[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
                         [H.A.S.C. No. 112-133] 

                   MILITARY RESALE PROGRAMS OVERVIEW 

                               __________

                                HEARING

                               BEFORE THE

                   SUBCOMMITTEE ON MILITARY PERSONNEL

                                 OF THE

                      COMMITTEE ON ARMED SERVICES

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD

                              JUNE 7, 2012


                                     
              [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]




                   SUBCOMMITTEE ON MILITARY PERSONNEL

                  JOE WILSON, South Carolina, Chairman
WALTER B. JONES, North Carolina      SUSAN A. DAVIS, California
MIKE COFFMAN, Colorado               ROBERT A. BRADY, Pennsylvania
TOM ROONEY, Florida                  MADELEINE Z. BORDALLO, Guam
JOE HECK, Nevada                     DAVE LOEBSACK, Iowa
ALLEN B. WEST, Florida               NIKI TSONGAS, Massachusetts
AUSTIN SCOTT, Georgia                CHELLIE PINGREE, Maine
VICKY HARTZLER, Missouri
               Michael Higgins, Professional Staff Member
                 Debra Wada, Professional Staff Member
                    James Weiss, Research Assistant
                            C O N T E N T S

                              ----------                              

                     CHRONOLOGICAL LIST OF HEARINGS
                                  2012

                                                                   Page

Hearing:

Thursday, June 7, 2012, Military Resale Programs Overview........     1

Appendix:

Thursday, June 7, 2012...........................................    21
                              ----------                              

                         THURSDAY, JUNE 7, 2012
                   MILITARY RESALE PROGRAMS OVERVIEW
              STATEMENTS PRESENTED BY MEMBERS OF CONGRESS

Davis, Hon. Susan A., a Representative from California, Ranking 
  Member, Subcommittee on Military Personnel.....................     2
Wilson, Hon. Joe, a Representative from South Carolina, Chairman, 
  Subcommittee on Military Personnel.............................     1

                               WITNESSES

Bianchi, RADM Robert J., USN (Ret.), Chief Executive Officer, 
  Navy Exchange Service Command..................................     5
Dillon, William C., Director, Semper Fit and Exchange Services 
  Division, Manpower and Reserve Affairs, U.S. Marine Corps......     7
Gordon, Robert L., Deputy Assistant Secretary of Defense, 
  Military Community and Family Policy, Office of Under Secretary 
  of Defense for Personnel and Readiness.........................     3
Gordy, Thomas T., President, Armed Forces Marketing Council......     9
Hendricks, Brig Gen Francis L., USAF, Commander, Army and Air 
  Force Exchange Service.........................................     4
Jeu, Joseph H., Director and Chief Executive Officer, Defense 
  Commissary Agency..............................................     6
Nixon, Patrick B., President, American Logistics Association.....     8

                                APPENDIX

Prepared Statements:

    Bianchi, RADM Robert J. (Ret.)...............................    49
    Davis, Hon. Susan A..........................................    26
    Dillon, William C............................................    75
    Gordon, Robert L.............................................    27
    Gordy, Thomas T..............................................   108
    Hendricks, Brig Gen Francis L................................    35
    Jeu, Joseph H................................................    62
    Nixon, Patrick B.............................................    81
    Wilson, Hon. Joe.............................................    25

Documents Submitted for the Record:

    [There were no Documents submitted.]

Witness Responses to Questions Asked During the Hearing:

    [There were no Questions submitted during the hearing.]

Questions Submitted by Members Post Hearing:

    Mr. Wilson...................................................   133
                   MILITARY RESALE PROGRAMS OVERVIEW

                              ----------                              

                  House of Representatives,
                       Committee on Armed Services,
                        Subcommittee on Military Personnel,
                            Washington, DC, Thursday, June 7, 2012.
    The subcommittee met, pursuant to call, at 2:37 p.m., in 
room 2212, Rayburn House Office Building, Hon. Joe Wilson 
(chairman of the subcommittee) presiding.

  OPENING STATEMENT OF HON. JOE WILSON, A REPRESENTATIVE FROM 
  SOUTH CAROLINA, CHAIRMAN, SUBCOMMITTEE ON MILITARY PERSONNEL

    Mr. Wilson. Ladies and gentleman, the hearing will come to 
order.
    Today, the subcommittee will examine the military resale 
programs within the Department of Defense [DOD], specifically 
the commissaries and exchanges operated by the Department. 
These programs are widely acknowledged as highly valuable and 
appreciated benefits that support Active Duty retention, the 
well-being of the military community, and the combat readiness 
of the force.
    These services are vital for our service members, military 
families, and veterans worldwide. In the current economy, 
commissaries and exchanges provide extraordinary job 
opportunities for military spouses and families.
    However, the recent pressures on the defense budget have 
yielded a number of initiatives to reduce funding for these 
programs and decrease their value to service members and their 
families. Although the threats to these programs were 
significant in 2011, the coordinated efforts of all of the 
members of the subcommittee, and in particular the ranking 
member, Mrs. Susan Davis, we were successful in fending off 
significant budget reductions.
    Unfortunately, we cannot declare a victory in this battle 
as the continuing pressure to shift budgets within the 
Department of Defense will energize the people who do not fully 
appreciate the value of these programs. This pressure can only 
be expected to increase in the coming months as the Congress 
debates the devastating reductions to defense accounts that are 
associated with the sequestration process scheduled to begin 
next year, which destroys jobs.
    Let me be clear. I remain a strong supporter of military 
commissaries and exchanges, and will continue to work in a 
bipartisan manner to ensure these programs endure through this 
era of budget challenges and remain the effective benefits that 
have long served our men and women in uniform and the Nation 
for so long.
    I would like to introduce our witnesses. Mr. Robert L. 
Gordon. He is the Deputy Assistant Secretary of Defense, 
Military Community and Family Policy, Office of the Under 
Secretary of Defense for Personnel and Readiness. Thank you for 
joining us again.
    Brigadier General Frances L. Hendricks, Commander of the 
Army and Air Force Exchange Service [AAFES].
    Rear Admiral Robert J. Bianchi, Retired, Chief Executive 
Officer [CEO] of the Navy Exchange Service Command [NEXCOM]. 
Mr. Joseph Jeu, Director and Chief Executive Officer of the 
Defense Commissary Agency [DeCA]. Mr. William C. Dillon, 
Director, Semper----
    Fit. Pardon me. It is Semper Fit. Okay, good. Semper Fit 
and Exchange Services, Manpower and Reserve Affairs Department, 
Headquarters of the U.S. Marine Corps. Mr. Patrick B. Nixon, 
President of the American Logistics Association [ALA]. And Mr. 
Thomas T. Gordy, President of the Armed Forces Marketing 
Council.
    There are a number of familiar faces among the witnesses. 
Mr. Gordon, Mr. Jeu, and Admiral Bianchi, welcome back to all 
of you. Especially you, Admiral Bianchi, as you begin your new 
life out of uniform, as a civilian.
    And welcome back to our witnesses that bring us important 
perspective of the private sector--Pat Nixon and Tom Gordy. It 
is good to see all of you here today.
    General Hendricks, I understand you will soon be retiring 
from the Air Force after 32-years-plus of service. Please 
accept our gratitude for your service to our Nation and our 
best wishes for your future.
    Mr. Dillon, not wanting to leave you out, welcome for the 
first time.
    [Laughter.]
    Mr. Wilson. I would also like to make note of the 
retirement last week of Ms. Janis White, the Director, Resale 
Activities and Nonappropriated Fund [NAF] Policy, after 34 
years of service. Janis' expertise and wise counsel were highly 
appreciated by this subcommittee, and we wish her well in her 
future endeavors, which I understand will include considerable 
time on the golf course. And we do have one or two at Hilton 
Head that are available.
    [Laughter.]
    Mr. Wilson. Now I would like to recognize the ranking 
member, Mrs. Susan Davis, for her opening remarks.
    [The prepared statement of Mr. Wilson can be found in the 
Appendix on page 25.]

