000. I think we can all agree 
the exchange and commissary systems have done a terrific job in 
finding efficiencies in savings.
    I have to begin to wonder now. While I understand that is 
an objective, what, if anything, would make you revisit that 
decision? I mentioned costs escalating, exploding costs of 
construction. I just would like to know if that is an open 
page. Is that a stated objective, or are we absolutely under no 
circumstances, regardless of what the tide may bring us, going 
to see a proposed increase in appropriated fund support?
    Secretary Dominguez. Sir, that is our objective. It is not 
an impermeable barrier. If reality changes, we will have to 
change with it. You know, clearly, some things can happen like 
the, you know, exploding construction costs, those kinds of 
things, pension, health care costs. So those things are putting 
stresses. To date, these gentlemen and the boards that back 
them have been forward-leaning, creative, aggressive, I think, 
achieving the kind of performance improvement that we have seen 
in the private sector, who are both benchmarks and, to some 
degree, competitors.
    Mr. McHugh. No good deed goes unpunished, right?
    Secretary Dominguez. Yes, sir, but this is life in retail, 
and you know, as we evaluate those, as the boards look at the 
challenges in front of them, we will have to consider that, but 
as a goal going in, as I said, there is plenty of demand for 
the appropriated funds. There are plenty of high priorities 
that demand those resources, and if these gentlemen can keep 
hitting that goal, then that is great. If they cannot, the 
benefit is important. The quality of service is important. What 
people--our members and families--you know, the value they 
place in this is clear to us, as you heard here in the opening 
statements about the survey responses. So retention and 
recruiting are big deals. This is an important piece of this. 
This is a piece of the compensation package that we offer our 
service members, and we need to be true and honor that promise.
    Mr. McHugh. I appreciate that. I would go so far--of 
course, I do not have to live by a particular manual, but I 
would go so far as quality-of-life issues, and this environment 
is a readiness issue. I strongly believe that.
    Let me pose a conundrum to you. I know that you have got a 
review underway with respect to the adequacy of nonappropriated 
funds for DeCA, but if construction costs force you to the 
point, what would be the decision, to make a proposal to 
increase the five-percent cap on commissary prices or would DOD 
consider using appropriated funds? Where would you go first?
    Secretary Dominguez. Um----
    Mr. McHugh. I will get to the hard questions in a minute.
    Secretary Dominguez. Yes, sir.
    I am not sure where we would go first. I mean, I think we 
would have to consult the Commissary Operating Board and then, 
you know, go through the process inside of the Department. I am 
not an enthusiast for increasing the surcharge, you know, 
simply because that has been so much a part of our 
understanding of the commissary benefit for so long.
    Mr. McHugh. Well, I am glad to hear you say that. I just 
have a few seconds, and I assume we will have other rounds. 
Just for the record, I am a damned opponent of raising the 
five-percent, but I want to underscore the fact that, in the 
commissary era, this is a retail challenge, and I think Pat 
would certainly agree. They have got to compete against the 
private sector, and the private sector is continuously 
modernizing stores, opening new stores and such, and if we 
cannot compete on that level, it is going to have a terribly, 
in my judgment, erosive effect on the customer base which, of 
course, starts downhill real fast. So I just want to suggest 
that, when it comes to appropriated funds, there are not a lot 
of other happy choices.
    So I thank you for your comments.
    Mr. Chairman, I yield back.
    Dr. Snyder. Thank you.
    Mrs. Drake.
    Mrs. Drake. Thank you, Mr. Chairman.
    First, I would like to thank you all for being here and for 
what you do for our military families, and my only regret is I 
cannot shop in them, because they are truly beautiful, the ones 
I have visited.
    Mr. Downs, I cannot sit here, looking at you, without 
telling you about the bumper sticker I saw Friday on my way 
home. It said, ``Northern Virginia,'' and it said, ``Sit down. 
Shut up. And let my Marine do his job.'' so I just have not 
been able to get that out of my mind, looking at you, but a 
couple of questions.
    First of all, two weeks ago, Douglas McAlister with 
American Logistics Association (ALA) was here, and he talked 
about limited base access for non-DOD employees, and certainly, 
we understand the security issues, and we understand the costs 
for resale, but isn't there some way to move more quickly to 
get some sort--Mr. Secretary, I guess this would be to you--of 
a standardized clearance card to get access to the base and 
without making people duplicate their efforts to get that kind 
of a card?
    Secretary Dominguez. Yes, ma'am.
    You know, I have talked to the ALA leadership about this. I 
went down to a convention they were having and spoke to them, 
and got feedback from them. I understand this is an important 
issue for our partners, and so it is an important issue for me. 
We believe we have the solutions that are compliant with 
Homeland Security Presidential Directive 12, and in fact, we 
are deploying that, you know, technology solution where you 
register people's credentials into a database that is then 
shared and accessible, and the deployment of that database, 
though, is complete in Europe. It is complete in Korea. We are 
now focused on deploying it in Southwest Asia, which obviously 
needs to be our first priority. Subsequent to that, we will be 
deploying in the United States as well, and that will help a 
great deal, and I believe that work is going on in partnership 
with ALA and organizations like that where their industry is 
also establishing its own credentials to standards identified 
by the U.S. Government and verifiable and transparent to us so 
that we can incorporate their credentialing into our systems 
and then make that data available to base commanders who 
ultimately determine who gets access to their bases. But there 
is a plan. There is a technological solution--I believe we are 
all agreed on that path--and it is just a question of getting 
it deployed.
    Mrs. Drake. Do we have a time frame?
    Secretary Dominguez. I do not right now.
    Mrs. Drake. Okay. The next question would also be to you, 
and that one deals with, this committee often deals with: How 
do we encourage people to join the military? How do we retain 
people? One of the things I have been hearing a little bit 
about is--because we also want to recruit people who do not 
make it a career even though we want to recruit people who do 
want a 30-year military career, and one of the things I have 
heard out there is--and I know we do this with some health care 
for military members who have served in a combat zone.
    Would there be a value to looking at commissary or exchange 
periods after discharge from the military for someone who is 
not retired? Is that one of the things we should throw out 
there as we look at, how do we attract the people who we need 
to fight the global war on terror?
    Secretary Dominguez. Ma'am, if we are thinking about it as 
a recruiting tool for people who just want to do, you know, a 
tour for a six-year enlistment and then out, there are much 
more effective ways to deal with that than through a commissary 
benefit, you know, after you end your enlistment, so I would 
not see that as a big driver, a big attractor, to recruiting. 
There are much more effective ways.
    Mrs. Drake. Does anyone else want to comment on that before 
I run out of time?
    Mr. Downs. I would tend to agree with Mr. Dominguez.
    Our folks who leave the services go to the wide expansive 
America, and commissaries and exchanges are in very limited 
places, so many of these departing service members are not 
going to find themselves in and around bases.
    Mrs. Drake. Thank you.
    Mr. Chairman, I yield back.
    Dr. Snyder. Sure.
    Mr. Nixon, I cannot let the hearing go by, of course, 
without asking about produce.
    Can you give us an update on the situation?
    Mr. Nixon. Yes, sir.
    Dr. Snyder. I am going to hold off on any tattoo questions 
for this panel and just ask about--what is the update on the 
situation with regard to produce, and one specific question is, 
would you describe for us, please--what is the status--I think 
it was either in your written statement about the status of 
legal challenges to the new way of doing produce. I did not 
understand that.
    Mr. Nixon. Yes, sir, and thank you for the personal 
interest that you have taken in produce and in our new 
procurement method.
    We set out a goal of soliciting a new produce business 
model for 184 stores by October first. We accomplished that. 
And because these are procurements and some of the largest 
produce procurements that have been awarded in the retail 
industry, public or private sector, there was a great deal of 
interest.
    To date, we have one active challenge, Government 
Accountability Office (GAO) challenge, outstanding for 31 
stores in the northeastern part of the United States. In total, 
we have two agency-level challenges, seven GAO challenges, and 
I think three--because these were set aside, three Small 
Business Administration (SBA) challenges whether companies are 
small businesses or not. We have worked through all of the 
protests with the exception of the 31 stores in the northeast 
and a lawsuit in the southeast portion of the United States. 
None of these, except for the one in the Northeast, have 
impacted us proceeding with performance to awarding the 
contracts.
    What we found is that, you know, the primary test area was 
in the Tidewater Area. We established that this business model 
was extremely effective. For two years in a row, they have had 
double-digit increases in sales, and we have benchmarked them 
against a very well-run chain there, Farm Fresh, and we have 
quadrupled our produce sales increases versus what they do.
