[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]




 
                         [H.A.S.C. No. 113-70] 
                   MILITARY RESALE PROGRAMS OVERVIEW

                               __________

                                HEARING

                               BEFORE THE

                   SUBCOMMITTEE ON MILITARY PERSONNEL

                                 OF THE

                      COMMITTEE ON ARMED SERVICES

                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD

                           NOVEMBER 20, 2013


                                     
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13

                                     
                                 ______

                   U.S. GOVERNMENT PRINTING OFFICE 
86-077                     WASHINGTON : 2014
____________________________________________________________________________ 
For sale by the Superintendent of Documents, U.S. Government Printing Office, 
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202ï¿½09512ï¿½091800, or 866ï¿½09512ï¿½091800 (toll-free). E-mail, [email protected].  
                                     
  


                   SUBCOMMITTEE ON MILITARY PERSONNEL

                  JOE WILSON, South Carolina, Chairman

WALTER B. JONES, North Carolina      SUSAN A. DAVIS, California
JOSEPH J. HECK, Nevada               ROBERT A. BRADY, Pennsylvania
AUSTIN SCOTT, Georgia                MADELEINE Z. BORDALLO, Guam
BRAD R. WENSTRUP, Ohio               DAVID LOEBSACK, Iowa
JACKIE WALORSKI, Indiana             NIKI TSONGAS, Massachusetts
CHRISTOPHER P. GIBSON, New York      CAROL SHEA-PORTER, New Hampshire
KRISTI L. NOEM, South Dakota
                Craig Greene, Professional Staff Member
                 Debra Wada, Professional Staff Member
                           Colin Bosse, Clerk


                            C O N T E N T S

                              ----------                              

                     CHRONOLOGICAL LIST OF HEARINGS
                                  2013

                                                                   Page

Hearing:

Wednesday, November 20, 2013, Military Resale Programs Overview..     1

Appendix:

Wednesday, November 20, 2013.....................................    23
                              ----------                              

                      WEDNESDAY, NOVEMBER 20, 2013
                   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, RDML Robert J., SC, USN (Ret.), Chief Executive Officer, 
  Navy Exchange Service Command..................................     4
Dillon, William C., Director, Semper Fit and Exchange Services 
  Division, Manpower and Reserve Affairs, U.S. Marine Corps......     8
Gordy, Thomas T., President, Armed Forces Marketing Council......    10
Jeu, Joseph H., Director and Chief Executive Officer, Defense 
  Commissary Agency..............................................     7
Nixon, Patrick B., President, American Logistics Association.....     8
Shull, Thomas C., Director and Chief Executive Officer, Army and 
  Air Force Exchange Service.....................................     6
Williams, Rosemary Freitas, Deputy Assistant Secretary of Defense 
  for Military Community and Family Policy, U.S. Department of 
  Defense........................................................     3

                                APPENDIX

Prepared Statements:

    Bianchi, RDML Robert J.......................................    58
    Davis, Hon. Susan A..........................................    29
    Dillon, William C............................................    93
    Gordy, Thomas T..............................................   128
    Jeu, Joseph H................................................    80
    Nixon, Patrick B.............................................   102
    Shull, Thomas C..............................................    70
    Williams, Rosemary Freitas...................................    31
    Wilson, Hon. Joe.............................................    27

Documents Submitted for the Record:

    National Military Family Association Statement for the Record   151

Witness Responses to Questions Asked During the Hearing:

    Mrs. Davis...................................................   159

Questions Submitted by Members Post Hearing:

    Mr. Wilson...................................................   163


                   MILITARY RESALE PROGRAMS OVERVIEW

                              ----------                              

                  House of Representatives,
                       Committee on Armed Services,
                        Subcommittee on Military Personnel,
                      Washington, DC, Wednesday, November 20, 2013.
    The subcommittee met, pursuant to call, at 2:43 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 gentlemen, the hearing will come to 
order. Welcome to a meeting of the House Armed Services 
Subcommittee on Military Personnel.
    Today, the subcommittee will examine the military resale 
programs within the Department of Defense, specifically how the 
military resale community will continue to provide appreciated 
benefits to service members, their families, and retirees in a 
fiscally constrained environment.
    The military exchanges, the commissary and the Morale, 
Welfare, and Recreation programs are acknowledged as highly 
valuable and appreciated benefits that support Active Duty 
retention, the well-being of the military community, and the 
readiness of the force. The commissaries, exchanges, and 
Morale, Welfare, and Recreation programs have long provided 
extraordinary savings to their patrons as well as job 
opportunities for military spouses and families, which I view 
as critical during the past years of economic challenges.
    The continued fiscal pressures on the defense budget have 
caused the Department and services to look at initiatives to 
reduced appropriated funding for these programs. As Congress 
debates the devastating reductions to the defense accounts that 
are associated with the sequestration, it is critical that we 
hear from the Department and the military resale community to 
reinforce the importance of these programs to the All-Volunteer 
Force, but also, how the resale community is working together 
to ensure this valuable benefit is maintained even in a 
fiscally constrained environment.
    I remain a strong supporter of the military commissaries, 
exchanges, and the Morale, Welfare, and Recreation programs and 
will continue to work to ensure these programs continue to 
provide the effective benefits our men and women in uniform 
deserve.
    I agree with President Obama, who spoke at Camp Pendleton 
on August 7, 2013, where he said, quote, ``Hardworking folks 
are getting furloughed, families getting by on less, fewer 
ships available for your training exercises, the commissaries 
your families rely on closed a day a week. We can do better 
than that. That is not how a great nation should be treating 
its military and military families,'' end of quote.
    I would like to welcome our distinguished witnesses: first, 
Ms. Rosemary Freitas Williams, the Deputy Assistant Secretary 
of Defense, Military Community and Family Policy, Office of the 
Under Secretary of Defense for Personnel and Readiness; Mr. 
Robert J. Bianchi, Rear Admiral, retired, Chief Executive 
Officer of the Navy Exchange Service Command; Thomas Shull, 
Director and CEO [Chief Executive Officer] of the Army and Air 
Force Exchange Program; Mr. Joseph Jeu, the Director and Chief 
Executive Officer of the Defense Commissary Agency; Mr. William 
C. Dillon, the Director, Semper Fit and Exchange Services, 
Manpower and Reserve Affairs Department, headquarters to the 
U.S. Marine Corps; Mr. Patrick B. Nixon, president, American 
Logistics Association; Mr. Thomas T. Gordy, president of the 
Armed Forces Marketing Council.
    Mrs. Davis, do you have any opening remarks?
    [The prepared statement of Mr. Wilson can be found in the 
Appendix on page 27.]

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

    Mrs. Davis. Thank you, Mr. Chairman. I also want to welcome 
our witnesses today.
    And, to Ms. Williams, we are pleased to have you. And I 
recognize that this is your first testimony before the 
subcommittee, and we certainly look forward to your statement.
    And I know the chairman introduced the rest of our panel 
today, and we certainly welcome all of our witnesses back. They 
are familiar to most of us. And we are glad that you are here 
today.
    This is our annual hearing on military resale and Morale, 
Welfare, and Recreation [MWR] programs. It is important that we 
hold this hearing each year and especially in these difficult 
economic times because the resale programs and associated MWR 
programs, as well, are so important and so valuable to the 
military community.
    Our Nation has been at war for nearly 12 years, and while 
the pace of deployment and the number of troops being sent into 
harm's way is decreasing, we know that the demand for support 
services is not decreasing. And, in fact, we see many accounts 
where it is doing just the opposite. Necessities like food and 
clothing as well as larger programs like marriage counseling, 
child care, transition programs, and alcohol treatment have all 
increased in need.
    The transition to a smaller force and the continued support 
that our military service members and their families will need 
is important if we are to ensure that the quality of life that 
they have earned is provided for. The reality of the current 
budget is upon us, and efforts to look at eliminating 
commissary and exchange benefits as a way to reduce costs are 
again being considered. Yet, we know that the commissary 
remains the most valued benefit by service members, retirees, 
and their families.
    And except primarily for second-destination funds, the 
exchanges actually provide a monetary benefit back to its 
customers through the dividends that support MWR programs. And 
the sad fact remains, however, that budget reviews tend to look 
only at the bottom line and fail to assess the secondary or 
even the unintended consequences of their recommendations.
    That said, the commissaries and exchanges and MWR programs 
have a fiduciary duty to ensure that they are providing the 
most cost-efficient benefit. Because commissaries are supported 
by taxpayer dollars and exchanges are supported by service 
member dollars, both systems need to ensure that they are doing 
all that they can to best utilize the resources that are 
provided.
    So I look forward to an open and frank discussion on these 
issues. The dedication and the commitment of our military 
resale employees have provided to military families under these 
ongoing and challenging conditions. They have been outstanding, 
and we are thankful for their contributions.
    Thank you so much, Mr. Chairman. I look forward to our 
witnesses.
    [The prepared statement of Mrs. Davis can be found in the 
Appendix on page 29.]
    Mr. Wilson. Thank you, Mrs. Davis.
    I now ask unanimous consent that a statement from the 
National Military Family Association be included for the 
record.
    Without objection, so ordered.
    [The information referred to can be found in the Appendix 
on page 151.]
    Mr. Wilson. Ms. Williams, we will begin with your 
testimony.
    As a reminder, please keep your statements to 3 minutes. We 
have your written statements for the record. Following your 
testimony, each subcommittee member will participate with 
questions in rounds of 5 minutes each until adjournment.