    STATEMENT OF HON. SUSAN A. DAVIS, A REPRESENTATIVE FROM 
 CALIFORNIA, RANKING MEMBER, SUBCOMMITTEE ON MILITARY PERSONNEL

    Mrs. Davis. Thank you. Thank you, Mr. Chairman. And I want 
to join you in welcoming all of our witnesses. And you have 
certainly welcomed everybody. And welcome, those of you who are 
here wearing a different hat, or no hat.
    And I also certainly want to say that for General Hendricks 
we wish you the best in your retirement, after 30 years of 
tremendous service to our country. Thank you. Thank you very 
much.
    And, Mr. Dillon, of course welcome to the subcommittee. We 
are very happy to have you here as well. Thank you all for your 
service to our Nation and many thanks to your family as well.
    This is our annual meeting, as you know, on morale, welfare 
and recreation [MWR] programs. And we consider that these 
hearings are very important, and we know how critical the 
programs are to our families and the value that they hold for 
our military community.
    Over 10 years of conflict has placed a tremendous burden on 
those in uniform and also on their families, and especially on 
their children. I always want to remember the impact that our 
conflicts and the wars that we have engaged in have been on the 
children of those serving in uniform.
    It is important in today's All-Volunteer Force that we 
ensure that the quality of life support that our families need, 
that they know where that support is, and that they know that 
it comes through many, many of these programs.
    As the budget climate begins to change, MWR programs will 
still be needed. And we are going to have to provide a 
wholesome quality of life for our Armed Forces personnel and 
their loved ones.
    These programs will need to ensure that they are spending 
limited resources efficiently. That is a requirement that we 
ask of them; that they are using those resources efficiently 
and effectively to ensure that both taxpayer and service member 
funds are being spent wisely.
    So during this hearing, we hope that the witnesses will 
share with us what efforts they are undertaking to ensure that 
these programs are effective at maximizing resources in support 
of military personnel and their families.
    I certainly look forward to that, to an open and frank 
discussion on these issues. The dedication and the commitment 
MWR employees have displayed to our military families under 
very challenging conditions, that we are really thankful for 
their contributions. You play a very important role in doing 
that.
    Thank you, Mr. Chairman. I look forward to hearing from 
witnesses.
    [The prepared statement of Mrs. Davis can be found in the 
Appendix on page 26.]
    Mr. Wilson. Thank you very much, Mrs. Davis.
    And we will now proceed to the witnesses in the order as I 
indicated. Mr. Robert L. Gordon.

 STATEMENT OF ROBERT L. GORDON, DEPUTY ASSISTANT SECRETARY OF 
DEFENSE, MILITARY COMMUNITY AND FAMILY POLICY, OFFICE OF UNDER 
        SECRETARY OF DEFENSE FOR PERSONNEL AND READINESS

    Mr. Gordon. Thank you, Mr. Chairman and members of the 
subcommittee. I am delighted to appear before you today, and I 
appreciate this subcommittee's tradition of strong support for 
important benefits derived from our resale programs.
    Commissaries and exchanges are a highly valued, non-pay 
compensation benefit for our service members and their 
families, and we appreciate that you also recognize their 
value. The Department's leadership remains committed to these 
important programs. Secretary Panetta has been clear that we 
want to maintain the quality of benefits that flow to our 
troops and their families.
    Also, our industry partners here today share our keen 
interest in preserving the valuable commissary and exchange 
benefit. Everywhere I go on my visits to military communities I 
hear of the tremendous appreciation for, and in some cases the 
need for, commissaries and exchanges.
    Often they are only the source of high-quality American-
made products. But equally important, they are the lifeblood to 
many of our installation support programs.
    I also see how important it is to have these programs that 
are the number one employer of our military family members. In 
fact, DeCA and the military exchanges are partners in the 
Military Spouse Employment Partnership, and each has committed 
to recruiting, hiring, and retaining military spouses as 
employees.
    Their jobs are listed on our newly redesigned Web portal, 
where military spouses can easily apply for positions around 
the world as a relocating military spouse.
    My written testimony outlines our ongoing work in greater 
detail. Please be assured that as we continue to institute 
necessary changes we will always consider these services as one 
of the most valuable non-pay benefits. We will do our very best 
to take care of our most valuable assets--our service members 
and their families.
    Thank you again for your support.
    [The prepared statement of Mr. Gordon can be found in the 
Appendix on page 27.]
    Mr. Wilson. Thank you very much.
    And we now proceed to Brigadier General Francis L. 
Hendricks.

 STATEMENT OF BRIG GEN FRANCIS L. HENDRICKS, USAF, COMMANDER, 
              ARMY AND AIR FORCE EXCHANGE SERVICE

    General Hendricks. Mr. Chairman and members of the 
subcommittee, thank you for the opportunity to address you 
today. AAFES has proudly served America's Armed Forces for 117 
years and remains focused on our longstanding mission, to make 
the lives of soldiers and airmen better.
    Strong exchange benefit is one of the cornerstones of the 
military way of life. It enhances recruitment and retention, 
thereby aiding in the readiness of the Armed Forces.
    I want to thank the committee, and specifically Congressman 
Jones, for the language you included in last year's National 
Defense Authorization Act [NDAA] that authorized the exchanges 
to use the Federal Finance Bank. Your effort will result in an 
annual savings of $25 million.
    AAFES is a committed partner and teammate of the military 
resale community. Together with our sister exchanges and DeCA, 
we are fully engaged in pursuing new opportunities for 
collaboration and efficiency for 2012 and beyond.
    Of course, we don't do this mission alone. I want to thank 
our vendor partners and military support organizations, 
especially the American Logistics Association and the Armed 
Forces Marketing Council.
    Our commitment to the military community extends beyond 
just the goods and services we provide. We have made a 
significant commitment to hiring members of the military 
community.
    Thirty-one percent of our 43,000 associates are military 
spouses and family members. Veterans make up 13 percent of our 
workforce. We have partnered with the Wounded Warrior Project 
to recruit and train valuable associates.
    Finally, with the recent end of U.S. military operations in 
Iraq, it is worthwhile to reflect upon our efforts to serve 
those serving there. In the early spring of 2003, as U.S. 
ground forces fought their way up the Euphrates and Tigris 
Rivers, AAFES was with them. Our first store in Iraq operated 
out of the back of a Toyota Land Cruiser. As troops advanced 
northward, so did our store.
    From those humble beginnings, AAFES support continued to 
grow. And at the height of the efforts in Southwest Asia we 
operated 95 sites throughout the theater. During the next 8 
years more than 4,000 AAFES associates volunteered and deployed 
to operate retail stores and food activities in support of the 
troops. We brought them familiar products and services, and the 
food they craved.
    In that moment, at that place, we brought a little piece of 
home to them. We did that mission for 8 years in Iraq, and we 
continue to do it in Afghanistan today.
    Mr. Chairman and members of the subcommittee, thank you 
again for your support. We are here to serve [H2S]. I look 
forward to your questions.
    [The prepared statement of General Hendricks can be found 
in the Appendix on page 35.]
    Mr. Wilson. Thank you very much. And I saw firsthand your 
service overseas and in-theater, and I know how much the troops 
truly appreciated this service.
    Rear Admiral Robert J. Bianchi.