    But as with any venture where we have new contractors 
moving into new areas, there are some start-up issues with 
getting the right people in place, getting the right 
distribution points in place, getting the right sources in 
place. One of the issues that we have been watching closely is 
the Birmingham market. In fact, the Military Produce Group 
(MPG), who is the successful test company in the Tidewater 
Area, was awarded the southeastern portion of the United 
States, and they have had a few start-up issues. We have had 
some start-up issues. This is a new partnership, a new business 
relationship that we have undertaken.
    I absolutely believe that applying commercial supermarket 
best practices is the way to go. I was even down in your area 
and happened to visit the Little Rock store. A fine, young, new 
produce manager down there came up from Key West. It is a 
significant increase in responsibility for her. So we provide 
additional training. Mr. Jerry McDonnell, the president of the 
Military Produce Group, I asked him to fly down and meet me 
there, and I said, let us look at the quality of the produce 
you have here as compared to the quality you have up in Oceana. 
And he did that, and there are a few things we have to work on, 
but I am absolutely committed that this is the right way to go, 
Mr. Chairman, and it will be successful.
    Where we have issues or where we think the contractors are 
providing nonconforming products not up to standards, we do the 
normal things you do in a contract. We issue discrepancy 
reports. We have our contracting officer first approach the 
contractor and give them, if necessary, a get-well notice, a 
cure notice, so we follow all the rules. I am very pleased with 
the direction produce is going, and it will be a signature 
department in the Defense Commissary Agency, and I welcome your 
visits often to the Little Rock commissary.
    Dr. Snyder. You may remember, Mr. McHugh, a couple of years 
ago, I did a little walk-through in the produce at the Little 
Rock Air Force Base, and it was really pretty abysmal--an 
abundance of molds and everything else--but we are 
dramatically--and I went back there just a couple of weeks ago, 
three weeks ago.
    The issue of produce--and I assume that--I mean, I am not a 
retailer, but I assume that produce is kind of like eye candy 
for consumers. I mean, you walk in the store, and that is what 
you see, and that is what you want folks to see, and if you see 
in the first rack that it is not where it ought to be and it 
does not compare favorably with the folks downtown, it sends a 
bad signal for the whole store.
    Mr. Nixon. Absolutely.
    Dr. Snyder. What is your monitoring system on this? I think 
the system is very responsive to my walk-throughs and questions 
and all, but are there stores sitting out there somewhere that 
do not have a member of Congress or a staff person close by? Or 
how do you all from your level----
    Mr. Nixon. That is not the criteria.
    Dr. Snyder. How do you handle that in--no, I do not mean 
that.
    Mr. Nixon. I understand.
    Dr. Snyder. I assume you will respond to complaints 
wherever they come from. I happened to be the one who walked 
through that one, but there may be people out there who, when 
they complain, the way they deal with it is they take their 
business elsewhere and do not let you know. I found you all 
very forthcoming on this.
    So what is your system for monitoring in some kind of 
meaningful way so you can do checks on all of the stores?
    Mr. Nixon. Sir, because of the importance of our perishable 
departments, we obviously have area managers who are focused 
just on the perishable departments. There is also a zone 
manager who does the overall operation, but in our Customer 
Satisfaction Survey, it measures 14 operational areas, all 
observable to the patron, I mean produce quality being one of 
those that allows us to benchmark stores against stores. So we 
will look at a store in an area that has a high score versus 
one that has a low score and use best practices and send that 
management team over to the store that needs some help 
improving. We monitor through a variety of sources, one 
including veterinary food inspectors, the quality of produce 
arriving at the back door. We reject it if it does not meet 
standards. It is rejected at the back door, and it should never 
make it into the produce department.
    It is a leadership issue with me because, in fact, now the 
trend in the supermarket industry--it used to be the meat 
department. Meat was the draw. That is what you based your menu 
around was the meat department. It is not anymore. The produce 
department is what you build your menu around, and you are 
absolutely correct. The message that the patron gets when they 
walk in and look at the produce is an evaluation of that store. 
Is everything in that store fresh? Is the store clean? Is there 
attention to detail? So, from a management perspective, I do 
inspections. I go out, and I want everybody to know that--you 
know, they always say that everybody pays attention to what the 
boss pays attention to. Produce is on the top of my list for 
the message we need to send, and I want--and I want patrons to 
realize that there is no place that they can go where they are 
going to get a fresher, better deal than at the Defense 
Commissary Agency. So I hope you sense my passion about this, 
and we introduced this procurement methodology to drive that 
kind of mentality, that kind of business approach for produce, 
not only the quality of produce but how the department looks 
when you come in, that it is a farmers' market. It is an open 
environment. There is excitement there. You do not know what is 
going to be on sale. That is what drives the excitement about--
--
    Dr. Snyder. Thank you, Mr. Nixon.
    Mr. McHugh, you may recall that, I think a couple years 
ago, there was a hearing on the Little Rock Air Force Base. It 
was a hearing that you chaired in which we had a group of 
enlisted people here. I think it was the Marine Corps. I think 
it was a gunnery sergeant who--you know, we asked, what is 
going on? He just made mention that, you know, my wife keeps 
complaining about the produce at some base. Mrs. Drake was part 
of this whole thing, too, and that is what led to a lot of 
these discussions from me.
    Mr. McHugh.
    Mr. McHugh. The Chairman has a thing about produce, which I 
commend him for. I have got a thing about Diet Coke. More 
importantly, I have got a thing about something they call Coke 
Lite that they foist on those poor Europeans and other people 
as a substitute for Diet Coke, and it stresses me greatly when 
I think about the lack of Diet Coke and the presence of Coke 
Lite in commissaries and exchanges overseas, which brings us to 
Second Destination Transportation. See, there is a method.
    I have been assured repeatedly by our folks, as they look 
at the budget numbers, that the Second Destination 
Transportation is going to be fully funded. Mr. Secretary, I 
always like to have somebody on record assuring me of that.
    Can you assure me that SDT is fully funded by the 
Department--by the Army, I should say?
    Secretary Dominguez. The Fiscal Year 2008 President's 
Budget submission, we got that fully funded, so that was not 
the case in the prior budget, and we corrected that for this 
year.
    Mr. McHugh. Well, I am glad, and I am glad to have it on 
record particularly, and I appreciate that.
    Mr. Secretary, you may have heard--well, I will just pose 
it in a different way. You know, we have heard about the 
dividend, and we heard about, I guess, 136--no--$221 million 
dividend by AAFES over the 2006, I believe it was, fiscal year. 
That dividend is critical to the entire effort.
    How does that play out over time as we draw down 
particularly overseas? Has anybody had a chance to try to 
quantify that and to try to accommodate for that? I mean, 
clearly, the overseas customers have always been the system's 
best customers. I believe, at one time, they provided well over 
50 percent of all of the revenues, and it follows that that is 
a huge part of the dividend. That is so important in providing 
MWR programs.
    So what does that look like--see, you were not talking this 
time, General Essex.
    Secretary Dominguez. He was anxious to talk.
    Mr. McHugh. He anticipated your answer.
    What kind of read do you have on that issue?
    Secretary Dominguez. Sir, right now--I mean, for the last 
several years, the dividends in aggregate across the exchanges 
have been declining, so they are under some significant 
pressure. It was in response to that that this Unified Exchange 
Task Force got started, and we really dove in with the Exchange 
Boards of Directors in exploring the concept of what kind of 
cooperative efforts we can do to drive down costs and, you 
know, to ensure the exchange profitability. So those things 
continue because the dividends will be under pressure for a 
while. The same things that are impacting the commissaries are 
impacting the exchanges with pension costs, construction costs 
climbing, the challenge of BRAC and restationing.
    Mr. McHugh. Is there a budget estimate? I do not know if 
you can get to that level of projection, but as you look into 
2009, 2010, et cetera, do you have a budget plan that says, 
well, we expect, by that time, the dividend will be $190 
million or $200 million, or have you just not been able to 
forecast out that far?
    Secretary Dominguez. Yes, sir, we do. I mean, each of the 
exchanges does with their boards of directors, you know, look 
at where things are going. I do not have that with me right 
now. I think each of them could talk to you about it, but we 
are and remain concerned about, you know, the downward trend 
and reversing that downward trend, and that is where a lot of 
our focus has gone.
    So let me go ahead and turn it over to Paul.
    General Essex. Thank you, sir.