   STATEMENT OF ROSEMARY FREITAS WILLIAMS, DEPUTY ASSISTANT 
SECRETARY OF DEFENSE FOR MILITARY COMMUNITY AND FAMILY POLICY, 
                   U.S. DEPARTMENT OF DEFENSE

    Ms. Williams. Thank you, Chairman Wilson, Ranking Member 
Davis, for your strong support of the quality-of-life programs 
for military members, their families, and survivors. Your 
leadership and emphasis have kept the focus on the programs 
that help keep our military strong and resilient.
    Today, perhaps more than ever, the members of our military 
community need to count on the resolve and commitment you have 
so consistently displayed over the years for the very programs 
they continue to depend on so heavily.
    I am honored and humbled by the opportunity to serve as the 
Deputy Assistant Secretary of Defense for Military Community 
and Family Policy. Although I was sworn in just a little over 4 
months ago, I bring to this position a passion for those who 
serve and the people who support them.
    My husband served as a marine for 20 years and deployed 
shortly after we were married, so I feel a special bond with 
those who must endure the heartache of family separations, the 
worry and fear of multiple deployments, and challenges of 
frequent moves. These experiences, as well as my professional 
work with the Veterans Administration and military family 
nonprofits, reinforce to me the value of the programs that now 
fall into my portfolio--rather, excuse me, they do not fall 
``into'' them; they fall ``in'' the portfolio. Excuse me.
    My written statement highlights some major recent 
achievements within the military family, community and family 
policy organization. The statement then shifts the focus to the 
current outlook for us and our resale partners in today's 
reduced budget environment. Finally, it provides a quick 
preview of some preliminary results from our Task Force on 
Common Services as well as some other transformational 
initiatives that hold great potential for our future.
    As you well know, these are trying times for our military 
community. Our people face unique challenges associated with 
their military service: over a decade of engagement in hostile 
operations overseas; multiple frequent deployments, many for 
extended periods of time; uprooting the family for a move to a 
different location for the needs of the service member; and the 
continued uncertainty about the budget and funding levels. Our 
civilian members have not been spared: furloughs that cut into 
the family paycheck, hiring freezes, and elimination of pay 
raises and awards.
    Keeping in mind that sequestration has only been in effect 
about 6 months. And without some relief, the Department faces 9 
more years of steeper funding cuts and ever more unprecedented 
fiscal uncertainty. At the very time of our community's 
greatest need, these funding cutbacks pose great risk to the 
programs and services on which our military members and their 
families depend on for resilience.
    Do not get me wrong. We are willing to do our part. My 
written statement shows that we are looking for efficiencies 
and ways to transform our programs to meet these fiscal 
realities. But we can't expect the service members, past and 
present, and their families to shoulder this burden alone and 
to meet these challenges with even more of their personal 
sacrifices.
    I look forward to working with this subcommittee to meet 
the needs of our military community, and thank you for your 
continued support. I welcome your questions.
    [The prepared statement of Ms. Williams can be found in the 
Appendix on page 31.]
    Mr. Wilson. Thank you very much, Ms. Williams.
    And Admiral Bianchi.

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

    Admiral Bianchi. Chairman Wilson, Ranking Member Davis, and 
distinguished members of the subcommittee, I appreciate the 
opportunity to appear before you today.
    Maintaining our Nation's commitment to our military members 
and their families' quality of life remains a key factor in 
ensuring a strong military and an All-Volunteer Force. As a 
nonappropriated funded entity, it is important to note that 
NEXCOM [Navy Exchange Service Command] kept faith and 
maintained that commitment through the recent government 
shutdown. Navy exchanges and Navy lodges remained open, sending 
a strong signal to our service members and military families 
that their needs had not been forgotten.
    The NEXCOM enterprise has broad reach and touches many 
aspects of Navy life. Every day, our military families around 
the world rely on us for quality products, uniforms, casual 
dining, hair care, auto services, gas, laundry, that touch of 
home, and more.
    We provide lodging for our military families when they 
change duty stations. For sailors and marines at sea, we 
provide essential items and funds to support their recreational 
needs. We help sailors and families stay connected with 
personal calling at sea and Internet and cellular services 
ashore.
    And at overseas locations, NEXCOM delivers the commissary 
and exchange benefit where a standalone commissary is not 
economical and provides school lunches for the Department of 
Defense education activity.
    Unlike other government programs, we operate as a true 
business. We have always and will continue to drive internal 
efficiencies to reduce costs and seek new opportunities to 
drive top-line sales. Recently, we consolidated buildings and 
automation in our Northeast Distribution Center, attriting 50 
full-time positions while increasing our throughput by 10 
percent. Our store lighting retrofits are yielding over 9 
million kilowatts in energy savings annually, with a cost 
avoidance of over $800,000.
    Through our partnerships with AAFES [Army Air Force 
Exchange Service], the Marine Corps, DeCA [Defense Commissary 
Agency], Coast Guard, Veterans Canteen, and our own Navy MWR, 
we will continue to implement joint efforts that reduce costs 
in our programs.
    While we are a nonappropriated funded entity, we do receive 
limited appropriated funds, and primarily these for overseas 
support. Based on the savings we provide Navy families and our 
dividends that support Navy quality of life, we actually 
provide a 6-to-1 payback on that appropriated fund investment.
    With the pressures on appropriations, we are concerned 
about potential reductions in appropriated fund support to our 
programs. As such, your continued support for sustaining 
second-destination transportation funding is critical to our 
ability to serve these families overseas.
    Through our customer satisfaction surveys and feedback on 
social media, we know our military families value and 
appreciate the benefits we provide. A recent social media 
posting summed it up best: ``I like shopping at the NEX [Navy 
Exchange] because it is a safe environment. I like going into 
the store and being made to feel like family.''
    We can't do this alone. I want to acknowledge the dedicated 
support we receive from our industry partners and from you on 
the committee.
    I look forward to your questions and thank you very much.
    [The prepared statement of Admiral Bianchi can be found in 
the Appendix on page 58.]
    Mr. Wilson. Thank you very much, Admiral.
    Mr. Shull.

  STATEMENT OF THOMAS C. SHULL, DIRECTOR AND CHIEF EXECUTIVE 
          OFFICER, ARMY AND AIR FORCE EXCHANGE SERVICE

    Mr. Shull. Mr. Chairman, Ranking Member Davis, and members 
of the subcommittee, thank you for the opportunity to speak 
today.
    Since this is my first appearance before the committee, 
please allow me to introduce myself. I am the son of a career 
Army officer. After graduating from West Point, I served for 
more than a decade as a soldier before embarking on a career in 
business, primarily in retail. In the past, I have served as a 
CEO of a major retailer, a large direct marketing corporation, 
and a top regional packaged goods company. Joining the Army and 
Air Force Exchange Service has been like coming home. There is 
no greater honor than serving those who serve.
    Although we are bringing a fresh approach to the 118-year-
old exchange benefit, our passion for serving the military 
family and saving the American taxpayer money remains 
steadfast.
    We have taken a proactive approach to reduce costs. In the 
last 17 months alone, the Exchange has lowered overhead 
expenses by $100 million. We have decreased full-time staffing 
by more than 3,000 while simultaneously reducing costs related 
to transportation, utilities, travel, supplies, and personnel 
moves. Drawing upon commercial best practices, dividends to MWR 
have gone up approximately 10 percent, as expenses, especially 
overhead, continue to go down.
    As we improve efficiencies we continue to exceed shoppers' 
expectations. On August 1, the Exchange announced a major 
investment in an enhanced Web site with improved order of 
fulfillment. Online and off, the Exchange is intensifying the 
presence of national brands such as Michael Kors, Ralph Lauren, 
Apple, Under Armour, Estee Lauder, New Balance, and Walt 
Disney. Thanks to a recent agreement with Disney, for the first 
time in the organization's history, the Exchange is now 
offering first-run movies in the continental United States.
    Our associates bring a special skill set and passion to our 
theaters, restaurants, and stores, and many have a direct 
connection with those they serve. Today, 30 percent of the 
Exchange team identifies themselves as a spouse or other family 
member; 13 percent are veterans; and 434 wounded warriors serve 
in our ranks.
    I want to thank my fellow military resale partners, 
vendors, and military support organizations. We stand united 
with you in our common pursuit to enhance the military 
community's quality of life.
    Mr. Chairman, Ms. Davis, and other members of the 
subcommittee, please allow me to thank you for the continued 
support that you give us each day. Together, we ensure that 
wherever service members are, an exchange is there to support 
them. Our operations increase the combat potential of America's 
forces and enhance the probability of mission success for our 
troops and our country.
    I look forward to your questions.
    [The prepared statement of Mr. Shull can be found in the 
Appendix on page 70.]
    Mr. Wilson. Thank you very much, Mr. Shull.
    And Mr. Jeu.