    STATEMENT OF RADM ROBERT J. BIANCHI, USN (RET.), CHIEF 
        EXECUTIVE OFFICER, NAVY EXCHANGE SERVICE COMMAND

    Admiral Bianchi. Chairman Wilson, Ranking Member Davis, and 
distinguished members of the subcommittee, I am pleased to 
appear before you today, and privileged to be back at NEXCOM as 
the first civilian CEO; proud to once again lead this 
tremendous group of 14,000 dedicated professionals around the 
globe.
    Today, much is asked of our men and women in uniform. And 
in an environment of smaller budgets and fewer forces, more 
will be asked of them. Nonappropriated fund programs are an 
important factor in increasing retention, improving readiness, 
and sustaining the quality of life of our Active Duty military, 
Reservists, Guard, retirees and their families.
    Navy exchanges, through savings at the cash register and 
funding for MWR programs, deliver more than a six-to-one 
payback of appropriated fund support, providing an effective 
and efficient mechanism to deliver the benefit our military 
families want and value.
    Support to our military families is vital, and in these 
tough economic times they expect more and rely on us more. Our 
2011 annual market basket survey results show that customers 
save an average of 23 percent below commercial retail prices, 
not including sales tax, generating over $500 million in non-
pay compensation.
    And for the second year in a row, our annual customer 
satisfaction index survey remained at an all-time high of 83, 
placing us in the top tier of industry retailers.
    New to the survey this year were questions to help us 
better understand how we connect with our military families. 
Customers responded very favorably that Navy exchanges make 
them feel connected to the Navy and demonstrate the Navy's 
commitment to their family needs.
    But NEXCOM delivers much more than savings. No commercial 
retailers have the depth and breadth of services that NEXCOM 
provides, nor do they go where we go; places like Djibouti, 
Africa, and Diego Garcia. We provide career opportunities for 
our military families and veterans. In fact, over 26 percent of 
our workforce are military family members.
    We bring a touch of America to sailors and their families 
around the world. With the support of our industry partners, we 
offer programs focused on military families, including customer 
appreciation events and joint events with the commissary and 
MWR. As a department of our base commands, we are also there 
during crises, as evidenced by our support to families during 
the earthquake and tsunami in Japan last year.
    We are focused on supporting the Secretary of the Navy's 
21st Century Sailor and Marine initiative. Together with the 
other Navy departments, we will help sailors make good choices. 
We are, and always will be, a military organization that 
contributes to personal and family readiness.
    Because our sailors depend on us, we are working to deliver 
the benefits in the most efficient manner, while remaining 
relevant for the future. Aligned with our industry partners and 
our sister resale agencies, we continue to work on taking costs 
out of the system, ensuring these valued non-pay benefits 
remain viable and strong for generations to come.
    What we accomplish cannot be done without the strong and 
unwavering support of this subcommittee. You have sent a clear 
message that these programs which support military families are 
critically important. We thank you, and are grateful for your 
support.
    I look forward to your questions.
    [The prepared statement of Admiral Bianchi can be found in 
the Appendix on page 49.]
    Mr. Wilson. Thank you very much. And it is particularly 
important you indicated that 26 percent of your personnel are 
persons of military families. Thank you for bringing that point 
up.
    Admiral Bianchi. Sure.
    Mr. Wilson. And we proceed now to Mr. Joseph Jeu.

   STATEMENT OF JOSEPH H. JEU, DIRECTOR AND CHIEF EXECUTIVE 
               OFFICER, DEFENSE COMMISSARY AGENCY

    Mr. Jeu. Chairman Wilson, Ranking Member Davis, members of 
subcommittee, it is my pleasure to provide the annual report on 
the state of the commissary benefit. As I visited many 
commissaries and conversed with our customers, I can assure you 
the commissary continues to be one of their most valued non-pay 
compensation benefits, at the same time providing taxpayers an 
excellent return on investment.
    Few, if any other, benefit systems can boast a two-for-one 
investment return. Last fiscal year, the commissary provided 
direct savings to commissary customers of $2.8 billion, for a 
taxpayer cost of $1.34 billion. The indirect support benefit, 
as outlined in my statement for the record, adds hundreds of 
millions of dollars more.
    Yet, some question whether today's commissary is 
antiquated. With 260,000 patrons visiting a commissary every 
day, buying $16 million in goods, there is no doubt the 
commissary remains relevant and an invaluable element of the 
non-pay compensation package. We have much to be proud of this 
year.
    In particular, they include achieving an unqualified audit 
opinion of our financial statement for the 10th consecutive 
year; being recognized with the Secretary of Defense's best 
mid-size component award for employing individuals with 
targeted disabilities; and the Paralyzed Veterans of America 
employable award for expanding employment opportunities for 
veterans; and supporting socioeconomic programs including $571 
million in contracts with small and disadvantaged businesses, 
and contracting for another $133 million going to AbilityOne 
program.
    In closing, I would like to thank the members of this 
subcommittee for their continued support of the commissary 
benefit, and I look forward to your questions.
    Thank you.
    [The prepared statement of Mr. Jeu can be found in the 
Appendix on page 62.]
    Mr. Wilson. Thank you, Mr. Jeu.
    And we now proceed to Mr. William Dillon.

   STATEMENT OF WILLIAM C. DILLON, DIRECTOR, SEMPER FIT AND 
EXCHANGE SERVICES DIVISION, MANPOWER AND RESERVE AFFAIRS, U.S. 
                          MARINE CORPS

    Mr. Dillon. Thank you.
    Chairman Wilson, Ranking Member Davis, distinguished 
members of the subcommittee, thank you for inviting me here 
today to discuss our Marine Corps exchange and retail programs. 
The Marine Corps Exchange is directly linked to our mission of 
taking care of our marines, sailors, and their families, and it 
is an important part of the overall non-pay compensation 
package.
    Our operational success is measured on our ability to 
provide unparalleled customer service, premier facilities, and 
valued goods and services at a savings. We believe that keeping 
faith means ensuring that the exchange benefit on which 
families depend remains high in quality, relevant, and 
accessible.
    We are executing branding strategies, and our aggressive 
reinvestment into main stores has been greatly appreciated by 
our patrons. Over the past 8 months, I have attended grand 
openings at Twenty-Nine Palms, Henderson Hall, Camp Lejeune, 
and Camp Pendleton. The new and refurbished main exchanges look 
great and offer a wide selection of right-priced, relevant 
merchandise in a shopper-friendly atmosphere.
    Our marines' gratitude for being provided these premier 
facilities is evidenced by their positive comments and by the 
strong sales results since opening. I would also like to point 
out, in support of hiring vets, spouses, and family members, 
that about 29 percent of our retail employees are family 
members. And many others are veterans.
    With our Marine Corps Exchange, marines, sailors, and 
families can rely upon a high-quality product at a fair, 
competitive price and know that the proceeds are reinvested in 
their community, their exchange, and their MWR programs, 
creating a stronger Marine Corps.
    On behalf of marines, sailors, families, and Marine Corps 
Exchange employees, I would like to thank you for your recent 
letter commemorating the Marine Corps Exchange's 115th 
anniversary, coming up on September 17th of this year.
    I appreciate the subcommittee's oversight and continued 
strong support of retail activities, and I look forward to your 
questions.
    [The prepared statement of Mr. Dillon can be found in the 
Appendix on page 75.]
    Mr. Wilson. Thank you very much, Mr. Dillon.
    And we now proceed to Mr. Patrick Nixon.