    Yes. I mean, you have identified one of the key reasons why 
dividend is changing. The move from Europe is anywhere from two 
to four times as much is spent by our customers when they are 
overseas in their exchange as when they come home, and then 
when they come home, they typically live off the post or off 
the base, so they pass two Wal-Marts, a Target and a strip mall 
before they even get to the gate, so it is going to affect our 
earnings. The other factors that are involved here are that it 
is not just the people moving and spending less, but when we 
have identified a place for closure, we have to start 
accelerating the depreciation schedule and finish that up by 
the time we close. So that adds to the issue. It is a temporary 
issue, but it is real, and gas sales and the whole gas business 
has been a change, too. Just 2 or 3 years ago, profit margins 
for us were 12, 13 percent, which is not great, but it is a 
benefit to the troops, and it was a fairly reasonable number. 
Now, even though sales on gasoline are way up, earnings are 
around five or six percent, so that has affected the earnings 
picture. Also, investment in the capital program at gaining 
bases where we have to build new stores has caused, you know, 
us to use a lot of that money in the 2006, 2007, 2008 time 
frame, and then, of course, as soon as you open a new store, 
you start the depreciation schedule again. So 2006-2007 has 
been sort of the perfect storm year where a lot of these things 
have come together. We expect 2008, when we start really 
getting some benefit from our Retek Oracle Retail 
implementation to kick in, 2008 dividends should start coming 
back up nicely and proceed on up.
    Mr. McHugh. Thank you.
    Admiral Cowley. Yes, sir.
    Our profit demographics or revenue demographics are a 
little bit different than AAFES. We did not have quite the same 
decline in overseas revenue and we experienced stronger 
performance overseas. In fact, we have seen some increase in 
overseas revenue with the exchange that we opened in the 
Kingdom of Bahrain that was previously a ships store. Since we 
have opened that, we have seen some increase in revenue due to 
that. Oddly, we have all of the same pressures that my 
colleagues have articulated here, and we are looking both 
internally and externally at initiatives that we can pursue in 
order to mitigate that. If we look on our operating profit from 
2003 on, it has been fairly steady. It has been health care, 
medical care. It has been some of the recapitalization. If you 
look at the pressure just in construction alone, it is fairly 
illustrative. We are seeing some increases, double-digit, 25, 
30 percent that is not generating commensurate benefit on the 
other end. So we are looking both within and across 
organizations to continue to drive those efficiencies and 
economies through standardization in order to put us back on 
that upward slope. We have now deployed and are operational 
with our Oracle Retail, and indeed, we are seeing some benefit 
accrue from that. But as you know, that benefit accrues on a 
curve, and that comes a lot more slowly than does depreciation, 
so some of these other pressures affect us, and I believe we 
are on an upward trend.
    Mr. McHugh. Thank you.
    Mr. Downs. This is one of those cases where size and 
location matters. The Marine Corps is not dramatically impacted 
by other BRAC or restationing, and we only have one overseas 
store. You will note that our dividends were up 34 percent from 
last year to this year. We anticipate being able to sustain 
that. This is a particular case of, we started later in 
efficiency initiatives than the other exchanges, and that is 
just now coming into fruition. We will have some minor impact 
from the fact that there are some stores that lose sales during 
the periods of renovation, and we are on a very active 
renovation initiative, but we do not anticipate a significant 
lowering of our dividend, and we will, in fact, remain steady 
out to the foreseeable future.
    Mr. McHugh. Thank you, gentlemen.
    Thank you, Mr. Chairman.
    Dr. Snyder. Mrs. Drake.
    Mrs. Drake. What about Mr. Kline?
    Dr. Snyder. Well----
    Mrs. Drake. Okay. Do you want me to go first? Okay. Well, 
thank you.
    First of all, Mr. Chairman, I want to tell you our pilot 
program on produce is working as well as Mr. Nixon has said. 
Customers are happy. Suppliers are happy. And it is really 
beautiful. It is well displayed. It is a good selection and 
just really working very well, and so I know we would like to 
see that everywhere, Mr. Nixon, but two of the other things 
that we have talked a lot about in here and certainly the one 
Mr. McHugh asked about, about secondary destination, is my 
term. In my time in Congress, we have talked about produce, 
secondary destination, but there are two other things, and one 
is the DOD is looking at eliminating restrictions on the sale 
of certain other products, whether it be jewelry, furniture, 
what the status of that is. Then the second question would deal 
with implementing shared services, kind of backroom for the 
separate exchanges--human services, logistics--an update on all 
of that.
    Secretary Dominguez. Let me start with the latter on the 
shared services.
    What we did as part of our discussion of the Unified 
Exchange Task Force is we recognized that the boards of 
directors for each of these exchanges has a fiduciary 
responsibility to their stakeholders to ensure that this 
dividend that we just talked about is sustained, and the 
Unified Exchange Task Force pointed out areas through, you 
know, shared purchasing, the potential for some shared human 
resources (HR) services, for some shared information technology 
(IT) services, those kinds of things, where costs could be 
reduced through economies of scale, and what we agreed was that 
we need to look at each of these individually as a business 
proposition and that the exchanges should develop mutually 
agreeable business proposals that would be vetted with their 
directors so that they then commit themselves to it because of 
a compelling business need. So we have really put this back to 
the boards to let them guide the way forward here, again, 
keeping our eye on that dividend ball. I am sorry. The----
    Mrs. Drake. Specialty items. Furniture.
    Secretary Dominguez. As a general proposition, we would 
like for the exchanges not to be restricted around the sale of 
some items. Again, that helps their ability to meet customer 
needs, generate revenues, profits and then MWR dividend. Saying 
that, we recognize that there are particularly issues with 
small businesses, in particular outside of our gates, and we 
have to be good stewards and citizens of the communities, you 
know, in which we live, but we are reviewing that continuously 
with an eye to try and lift restrictions wherever that is 
possible and that it makes sense and will not disrupt the 
community where we belong.
    Mrs. Drake. Thank you very much.
    Thank you, Mr. Chairman. I will yield back.
    Dr. Snyder. Mr. Kline.
    Mr. Kline. Thank you, Mr. Chairman. I was not going to 
speak because I, unfortunately, came in late, and I am always 
hesitant to ask a question that has been covered probably three 
times by every member and every witness.
    Dr. Snyder. It does not stop the rest of us.
    Mr. Kline. I know. I remembered that, Mr. Chairman, and 
thought, what was I thinking?
    I just wanted to say a couple of things and get to one 
question that is always nagging out there for me. First of all, 
let me say that the reports that I have heard about the 
commissary and exchange system continue to be good. I have my 
built-in spy system. My son is serving on active duty; his wife 
goes to the commissary and the exchange at Fort Campbell, 
Kentucky, and I continue to get good reports. And so I always 
check that barometer on how things are working; I am glad to 
hear that.
    One of the things that continually comes up is of some 
concern to me and, I hope, to you. When we have troops deployed 
in relatively small numbers, typically to remote corners--
Admiral, you mentioned Bahrain, but we have troops in Djibouti 
and Iraq and Afghanistan and all sorts of places--where they 
are set up for sometimes several weeks or several months, we 
need some sort of exchange system, and that has worked pretty 
well.
    In the past, there have been problems getting sort of 
essential items, small, round, circular cans of smokeless 
tobacco and things like that. I am just saying that I hope that 
we have foreseen our way through that and are able to get that 
kind of essential item to these troops in these remote corners. 
And I ask any of you if you are getting any feedback that there 
is difficulty there. I wouldn't expect from this group that you 
would.
    General Essex. Sir, we watch that stuff closely; that is, 
job one at the Army and Air Force exchange service is the 
support to our deployed troops, Operation Allied Force (OAF) 
and elsewhere, as you mentioned, in various locations. And we 
pay particular attention to that. I have a senior vice 
president in my area staff that focuses on that.
    For the small locations out in the more remote parts of 
Iraq, for example, we typically use what are called impressed 
fund operations; that is, where someone in that small unit will 
actually go pick up tobacco, toothpaste, whatever they are 
going to take back and we give them a credit account and they 
sell it and then once a month or once every couple of weeks, 
depending on how often the need, they come back and replenish.
    That said, as hard as we try, sometimes we do run out of 
some particular item at certain locations. The logistics are a 
tough, tough problem in some of these places. And we watch it 
as closely as we can and do make it a major focus.
    Mr. Kline. Exactly. It is the logistics that are almost 
always the issue.
    We have enormous demands on intratheater lift in Iraq. I 
know that you are very much aware of that. But intertheater 
lift, we have had instances in my ancient history where we 
couldn't find the transportation or you all couldn't find the 
transportation to get the items there; and that is what I was 
going to.
    Are you running into that? Are you hearing sorts of things 
that you can't get, some of these high-demand items, to the 
more remote corners?