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

    Mr. Jeu. Chairman Wilson, Ranking Member Davis, members of 
the subcommittee, I am pleased to update you on DeCA's progress 
this past year.
    We have been engaged in a number of initiatives to improve 
the delivery of the commissary benefit as well as assisting the 
Department in improving the quality of life of service members 
and their families. While detailed more fully in my statement 
submitted for the record, those projects include enhancing our 
sustainability program, revitalizing our construction program, 
implementing online ordering and curbside pickup, and providing 
a venue for the Department to deploy the Healthy Base 
Initiative program.
    It has been a year filled with challenges which 
significantly impacted commissary patrons. However, these 
challenges demonstrated that the commissary continued to play 
an important role in the economic well-being of our military 
families.
    A prime example would be what happened on October 1st, the 
first day of the government shutdown. That day was our highest 
sale day ever, totaling over $30.5 million. This amount is 
double our normal business day, with our military families 
coming to the commissary to stock up. With both the Department-
wide hiring freeze and employee furloughs required to meet 
sequestration requirements and the recent government shutdown, 
customer service suffered greatly. With DeCA's high turnover 
rate of lower-graded employees, over two-thirds of our store 
fell below the level required to effectively run the store. 
While the Department has provided hiring freeze relief, the 
cure was not immediate because of the new employee vetting time 
lag.
    The closure of your stores for 1 day a week for 6 weeks 
impacted customers further. Customer complaints rose by over 50 
percent and hit an all-time high during the furlough. The 
recent shutdown also hampered commissary patrons, our 
employees, and our suppliers.
    Although we encountered some challenges associated with the 
sequestration and government shutdowns, we are forging ahead 
with ongoing initiatives to seek innovative, efficient method 
of commissary benefit delivery.
    In closing, I would like to thank the members of the 
subcommittee as well as each Member of Congress for their 
continued support of the commissary benefit. I will be happy to 
answer any questions you may have.
    [The prepared statement of Mr. Jeu can be found in the 
Appendix on page 80.]
    Mr. Wilson. Thank you very much, Mr. Jeu.
    And we proceed to Mr. Dillon.

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

    Mr. Dillon. Chairman Wilson, Ranking Member Davis, and 
distinguished members of the subcommittee, thank you for 
inviting me here today to discuss Marine Corps exchange and 
retail programs.
    The Marine Corps Exchange is a vital part of the overall 
non-pay compensation package for marines and their families. We 
measure our success by our ability to provide unparalleled 
customer service, premier facilities, and valued goods and 
services at savings, while also returning a significant 
dividend to the Marine Corps community. I am also proud to note 
that nearly 30 percent of our retail employees are military 
family members.
    Marine Corps retail programs are not immune from fiscal 
challenges, but challenges we believe bring great opportunity. 
The Marine Corps Exchange aims to execute programs in the most 
resourceful way as part of our regular business practice. We 
are assessing our business and support capabilities to increase 
these efficiencies. We are also collaborating with our sister 
services whenever possible and leveraging our partnership with 
industry. Many of these efforts have already provided 
significant cost savings, and we look forward to additional 
opportunities to expand efficiency.
    With Marine Corps Exchange, marines and families can rely 
upon a high-quality product at a fair, competitive price and 
know that the proceeds are reinvested in the community, 
creating a stronger Marine Corps.
    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 93.]
    Mr. Wilson. Thank you very much, Mr. Dillon.
    We now proceed to President Nixon.

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

    Mr. Nixon. I like that title, sir.
    Thank you, Mr. Chairman. It is an honor to be here today 
representing the ALA and our affiliate organization, the 
Coalition to Save Our Military Shopping Benefit.
    The sun never sets on the military resale system. Every 
day, thousands of exchange and commissary employees and 
industry members work hard to take care of our military. It is 
a partnership that brings together the best of the private 
sector and the best of the public sector to care for the best 
people in the world.
    And this subcommittee can be proud of its support and 
advocacy for a program that serves so many with so much at so 
little cost. And we are grateful to you for fully supporting 
funding for these programs in this year's budget.
    We owe it to our military people to do the right thing 
right now. The specter of the sequester must be lifted 
immediately, and budget stability must be returned to the 
Department of Defense [DOD].
    It has been a tough year, particularly for commissary 
employees. They must feel like they live in Antarctica, with 
hiring freezes, pay freezes, funding freezes, and travel 
freezes, yet they continue to deliver.
    On the exchange front, we are concerned about the 
unintended consequences of sustainability and local procurement 
legislation and the impacts of the Bangladesh Fire and Safety 
Accord. In addition, it is time to refresh the Armed Services 
Exchange Regulation to better reflect the marketplace, from 
Internet sales to outdated rules on automobile sales.
    And even though the commissary and exchange employees 
operate in the cold world of budgetary whipsaw, they continue 
to give a warm welcome to millions of patrons every day. We 
salute them for all they do each and every day.
    Today, it is in vogue to talk about efficiency, to talk 
about hiring veterans and military family members, to talk 
about keep taking care of people in a constrained environment. 
This may be new to a lot of defense programs, but it is not new 
to the military resale programs.
    Exchanges and commissaries have been taking major costs 
over the past decade--taking out major costs over the past 
decade and hiring thousands of veterans and family members. 
Hundreds of millions in annual cost have been pared from these 
programs, and managers have it in their DNA to continue to cut 
cost. Commissaries are sharing in the continuing resolution, 
sequestration, and budget pain and have taken more than their 
fair share of reductions.
    But that may not be enough to feed the budget beast. Some 
defense planners want more. They seek to reduce the commissary 
budget far beyond that being asked for any other defense 
program. DOD shouldn't punish success. That will send the wrong 
message to the rest of DOD.
    Congress established the Compensation Commission to 
carefully and methodically weigh and balance costs. This 
commission should be allowed to do its work and present a 
sensible and coherent package and roadmap to the administration 
and the Congress and not arbitrarily hack away at any 
particular program without careful analysis and consultation 
with Congress.
    ALA's economic report issued earlier this year elucidates 
many of the contributions of these programs with a high return 
to the DOD and the Nation for the resources provided. We don't 
fear analysis. We fear no analysis. It is like the Old West 
hero, Paladin, with a twist: Have facts, will travel.
    The military resale program should be emulated, not 
decimated. My prepared statement lists the multitude of reasons 
that the system must be maintained and allowed to prosper. The 
President said that ``closing commissaries is not the way a 
great Nation should treat its military and their families.'' We 
couldn't agree more.
    I look forward to your questions.
    [The prepared statement of Mr. Nixon can be found in the 
Appendix on page 102.]
    Mr. Wilson. Thank you very much, Mr. Nixon.
    Now we proceed to President Tom Gordy.