 STATEMENT OF PATRICK B. NIXON, PRESIDENT, AMERICAN LOGISTICS 
                          ASSOCIATION

    Mr. Nixon. Thank you, Mr. Chairman. It is once again an 
honor to appear before this subcommittee representing the 
membership and board of directors of the American Logistics 
Association.
    The ALA is over 90 years old, and its members consist of 
some of the largest consumer packaged goods companies, service 
providers, retail brokers, and distributors in the world.
    In addition, this year I am honored to represent the 
members and valued associates of the Coalition to Save Our 
Military Shopping Benefits. The members of the coalition 
consist of many military patrons, resale employees, and 
thousands of Americans that care about how we take care of our 
military families.
    The valued associates of the coalition include the National 
Military Family Association, the Fleet Reserve Association, the 
National Industries for the Blind, and our colleagues here 
today, the Armed Forces Marketing Council. They understand the 
importance of these benefits to the military, and have stepped 
forward to add their voice to the discussion.
    I also want to take this opportunity to recognize the 
leadership of the chairman and the distinguished ranking member 
over the course of the last several years, in particular your 
support of these vital benefits we will discuss today.
    I want to specifically recognize the subcommittee for the 
construct and conduct of these hearings over the last several 
years. The transparency of strategy, discussions, and 
collaboration are a clear testament to the value of this unique 
public-private partnership that supports and delivers these key 
benefits for our military and their families.
    The ALA has undertaken an additional initiative this year 
by working with Secretary Gordon and the White House to harness 
the employment engine of the ALA member companies to support 
the initiative of hiring veterans and military family members 
outlined by the Joining Forces initiative, under the leadership 
of the first lady.
    The ALA member companies committed to hiring of 25,000 
veterans and military family members, which is 25 percent of 
the program goals. A point that also deserves recognition is 
the fact that the military resale system is the largest 
employer of military family members and veterans in America.
    Mr. Chairman, we have provided, in our testimony for the 
record, an outline of thoughts, concerns, and recommendations. 
During the past year, the Congressional Budget Office [CBO] 
deficit reduction recommendation has served as the basis for 
several attacks on the resale system. We take great exception 
to their assumptions and findings, and have included specific 
concerns about the CBO report in our prepared remarks.
    We are clearly approaching the perfect storm of budget 
impacts, with extreme implications for every American. In any 
meaningful evaluation of the way ahead, there needs to be a 
review of all programs. But that review must take into account 
those programs that can serve as a benchmark for efficiency, 
effectiveness, and return on investment to the American 
taxpayer. The military resale system is just such a program.
    The savings delivered by the systems provide a two-to-one 
return to the taxpayer, and the benefits continually rank near 
the top of the valued benefits to the military. When you take 
into account the equity derived from the patrons' investment in 
infrastructure, the offsets to cost-of-living adjustments 
[COLAs], the offsets to military transportation costs, the 
employment opportunities provided military family members, and 
the support provided to morale, welfare and recreation 
programs, the economics are clear. These elements are captured 
in our formal testimony and I am sure will surface in our 
discussions today.
    Thank you, and I am prepared to answer your questions as we 
proceed.
    [The prepared statement of Mr. Nixon can be found in the 
Appendix on page 81.]
    Mr. Wilson. Thank you very much, Mr. Nixon.
    And we now proceed to Mr. Thomas Gordy.