    And I am thinking certainly there are some forward 
operating bases (FOB) and things in Iraq, but I am also 
thinking of places like Djibouti and Bahrain and places that 
don't have the focus and may not have the continuing flow of 
the lift.
    General Essex. I can't say that we are perfect. We try and 
we do watch it closely. Occasionally things pop up where we run 
out of something, but we push hard to get everything 
replenished as quickly as we can.
    And we hear--with the e-mail age here, the troops are 
pretty well connected and they let us know.
    Mr. Kline. Thank you very much.
    Thanks, Mr. Chairman.
    Dr. Snyder. Thank you, Mr. Kline.
    I wanted to ask Mr. Nixon one more. I can't let go of 
produce. One of the issues from my last visit out there, for 
want of a better term, it is ``specialty items,'' where you 
have, let's suppose, some kind of item that is good for perhaps 
ethnic cooking or it has got a little niche consumer base.
    I was discussing with, I think, the produce manager there 
about the issue that if something--if you buy in certain 
volume, if you buy 20 of something, but you only sell three 
packets, it does not take you long to figure out that is a 
loser and so the response may be to cancel the item.
    How do we deal with that--that situation? Is the problem, 
too many were being shipped from your wholesaler? Or is that an 
issue that has come up? I assume that is an issue that has come 
up at other places.
    Mr. Nixon. In particular, with the produce manager there; 
and having come from a smaller location--she came up from Key 
West--one of the things that we stress in our operations, 
especially the ones that are perishable, is accountability and 
they have to recoup the amount of money for the markup for 
processing, whether it is meat or whether it is produce.
    One thing I challenged her, and also challenged Mr. 
McDonald, is that, you know, when a produce market will carry--
a full-range produce market will carry 350, 400 items and they 
were carrying probably 250 there. And in talking with store 
management, I said, let's be aggressive, and if the packs are 
too big, let's work with the produce company.
    The MPG group has all military commissaries on the East 
Coast except the ones protested in the Northeast. They 
certainly have enough volume to stretch a little bit. And I 
said, let's stretch and let the customer decide. If there is a 
pack issue, worry about that.
    Bridget Bennett, our produce specialist for the East Coast, 
added 50 items while she was there. And some of the items she 
added only were shipped the first time, and the supplier wasn't 
ready for the orders.
    But there are folks who are willing to experiment with 
produce, and let them decide. And price wise, too; we always 
want to be price conscious.
    The things that I noticed when I went down there, we are 
bringing the oranges and grapefruit in from Texas, and from an 
appearance standpoint, they worked with the best. But they were 
the ones that were competitive with what was being sold out in 
town.
    I say, bring the top of the line, and if it is a dollar an 
orange, let the customer decide. If they want to pay a dollar 
an orange, we will sell them an orange. And that dollar will be 
50 cents cheaper than out in town, if they carried it.
    From the aspect of getting new, what you call ``exotic-
type'' items, it is up to our managers to stretch and our 
suppliers to bring them in. And we can work with the packs, and 
work with the growers, and say, look, I can't take a 24-pack on 
that. I want you to start going to a 12-pack. We can start 
moving some of these items in multiple items. That is what we 
did and what we are going to do.
    Dr. Snyder. And those are some of the issues that are 
continuing to evolve under this new way of supplying produce; 
is that correct?
    Mr. Nixon. Yes, sir.
    Dr. Snyder. Mr. Dominguez, I wanted to ask you, have you 
reached any conclusions or have opinions on whether there 
should be insurance on exchanges or commissaries? I think there 
was an ongoing study about how you see the status of that.
    And the second, is with regard to beer and wine sales at, 
potentially, commissaries as a way of dealing with this 
potential shortfall on the five percent surcharge.
    Secretary Dominguez. Sir, first, with respect to insurance, 
the exchange commanders are still looking at that. It is 
actually quite a complicated challenge to look at the risk 
profile everywhere they are, and then the availability of 
insurance products and the affordability of those products.
    So they are still working their way through that. I am 
going to refrain from issuing an opinion until after I have 
seen their studies and get the advice from their boards.
    On the beer and wine sales in the commissaries, I think if 
I was to put these two problems, the MWR dividend and Mr. 
Nixon's challenge, on the scale and weigh them with the beer 
and wine, my opinion is, beer and wine comes down on the 
exchange side, on the MWR dividend side.
    I am not nearly as sanguine as these gentlemen are about 
our ability to turn that dividend growth--or that decline back 
into growth. And I certainly wouldn't want to erode their 
ability to generate that MWR dividend through this very highly 
profitable line of business that they have there.
    I think I accept the challenge Mr. Nixon has with that five 
percent surcharge having been created in a different era. But 
if we tackle that problem, I would like to do that without 
putting in jeopardy the MWR dividend.
    So those are my thoughts on the beer and wine.
    Dr. Snyder. Mr. McHugh.
    Mr. McHugh. Thank you, Mr. Chairman.
    Mr. Secretary, I would like to go back to Mrs. Drake's 
question about Armed Services Exchange Regulation (ASER). I 
heard what you said and I appreciate that. Outside-the-gate 
sensitivity is certainly something that those of us on this 
subcommittee and, in fact, the entire committee in Congress 
share. As you know, the House, however, has approved some 
relaxing of restrictions in the past--last year included, I 
believe--that the other body, as we say, did not totally agree 
to.
    Do you know of any--well, are you attempting to talk to the 
Senate to see what receptivity might be for future relaxation? 
Or what is the status of that? Is there anything you can share 
with us there?
    Secretary Dominguez. It is an issue. I have not yet engaged 
with members of the Senate or their staff on this. But my staff 
has, and I know the staff of these gentlemen have, because 
there are clearly important business opportunities that are 
important to generating and sustaining that MWR dividend that 
they are being precluded from pursuing. And some liberalization 
of those restrictions, I think, would be important; and we will 
engage and continue to push.
    Mr. McHugh. So it is a live issue, I guess?
    Secretary Dominguez. It is a live issue.
    Mr. McHugh. Rather than just a broad-based study?
    Secretary Dominguez. No, sir. There are some specific 
product lines they will talk to you about that we would like 
for them to be able to get into. We see no reason why they 
should not be in there. And it will be important, in my 
judgment, in ensuring and guaranteeing their profitability both 
by drawing in customers and by selling products that are in 
demand, that will generate a profit margin.
    Mr. McHugh. Okay.
    At least 10 years ago--and I don't have my biography in 
front of me; it may have been 12--I had the honor of serving as 
MWR Chairman. That was an independent panel prior to the 
reconstruction of this Personnel Subcommittee that brought MWR 
back under our jurisdiction. MWR was all we did.
    At that time we were talking about back office cooperation, 
shared efficiencies, where can the exchanges work together? 
That was 10 years ago. We are still talking about it.
    Can you tell me what exactly has been done with respect to 
cooperation, other than talking about it? Talking is great, but 
when are we going to do something?
    Secretary Dominguez. I believe that there has been actual 
progress----
    Mr. McHugh. Good.
    Secretary Dominguez [continuing]. Through the forums that 
we have set up. And what I would like to do is refer to the 
gentlemen here. Why don't we start with the Admiral.
    Admiral Cowley. As the current chairman of the Cooperative 
Efforts Board, we have done a number of logistics initiatives; 
and today we are taking a very programmatic approach and 
looking at discrete milestones and business case analyses so 
that we can go back and report to our board of directors vis-a-
vis our fiduciary responsibility.
    We have a number of initiatives that we are pursuing with 
AAFES that are very well along. The nonretail procurement, we 
are very well along on that. We have established commodity 
councils. We are using community analogs.
    We are not making this up as we go along. We are looking at 
what works in the commercial sector and we are pursuing that.
    The long pole in this is the IT backbone, and we currently 
have an initiative in place right now where we are looking at 
mapping that IT backbone. And it is not just information 
technology; it comes down to the business process level. In 
order to make a lot of this stuff actionable, you have to be 
able to translate it down to the business process level.
    It is a detailed process, but we have undertaken that 
effort and we are not going to wait until we get nirvana out 
here. We are actually looking at how to capitalize on different 
opportunities, as we discover these in the process as we move 
along. So I think we are making pretty good progress there in a 
number of these areas.
    And, in addition, I know within Navy we are looking at 
consolidating some of our backroom functions with MWR. We are 
now looking at some of the quality control and the audit 
functions there, as well as some of the retail functions where 
we can reach across and operate more effectively and 
efficiently.