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

    Mr. Gordy. Thank you, Mr. Chairman. And I agree with 
everything he said.
    Good afternoon, Mr. Chairman, Ranking Member Davis, and 
distinguished members of the Personnel Subcommittee. And thank 
you for the invitation to offer comments on behalf of the 
members of the Armed Forces Marketing Council regarding the 
military resale services and the financial benefits they 
provide to support the quality of life of our service members 
and their families.
    Today, the commissaries and exchanges continue to deliver a 
world-class non-pay compensation benefit to military families. 
While there have been strong headwinds in the form of furloughs 
and diminishing budgets as a result of sequestration and 
continuing resolutions as well as the government shutdown, the 
leaders and the associates of the resale systems are to be 
commended for the great work they have done in a very 
challenging year.
    As we delve into the issues pertaining to military resale 
today, I would like to make it clear that, in the view of the 
Armed Forces Marketing Council, the commissaries and exchanges 
are not broken. In fact, they do their part, in partnership 
with industry, to become more efficient so that they may lower 
costs and find ways to continue providing significant savings 
to military families. It is the nature of the business that 
they do so.
    However, due to declining budgets, they are being asked to 
consider significant cuts to their appropriated support that go 
beyond efficiencies to a real degradation and/or elimination of 
the benefit for military patrons, particularly those in CONUS.
    While we understand the plight of the Department of Defense 
and the budgetary challenges it and the military services face, 
we are also aware and sympathetic to the fact that reductions 
in taxpayer dollars will get passed on to the military families 
in the form of higher prices or a complete loss of benefit. In 
other words, it would be taxing military families for the 
delivery of their own benefit or breaking faith with them.
    There are two numbers that I would like you to keep in mind 
today. The first is $600 million. That is the approximate level 
of appropriated support proposed to be cut from DeCA's budget, 
resulting in the closure of CONUS stores as called for in the 
Resource Management Directive, plus the amount of overseas 
shipping that some had discussed earlier in the year from being 
cut from the exchanges.
    The second number is $2.1 billion. That is the estimated 
amount of non-pay compensation military families would lose if 
those cuts and associated closures were to be implemented.
    We are very concerned that the short-term budget decisions 
made today that degrade or eliminate the resale benefit will 
have adverse long-term impacts on our military families as well 
as our ability to retain a ready All-Volunteer Force.
    Chairman Wilson, thank you once again for the opportunity 
to provide insights on military resale today, and I look 
forward to your discussion.
    [The prepared statement of Mr. Gordy can be found in the 
Appendix on page 128.]
    Mr. Wilson. Thank you very much, Mr. Gordy.
    And we will begin now with questions. And Craig Greene, we 
note that he will maintain the time carefully, including on me.
    As we begin, normally, we hear from you. I can give you a 
report, multigenerational. My mother-in-law, a very proud 
Marine widow, and my wife, a very proud National Guard retiree 
wife, were at Fort Jackson last week. It was world-class at the 
commissary and very meaningful.
    And then, for our family, I particularly appreciate the 
overseas capability. And I wish more Americans understood how 
important it is to have a system that is domestic and overseas. 
And we have part of our family, Navy, serving in Southern 
Europe. And then today is a special day. My youngest son is 
celebrating his birthday in Central Asia. So it is--but I know 
this, that they have capabilities of having a very positive 
lifestyle due to your service, so I want to thank you.
    Mr. Jeu, we have been told that an independent study was 
directed as part of the Resource Management Directive [RMD] to 
propose changes to the Defense Commissary Agency operations 
that would accommodate an operating cost reduction as well as 
focusing on commissary operations, primarily on overseas, 
reducing appropriated funding.
    What is the status of the study, and when will the 
Department be able to share the results?
    Mr. Jeu. Mr. Chairman, with the sequestration, the 
Department is reviewing all of its programs, and nothing, 
including commissary, is off the table.
    And I can tell you, the Department has not made its 
decision regarding the RMD, and I believe it is inappropriate 
for me to discuss any of the details of the RMD at this time.
    Mr. Wilson. Well, as soon as you can release it, please let 
us know. Because, again, I agree with Mr. Gordy, this is a 
world-class provision, appreciation of our military families.
    Another question, Mr. Jeu: What initiatives has the Defense 
Commissary Agency taken to become more efficient in 
anticipation of reduced appropriated funding?
    Mr. Jeu. Mr. Chairman, DeCA has a long history of becoming 
a model agency. Over the years, we have taken an effort to 
become more efficient. And, in fact, over the past 20 years, we 
were able to reduce our funding requirement by $700 million 
and, also, we reduced our inventory by $500 million.
    Some of the examples are we eliminated warehouse functions 
and we went directly to vendor-delivered, relying on the 
private sector. By doing so, we were able to eliminate 
positions as well as eliminate stock funds. Or the other one 
would be centralizing accounting, voucher functions and 
automating.
    And so we have a long history. Even then, every day we are 
looking for more and more and greater efficiency. And so I 
think we are very proud of what we have done.
    And a final thought is, we do not have any low-hanging 
fruit. I think there is some misperception out there; perhaps 
there is some magic out there for DeCA to do. Sir, all those 
are gone, and what we have left is minor efficiencies.
    Mr. Wilson. Thank you very much.
    And, Mr. Nixon and Mr. Gordy, has there been dialogue with 
the private-sector resale community to help increase 
efficiencies as a resale community to ensure the commissary 
benefit is sustained?
    Mr. Nixon. Yes. And, Mr. Chairman, this is really a model 
for a partnership between the public sector and the private 
sector for looking for efficiencies in operations. And, 
continually, there are standing committees that work with the 
leadership of all of the resale commands to look for 
opportunities to improve supply-chain efficiency.
    And particularly, most recently, a blue-ribbon panel to 
look at supply-chain efficiencies has been established, led by 
David Sisk from Procter & Gamble. It is working with each one 
of the resale commands to identify opportunities to bring best 
business practices into the military resale business channel 
and drive efficiencies.
    But it is important to note that, because these operations 
work as businesses, every decision they make is based on 
efficiency and effectiveness. It is in their DNA, and they do 
it each and every day. This is just an additional opportunity 
to partner with them to look for additional opportunities.
    Mr. Gordy. I would just like to also add that the 
memberships of the ALA, all of our members are members of the 
ALA, but our members are specifically brokers who represent 
manufacturers. And the brokers themselves hire employees who 
work in the stores so that DeCA does not have to hire 
employees. And so many of the folks who stock the stores are 
paid for through the private sector, and our folks are part of 
that solution.
    And these are efforts that have been going on for decades; 
these are not new. And this is to help DeCA find ways that it 
can help reduce its appropriated support. And so when you take 
a look at the commissaries and the exchanges, it is clearly a 
public-private partnership so that this benefit can be 
delivered in a world-class way.
    Mr. Wilson. And with the technological advances of barcode, 
QR code, it is really exciting to me to see what can be done 
for military families with greater efficiency worldwide. And, 
indeed, I have a personal interest in that.
    At this time, we will proceed to Ms. Davis.
    Mrs. Davis. Thank you, Mr. Chairman.
    And, Ms. Williams, again, it is good to have you here.
    I know from the remarks and your presentation that there 
has been a review of military family support programs under the 
Task Force on Common Services. And you mentioned a number of 
areas of interest there. Could you very briefly, I guess, 
summarize for us some of the preliminary findings?
    And one of the things I found interesting about that, it 
sounded like there are some changes that are being recommended, 
and at the same time people are saying, oh, why haven't we done 
this before? You know, we could have brought folks together and 
managed this better.
    Could you talk a little bit about that task force's 
findings?
    Ms. Williams. Yes, ma'am.
    As you mentioned, the Task Force on Common Services, it was 
established to review the total cost of providing common 
services for service member and family support programs DOD-
wide. So it is really not the installation level, ma'am, it is 
more of the global look, how we deliver and not what we 
deliver, if you will.
    They concluded the 5 months of the weekly meetings and 
really intense study of the overhead functions. And at the end 
of the day, we are compiling a final report on the discussions, 
if you will. And within that report, which will be ready by the 
end of this year, we will have a good sense of the 
recommendations well laid-out.
    Concurrent to that, if you will, we have launched the data-
gathering piece. So, respectfully, if you and I decide it is a 
good idea to combine something, we still need the data to prove 
the business case. So by bringing all this data in concurrently 
and building a business case, it is an easier sell and an 
easier way to move forward on these recommendations if they all 
stick, if you will.
    That report, where it is the business case, will be done 
this time next year. It is rather intensive. They looked at 15 
separate functions. One good example would be in fact, this one 
has already launched. There were a lot of ``a-ha'' moments in 
the meetings, as I understand it. The services have agreed to 
create a common standard chart of accounts. So it is sort of 
dry stuff.
    But at the end of the day, if we can get all the services 
together in one effort, there are some significant efficiencies 
there. And that is what we are looking at, ma'am, is 
efficiencies.
    Mrs. Davis. Can you actually evaluate which of those 
efficiencies are the ones that are going to help make your case 
more than perhaps others?
    Ms. Williams. Yes, ma'am. It is a very exciting time, 
actually. And it is the first time the services have gotten 
together and really taken a hard look at these overhead 
functions.
    And they--we all face the same battle. You know, we are cut 
down to bone. We have no--we have nothing left to cut. So if we 
are going to limit the impact on the end-user, our service 
members and families, in some cases retirees, how do we do 
that? How do we deliver these with minimum impact? There is 
going to be impact, no question, but how do we minimize that 
impact?
    So, yes, ma'am, we have great confidence in that.
    Mrs. Davis. We have a hard time when it comes to scoring 
items trying to show that in the long term we actually save 
money although in the short term perhaps there is some 
additional cost there.
    Ms. Williams. Yes, ma'am. And we really are looking at it 
for efficiencies first, and the business case, obviously, the 
money follows, as well, the savings follow, as well.
    Mrs. Davis. To the rest of you, one of the things that 
frustrates me is making the case to our colleagues that, in 
fact, we actually have to get our act together here in Congress 
and deal with this budget in order for you to facilitate and to 
be able to prepare for the work that we expect you to do, that 
is being done every day. And we know the charges that you have 
and the commitment that you have to doing that properly.
    How can you, I guess, encapsulate, sort of, the need to get 
that done so that the benefits that we provide our men and 
women who serve and their families actually reaches them? If 
you had--I guess it is sort of the elevator speech. I mean, 
what is it that you want Members of Congress to know that is 