STATEMENT OF THOMAS T. GORDY, PRESIDENT, ARMED FORCES MARKETING 
                            COUNCIL

    Mr. Gordy. Chairman Wilson, Ranking Member Davis, and 
members of the Personnel Subcommittee, thank you so much for 
allowing the Armed Forces Marketing Council to participate in 
today's hearing.
    I wanted to begin first by offering our most sincere 
appreciation to you, Mr. Chairman and Mrs. Davis, for your 
leadership last year in getting 67 other Members of Congress as 
well as most of the members of this subcommittee to sign the 
letter to the Secretary of Defense sharing this Congress' 
support for this very valuable benefit.
    We also were very grateful to Congress for passing the 
repeal of the 3 percent withholding requirement on government 
contracts last year. This subcommittee was instrumental in 
highlighting the adverse impact that the impending enactment of 
the withholding requirement would have on the commissaries in 
the exchanges.
    Passage of the repeal has saved hundreds of thousands to 
millions of dollars from being unnecessarily spent by the 
resale systems, protected MWR dividends, and insured the prices 
at the shelf remain low for the patron.
    The council would also like to go on record and thank the 
member associations of The Military Coalition and the National 
Military and Veterans Alliance for their efforts last year in 
opposing S. 277 and the Coburn amendment to the 2012 National 
Defense Authorization Act, both of which called for 
consolidation of military resale as promoted and proposed by 
the Congressional Budget Office that Mr. Nixon spoke of 
earlier.
    Because of the combined efforts of so many individuals and 
organizations, we are happy to state that both pieces of 
legislation were not passed by the Senate. We also want to 
recognize the success of the Department of Defense and the 
military resale systems to continue to deliver a world-class 
benefit for military families.
    In my mind, one event occurred last year that completely 
demonstrates the importance of the benefit and the valuable 
partnership that makes it all work. When the earthquake and 
tsunami struck Japan in April of last year, military resale 
systems, working with industry partners and the services, 
ramped up efforts to ensure that military families stationed in 
Japan had access to food, water, milk, and other essential 
items like diapers and baby formula. And as the father of a 16-
month-old, I couldn't imagine life without diapers, let me tell 
you.
    [Laughter.]
    Mr. Gordy. The resale stores in Japan remained stocked, 
while the stores outside the gate were empty. Not only did the 
system support our military families, but also was able to 
support the recovery effort with essential supplies, providing 
the United States with another element of humanitarian support 
to our friends in Japan. And it should also be noted there were 
no price increases on the products at the shelf.
    There is a strong partnership between the Congress, the 
Department of Defense, and the services and the resale industry 
to insure the effective, efficient, and continuous delivery of 
this very important quality of life benefit for our military 
families.
    There are, however, issues of concern to the council that 
we have highlighted in our written testimony, and look forward 
to addressing those and other concerns in today's hearing.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Gordy can be found in the 
Appendix on page 108.]
    Mr. Wilson. Thank you very much, Mr. Gordy.
    We will now proceed into a round of members of the 
subcommittee asking questions. We are under a strict 5-minute 
guideline, and we have a person above reproach who will be 
maintaining that time. Of course that is Mike Higgins.
    And so as you see him grimace, that means the 5 minutes is 
up. But we will begin with myself. And then we will proceed 
with our other subcommittee members.
    As I indicated in my opening statement, I am very, very 
concerned about the effect of sequestration, the defense cuts, 
as to the impact on our service members, military families, 
veterans. The defense budget has been cut $100 billion. It has 
been cut further by $487 billion. And now we are facing, 
January 1, an across-the-board cut of nearly $600 billion. It 
has been interpreted it could be between 8 percent to 12 
percent of the defense spending.
    And, Mr. Jeu, what would be the affect of such a cut on the 
defense commissary agency of sequestration?
    Mr. Jeu. Sir, first let me talk a little bit about the--I 
think DeCA has been a model agency for efficiency. Since DeCA 
was created in 1991, we have achieved over $900 million in 
savings, and reduced our full-time [FT] employees by 6,600 
people.
    And so, consequently, there is not very much left in terms 
of significant savings. So should there be any cuts with the 
sequestration or in other means, it would have direct impact on 
our service and benefit to our customers.
    Mr. Wilson. And I appreciate you raising this for the 
American people to know. And I am just so hopeful that there 
can be bipartisan addressing of this issue.
    General Hendricks, Admiral Bianchi, and Mr. Dillon, another 
issue would be appropriated funding. If that were eliminated, 
what would be the impact on your ability to provide services?
    General Hendricks. Sir, the limit of appropriated funding 
would hinder some of the ability of us to do that. Our main 
concern right now would be overseas utilities, which are now 
paid for through appropriated funding.
    We would either have to account for those on the business 
line, or they would come out of the MWR piece. Either way, it 
is going to end up hurting the family members and the soldier, 
airman, sailor, and marine. So it would have a direct impact.
    Admiral Bianchi. Sir, I would offer that, from the 
appropriated funds [APF] side, one of the primary activities 
that are funded is second-destination transportation. So if 
there were any reductions there, those funds are certainly 
critical to us providing quality goods and services to our 
forward-deployed service members to make sure they have access 
to comparable levels of service as their counterparts here in 
the U.S.
    So if there were any reduction, that would potentially 
limit our ability to provide those services. And I guess I am 
mostly concerned about places where there are limited options 
outside the gate, like Gitmo or in Djibouti. So, you know, 
there are certain locations in particular where no one has an 
opportunity for an alternative source of supply.
    So yes, sir, there could clearly be an impact there.
    Mr. Dillon. Chairman Wilson, I would echo what the Admiral 
had to say in terms of the concern that I would have with 
second-destination transportation not being supported.
    In addition to that, as you probably know our facilities, 
our exchange facilities are supported. The maintenance on those 
facilities is covered by appropriated funds today on our 
installations. If those funds were to be depleted in any way, 
then over time our facilities would begin to deteriorate. We 
may not be able to maintain them for future marines coming 
through the gate.
    Mr. Wilson. And thank you each, because you have really 
brought a real-world circumstance of utilities, of 
transportation, of maintenance. And again, thank you.
    Mr. Nixon and Mr. Gordy, what would you believe is the 
private sector reaction to the sequestration cuts?
    Mr. Nixon. Mr. Chairman, the impacts would be devastating, 
clearly. We know that. And I commend your leadership recently 
in bringing the issue of sequestration to the forefront. It is 
an item we must discuss, we can no longer avoid. Because action 
soon needs to be taken to address what is going to happen.
    The principal use of appropriated funds for the Defense 
Commissary Agency is employees, around 70 percent. The impact 
on the exchanges for the elimination of appropriations would 
just devastate their ability to provide any support for MWR.
    From our Save Our Benefit Web site, I have a quote. We ask 
for testimonials. And here is a quote I want to read; Kathleen 
in Ohio. ``Our family is a proud military unit. We didn't 
enlist our family in the military to get rich. However, at 
times it seems to be a bit of a struggle to make ends meet. If 
Congress decides to eliminate our commissaries and exchange 
benefit, it will make it impossible to raise a healthy family, 
much less survive. Please do not end these benefits. We are a 
strong military family. But if faced with this, re-enlistment 
is no longer an option.''
    That is the impact on the military.
    Mr. Wilson. That is gruesome.
    And Mr. Gordy, very briefly.
    Mr. Gordy. Well, just to echo what has already been said, 
you know, the impact would be devastating. At the end of the 
day what it means is that military families would not only have 
to earn this benefit, but then they would also have to pay for 
it.
    So therefore, there is no longer any benefit, and it would 
be hard to call it that going forward. As Mr. Jeu pointed out, 
you know, there is not a lot of fat to cut in their budget. And 
so the only way, if it comes down to a salami-slicing of 8 to 
12 percent, it is the military family who is going to end up 
feeling the pain once again.
    Mr. Wilson. And again, thank you very much.
    And we now proceed to Mrs. Susan Davis.
    Mrs. Davis. Thank you, Mr. Chairman.
    And I think you have all really made the economic argument, 
and certainly the support for our troops and for our families. 
I wonder, though. And I can assure you that we support you in 
that and certainly advocate in that way.
    Having said that, though, you have dealt with consolidation 
before, particularly General Hendricks and Mr. Bianchi, Mr. 
Dillon in the exchange systems. And I am wondering what kinds 