    Secretary Dominguez. Sir, maybe General Essex can talk to 
you about the gift card, which is a new product that the 
exchanges have brought on line.
    General Essex. That is one of the four cooperative efforts 
that we have tackled this past year. And it is the one that is 
going to pay off first.
    It seems like a small thing, but it is actually quite a big 
thing from a customer perspective; and it was a request of the 
Marine Corps and Navy Exchange that we tackle this. And it is 
simply that if a family or troop wants to buy a gift card at a 
Marine Corps exchange, that they would be able to cash it in at 
an Army and Air Force exchange or vice versa.
    And as Admiral Cowley pointed out, business processes and 
IT had made that a problem. We have had three different size 
companies over the years, as you know, with different business 
practices because of that, and different IT. So it is very 
encouraging what we are doing.
    I think it is exactly the right thing. The gift cards is a 
good step in the right direction, and certainly the logistics 
and the indirect procurement and the information technology are 
going to pay good dividends for a long time.
    Mr. Downs. Congressman McHugh, I testified in front of that 
MWR panel when Congressman Martin was the ranking member. But 
it bothers me that we allow the thought out there that 
exchanges haven't been making real progress and efforts within 
the cooperative efforts for many, many years.
    The Marine Corps exchange has lived off of cooperative 
efforts with the AAFES and Navy Exchange Command (NEXCOM), as 
far as I can remember; and perhaps we haven't spoken to that 
enough, but there have been 70 or 80 cooperative efforts that 
have been on the books between the various exchanges for 
multiple years. And we just don't seem to get credit because 
they are not big banner items. They are not big bang items, but 
they are, in fact, things that allowed us to incrementally do 
things more efficiently and effectively.
    Mr. McHugh. Well, I appreciate that. Let me tell you why it 
is important, and maybe you should start tooting your horns a 
little bit louder.
    The fact of the matter is, Admiral, the reason that is the 
long pole, that is the hardest, I think--I understand that--but 
that is also where the biggest savings potentially lie. And, 
remember, don't forget, why this is a point of interest and 
concern: Because the Department at one point was talking about 
outright exchange consolidation, and the Congress did not want 
to do that. But Congress felt the responsibility to ensure that 
you worked very proactively to derive some meaningful savings; 
not that savings in other things aren't good, but we are 
talking about backroom operations and such.
    What worries me, and I am not trying to put the bean on 
Secretary Dominguez, but we will all pass away from this place 
and do other things with our lives; and in another time someone 
in his place is going to come in and say, we are going to 
consolidate, again because they people did not do what you 
challenged them to do.
    That is why I worry and that is why I think the question is 
important. And I certainly want to encourage you to continue to 
work as hard as you possibly can to get the long pole up and do 
as much as you can, so we don't have to be dealing with 
consolidation.
    And the other things that I think are problematic in 
recognizing that you all have your legitimate cultures, there 
are differences amongst your various customer bases that I 
think legitimately need to be reflected in what you do. And 
that would be greatly jeopardized, in my judgment, with 
consolidation, outright consolidation. That is the purpose of 
my question.
    With that, Mr. Chairman, I guess the red light is on. You 
got it fixed for me. I yield back.
    Dr. Snyder. Mr. Murphy.
    Mr. Murphy. Thanks, Mr. Chairman. As a former soldier 
myself, I know how important the MWR is to accomplishing the 
mission. In fact, in the 82nd Airborne Division, we used to say 
the heart of the soldier is more important than the body of the 
soldier. One of the most critical things for a soldier is that 
peace of mind while serving his country overseas to know that 
his family is being taken care of.
    I am very concerned about the decreasing exchange 
dividends, a problem which appears to be prevalent across the 
services, though most notably in the Army and Air Force 
exchange systems. The dividends from the exchange services fund 
about 16 percent of the MWR programs. These MWR programs fund 
critical things for military families such as child care 
centers, e-mail, phone access so families can communicate with 
their soldiers overseas, and a wide range of other programs.
    So I looked at numbers, the profit, the dividend ratio, 
with 55 to 60 percent of the profits going to fund MWR 
dividends. If we continue to see declining profits in the 
exchanges, would it be possible to increase the percentage of 
profits that go to MWR dividends? And if we did this, what 
other programs or areas might lose out?
    Secretary Dominguez. Sir, let me take that to start with.
    We all share your concern, and I think before you got here, 
you heard, or the committee heard, each of the exchange 
commanders testify to their optimism that the decline in MWR 
dividends will be, in the years ahead--near years, not distant 
years--near years ahead will turn around and they will start 
growth again.
    I have extraordinary confidence in their management and 
leadership abilities. It is something that we do need to watch.
    The right attack on the problem, I think, is through cost 
containment, which is, again--some of these issues that 
Congressman McHugh was asking about where you consolidate back 
office operations and try and reduce overhead costs are 
contributors to that. It is also through the expansion of new 
products and new product lines and new methods of delivery.
    So these gentlemen are all into using the Web now, and we 
just talked with the committee about easing some of the 
restrictions that now they have that keep them out of some 
business lines.
    And the other challenge is going to be closing facilities 
where the bases are closed, where there isn't the business 
anymore that generates revenue and, in fact, where we are 
actually hemorrhaging. That is a big challenge for us.
    The big challenge in trying to work cooperatively with the 
commissary so that the two entities can draw customers in and 
increase foot traffic.
    And so all of those things are now going on. And it is 
through those mechanisms that I think we will be able to turn 
this direction around.
    Mr. Murphy. And I understand what you are saying, and I 
understand that you are optimistic about how you can could do 
that. But my question, if you can't turn around and if you see 
the profits continuing to decrease, would you change the 
dividend ratio? Because right now it is 16 percent MWR funds 
from you, and I want to make sure that these soldiers getting 
taken care of and these Marines and airmen.
    Secretary Dominguez. The only way we can do that in the 
exchanges is to put further pressure on their recapitalization. 
So that is not a good long-term strategy.
    Mr. Murphy. But what window are we talking about here? My 
concern is, I want to make sure that these MWR programs that 
are directly affecting soldiers that are serving overseas in 
deployments are being taken care of. Is there a look at 
changing this ratio if you can't hit it in the short term, and 
what is the short term? Quarterly? Are we talking annually?
    I want to make sure that these MWR programs are not getting 
shortchanged.
    Secretary Dominguez. Right. I share your concern with that.
    We do have the ability to fund, and we do fund directly in 
the MWR programs with appropriated funding. So if the dividends 
diminish to such a degree that some of these essential 
programs--as Congressman McHugh said, those are readiness; they 
affect readiness, they affect retention. So these are critical 
programs. And we would first look at increasing the amount of 
appropriated funding we are giving to the different MWR 
categories.
    Another challenge, and we talked to Congressman Snyder 
about this, is that our construction recapitalization programs 
right now are authorized to be funded through appropriated 
funds, through the BRAC and the global repositioning. We were 
unsuccessful in making that case inside the Department so 
that--there was not enough money to go around, and we drew the 
line, so these are now being funded out of the profits the 
exchanges generate.
    That again is a continuing debate we need to have. We need 
to keep that issue on the table and in front of decision 
makers, particularly if we start to see the support to the MWR 
accounts erode. Then that balance may tip and these projects 
may get above the line in terms of the BRAC construction 
accounts.
    So you are exactly right, exactly right to focus in terms 
of watching that dividend. And there are a lot of things going 
on to try to protect that.
    General Essex. Sir, if I could add one point to that that 
you could do.
    Mr. Murphy. It is up to the chairman.
    Dr. Snyder. We would like to hear your comment. You will 
have another opportunity, Mr. Murphy, if you need it.
    General Essex. Just to add one more point to that, when 
AAFES operates overseas in contingency areas, we have 
extraordinarily high operating costs, sometimes, which we are 
reimbursed for. Last year, the Congress did reimburse almost 
the entire amount; it was $80 million that we were authorized. 
And it has not always been that way in the past, but last year 
it worked out.
    In the future and this coming year, we will have 
extraordinary expenses that are authorized for appropriated 
funds. If those are provided, then it goes to the bottom line 
and that goes to the dividend.
    Secretary Dominguez. And that is through the supplemental 
process.
    What he is talking about is direct support to soldiers, 
sailors, airmen, Marines engaged in combat.
    Mr. Murphy. Last year it was 80 million. This year it is 
what?
    General Essex. We won't know yet.
    Dr. Snyder. Mrs. Davis.
    Ms. Davis of California. Thank you, Mr. Chairman. And, as 
usual, I am doing double duty with other committees.
    I appreciate that you are all here, and I am sorry that I 
missed your earlier testimony.