going to kind of move them to understand that we need to get 
our act together here?
    Ms. Williams. I will take a stab at it, if I may, ma'am.
    A couple of things. Now more than ever, our military and 
their families need the programs and services we provide. After 
12 years--and now more and more are coming home, which means 
there is going to be greater need for these programs and 
resources. And it is only slightly ironic that we are talking 
about pulling them back. We have nothing left to cut.
    So when we talk about daycare, for instance, here is a 
really solid example. Many of our installations and bases are 
in places where quality daycare is just not available. And 
quality daycare is not just about people going to work. It is 
also about respite. It is about taking care of the family, and 
resiliency, the mental and health--mental and physical well-
being of our community.
    In the general public, in the general population, our 
childcare centers are--8 to 10 percent are nationally 
accredited. In the military, 97 to 98 percent are. It is 
remarkable. It is considered the gold standard for child care 
by organizations such as Child Care Aware.
    Our fitness programs are not just about keeping fit and 
passing the PT, which, of course, is very important; it is 
togetherness for families. It is burning adrenaline for those 
hard-charging single members that maybe can get themselves in a 
pickle out off the installation if they are not careful, if 
they are not burning off that energy. And these are state-of-
the-art. So when you are--so there is not only--it is not just 
a readiness issue and a resilience issue; this is also a 
national security issue and a moral imperative, if you will.
    And we can lay that out in a number of different ways for 
you, if you would like. I know National Military Family 
Association has done a remarkable job capturing some of those 
anecdotes and some of those situations on the installation 
level, and they are quite powerful, ma'am.
    Mrs. Davis. Thank you.
    Mr. Wilson. Thank you, Mrs. Davis.
    We now proceed to Congressman Joe Heck of Nevada.
    Dr. Heck. Thanks, Mr. Chairman.
    Thank you all for being here. And as someone who has used 
commissaries and exchanges throughout Europe, Iraq, 
Afghanistan, and all across this country, I can attest to what 
a valuable service and benefit they are. In fact, we still shop 
at the Nellis Commissary once a month. So it certainly is an 
important benefit.
    But, with that, I mean, as you all have clearly stated, we 
face fiscal challenges. And while nobody wants to, as has been 
said, you know, balance the budget on the backs of our service 
members or our veterans, there are going to be some hard 
decisions to make.
    And so, Mr. Jeu, I would ask you, you know, some of the 
ideas that have been thrown about specifically for the Defense 
Commissary Agency is increasing the surcharge from 5 percent to 
10 percent or going to an enhanced commissary where you may 
have some other items that you could sell at a profit to help 
offset expenses or eliminating the second-destination 
transportation charges and increasing prices by 2 to 3 percent 
to cover those costs.
    Do you have an opinion on those three potential items to 
help offset the costs?
    Mr. Jeu. First of all, I have to say that the commissary 
benefit is part of non-pay compensation package, and it is 
valued by military members as the number one or number two.
    All those options you mentioned, while it is viable, it has 
direct impact on military family members. Because what that 
will do is it will shift cost burden onto our military 
families. So, in each of those scenarios, the savings will go 
down by whether 5 percent or 3 percent, whatever the percentage 
you want to change, savings will go down by that much. So, 
therefore, the burden has now shifted----
    Dr. Heck. But I guess some could argue that that small--and 
I am not saying I am pro any of these. But, you know, if we, 
let's say, increased the surcharge from 5 to 10 percent. In 
your written testimony, you say that a family of four saves, on 
average, about $4,500 a year at the commissary. So they would 
save $4,275 or lose $225 a year. Sure, you know, to an E-3, E-
4, that is going to be a big thing.
    Mr. Jeu. Yes, sir.
    Dr. Heck. But to higher ranks, it wouldn't necessarily be a 
big thing. And if that shift is what allows the programs to 
continue to function, we have to look at the cost-benefit of 
each one of these. And I would encourage you to take that kind 
of a perspective.
    Mr. Jeu. Absolutely, I think senior leaders are taking all 
this into consideration. Yes, sir.
    Dr. Heck. To the exchange directors, somebody has to help 
me understand why we have to have three, you know, separate 
exchange directorates. And just like we have Defense 
Commissary, why don't we have Defense Exchange?
    Admiral Bianchi. Sir, I think the primary reason that we 
operate in this manner is that we are, at least in my case, I 
am an integral part of the Navy. I am an Echelon 3 command 
under the direction of the Secretary of the Navy, and I am 
involved in more than just retail. While we have the retail 
component, I also am part of the messaging, the strategic 
messaging of the Department, the family and personnel readiness 
aspect. And so I believe if you asked my senior leadership, 
they would say that I am woven into the fabric of the Navy 
leadership and Navy mission readiness.
    That being said, this question has been raised many times, 
and we have undertaken and we are constantly in the process of 
looking at areas where we may be able to have cooperative 
efforts where we can save money. There are numerous examples I 
could state for you where we have joint contracting efforts and 
so forth.
    But I think the bottom line is that we each are optimizing 
our operations. And just like you wouldn't necessarily kludge 
Ford and GM together and necessarily get a better organization 
out of it, I think this allows us to meet the needs of our 
service members while still maintaining operational 
efficiencies cooperatively without having to create one mega 
organization, so to speak.
    Dr. Heck. Any of the other exchange reps want to just ditto 
it, or do you have something else to add on that issue?
    Mr. Dillon. Yes, sir. I would just like to offer that, from 
the Marine Corps standpoint, you may or may not be aware of the 
fact that we already are a combined operation. Not only do I 
have responsibility for the exchange, but I also have 
responsibility for MWR programs.
    Years ago, we consolidated those functions so that we could 
become more efficient. All of our back-office functions serve 
both the exchange as well as the MWR programs. So we have taken 
that step to become as efficient as possible.
    We are looking at additional reductions in efficiencies and 
overhead as I speak today. But as part of the studies that we 
have done in the past, actually from a Marine Corps standpoint, 
to combine the operations it would actually cost us more money 
than it does to operate our exchange and our MWR today.
    Dr. Heck. Thank you.
    Thanks, Mr. Chair. Yield back.
    Mr. Wilson. Thank you, Dr. Heck.
    We now proceed to Congresswoman Madeleine Bordallo of the 
beautiful territory of Guam.
    Ms. Bordallo. Oh, thank you very much, Mr. Chairman. I 
always appreciate that because Guam is a small place and it is 
not mentioned very often.
    I want to thank you for calling this. I remember going to 
the hearing last year, same--I think you have an annual hearing 
on this.
    And I want to thank all the witnesses for their testimony 
today.
    I am going to focus on commissaries and exchanges. And 
being brought up on Guam, I visited commissaries and exchanges 
for many, many decades. And most recently on travels, a CODEL 
[congressional delegation] to Australia and Singapore, I was 
able to go into--we had a few minutes before boarding the plane 
to come back to Washington, so we visited a commissary and the 
exchange there. And, believe me, you have made a great deal of 
progress from the very first days. Now you see all these 
displays and merchandise and eateries, all very up-to-date. I 
saw those luxury goods. I was tempted.
    And so, Mr. Jeu, I think this question would be to you. And 
I have noticed that you put out a policy--Director's policy 
here. I am going to ask you, I am aware of the policy on 
sustainability. Now, while I appreciate your efforts to develop 
this policy, I did notice specific goals and targets for the 
acquisition of sustainable products.
    So can you please comment on how your agency intends to 
monitor any objectives you may have in place to provide fresh 
and healthy products to military families and how your agency 
will maintain awareness of these goals across the many 
individual commissary stores?
    Also, could you please comment on the criteria used to 
determine when DeCA will choose to pursue locally grown 
products? In the last NDAA [National Defense Authorization 
Act], I introduced a green grocery amendment. And so I am 
wondering, how is this going and how much of this policy have 
you implemented so far?
    Mr. Jeu. Okay. I think that, in terms of a study, I believe 
this falls under another office.
    But in terms of our purchase through local, we try to buy 
locally whenever it makes sense. We look at price, quality, and 
customer preference. And I say price because, particularly in 
overseas, it is a little bit more sensitive in overseas area, 
and particularly like Guam as well, because the Congress 
decided that cost of goods overseas should be no higher than 
cost of goods in U.S. So that is why we receive a second-
destination fund.
    And so, especially overseas, including Guam, we look at 
price as well as quality and customer preferences, but, 
whenever possible, we try to buy locally. So, in Guam's case, 
we do buy from 15 local vendors from the local community for 
items such as bakery items or snack items, some miscellaneous 
drinks, and so on. So we----
    Ms. Bordallo. Vegetables and fruits?
    Mr. Jeu. In limited cases, but we do encourage those. And 
we encourage not only in Guam but elsewhere throughout the U.S. 
Buying locally does make sense.
    For example, produce particularly. I was at Fort Jackson 
commissary just last week. And when I was there, I met W.P. 
Rawl & Sons. And they were there, and they were demonstrating 
their produce, cooking and so on. And I met their third-
generation farmer, and he was so thankful for DeCA because we 
are buying locally. And he said he is selling all the greens to 
the commissary and not only at Fort Jackson but all the other 
commissaries in South Carolina.
    We do the same thing on seafood. We try to buy locally. 
And, in fact, on the domestic seafood, sales went up by 6.6 
percent. That is far outpacing the sales from other sources.
    So, to summarize, really, we do try to buy locally whenever 
possible, considering all those factors: quality, price, and 
customer preferences.
    Ms. Bordallo. Thank you, Mr. Jeu. I really appreciate that. 
I am very grateful.
    But, Mr. Chairman, I would like to find out--do you have--I 
noticed you mentioned some statistics there, numbers and how 
many farmers and so forth. And I think you particularly 
mentioned Guam.
    Would there be some way that you could provide us a report 
on how it is going across the Nation? Would that be too 
difficult? You said----
    Mr. Jeu. We have 15 VAT [value-added tax] vendors, and I 
could give you a list of those. And there is amount and all 
those.
    Ms. Bordallo. Right.
    Mr. Jeu. Yes, I could do that.
    Ms. Bordallo. I think the committee would appreciate to see 
how this program is progressing. So if you could provide that.
    [The information referred to was not available at the time 
of printing.]
    Ms. Bordallo. And thank you, Mr. Jeu, very much for your 
comments.
    Thank you, Mr. Chairman. I yield back.
    Mr. Wilson. Thank you very much, Ms. Bordallo.
    And we have a special Member, Congressman Brad Wenstrup. He 
is doing his part for a multigenerational commissary and 
exchange. He has a brand-new baby at home.
    Congressman Wenstrup of Ohio.
    Mr. Wenstrup. Thank you, Mr. Chairman.
    Thank you all for being here.
    And, you know, I will say, as a service member--I still 
serve in the Reserve--that, you know, the commissary and the PX 
[Post Exchange] is--there is some morale value to that, I truly 
believe that, for our troops. I think it is appropriate to be 
affiliated with MWR. And it also gives, I think, people, 
military families, an opportunity to shop like the rest of 
America even when they are not in America, and I think that 
there is some benefit to that, obviously.