of preparation you have been under. You know, option 6 I think 
you looked at, and 11.
    What is it that you are doing to sort of help, I guess, to 
outline that preparation? And part of that, I think, is some of 
the advocacy that we can use to really paint a very clear 
picture for people of what this means.
    You have already stated that. I don't want to ask you to 
have to do that again. But can you let us in on some of the 
specific plans that really help to address some of these issues 
if, in fact, some of the concerns around consolidation were to 
move forward?
    Mr. Gordon. Well, let me start off very quickly. But the 
Department has no plans at this point to examine exchange 
consolidation. In the past, there have been seven studies. 
Those studies have basically shown that consolidation of our 
exchanges actually can do more harm than good in terms of cost 
savings and innovation.
    And I am happy to say, and I will let the commanders speak 
for themselves, that through partnership and through 
cooperative efforts--and we have many examples of those--that 
our three exchange systems are robust and vital as they 
currently stand.
    Admiral Bianchi. I guess I would just offer a couple of 
specific examples where the exchange commanders are working 
together as was kind of the outcome of the last study which was 
the Unified Exchange Task Force [UETF]. That consolidation 
 really is the more efficient and effective means.
    At NEXCOM, we share facilities with AAFES for van stuffing 
to send products to Japan and Guam. The Marine Corps Exchange 
uses our distribution center. We support 120 Marine Corps 
locations through our distribution center.
    We just negotiated a contract for motor fuel in Hawaii 
between the exchange and NEX and AAFES. We are saving $3.7 
million. We share a contract for inventory-taking equipment 
that saved over $200,000.
    So there are opportunities out there. We have a very strong 
cooperative efforts board [CEB]. We formally added Joe Jeu of 
DeCA to the organization this year. We also added the Coast 
Guard Exchange as an ad hoc member. We meet on a regular basis. 
And we have subgroups that are constantly looking for ways to 
save, to consolidate  and become more efficient.
    And those are just a few. I mean, we publish a report every 
year, submit it to the Department, of our efforts. And I think 
we have demonstrated over the years that we turn every rock 
over and look for opportunities to consolidate  and 
save.
---------------------------------------------------------------------------
     Subsequent to the hearing, the witness informed the 
committee that he intended to use the terms ``cooperation'' and 
``cooperate'' rather than ``consolidation'' and ``consolidate'' in the 
three instances indicated.
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    Mrs. Davis. Are there any areas that you have followed in 
the past that for whatever reason have just been very difficult 
to do? I mean, what are the obstacles as you try and look at 
some of those areas where you can be more effective?
    And obviously you have been successful in doing that. I am 
wondering, are there some areas, though, that are just really 
difficult? And is there any way in which we could be helpful in 
that way?
    Mr. Dillon. I would like to address that to some extent, 
Congresswoman Davis. The services have cooperated on a number 
of areas. One of them that has been very successful in certain 
ways has been in private label sourcing of merchandise.
    The exchange select program in consumables has been 
extremely helpful for all of the exchanges; a wonderful 
product, as good as you can find. I know we have a Proctor & 
Gamble representative here but, hey, our stuff is really good.
    [Laughter.]
    Mr. Dillon. But there are probably other areas, I think, 
that we could explore in this, in private label, that would 
generate some savings to a great extent that we need to pursue 
as an organization with the cooperative efforts board that we 
probably haven't gone after as much as we should have.
    Mrs. Davis. Thank you.
    Did you want to----
    General Hendricks. Yes, ma'am. I was just going to say 
that, you know, since that last study we have really, really 
embraced collaborative efforts in regards to communicating 
better with one another.
    Just the other day I did an announcement that goes into all 
the commissaries and the exchanges over our radio system on the 
upcoming Army's birthday. I called my good friend Joe Jeu and 
said, ``Hey, here is what I just said. You just take my name 
out, put yours in, because our radio plays in the commissary 
and our stores.'' We are going to record him tomorrow, too.
    It is very important that the military community hears all 
of us and sees us all working together. So I am very excited 
about where we are headed in our efforts, the new CEB, adding 
Joe and the others to the team this year. Communication is key 
as we move forward with the deficit reductions that are coming 
that we are looking every way we can to assist the community.
    Mrs. Davis. Thank you.
    Thank you, Mr. Chairman.
    Mr. Wilson. Thank you, Mrs. Davis.
    We now proceed to Congressman Alan West of Florida.
    Mr. West. Thank you, Mr. Chairman and ranking member. And 
thanks for the panel for being here and, sir, ``Rangers lead 
the way.''
    As we just finished voting on the fiscal year 2013 military 
construction [MILCON] appropriations last week, my first 
question is, are we meeting your requirements, or what 
percentage are we meeting the requirements, of the services you 
provide as far as military construction? I know we just talked 
about a new facility there, but are we keeping up with the 
demands that you all are placing?
    Admiral Bianchi. Sir, I would say we have a very robust 
recapitalization plan. The Navy's formula is 70-30, so all the 
profits that I make, 70 percent go to MWR, 30 percent are 
retained for recapitalization. And our recapitalization budget 
averages between $30 million to $50 million each year. In fact, 
we are just getting ready to cut the ribbon in the fall in 
Bethesda at the new 150,000-square-foot store.
    So we all realize, I think, that if we don't have fresh 
facilities, modern facilities, our patrons will vote with their 
feet. They deserve a recapitalized infrastructure and we are 
committed to doing that.
    And with the Navy, at least, we have a strong board 
oversight, an MWR exchange board run by three-stars across the 
Department. And part of their job is to ensure that this 
recapitalization plan continues.
    So I believe we are meeting that need. And we do not have a 
backlog. We have a very structured approach to that, sir.
    Mr. Dillon. I would also like to add to what the admiral 
had to say. Our program, too, is very structured. We are doing 
very well. I addressed some of the most recent main exchanges 
that we have opened. We have a number of Marine Marts that we 
will be touching over the next few years.
    But I think to get to your point, sir, in terms of where 
MILCON can help out, with most of these exchange programs that 
we have and construction programs there is a companion MILCON 
project. And it is very important that that military 
construction funding be available.
    So when we start to talk about reductions in appropriated 
funds on the MILCON side, it can hurt our recapitalization of 
our NAF facilities if those companion projects that are 
required--putting in roads, putting in utilities, those kind of 
things--if the funding for those are not available.
    So in terms of being able to help us out, making sure that 
funding for MILCON is there, we can get those companion 
projects finished and be sure that we can complete our NAF, our 
nonappropriated fund projects, on time.
    Mr. West. Okay. General.
    General Hendricks. I echo those comments exactly, as Mr. 
Dillon said. That is going to be the short pole in the tent 
coming forward. Over the last 5 years in AAFES, we have done 
$1.5 billion in MILCON for the places we serve and whatnot.
    I would like to thank the committee for the assistance on 
lifestyle centers. Fort Bliss is just a win-win-win; win for 
the soldiers and their families, win for the city of El Paso, 
the jobs. We collect appropriate taxes there from the 
concessionaires, and it is a win for the third-party tenants. 
Many are leading their particular industries locally, 
regionally, or nationally.
    Now, we have two more pilots coming up, one at Lewis-
McChord, which is presently 95 percent designed. We look for a 
fall-winter beginning construction there of 2012, completed in 
the fall-winter timeframe of 2014. Very key for that big 
community up there.
    And the third pilot we have is the Joint Base San Antonio, 
which is presently 65 percent in design, with a planned opening 
date of 2016. We appreciate again the committee's support there 
as we look at these types of things.
    And from those pilots we will take things from there and 
spread them across the other installations. But this has been a 
great program in partnership with the public and the private 
venture.
    Mr. West. Thank you.
    As we move, I want to talk about operations in combat 
theaters. And I will tell you that there was no greater day 
than when that first 5-ton truck rolled into Taji Air Base and 
it had Pringles potato chips and cookies on it.
    [Laughter.]
    Mr. West. And the battalion commander was the first one to 
get onto that truck.
    [Laughter.]
    Mr. West. But the thing that I want to ask you is, now that 
we have ended those combat operations in Iraq, did we go back 
and do an after-action review to look at the things that we 
learned as far as, you know, that type of support of exchange 
and services?
    And what type of constraints did you see overall for your 