    I wanted to mention, because I think it is so important to 
the San Diego area--and I appreciate, Mr. Nixon, your work on 
this--that we do have--we will be opening, actually, a 118,000-
foot commissary next month. And that will have some unique 
features, so that families can come--if they want to 
convenience shop, they can do that; and if they want to fill 
their pantries, it is a different kind of shopping in a 
different area that they will be engaged in.
    We think this store within a store is going to be very 
important. And I appreciate some of the decision-making that 
went into that.
    I don't know if you want to comment on that, Mr. Nixon, in 
terms of how you got to that point, and whether or not that is 
a model that really should be tried elsewhere in the country 
and if we are going to be look at that.
    Mr. Nixon. Yes, ma'am. Actually, we went out and did 
significant market research and brought a consultant in to find 
out what were the shopper-of-the-future's requirements going to 
be. And they surveyed all the leading retailers and said, you 
are going to have to meet two particular shopping demographics, 
a convenience shopper and a pantry-building shopper. And how to 
do that? You build a store within a store.
    When you go into the store of the future, you go into a 
convenience-type store environment to get that day's meal--get 
in, self-check out--get in and out. And we will have short-term 
parking, and we put it on the side where the barracks are going 
to be.
    If you are going to do the pantry-loading shopping, you go 
in the other entry. The line of demarcation is the frozen 
foods. That is convenience and pantry-loading. We have set a 
goal to be the nutritional leader in the supermarket industry, 
so we are putting in an extensive organic and health and 
wellness section associated with a huge produce section, the 
largest meat department in the world.
    Incredible, incredible opportunities and some additional 
technological futures like a new front end system. The self-
checkout counters, being able to order through kiosks, place an 
order and go pick it up in the deli or bakery later on.
    We did extensive research. This is the model we will use, 
but it has to be tailored to the demographics of the particular 
base. Our goal in the naval station store is to have the 
largest commissary in the world, but an individual shopping 
experience. And that really is leading edge in the supermarket 
industry.
    So if we can accomplish that----
    Ms. Davis of California. Thank you. I appreciate that. I 
guess the one thing we are going to want to evaluate as we look 
at that is whether it makes for more affordability for 
families, as well, whether they feel that they are going to go 
in. What we don't want probably--and we all experienced this in 
Costco--is a lot of impulse shopping, so that families find 
that their budgets don't go as far as they would like them to, 
and so that they can really focus on what is most nutritious 
and affordable and help them out through that impulse.
    Mr. Nixon. We allow them to go on www.commissaries.com and 
do their shopping list while they are at home so they are not 
tempted by the impulse items. They may see one item they can't 
pass by, but for the most part we allow them to do the shopping 
experience in their home and bring that list with them.
    Ms. Davis of California. Is there also an opportunity in 
that for families within a certain distance, that they can have 
deliveries if they shop on line?
    Mr. Nixon. We have looked at that option and we are 
evolving the virtual commissary. Right now, it has gift packs--
very successful. Our sales per visit to the virtual commissary 
mirror what happens in the private sector. It is primarily gift 
packs now. We are hoping by summertime, we will have around 200 
items on sale, like Amazon.com has groceries for sale, for a 
shipping fee.
    We haven't talked about the delivery mechanism, but we will 
once we make sure that we have the mechanism in place to order 
on-line.
    Ms. Davis of California. Thank you.
    And getting back to my colleague's question, what we want 
is to be able to serve our families, our military families, and 
to be able to return to them their investment in their shopping 
experience as well. And as we have some extraordinary services 
that I hope you will be providing there, how do we monitor that 
so that we are able to capture those best practices, whatever 
you want to call it, and see whether or not it is making a 
difference in terms of MWR and whether or not they are really 
getting that return?
    Are you all going to be looking at that? How are you going 
to be doing that?
    Secretary Dominguez. We survey customers to ensure that the 
quality of their experience meets or exceeds industry 
standards. And so we do the surveys. And someone up here 
mentioned that these are contracted out to a group that does 
this in industry. So that is important.
    Through the efforts of the boards and through the exchange 
cooperation, we are continually looking at benchmarks against 
our competitors in terms of practices and profitability and 
those kinds of issues. It is a continuing obsession with these 
leaders here and their boards of directors.
    I hope that answers your question.
    Ms. Davis of California. Just quickly, Mr. Nixon, do you 
expect the revenues to jump by any measurable degree at the 
stores?
    Mr. Nixon. Since we are not directly involved in generating 
MWR dividends, we expect sales to increase significantly. In 
fact, our largest volume commissary is Fort Belvoir, doing 
around $92 million a year. We think the naval station could be 
the first $100 million commissary. The significant funds 
generated will be to surcharge the patron's dollar, to go back 
and recapitalize other investment opportunities.
    Absolutely. This was built--we do charrettes; we ask the 
patrons what they would like to see in it, and that is what we 
put in it. We monitor, as the Secretary said, their shopping 
experience to make sure it is world class, because they deserve 
it.
    Ms. Davis of California. Thank you. We are excited.
    Dr. Snyder. Mr. McHugh and I will both have questions for 
the record which we hope you all will respond to in a timely 
fashion, but I wanted to give Mr. Murphy and Mrs. Davis any 
opportunity for questions they have today.
    Mr. Murphy. I just want to make sure, from my understanding 
of the timing issue when we talk about the dividend ratio. Do 
you make that decision on an annual basis?
    Right now, 16 percent; it has been about 16 percent that 
you fund MWR. If we continue to see a decrease in profits, when 
do you look at that? And I understand you are optimistic.
    Secretary Dominguez. Well, first, these decisions are made 
by the individual military services in consultation with their 
boards as they are looking at their exchanges annually. That is 
annually.
    Mr. Murphy. How about this fiscal year? When are we looking 
at this?
    Secretary Dominguez. This fiscal year, the aggregate--
again, that is, in aggregate--the situation is different by 
individual exchange, but in aggregate the MWR dividend is 
smaller this year than last.
    I think we are looking at 2010 or so to really to have that 
begin to turn around again; that is, in aggregate, the 
individual exchanges have different pictures each.
    Mr. Murphy. Would each you like to comment?
    Admiral Cowley. I guess it is true each of our boards do 
establish targets for us that we meet. Ours is established 
annually and we report performance to plan on a quarterly 
basis.
    One thing I would like to say is, as we look at this, it is 
established based on requirement. Looking at it, year on year, 
in terms of consumption does not necessarily tell the whole 
story. As we are looking at reductions in active duty 
population and whatnot and what the actual requirement is out 
there, that is what the board looks at; and our boards look 
across both MWR and the exchange and balance across the two of 
them.
    There may be one year where there is emphasis in one of 
them and one year where there is emphasis in another. Without 
looking at that granular level, just looking at a top level 
does not tell the whole story. We really look at the discrete 
requirements in the MWR categories as well as the savings that 
we are providing to our customers when they come in the stores, 
our recapitalization. That is the dialogue that goes on in our 
board meetings, and they meet quarterly.
    General Essex. I can speak for the Army and Air Force 
Exchange Service. The number we use--and I believe our numbers 
are correct--is, 65 percent of our earnings goes to the 
dividend. It is split between the Army and Air Force, but also 
Marines and Navy because we operate exchanges on Okinawa, 
Marine bases, but we operate the exchanges and provide the 
dividend to them.
    And then, of course, there is the split for the earnings 
that come from Internet sales and cataloguing we do 
cooperatively. So two-thirds are dividend, one-third capital 
program.
    The best advice we have from industry and academia says 
that basically taking money from that capital program will have 
a very negative, long-term impact and the strong advice is 
against doing that.
    One of the things that we wrestle with every year in our 
board meeting, where we discuss our annual financial plan, is 
this very issue. And one of the problems we have is that we 
are, like any private company, required to follow generally 
accepted accounting principles, or GAAP, and that requires that 
we do deal with depreciation just like a private entity does.
    And when I was talking earlier--I don't remember if you 
were in yet--but I was trying to explain in 2006 and 2007 is 
kind of a perfect storm year for us where we have a lot of 
capital programs, due to BRAC, and a lot of depreciation that 
comes with that. And then the closing bases with BRAC and 
global restationing cause us to do accelerated depreciation.
    That also impacts our dividend; and hence, my point that I 
keep, you know, probably exaggerating, but make as strongly as 
I can, that any time there is an appropriated fund authorized, 
then it does make a direct impact on the MWR dividend if it can 
be actually appropriated, instead of making us use the soldiers 
and airmen nonappropriated money that is generated from sales.
    Mr. Murphy. Thank you.