    Just a couple of questions. You know, as I look at stores 
like Walmart that are comprehensive, have everything from 
clothes to groceries, it is usually in one building, and so 
many times on our bases we are in two separate buildings. Is 
there a history to that or is there a strategy to that, to why 
we typically have two buildings between the exchange and the 
commissary itself? Does anyone know?
    Mr. Gordy. I believe the law, title 10, requires the 
operation of separate commissaries and exchanges, and that may 
be the history there, sir.
    Mr. Wenstrup. Yeah, I would be curious on that because it 
seems, as we are looking for places of savings, especially in 
the future, if we can combine them into one facility rather 
than two separate facilities. Plus, it makes shopping a little 
bit easier. I mean, I think Walmart has figured it out, right?
    And the other question I have is with the kiosks that we 
often see. What is the arrangement with them? Are they just 
leasing space? A percentage of profits? How does that work when 
we have these outside vendors that have their own kiosk within 
the facilities? Does anyone know?
    Admiral Bianchi. Yes, sir. We, at least for the Navy 
Exchange, we basically set up short-term concession 
arrangements with them. Typically, it is vendor-owned 
inventory, and we get a--we negotiate a percentage, a 
commission percentage, with them. It allows us to perhaps bring 
in sometime some niche categories or something and offer 
variety, excitement to the shopper.
    So what you will usually find, I think, in most of our 
exchanges is these concessionaires will rotate through so that 
we provide variety, but we are negotiating favorable 
commissions with them. And that goes into our bottom line, you 
know, which drives the dividend.
    Mr. Wenstrup. Is that the same with the chain food court?
    Admiral Bianchi. Yes, sir. Well, the models are different 
there. We have, just like my counterparts here, some of those 
we run organically, and others are concessions with, you know, 
whether it is Subway or other vendors, so that there is a 
combination there.
    Mr. Wenstrup. And do they lease the space, or is it all 
commission? Or does it vary?
    Admiral Bianchi. I can only speak for--I know in the Navy, 
we provide the space. So, basically, we give them a white box, 
and they come in and perform under contract, yes, sir.
    Mr. Wenstrup. All right. Thank you very much.
    I yield back.
    Mr. Wilson. And thank you very much, Congressman Wenstrup.
    And we will proceed for a second round.
    And, for myself, Ms. Williams, how does the risk of 
reductions to the second-destination transportation cost 
increase if the Department of Defense must comply with the cuts 
associated with full or partial sequestration?
    Ms. Williams. Sir, so I understand your question, are we--
you are talking about possibly cutting second----
    Mr. Wilson. Destination costs.
    Ms. Williams. Very well. Okay, thank you. Thank you for the 
clarity.
    We have continually focused on improving efficiencies with 
the transportation costs through efficient use of 
transportation modes, cooperative efforts among the services. 
And they can explain a little bit more about those 
efficiencies, sir.
    Frankly, the Department's stand is that DeCA and the 
military services are complying with the statutory requirement 
to fund the expenses of transporting commissary and exchange 
supplies overseas. Further, the Army reports that second-
destination transportation is fully funded through the Future 
Year Defense Plan fiscal year 2019, and we believe the other 
services have made similar commitments, sir.
    And, with that, I would defer to the directors.
    Mr. Wilson. Thank you.
    In fact, Mr. Shull, Admiral, Mr. Dillon, any comment?
    Admiral Bianchi. Yes, sir. I would offer, as Ms. Williams 
stated, second-destination transportation is obviously a 
critical element in delivering this exchange benefit.
    And I believe the ability to have the fully funded account 
enables us to provide these comparable products and assortments 
overseas. It is not only an important morale factor, but it is 
also a necessity in many areas where these types of goods 
aren't available, like in Bahrain and Djibouti, for example.
    But I would also offer to you it is an efficient and 
effective way to provide the merchandise. Because if you think 
about it, the kids and families overseas, they need to provide 
clothes for their children. They need shoes, they need other 
goods. You know, we can ship it economically. We can serve, in 
essence, as a distribution node for those products.
    If you think about thousands of overseas folks going online 
and ordering their own items and the effect that that has on 
the military postal system, you know, it is kind of going to be 
a pay-me-now or pay-me-later. You are going to spend more money 
shipping it individually than you can if we bring, you know, 
containers of jeans and so forth overseas.
    So we believe we are efficient with our second-destination 
transportation [SDT] dollars. We have cooperative efforts 
ongoing right now with DeCA, with AAFES for van stuffing. We 
have saved money over the years.
    But, overall, I believe the loss of that would result in 
either having to raise prices for products for those stationed 
overseas, and that would drive COLA [cost of living allowance] 
rates up, so there, again, you are driving a cost in a 
different account but nonetheless it is a higher cost, or it 
would force us to rationalize our assortments, which I think 
would be going against congressional intent, which is why the 
statute was put in place, I believe, back in 2006.
    Mr. Wilson. Thank you.
    Mr. Shull. Mr. Chairman, let me add to Admiral Bianchi's 
remarks. I fully concur with what he said. And I want to add, 
we were asked by the Army to take a very hard look at SDT this 
last year. And, of course, I am new to the exchange, having 
served for a number of years as a soldier and am now a retailer 
for 28 years, in restructuring, coming into the exchange 
system, I took kind of a different look at it.
    We were able to reduce costs of SDT by about $20 million 
this last year, and we project another $10 million. But that is 
really the slack in the system, as I would describe it. That is 
the inefficiency that we--partly we allowed to occur as we 
ramped up to serve in a combat environment. Now that we are 
drawing down, there were some efficiencies to be gained.
    For example, shipping via surface versus air for various 
products where, in the contingency in Europe, we needed to get 
product in quicker to serve those who were in harm's way. And 
so, now that we are moving into more of a peacetime 
environment, we were able to look at that very rigorously and 
able to reduce it.
    But we are at the point where it is efficient, in my view. 
And as Admiral Bianchi said, if we take more money out of the 
SDT support at this juncture, we will be risking readiness and 
resiliency and possibly having to increase prices and change 
the product mix that we provide locally in terms of a taste of 
home and having the right mix of product from the United 
States.
    Mr. Wilson. Thank you.
    And Mr. Dillon.
    Mr. Dillon. Yes, sir, I can only agree with what my 
partners here have to say, first of all.
    Secondly, we enjoy today because we are the small one on 
the block, and we enjoy the cooperative efforts that we have 
today. We generally ride often with shipments for either AAFES 
or for NEX, especially. We have a lot less of an overseas 
requirement than they do. And so the benefit would be 
significant to us, as well, if it were to be cut because we are 
enjoying that savings right now in partnering with the other 
services.
    Mr. Wilson. You all have brought up some terrific points. 
Thank you so much. The postal, that is really on point.
    Mrs. Davis.
    Mrs. Davis. Thank you, Mr. Chairman.
    And I know my colleague earlier mentioned bringing variety, 
you know, why we have the kiosk and what those arrangements 
are. And, certainly, we want to have that variety.
    But I wanted to mention and ask Mr. Shull, the--my 
understanding, at Fort Bliss Lifestyle Center, they brought in 
a dollar store. And so, in many ways, this store is competing 
with other opportunities that our military families have to 
spend money that brings money back to Morale, Welfare, and 
Recreation.
    You know, how do we deal with this issue where we have a 
potential competitor against the military operations? How do 
you make those decisions?
    Mr. Shull. That is a very good question, ma'am, and we are 
looking at that now. We only have one Dollar Tree location. It 
is in Fort Bliss. It is in the Lifestyle Center. We have a 
different business model there at the Lifestyle Center, where 
we do bring out--through a broker, we fill the space. And, in 
this instance, we worked with a broker to fill some vacant 
space with a Dollar Tree.
    We are going to review that. We didn't know that--part of 
the problem is, when you do that, when you work through a 
broker, you don't necessarily have full control over the 
merchandise assortment. So we are reviewing that merchandise 
assortment to make sure that it does not conflict with our 
sister agencies or with us, in terms of offering. We believe 
there is something like 31 items that may compete with the 
commissary. We are going to review that, and I would like to 
ask to be able to get back to you on that, ma'am, in terms of 
the detail.
    [The information referred to can be found in the Appendix 
on page 159.]
    Mr. Shull. But remember, it is one location. We have 3,700 
facilities, and this is one location. We will not proceed to 
broaden the footprint of that kind of concept because of the 
fact that we just recently learned there may be some conflict 
with the offerings of DeCA and our sister exchanges and even 
for our own offering.
    But, again, this is a different business model. It is in 
one location. We are going to look at that Dollar Tree and 
evaluate whether we should have it in the mix of our--both in 
terms of assortment as well as facilities.
    Mrs. Davis. Uh-huh.
    Do you ever hear also from DeCA or on other occasions where 
perhaps it is not a Dollar Store but it is an entity that is 
competing in some way with something, I guess fairly basic, 
that is being offered?
    When I think of a kiosk, I think of something different, 
special that comes in, that you have decided at the holiday 
time or, you know, at some point would be a benefit to families 
to have access to. But I can imagine that there also must be 
others where there is really a competition there.
    Mr. Shull. There could be, ma'am. I am not aware of any 
others. We are very diligent, working through the Cooperative 
Efforts Board, as a team here to make sure we don't compete 
with one another or bring in businesses that might compete with 
our own business.
    Mrs. Davis. Right. Right.
    Mr. Shull. We do need to look at the Dollar Tree issue. 
This is the first time this has come up in my 18 months, and we 
will take a very serious look at this and make sure it doesn't 
in any way compete with, particularly, a commissary.
    Mrs. Davis. Okay. Thank you very much. Appreciate it.
    Ms. Williams. And, ma'am, if I might add, there is a great 
deal of transparency with the concessions and the PPVs [public-
private ventures], and all of the directors are quite open in 
the dialogue. The Dollar Tree, in particular, is in internal 
dialogue right now, and we hope to have resolution shortly.
    Mrs. Davis. Uh-huh. Great. Thank you.
    And thank you all for trying to address the efficiencies. 
Obviously, when we come back here next year, it is going to be 
good to know, you know, was there something in the past year 
that occurred that really made a difference, that was a new 
innovation in the efficiency area, because we obviously need to 
find those.
    Mr. Jeu.
    Mr. Jeu. If I could add just one more thing, I think that 
we do work closely together, between commissaries and 
exchanges. And I believe when we complement each other, I think 
it brings strength to the resale system. I think when we 
compete, which we do not, then it does not. I think it brings 
system weaker.
    So, fortunately, all of us work together collectively to 
have a complementary system. And I think we are doing that.
    Mrs. Davis. Thank you.
    Mr. Wilson. And, again, thank you very much.
    And thank you, Mrs. Davis.
    And I do appreciate the final comment, a complementary 
system which is beneficial to military families.
    There being no further business, we are adjourned.
    [Whereupon, at 3:48 p.m., the subcommittee was adjourned.]
?