system operating in two combat theaters of operation in Iraq 
and Afghanistan? Any points on that?
    General Hendricks. Sir, yes, sir. We have done an extensive 
hot wash coming out of Iraq as we have swung from there into 
Afghanistan. A lot of lessons learned that we have taken back 
and we will formalize for when we go forward. The biggest 
concern is, when we started down this thing folks in the 
building were looking around at each other. It has been a while 
since we had done one of these, and so we had to learn on the 
fly.
    So we are capturing all those. We are using the lessons 
learned there. And again, we are already starting. As we look 
at Afghanistan, our exit strategies, we have learned how to get 
things in there where they need to be there very quickly; 
various routes of entry through the logistics operations 
centers [LOCs], depending on what is available and what is not. 
And how do we take care of our soldiers there.
    We had a site last week that had a direct hit. We were able 
to get a TFE back in site, a tactical field exchange, within a 
day. It is very important to us and those soldiers that they 
know that what they need we can get there in short order.
    And so yes, sir, to answer your question, we have learned a 
lot. We are capturing that so that someday in the future when 
we need that again we will be able to pull it off the shelf and 
be able to review it.
    Mr. West. Thank you, Mr. Chairman. I yield back.
    Mr. Wilson. Thank you very much, Mr. West.
    We now proceed to Congresswoman Madeleine Bordallo of Guam.
    Ms. Bordallo. Thank you, Mr. Chairman. And to all our 
witnesses, thank you for your testimonies this afternoon.
    My first question is for Mr. Gordon. As you are aware, I 
sponsored section 644 of the House-passed fiscal year 2013 
NDAA. It requires the commissary and exchange oversight boards 
to establish guidelines for identifying certain sustainable 
products. It also requires the Department to develop a plan on 
how it would implement greater procurement of sustainable 
products.
    I am very adamant that we can do much more to make the 
commissary and exchange system more sustainable. Private 
industries have taken the lead on these initiatives, but I fear 
the exchange and the commissary system is falling behind.
    So I would like to understand the Department's position on 
this provision. What efforts, if any, are ongoing to procure 
these products?
    Mr. Nixon and also Mr. Gordy, I am also interested in 
learning how the private sector can help to achieve whatever 
goals DOD may set if my provision is included in the final 
bill.
    Mr. Gordon. Thanks very much for that, Congresswoman. 
Sustainability is very important. I will let some of the 
exchanges speak for themselves in terms of what they are doing. 
But the Defense Department strives to be a very good steward of 
our environment, first of all.
    And in terms of the products that we sell and the goods and 
services that we provide our military community members, we 
believe that we were very thoughtful, first of all, in 
considering the sustainability efforts, from the construction 
of our plant and equipment to our operations and maintenance, 
to the types of foodstuffs and services that we provide in our 
commissaries and exchanges.
    And I would like to defer to our commanders to talk about 
some of that sustainability.
    Mr. Jeu.
    Mr. Jeu. Obviously, we support sustainability. I am going 
to focus a little bit on some of the sustainability that is 
going on within the commissary system because we are the heavy 
user of energy. And, in fact, our refrigeration system consumes 
so much energy it is quite important for us to be energy 
efficient.
    And so over the last 10 years, 20 years, we have made 
concerted effort to reduce our energy consumption. In fact, 
results show that our energy consumption is about 30 percent 
less than commercial private sector.
    So we are very proud of the achievement we have made. We 
have a great recycling program within our commissaries. We 
recycle over 53,000 tons of cardboard boxes. So those are some 
of the things we do.
    And as far as product that we sell, there is no industry 
standard yet because in the grocery industry that is still in 
development. But as soon as we have a more formed plan then, 
obviously, we will add more and more sustainable environment 
and friendly type of products.
    Ms. Bordallo. Thank you.
    Anybody else want to comment?
    Mr. Nixon. Yes, ma'am. In reviewing the proposal that you 
have submitted, one of the things we did was reach out to our 
member companies. As a trade association, we have a lot of 
member companies that have some really leading-edge technology 
in this area.
    And one of the things we thought is to put together an 
industry forum that focused specifically on this issue. Some of 
our member companies, like WESCO, deal in the construction and 
supply industry. The other consumer packaged goods companies 
have leading-edge technologies on what is the art of the 
possible in sustainability and developing sustainable products.
    So industry can play a very important role in working in 
the partnership with the resale commands to put together a 
solid program, ma'am.
    Ms. Bordallo. Good. Thank you very much. I have a final 
question here for Mr. Gordon regarding container deposit 
programs.
    I want to understand how the exchanges and the commissaries 
in states or localities that have container deposit programs 
comply with these laws, or those laws. Or if they don't comply, 
what is the issue that hinders compliance?
    For example, I believe that military installations in the 
State of California and the State of Hawaii comply with the 
container deposit programs. So how is this achieved, and how 
can we ensure that we get compliance on Guam as well?
    Mr. Gordon. Well, we can. We have to understand, especially 
in places like Guam, what some of the issues are with respect 
to container deposit programs. I will tell you that we are 
working hard.
    I know that you want us to submit a report on that. We look 
forward to submitting that report. But I just want to let you 
know that the Department is committed.
    Ms. Bordallo. Very good.
    And I yield back, Mr. Chairman.
    Mr. Wilson. Thank you, Ms. Bordallo.
    And we now will proceed to Congressman Austin Scott of 
Georgia.
    Mr. Scott. Thank you, Mr. Chairman. I will try to be brief.
    But, Mr. Gordon, are you operating under the assumption 
that sequestration happens?
    Mr. Gordon. We are not. We are not planning for 
sequestration at this time, Congressman.
    Mr. Scott. With all due respect, and I didn't vote for it, 
but if you are not planning for it at this time and the 
President hasn't said he is not going to undo it, when do you 
intend to start planning for it?
    Mr. Gordon. Well, at this point in time, as Chairman Wilson 
said, this Department is looking at a $487 billion cut over the 
next 10 years. And with sequestration, with an additional $500 
billion, that would be nearly $1 trillion and would be 
devastating for the Department.
    We are moving forward with our current plans in terms of 
that $487 billion over 10 years.
    Mr. Scott. Mr. Gordon, I agree with you on the devastating 
cuts. But the fact of the matter is, sequestration is the law 
of the land. And it concerns me when members of the Department 
in leadership positions come before us and say that they are 
operating under the assumption that it is not going to happen.
    And I would just tell you that I think, with due respect, 
that as long as it is the law of the land--and as long as there 
are no plans from the executive branch, the President and, it 
seems, from Secretary Panetta that he expects sequestration, or 
certainly some form of it, to happen--how could the Department 
possibly carry out sequestration without having a devastating 
impact--especially to those men and women who are in the war 
zones--if, here in mid-June, you are not even--and I am not 
talking about you in particular, but the leadership of the 
Department--is not even making plans to deal with what the 
current law of the country is?
    And I think the impact on our soldiers from not having a 
plan is going to be devastating. And I think if you had a plan, 
and showed America the end result of the plan, then we, those 
of us who want to undo it, would get a lot further with getting 
it undone. And so I would just encourage you to put together 
the plan, all of you.
    I mean, General, you didn't get to be a general without 
following a plan. And I mean that very respectfully. You can't, 
we can't, assume that this is not going to happen. We cannot 
make the assumption that sequestration is not going to happen.
    And I encourage you to put together a plan so that the 
American public can see what the impact to its soldiers will 
be. And then I think that we will have the help we need, those 
of us who want to undo sequestration.
    Thank you, and I yield the remainder of my time.
    Mr. Wilson. Thank you very much, Mr. Scott. And I 
appreciate in particular Congressman Scott being here. He is 
undergoing a high element of flu, but that doesn't stop him 
from getting around.
    [Laughter.]
    Mr. Wilson. And he has assured me that it is not contagious 
to Congressman West, okay?
    [Laughter.]
    Mr. Wilson. And but, hey, he is immune. But we just 
appreciate your dedication.
    And I, on behalf of the subcommittee, would like to thank 
all of you for being here today. Your commitment to our service 
members--and it is so exciting for me to hear what Pat 
mentioned about military families and employment 
opportunities--this is just extraordinary. And for our 
veterans, too.
    And so if there is no further business, we shall be 
adjourned.
    [Whereupon, at 3:31 p.m., the subcommittee was adjourned.]
      