    Dr. Snyder. Anything further, Mr. Murphy?
    Mr. Murphy. No, sir.
    Dr. Snyder. Gentlemen, we appreciate your being here today, 
and we appreciate your comments as we head into this year's 
Defense Bill. The hearing is adjourned.
    [Whereupon, at 11:45 a.m., the subcommittee was adjourned.]



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                            A P P E N D I X

                             March 13, 2007

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                             March 13, 2007

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             QUESTIONS AND ANSWERS SUBMITTED FOR THE RECORD

                             March 13, 2007

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                   QUESTIONS SUBMITTED BY DR. SNYDER

    Dr. Snyder. Cost of New Construction: The ongoing global 
repositioning of forces would seem to demand that some appropriated 
funding be provided to support construction of expanded commissaries 
and exchanges. Why is this realignment-based construction being 
financed out of accounts dedicated to routine replacement and 
rehabilitation of facilities? Will appropriated funds be available to 
reduce the pressure on the troops' non-appropriated accounts?
    Secretary Dominguez. Under Department policy, appropriations may 
fund requirements for those installations receiving over a 25 percent 
increase in personnel within a two-year period. The Defense Commissary 
Agency (DeCA) and the Exchanges are committed to providing adequate 
facilities to support quality of life for the Service members and their 
families relocating to these installations. Although requirements were 
considered, sufficient resources were not available for the Department 
to propose funding in the Fiscal Year (FY) 2008 Budget. Therefore, DeCA 
and the Exchanges are reprioritizing their capital investment programs 
to meet the highest priority needs using commissary surcharge or non-
appropriated funds in the absence of appropriated funds. Those 
requirements related to facility construction costs will be identified 
in the FY 2008 Commissary Surcharge and Non-appropriated Fund 
Construction Program. We continue to advocate for appropriated funding 
for these requirements in future appropriated budget submissions.
    Dr. Snyder. A new round of base closures was announced in 2005. In 
the past, there has been considerable interest in maintaining some 
level of commissary and exchange support at base closure sites to 
support the retired and reserve population. We understand that the 
ongoing negotiations to establish a new model for combined exchange and 
commissary stores has been complicated by an inability to decide which 
products will be sold by exchanges and which products will be sold by 
commissaries. Why are such decisions so difficult? Why are such 
decisions allowed to impede the development of a store model that is 
urgently needed by military patrons, particularly at base closure 
sites?
    Secretary Dominguez. To maintain some level of support for the 
military community after a base closes or when separate operations are 
not feasible, the Congress authorized the exchanges to run combined 
commissary and exchange stores with reduced appropriated funding. Under 
the combined store concept, food items are sold at cost plus 5% and all 
other merchandise is sold at the exchange mark-up. Without exception, 
the concept has not been financially successful at base closure 
locations.
    Under the direction of the Executive Resale Board, the Defense 
Commissary Agency (DeCA) and the Exchanges are evaluating other store 
models that may share facilities or other operating features. Because 
DeCA and the Exchanges are both authorized to sell certain merchandise, 
an important consideration is how to allocate the inventory and pricing 
and the residual effect on exchange profit, dividends to morale, 
welfare, and recreation, and commissary surcharge trust funds. As a 
companion effort, the Deputy Under Secretary of Defense for Military 
Community and Family Policy is developing a process to adjudicate such 
conflicts.
    Dr. Snyder. Cost of New Construction: The ongoing global 
repositioning of forces would seem to demand that some appropriated 
funding be provided to support construction of expanded commissaries 
and exchanges. Is the funding for new construction to support the 
exchange and commissary projects associated with global repositioning 
adequate and are those funds being provided separately or is each of 
you funding your own projects?
    Mr. Nixon. Except for $300,000 received to offset the Base 
Realignment and Closure (BRAC) impact at one Air Force installation, 
the Defense Commissary Agency is not slated to receive any appropriated 
funding. Commissary requirements were considered when the Services 
prioritized their total requirements, but the required commissary 
projects fell below the cut line on the prioritized lists.
    Dr. Snyder. A new round of base closures was announced in 2005. In 
the past, there has been considerable interest in maintaining some 
level of commissary and exchange support at base closure sites to 
support the retired and reserve population. We understand that the 
ongoing negotiations to establish a new model for combined exchange and 
commissary stores has been complicated by an inability to decide which 
products will be sold by exchanges and which products will be sold by 
commissaries. Has the military resale community done more work on 
developing new approaches for providing military resale benefits at 
base closure sites? What is the status of current efforts to develop a 
new combined store model?
    Mr. Nixon. Under the direction of the Executive Resale Board, the 
Exchanges and the Defense Commissary Agency (DeCA) are exploring the 
potential as to whether a new model of combined operation might be more 
advantageous in providing the commissary and exchange benefits in some 
locations. We call this the shared facility concept, and it is still in 
the development stage. It envisions that a commissary and an exchange 
could operate in a single facility, sharing certain support costs, 
complying with existing statutory guidance that requires the operation 
of separate commissary and exchange systems. This concept has many 
moving parts and we have yet to resolve a number of them.
    The Shared Facility concept is based upon three premises: (1) that 
it should enhance both exchange and commissary shopping experiences; 
(2) it should generate additional morale, welfare and recreation 
dividends; and (3) it should generate additional surcharges for DeCA, 
without increasing the top line appropriated costs. The Executive 
Resale Board is considering a process to adjudicate the merchandise 
authorities.
    Dr. Snyder. Cost of New Construction: The ongoing global 
repositioning of forces would seem to demand that some appropriated 
funding be provided to support construction of expanded commissaries 
and exchanges. Is the funding for new construction to support the 
exchange and commissary projects associated with global repositioning 
adequate and are those funds being provided separately or is each of 
you funding your own projects?
    General Essex. To date, the Army and Air Force Exchange Service 
(AAFES) has not received any authorized appropriated funds (APFs) in 
support of Global Repositioning of Forces to the United States, nor has 
there been any indication that APFs will be forthcoming. In-turn, AAFES 
is required to fund capital improvements with retained earnings and 
accumulated depreciation for projects eligible for APF support.
    The DOD authorized the use of APF's for community facility 
construction related to the establishment, activation, or expansion of 
a military installation. In the case of an installation expansion, a 
major increase in authorized and assigned personnel strength over a 
short period of time is necessary before APF construction can be 
programmed. A 25-percent increase in personnel over a two-year time 
span satisfies this requirement.
    Additionally, closing installations are authorized APF support for 
expense items such as: civilian severance pay; permanent change of duty 
station; transportation costs of relocating assets; and residual value 
of facilities constructed with AAFES funds.
    During 2006-2012, AAFES will make worldwide, non-appropriated fund 
(NAF) investments of more than $476M ($358M in construction costs) in 
new and expanded facilities. This does not include an additional $25M 
investment in expense items relating to installation closures.
    AAFES identified CONUS facility needs totaling $359M ($263M 
authorized APF support) to meet quality of life requirements. Projects 
are being developed, or are underway at Ft. Belvoir, Ft. Benning, Ft. 
Bliss, Ft. Carson, Ft. Drum, Ft. Lee, Ft. Lewis, Ft. Riley, Ft. Sam 
Houston and Ft. Sill.
    New exchange OCONUS facilities totaling $117M ($96M authorized APF 
support) are underway, or being developed for Andersen AFB, GU, Dal 
Molin, IT, Grafenwoehr GE, and Weisbaden GE.
    Dr. Snyder. A new round of base closures was announced in 2005. In 
the past, there has been considerable interest in maintaining some 
level of commissary and exchange support at base closure sites to 
support the retired and reserve population. We understand that the 
ongoing negotiations to establish a new model for combined exchange and 
commissary stores has been complicated by an inability to decide which 
products will be sold by exchanges and which products will be sold by 
commissaries. Has the military resale community done more work on 
developing new approaches for providing military resale benefits at 
base closure sites? What is the status of current efforts to develop a 
new combined store model?
    General Essex. The Army and Air Force Exchange Service (AAFES) 
evaluates exchange operations at BRAC closure sites by location and 
adjusts the scope of operations based on a sound business case. Any 
operations that remain open will be monitored to ensure economic 
viability after closure.
    AAFES and the Defense Commissary Agency (DeCA) are currently 
exploring the feasibility of using a shared facility concept as a 
potential operating model at small or downsized military installations. 