      
=======================================================================




                            A P P E N D I X

                           November 20, 2013

=======================================================================

      
?

      
=======================================================================


              PREPARED STATEMENTS SUBMITTED FOR THE RECORD

                           November 20, 2013

=======================================================================

      
      
    [GRAPHIC] [TIFF OMITTED] T6077.001
    
    [GRAPHIC] [TIFF OMITTED] T6077.002
    
    [GRAPHIC] [TIFF OMITTED] T6077.003
    
    [GRAPHIC] [TIFF OMITTED] T6077.004
    
    [GRAPHIC] [TIFF OMITTED] T6077.005
    
    [GRAPHIC] [TIFF OMITTED] T6077.006
    
    [GRAPHIC] [TIFF OMITTED] T6077.007
    
    [GRAPHIC] [TIFF OMITTED] T6077.008
    
    [GRAPHIC] [TIFF OMITTED] T6077.009
    
    [GRAPHIC] [TIFF OMITTED] T6077.010
    
    [GRAPHIC] [TIFF OMITTED] T6077.011
    
    [GRAPHIC] [TIFF OMITTED] T6077.012
    
    [GRAPHIC] [TIFF OMITTED] T6077.013
    
    [GRAPHIC] [TIFF OMITTED] T6077.014
    
    [GRAPHIC] [TIFF OMITTED] T6077.015
    
    [GRAPHIC] [TIFF OMITTED] T6077.016
    
    [GRAPHIC] [TIFF OMITTED] T6077.017
    
    [GRAPHIC] [TIFF OMITTED] T6077.018
    
    [GRAPHIC] [TIFF OMITTED] T6077.019
    
    [GRAPHIC] [TIFF OMITTED] T6077.020
    
    [GRAPHIC] [TIFF OMITTED] T6077.021
    
    [GRAPHIC] [TIFF OMITTED] T6077.022
    
    [GRAPHIC] [TIFF OMITTED] T6077.023
    
    [GRAPHIC] [TIFF OMITTED] T6077.024
    
    [GRAPHIC] [TIFF OMITTED] T6077.025
    
    [GRAPHIC] [TIFF OMITTED] T6077.026
    
    [GRAPHIC] [TIFF OMITTED] T6077.027
    
    [GRAPHIC] [TIFF OMITTED] T6077.028
    
    [GRAPHIC] [TIFF OMITTED] T6077.029
    
    [GRAPHIC] [TIFF OMITTED] T6077.030
    
    [GRAPHIC] [TIFF OMITTED] T6077.031
    
    [GRAPHIC] [TIFF OMITTED] T6077.032
    
    [GRAPHIC] [TIFF OMITTED] T6077.033
    
    [GRAPHIC] [TIFF OMITTED] T6077.034
    
    [GRAPHIC] [TIFF OMITTED] T6077.035
    
    [GRAPHIC] [TIFF OMITTED] T6077.036
    
    [GRAPHIC] [TIFF OMITTED] T6077.037
    
    [GRAPHIC] [TIFF OMITTED] T6077.038
    
    [GRAPHIC] [TIFF OMITTED] T6077.039
    
    [GRAPHIC] [TIFF OMITTED] T6077.040
    
    [GRAPHIC] [TIFF OMITTED] T6077.041
    
    [GRAPHIC] [TIFF OMITTED] T6077.042
    
    [GRAPHIC] [TIFF OMITTED] T6077.043
    
    [GRAPHIC] [TIFF OMITTED] T6077.044
    
    [GRAPHIC] [TIFF OMITTED] T6077.045
    
    [GRAPHIC] [TIFF OMITTED] T6077.046
    
    [GRAPHIC] [TIFF OMITTED] T6077.047
    
    [GRAPHIC] [TIFF OMITTED] T6077.048
    
    [GRAPHIC] [TIFF OMITTED] T6077.049
    
    [GRAPHIC] [TIFF OMITTED] T6077.050
    
    [GRAPHIC] [TIFF OMITTED] T6077.051
    
    [GRAPHIC] [TIFF OMITTED] T6077.052
    
    [GRAPHIC] [TIFF OMITTED] T6077.053
    
    [GRAPHIC] [TIFF OMITTED] T6077.054
    
    [GRAPHIC] [TIFF OMITTED] T6077.055
    
    [GRAPHIC] [TIFF OMITTED] T6077.056
    
    [GRAPHIC] [TIFF OMITTED] T6077.057
    
    [GRAPHIC] [TIFF OMITTED] T6077.058
    
    [GRAPHIC] [TIFF OMITTED] T6077.059
    
    [GRAPHIC] [TIFF OMITTED] T6077.060
    
    [GRAPHIC] [TIFF OMITTED] T6077.061
    
    [GRAPHIC] [TIFF OMITTED] T6077.062
    
    [GRAPHIC] [TIFF OMITTED] T6077.063
    
    [GRAPHIC] [TIFF OMITTED] T6077.064
    
    [GRAPHIC] [TIFF OMITTED] T6077.065
    
    [GRAPHIC] [TIFF OMITTED] T6077.066
    
    [GRAPHIC] [TIFF OMITTED] T6077.067
    
    [GRAPHIC] [TIFF OMITTED] T6077.068
    
    [GRAPHIC] [TIFF OMITTED] T6077.069
    
    [GRAPHIC] [TIFF OMITTED] T6077.070
    
    [GRAPHIC] [TIFF OMITTED] T6077.071
    
    [GRAPHIC] [TIFF OMITTED] T6077.072
    
    [GRAPHIC] [TIFF OMITTED] T6077.073
    
    [GRAPHIC] [TIFF OMITTED] T6077.074
    
    [GRAPHIC] [TIFF OMITTED] T6077.075
    
    [GRAPHIC] [TIFF OMITTED] T6077.076
    
    [GRAPHIC] [TIFF OMITTED] T6077.077
    
    [GRAPHIC] [TIFF OMITTED] T6077.078
    
    [GRAPHIC] [TIFF OMITTED] T6077.079
    
    [GRAPHIC] [TIFF OMITTED] T6077.080
    
    [GRAPHIC] [TIFF OMITTED] T6077.081
    
    [GRAPHIC] [TIFF OMITTED] T6077.082
    
    [GRAPHIC] [TIFF OMITTED] T6077.083
    
    [GRAPHIC] [TIFF OMITTED] T6077.084
    
    [GRAPHIC] [TIFF OMITTED] T6077.085
    
    [GRAPHIC] [TIFF OMITTED] T6077.086
    
    [GRAPHIC] [TIFF OMITTED] T6077.087
    
    [GRAPHIC] [TIFF OMITTED] T6077.088
    
    [GRAPHIC] [TIFF OMITTED] T6077.089
    
    [GRAPHIC] [TIFF OMITTED] T6077.090
    
    [GRAPHIC] [TIFF OMITTED] T6077.091
    
    [GRAPHIC] [TIFF OMITTED] T6077.092
    
    [GRAPHIC] [TIFF OMITTED] T6077.093
    
    [GRAPHIC] [TIFF OMITTED] T6077.094
    
    [GRAPHIC] [TIFF OMITTED] T6077.095
    
    [GRAPHIC] [TIFF OMITTED] T6077.096
    
    [GRAPHIC] [TIFF OMITTED] T6077.097
    
    [GRAPHIC] [TIFF OMITTED] T6077.098
    
    [GRAPHIC] [TIFF OMITTED] T6077.121
    
    [GRAPHIC] [TIFF OMITTED] T6077.122
    
    [GRAPHIC] [TIFF OMITTED] T6077.123
    
    [GRAPHIC] [TIFF OMITTED] T6077.099
    
    [GRAPHIC] [TIFF OMITTED] T6077.100
    
    [GRAPHIC] [TIFF OMITTED] T6077.101
    
    [GRAPHIC] [TIFF OMITTED] T6077.102
    
    [GRAPHIC] [TIFF OMITTED] T6077.103
    
    [GRAPHIC] [TIFF OMITTED] T6077.104
    
    [GRAPHIC] [TIFF OMITTED] T6077.105
    
    [GRAPHIC] [TIFF OMITTED] T6077.106
    
    [GRAPHIC] [TIFF OMITTED] T6077.107
    
    [GRAPHIC] [TIFF OMITTED] T6077.108
    
    [GRAPHIC] [TIFF OMITTED] T6077.109
    
    [GRAPHIC] [TIFF OMITTED] T6077.110
    
    [GRAPHIC] [TIFF OMITTED] T6077.111
    
    [GRAPHIC] [TIFF OMITTED] T6077.112
    
    [GRAPHIC] [TIFF OMITTED] T6077.113
    
    [GRAPHIC] [TIFF OMITTED] T6077.114
    
    [GRAPHIC] [TIFF OMITTED] T6077.115
    
    [GRAPHIC] [TIFF OMITTED] T6077.124
    
    [GRAPHIC] [TIFF OMITTED] T6077.125
    
    [GRAPHIC] [TIFF OMITTED] T6077.126
    


      
=======================================================================


                   DOCUMENTS SUBMITTED FOR THE RECORD

                           November 20, 2013

=======================================================================

      
      
    [GRAPHIC] [TIFF OMITTED] T6077.116
    
    [GRAPHIC] [TIFF OMITTED] T6077.117
    
    [GRAPHIC] [TIFF OMITTED] T6077.118
    
    [GRAPHIC] [TIFF OMITTED] T6077.119
    
    [GRAPHIC] [TIFF OMITTED] T6077.120
    
?

      
=======================================================================


              WITNESS RESPONSES TO QUESTIONS ASKED DURING

                              THE HEARING

                           November 20, 2013

=======================================================================

      
              RESPONSE TO QUESTION SUBMITTED BY MRS. DAVIS

    Mr. Shull. Staff from the Office of the Under Secretary of Defense 
for Acquisition, Technology and Logistics met with committee staff to 