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                            A P P E N D I X

                              June 7, 2012

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              PREPARED STATEMENTS SUBMITTED FOR THE RECORD

                              June 7, 2012

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    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
      
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              QUESTIONS SUBMITTED BY MEMBERS POST HEARING

                              June 7, 2012

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                   QUESTIONS SUBMITTED BY MR. WILSON

    Mr. Wilson. Are there legislative or policy barriers that prevent 
the military resale activities from fully supporting military patrons 
and their communities and maximizing sales? If so, what are those 
barriers and what are your recommendations for improving the 
environment?
    Admiral Bianchi. Armed Services Exchange Regulations restrict 
certain types of products offered by the Exchange services thereby 
restricting Exchanges from offering a wider variety of merchandise to 
Service Members and their families that are already available to the 
general public. The Navy Exchange Service Command's preference is to 
eliminate all exchange merchandise restrictions.
    Mr. Wilson. Are there legislative or policy barriers that prevent 
the military resale activities from fully supporting military patrons 
and their communities and maximizing sales? If so, what are those 
barriers and what are your recommendations for improving the 
environment?
    Mr. Dillon. The Marine Corps' preference is to eliminate all 
merchandise restrictions imposed by Congress. In the last decade, 
Congress supported requests to eliminate most of the restrictions on 
merchandise sold by Exchanges in the United States. The Exchanges 
continue to seek removal of the remaining restrictions, which include 
the size of diamonds and finished furniture selling space. The 
authority to sell a wider variety of exchange merchandise improves our 
capability to meet the needs of members and their families, and to 
provide goods that are already available to the general public.
    We would like to thank Congress, especially this Subcommittee, for 
all of the support they have shown to the military resale system. We 
appreciate your continued support to protect the Exchange and 
Commissary benefit that is so vital to Service members and their 
families.
    Mr. Wilson. Are there legislative or policy barriers that prevent 
the military resale activities from fully supporting military patrons 
and their communities and maximizing sales? If so, what are those 
barriers and what are your recommendations for improving the 
environment?
    Mr. Gordon. The Defense commissary system is limited by statute 
(title 10 U.S.C. Sec. 2484) as to the products which can be sold. The 
Department does not recommend any change to the current merchandise 
restrictions on Commissaries.
    The Department's preference is to eliminate all Exchange 
merchandise restrictions imposed by Congress. In the last decade, 
Congress supported the Department's requests to eliminate most of the 
restrictions on merchandise sold by Exchanges in the United States. The 
Exchanges continue to seek removal of the remaining restrictions, which 
include the size of diamonds and the cost of jewelry; finished 
furniture selling space and finished furniture, home furnishings, small 
appliances, recreational boats and equipment, and power tools. The 
authority to sell a wider variety of exchange merchandise improves our 
capability to meet the needs of members and their families, and to 
provide goods that are already available to the general public.
    Mr. Wilson. Are there legislative or policy barriers that prevent 
the military resale activities from fully supporting military patrons 
and their communities and maximizing sales? If so, what are those 
barriers and what are your recommendations for improving the 
environment?
    Mr. Gordy. In the view of the Armed Forces Marketing Council, there 
exist both legislative and policy barriers that limit the extent to 
which military patrons are supported by the resale systems and limit 
sales.
    The Armed Services Exchange Regulations is one such example, 
particularly the merchandise restrictions on CONUS exchanges. Given the 
dynamic shift to an Internet- and mobile-based economy, these 
restrictions are antiquated and, in some cases, are irrelevant (i.e., 
projection televisions). The Council's view is that these limitations 
should be eliminated. If not eliminated, then the cost limitations 
should at the least be either increased automatically on an annual 
basis to keep up with inflation or reviewed on an annual basis by the 
Department of Defense and Congress to ensure the exchanges can provide 
a wide selection of merchandise to meet the divergent needs of military 
families while also ensuring that the regulations are reflective of an 
ever-changing marketplace.
    We are also concerned that there may exist some limitations on the 
resale systems that would preclude them from actively and aggressively 
participating in e- and m-commerce or would limit their adaptability in 
a fast-changing marketplace to meet patron needs and demands. We are 
aware and appreciative of efforts by the systems and DOD to take a look 
at current policies, laws and regulations that hinder military resale's 
participation in the cyber marketplace and seek remedies in order that 
military resale remains relevant, especially with younger, tech-savvy 
patrons. We look forward to their conclusions and working with them and 
the Subcommittee to develop new policies and regulations that ensure 
military resale can adapt to new technologies and reach the patron 
through new and emerging technologies.
    Mr. Wilson. Are there legislative or policy barriers that prevent 
the military resale activities from fully supporting military patrons 
and their communities and maximizing sales? If so, what are those 
barriers and what are your recommendations for improving the 
environment?
    General Hendricks. Below are five issues that are currently or will 
affect the service of AAFES to our military patrons:
    Defense Business Systems over $1M: Section 901 of the National 
Defense Authorization Act for Fiscal Year 2012, which includes the word 
``non-appropriated,'' could be interpreted to include the military 
exchanges and result in policy that is not conducive to efficient and 
effective operations. Specifically, an interpretation that creates 
policy bringing military exchange information technology initiatives 
under the Investment Review Board certification and Defense Business 
Systems Management Committee process would have an adverse impact on 
our ability to change IT systems to respond to changing customer needs 
or industry standards to the detriment of service members. Military 
exchanges estimate losses in revenues of $4.9 million each month 
execution of information technology initiatives are delayed through 
increased oversight, which would reduce dividends available to support 
morale, welfare and recreation programs.
    We believe AAFES annual IT certification process is sufficient to 
confirm NAFI business systems conform to standards contained in DOD IT 
Standards Registry (DISR) and also provides a process to address 
deviations or recommendations needed.
    Services Contract Act: Amend the Service Contract Act of 1965 to 
exclude contracts for retail services for members of the Armed Forces. 
The Service Contract Act provides a minimum wage base for service 
employees on Federal service contracts. The law requires that persons 
employed to provide services under a Federal service contract be paid 
at prevailing wage rates determined by the Department of Labor.
    An amendment would exclude service contracts entered into by the 
United States to provide retail services to members of the Armed 
Forces. These are unique contracts to which the United States is a 
party, but not a beneficiary. The beneficiaries of the services are 
Soldiers, Sailors, Airmen and Marines. While protecting the service 
employee, application of the Service Contract Act to these contracts 
artificially increases the costs of services under the contract, a cost 
that is not borne by the Government, but rather by the individual 
warfighter who actually uses the service. In some cases, it is 
difficult to find businesses that will operate on the base, which may 
deny the full range of services offered to the military customer. This 
amendment would simply put these services on par with other public 
sector retail service operations, which are not required to pay similar 
minimum wages to their service employees.
    New Car Sales: Clarify the current DOD policy to authorize new cars 
assembled in North America (including Mexico) by allowing exchanges to 
take orders for North American manufactured U.S. name-plate 
automobiles; North American manufactured foreign name-plated vehicles 
with at least 75 percent U.S. or Canadian content; and motorcycles. 
North America is defined as the continental United States, the District 
of Columbia, Canada, and Mexico.''
    ASER Restrictions: AAFES appreciates the support of the House Armed 
Services Committee/Senate Armed Services Committee in recent years to 
continue to ease merchandise restrictions. The committee's recent 
efforts to relax Armed Services Exchange Regulation (ASER) restrictions 
on TVs, furniture, and diamonds allows AAFES the authority to sell a 
wider variety of exchange merchandise, which improves our capability to 
meet the needs of service members and their families.
    AAFES will continue to advocate for the relaxation of all 
merchandise restrictions that effectively deny military families the 
ability to buy a more extensive range of products and services from 
their exchange. Another proposal might be to tie merchandise cost 
limits to inflation rates which would automatically adjustment to meet 
the changing needs of the market. In short, we want to minimize the 
barriers that keep military families from making major purchases 
utilizing the low prices and the favorable credit terms that the 
exchange can deliver.
    Advertising Restrictions: Presently, advertising authority is 
limited to those products and services the military exchanges are 
authorized to sell. Expansion of military exchange advertising 
authority would support efforts to raise awareness of quality of life 
benefits and enhance exchange dividends through further amortization of 
marketing costs. AAFES proposes that authority be extended to pay 
advertising for military benevolent organizations, military community 
cooperatives and other commercial organizations that offer products and 
services that would be of benefit to military Service Members. Of 
course any such advertisements would be in accordance with Joint Ethics 
Regulation, DOD Directive 5500.07-R, which requires advertisements for 
products and services not authorized for exchange resale to include a 
disclaimer that it does not constitute Department of Defense, U.S. 
Armed Services, or military exchange endorsement.
    Mr. Wilson. Are there legislative or policy barriers that prevent 
the military resale activities from fully supporting military patrons 
and their communities and maximizing sales? If so, what are those 
barriers and what are your recommendations for improving the 
environment?
    Mr. Jeu. The Defense commissary system is limited by statute (title 
10 U.S.C. Sec. 2484) as to the products which can be sold. The 
Department does not recommend any change to the current merchandise 
restrictions on Commissaries.
    Mr. Wilson. Are there legislative or policy barriers that prevent 
the military resale activities from fully supporting military patrons 
and their communities and maximizing sales? If so, what are those 
barriers and what are your recommendations for improving the 
environment?
    Mr. Nixon. The American Logistics Association appreciates the 
support of the House Armed Services Committee in fostering an 
environment wherein resale programs can optimize their ability to 
support our valued patrons and looks forward to working with the 
Committee in ensuring a responsive and efficient business environment.
    There are several key market and budgetary dynamics that prompt a 
re-examination of the restrictions that are placed on resale programs. 
These include:
      Effects of increased deployment on military families and 
the need for on-base retail services to be more responsive.
      Increased reliance on the National Guard and Reserve that 
drives changing product awareness.
      Exchanges offer favorable credit terms that are sensitive 
to the financial needs of military patrons and help insulate military 
personnel from high-interest off-base merchandisers.
      Need for resale agencies to continue to optimize 
efficiency in operations in order to minimize reliance on 
appropriations and keep prices low for patrons.
      The need for on-base retailers to be free from 
restriction in order to rapidly respond to evolving consumer demand.
      Market dynamics including the proliferation of mass-
merchandisers, specialty big-box retailers.
      Increasing electronic commerce options, communications 
evolution, peer-to-peer marketing though social media, and e-commerce 
rapid supply chain response and delivery.
      Instant price and product comparison technology.
      And a more well-paid, better educated, brand-conscious, 
sophisticated, mobile, tech savvy, and discerning military shopper 
demographic.

ASER Restrictions
    The ALA appreciates the support of the Armed Services Committees of 
the House and Senate to relax Armed Services Exchange Regulation 
restrictions. We support removing all remaining restrictions on the 
sale of merchandise in exchanges.

Advertising Restrictions
    The ALA also supports a re-examination and change to the current 
policies on advertising. Currently, there are limitations on 
dissemination of sales prices in media that can be removed from the 
store. While we understand the spirit and intent of this restriction, 
the Internet now allows market segmentation where only eligible 
military shoppers can be isolated and informed. This electronic and 
targeted media should be allowed to inform eligible patrons of pricing.
    A family of four can save nearly $7,000.00 per year by shopping at 
exchanges and commissaries with savings in commissaries in the range of 
30 to 50 percent and exchange savings above 20 percent. These benefits 
are the only benefits in the Department of Defense where there is a 
lower cost per user as volume increases. Therefore, it benefits the 
overall compensation package when more shoppers are aware of these 
benefits and use them. We therefore encourage a re-examination of the 
price advertising restriction to allow prices to be disseminated to 
eligible patrons with targeted print or electronic media.
    We are aware of efforts by the resale agencies to review the policy 
on promotion of products and will work with these agencies to ensure 
patrons are aware of all that resale agencies have to offer.

Service Contract Act Application
    The ALA also supports a re-examination of the application of the 
Service Contract Act to retail services for military patrons. 
Application of this Act artificially increases costs of services under 
the contact--costs that must be passed on to military patrons.

New Car Sales
    ALA also supports a correction to the current policy to authorize 
new cars assembled in North America and allow exchanges to respond to 
the service members' needs by being permitted to sell North American 
assembled cars, motorcycles or other vehicles.

IT Modernization
    Further, ALA supports exclusion of nonappropriated fund information 
technology systems from the requirements of Section 901 of the Fiscal 
Year 2012 National Defense Authorization Act. Including NAF systems 
under this Act unnecessarily impedes the rapid execution of IT systems 
that can make exchanges and MWR programs more efficient and responsive 
to patrons. This would not effect the DOD's efforts to control 
duplicative and wasteful IT expenditures on enterprise wide systems for 
human resources, finance, and acquisition which appear to be the 
problem that Section 901 sought to remedy.

                                  
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