We are proceeding cautiously in our discussions with DeCA to ensure we 
are within the bounds of Section 2481(a) of Title 10 which mandates 
separate exchange and commissary systems. This cooperative effort 
focuses on increasing the value of the military resale system for its 
patrons. In the shared facility concept, the commissary and the 
exchange remain separate entities within the meaning of the law, but 
reside in a single facility to maximize shared services. Commissary and 
exchange merchandise sales would be credited to the appropriate 
separate account and each organization would be responsible for its pro 
rata share of infrastructure costs and common operating expenses.
    AAFES and DeCA will continue to address a number of major issues: 
defining the commissary/exchange merchandise category mix; adapting IT 
systems to ensure separate organizational accountability; sharing 
credit card fees and other common expenses; and resolving any workforce 
issues resulting from different human resource systems (appropriated 
fund v. non-appropriated fund).
    Dr. Snyder. Cost of New Construction: The ongoing global 
repositioning of forces would seem to demand that some appropriated 
funding be provided to support construction of expanded commissaries 
and exchanges. Is the funding for new construction to support the 
exchange and commissary projects associated with global repositioning 
adequate and are those funds being provided separately or is each of 
you funding your own projects?
    Admiral Cowley. In general, Navy Exchange construction required to 
support global repositioning at Navy installations has been minimal 
since the plan is still being developed. NEXCOM is working with 
military planners to evaluate the need to construct additional Navy 
exchange facilities to support a major influx of Marines to Guam from 
Okinawa Japan. Specific details on the scope and cost of Navy Exchange 
construction have not been developed pending completion of a 
comprehensive master plan for this initiative.
    Dr. Snyder. A new round of base closures was announced in 2005. In 
the past, there has been considerable interest in maintaining some 
level of commissary and exchange support at base closure sites to 
support the retired and reserve population. We understand that the 
ongoing negotiations to establish a new model for combined exchange and 
commissary stores has been complicated by an inability to decide which 
products will be sold by exchanges and which products will be sold by 
commissaries. Has the military resale community done more work on 
developing new approaches for providing military resale benefits at 
base closure sites? What is the status of current efforts to develop a 
new combined store model?
    Admiral Cowley. Department of Defense (DOD) policy ties the 
continued operation of exchanges and commissaries at closed 
installations to specific criteria including whether the installation 
has an active duty mission, the number of active duty or reserve 
component population remaining, and the proximity of other facilities. 
A combined commissary and exchange store may be considered at a closed 
installation upon reviewing the criteria. As the geographic area around 
a closed installation may have authorized patrons which would benefit 
from the commissary and exchange benefit, although most likely a much 
smaller population, determining the optimal combined store model 
becomes critical.
    The DOD Executive Resale Board, whose members include the heads of 
the Defense Commissary Agency and the Military Exchange commands, is 
currently discussing merchandise assortments and various operating 
models for future combined exchange and commissary stores. The 
Executive Resale Board had discussions during the February 2007 
meeting, and is scheduled to continue these discussions in the July 
2007 meeting. No definitive future model for combined stores has been 
determined, however, the focus of the review is on determining the best 
enterprise approach to provide the commissary and exchange benefit to 
our military members.
    Navy Exchange successfully operates a NEXMART model of combined 
commissary and exchange stores at nine overseas locations. This non-
appropriated exchange store model delivers commissary benefits in a 
fully integrated facility with shared costs for common functions. The 
exchange labor costs associated with delivering commissary merchandise 
are funded by DeCA, and when normalized for operating hours this offers 
the most cost-wise solution compared with similar sized stand-alone 
commissaries. NEXMARTs provide added customer satisfaction with 
extended store hours and convenience of one-stop shopping. The 
commissary merchandise is procured from DeCA and sold at cost plus five 
percent. This combined store model works best in lower volume locations 
where the economies of scale with combined stores are easier to garner. 
These could include base closure sites.
    The policy discussion about which products will be sold by 
exchanges and which products will be sold by commissaries becomes more 
pointed in a combined store. Since no gross margin dollars are produced 
by commissary-type merchandise sales, expenses resulting from wider 
assortments must be subsidized by more appropriated funding. If a 
combined store's goal is to reduce overall appropriations, then it is 
counter-productive to subsidize these sales with more appropriated 
funding, especially since the same sales can be made with exchange 
merchandise that generates gross margin dollars to offset expenses. 
Thus, the practice of selling exchange-type merchandise at cost 
represents a significant expense for the DOD.
                                 ______
                                 
                   QUESTIONS SUBMITTED BY MR. MCHUGH
    Mr. McHugh. The Department of Defense Instruction (DODI) 1330.21, 
``Armed Services Exchange Regulations,'' issued July 14, 2005, 
authorizes exchanges to operate revenue generating activities such as 
personal telecommunications services but does not specifically address 
the Internet as a revenue generating vehicle. As a result, a number of 
organizations at the base level are providing revenue generating 
Internet cafes, on-line games and other Internet based activities to 
service members and there appears to be considerable duplication at the 
base level in providing such Internet based activities. It would appear 
that the failure of the DOD instruction to specifically address the 
Internet as a revenue generating activity has left a policy vacuum. 
When does the Department plan to update the DOD instruction in order to 
address the duplication problem?
    Secretary Dominguez. The Exchanges have primacy in the operation of 
``fee-for-service'' personal telecommunications, including personal 
Internet access (email accounts, high-speed Internet service provider 
accounts, etc.). Authorized morale, welfare, and recreation activities 
may be Internet-enabled, including on-line games and ``no-fee'' 
Internet access in recreation, community, and library activities. The 
Department is in the process of publishing updates to the Exchange and 
Morale, Welfare, and Recreation policies to clarify the Internet access 
policies.
    Mr. McHugh. The John Warner National Defense Authorization Act for 
Fiscal Year 2007 (Public Law 109-364) directed the Secretary of Defense 
to report by July 31, 2007, an evaluation of the cost effectiveness of 
purchasing commercial insurance to protect the financial interest in 
facilities operated by the Defense Commissary Agency, the Army and Air 
Force Exchange Service, the Navy Exchange Service Command, the Marine 
Corps exchanges and morale, welfare and recreation non-appropriated 
fund activities of DOD. Given what we heard in testimony about 
exploding construction costs, limitations on the availability of 
commissary surcharge funds and appropriated funds, it seems to me that 
commercial insurance may almost be a foregone conclusion. To better 
understand the evaluation that is being conducted, please tell me to 
what extent will the Department's evaluation take into account and 
weight in the evaluation: (1) The current trend in the explosive growth 
of construction costs but also future projections in construction costs 
for both new construction and modification to facilities; (2) The 
expected limited availability of appropriated or other funds (for 
example, the commissary surcharge fund) to respond to catastrophic 
loss; and, (3) A possible decreasing reliance on emergency supplemental 
appropriations to address unforecast losses? Beyond that, as a hedge 
against future catastrophic facility losses in the commissary, exchange 
and MWR activities, and to preserve the benefit in a predictably 
stressful fiscal operating environment, will DOD be considering 
appropriated funding for commercial insurance for such facilities?
    Secretary Dominguez. In addition to the evaluation of commercial 
insurance, the subcommittee also requested a report on future funding 
to maintain and construct facilities. Because both reviews will 
consider escalating materials costs, the availability of 
appropriations, and other facility funding sources (including non-
appropriated, commissary surcharge, and private financing), and 
operational funding, the Department plans to submit the reports 
together, with the FY 2008 construction program, in August 2007. The 
review will consider the cost effectiveness of purchasing commercial 
insurance with either or a combination of non-appropriated and 
appropriated funding.
    Mr. McHugh. The Department of Defense Instruction (DODI) 1330.21, 
``Armed Services Exchange Regulations,'' issued July 14, 2005, 
authorizes exchanges to operate revenue generating activities such as 
personal telecommunications services but does not specifically address 
the Internet as a revenue generating vehicle. As a result, a number of 
organizations at the base level are providing revenue generating 
Internet cafes, on-line games and other Internet based activities to 
service members and there appears to be considerable duplication at the 
base level in providing such Internet based activities. It would appear 
that the failure of the DOD instruction to specifically address the 
Internet as a revenue generating activity has left a policy vacuum. 
When does the Department plan to update the DOD instruction in order to 
address the duplication problem?
    General Essex. The Exchanges have primacy in the operation of 
``fee-for-service'' personal telecommunications, including personal 
Internet access (email accounts, high-speed Internet service provider 
accounts, etc.). Authorized morale, welfare, and recreation activities 
may be Internet-enabled, including on-line games and ``no-fee'' 
Internet access in recreation, community, and library activities. The 
Department is in the process of publishing updates to the Exchange and 
Morale, Welfare, and Recreation policies to clarify the Internet access 
policies.

                                  
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