relay our concerns and to ensure that the language included in Section 
713 of the National Defense Authorization Act for Fiscal Year 2014 was 
both acceptable to and achievable by the Department. [See page 21.]
?

      
=======================================================================


              QUESTIONS SUBMITTED BY MEMBERS POST HEARING

                           November 20, 2013

=======================================================================

      
                   QUESTIONS SUBMITTED BY MR. WILSON

    Mr. Wilson. Has the Department of Defense re-opened discussions on 
consolidating exchanges? If so, what appropriated dollar savings does 
the Department garner from this initiative? Mr. Shull, Mr. Bianchi, and 
Mr. Dillon, has there been further discussion on developing hybrid 
stores selling merchandise and groceries, similar to Walmart and 
Target? Is this something that should be explored? Mr. Nixon and Mr. 
Gordy, what are your perspectives regarding an exchange consolidation 
or developing a hybrid model?
    Ms. Williams. No, the Department has not re-opened discussions on 
consolidating exchanges. Finding more effective and efficient ways to 
operate is critical, and we will continue to seek efficiencies within 
the military resale systems.
    Mr. Wilson. Has the Department of Defense re-opened discussions on 
consolidating exchanges? If so, what appropriated dollar savings does 
the Department garner from this initiative? Mr. Shull, Mr. Bianchi, and 
Mr. Dillon, has there been further discussion on developing hybrid 
stores selling merchandise and groceries, similar to Walmart and 
Target? Is this something that should be explored? Mr. Nixon and Mr. 
Gordy, what are your perspectives regarding an exchange consolidation 
or developing a hybrid model?
    Admiral Bianchi. NEXCOM is neither aware, nor is a participant in 
discussions for developing hybrid stores selling merchandise and 
groceries similar to Walmart and Target. These commercial formats 
benefit from one-stop shopping and cost synergies driven by an 
integrated business strategy with a hybrid concept as the end state. 
This is unlike military resale where commissary and exchange stores are 
mature businesses operating independently. Creating military resale 
hybrids would require significant investments. For example, 
commissaries and exchanges are often not co-located on installations 
nor operate on similar information technology platforms. Consequently, 
military resale would require significant capital investments in 
construction, assuming available federal land, as well as investments 
in technology and other areas to retrofit and re-purpose stores to a 
hybrid model. Similarly, using only one of two existing separate stores 
where the commissary and exchange are apart, would require reducing 
available exchange and commissary products thereby generating business 
risks while diluting the current non-pay compensation resale benefit.
    Navy has successfully operated a limited number of hybrids in 
overseas locations--NEXMARTs--which sells both exchange and commissary 
products. NEXMARTs success is driven by their creation as hybrids with 
appropriations for the commissary portion of the store. Less clear in 
the question is whether an explored hybrid model will be wholly non-
appropriated funded, in which case price increases would be needed to 
support the model. This would change and dilute the current resale non-
pay compensation benefit. NEXCOM does not believe hybrid stores, writ 
large, are a viable option to be explored for the current commissary 
and exchange benefits.
    Mr. Wilson. How many lifestyle centers have been completed and what 
is the occupancy rate? What type of stores are occupying the life style 
centers? Are any of them in direct competition with the exchange store 
or the commissary for products?
    Mr. Shull. Construction on one Lifestyle Center, Freedom Crossing 
at Ft. Bliss, has been completed. Its occupancy is currently 83%. The 
center is comprised of a variety of operations including AAFES direct 
operations such as the Exchange, name brand fast food operations, and 
traditional concession activities. Also included are dining and 
entertainment operations with brands such as The Grand Theater, Buffalo 
Wild Wings, and Texas Road House. In addition, there are complementary 
retailers such as Under Armour, Things Remembered, Game Stop, Patriot 
Outfitters, Dollar Tree, and others. All products sold complement the 
Exchange and Commissary stock assortments.
    Mr. Wilson. What is the feasibility and impact of the commissary 
operating under non-appropriated funds instead of appropriated funds? 
Will DeCA still be able to provide savings to military patrons? Right 
now the commissary provides approximately 30% savings to patrons, can 
those savings be reduced to 25%-28% and, if so, what actions would need 
to be taken?
    Mr. Jeu. Currently commissaries sell merchandise at cost plus a 5% 
surcharge. The surcharge use is limited to building and maintaining 
commissaries as well as commissary equipment purchase. Current savings 
average 30.5% compared to commercial retailers. If commissaries were 
operated partially funded through other than appropriated funds, DeCA 
would be compelled to institute a pricing structure similar to that of 
commercial grocers, with the resulting revenue used to offset the loss 
of the appropriation. Patron savings would be reduced dependent on the 
amount of cost recovery necessary. Numerous changes to legislation 
would be required to allow the commissary system to operate under a 
cost recovery model.
    Mr. Wilson. Has the Department of Defense re-opened discussions on 
consolidating exchanges? If so, what appropriated dollar savings does 
the Department garner from this initiative? Mr. Shull, Mr. Bianchi, and 
Mr. Dillon, has there been further discussion on developing hybrid 
stores selling merchandise and groceries, similar to Walmart and 
Target? Is this something that should be explored? Mr. Nixon and Mr. 
Gordy, what are your perspectives regarding an exchange consolidation 
or developing a hybrid model?
    Mr. Dillon. I defer to DOD on whether it has re-opened discussion 
on consolidation and on the issue of costs/savings of doing so. In 
regard to hybrid stores, I have not participated in any discussions 
regarding developing such stores that would sell merchandise and 
groceries. I don't believe this is a viable option as combining systems 
and facilities would result in a huge upfront cost with limited 
opportunities for savings in the out years. In this already constrained 
fiscal environment, this action could threaten the MWR dividend 
significantly.

                                  
