[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
[H.A.S.C. No. 114-81]
VIEWS ON COMMISSARY REFORM
__________
HEARING
BEFORE THE
SUBCOMMITTEE ON MILITARY PERSONNEL
OF THE
COMMITTEE ON ARMED SERVICES
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
__________
HEARING HELD
JANUARY 13, 2016
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
_________
U.S. GOVERNMENT PUBLISHING OFFICE
98-890 WASHINGTON : 2016
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SUBCOMMITTEE ON MILITARY PERSONNEL
JOSEPH J. HECK, Nevada, Chairman
WALTER B. JONES, North Carolina SUSAN A. DAVIS, California
JOHN KLINE, Minnesota ROBERT A. BRADY, Pennsylvania
MIKE COFFMAN, Colorado NIKI TSONGAS, Massachusetts
THOMAS MacARTHUR, New Jersey, Vice JACKIE SPEIER, California
Chair TIMOTHY J. WALZ, Minnesota
ELISE M. STEFANIK, New York BETO O'ROURKE, Texas
PAUL COOK, California
STEPHEN KNIGHT, California
Dave Giachetti, Professional Staff Member
Craig Greene, Professional Staff Member
Colin Bosse, Clerk
C O N T E N T S
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Page
STATEMENTS PRESENTED BY MEMBERS OF CONGRESS
Davis, Hon. Susan A., a Representative from California, Ranking
Member, Subcommittee on Military Personnel..................... 1
Heck, Hon. Joseph J., a Representative from Nevada, Chairman,
Subcommittee on Military Personnel............................. 1
WITNESSES
Goldberg, Brooke, Deputy Director for Government Relations,
Military Officers Association of America....................... 8
Gordy, Thomas T., President, Armed Forces Marketing Council...... 4
Huck, Eileen, Government Relations Deputy Director, National
Military Family Association.................................... 6
Nixon, Patrick B., President, American Logistics Association..... 2
APPENDIX
Prepared Statements:
Goldberg, Brooke............................................. 95
Gordy, Thomas T.............................................. 62
Heck, Hon. Joseph J.......................................... 27
Huck, Eileen................................................. 84
Nixon, Patrick B............................................. 28
Documents Submitted for the Record:
Testimony of American Federation of Government Employees..... 109
Witness Responses to Questions Asked During the Hearing:
[There were no Questions submitted during the hearing.]
Questions Submitted by Members Post Hearing:
Mr. Jones.................................................... 117
VIEWS ON COMMISSARY REFORM
----------
House of Representatives,
Committee on Armed Services,
Subcommittee on Military Personnel,
Washington, DC, Wednesday, January 13, 2016.
The subcommittee met, pursuant to call, at 10:30 a.m., in
room 2118, Rayburn House Office Building, Hon. Joseph J. Heck
(chairman of the subcommittee) presiding.
OPENING STATEMENT OF HON. JOSEPH J. HECK, A REPRESENTATIVE FROM
NEVADA, CHAIRMAN, SUBCOMMITTEE ON MILITARY PERSONNEL
Dr. Heck. Well, good morning. I want to welcome everyone
today to today's Military Personnel Subcommittee's hearing on
commissary reform. We are here today to hear from military
service organizations and the grocery retail industry on the
value of the commissary system to beneficiaries and the effects
of any possible changes to the commissary's business model. As
we are all well aware, commissary benefits are a valued part of
our current and retired service member's compensation package
and contribute to their and their family's overall quality of
life.
The Military Personnel Subcommittee is taking every
opportunity to thoroughly review and discuss the way forward on
any commissary reform, and is committed to retaining the
commissary benefit while improving the business practices of
the commissary system and at the same time reducing its
dependence on appropriated funds.
Our purpose today is to gain an understanding from the
panel on their views of the possible effects to the
beneficiaries or to the business practices of our industry
partners of any changes to the commissary system business
model.
Before I introduce my panel, I would like to offer
Congresswoman Davis an opportunity to make any opening remarks.
[The prepared statement of Dr. Heck 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 very much, Mr. Chairman. And thank
you to all of our witnesses. Good to see all of you here today.
Our panel represents beneficiaries as well as retail industry
partners that work with the commissary system.
I think we can all agree that what is paramount in this
discussion is that the commissary benefit must be maintained.
How that happens, though, and what the system will look like is
what we are here to discuss. Change is never easy, we know, but
in today's fiscal environment, it is required. This committee
certainly has met several times since the release of the Boston
Consulting Group [BCG] report, and we have heard from the BCG,
as well as the Department of Defense [DOD], on ways to sustain
the commissary benefit even when we know and we hear that many
feel that the commissary system is just not sustainable as it
is currently today.
I was pleased to hear from DOD leadership that they concur
with the report. Regardless of how much reform is done to
create a more efficient business model, keeping the savings
that are realized today for patrons is critical.
As we wait to see what the Department will submit to
Congress for this year's NDAA [National Defense Authorization
Act], I would encourage all of us, all of you to work with the
DOD and help us reform a system that will endure into the
future.
I look forward to hearing from our witnesses as we work to
responsibly and efficiently protect the commissary benefit for
our service members and families.
Thank you, Mr. Chairman.
Dr. Heck. Thank you, Mrs. Davis.
I now ask unanimous consent that the following testimony be
entered into the record from the American Federation of
Government Employees. Without objection, so ordered.
[The information referred to can be found in the Appendix
on page 109.]
Dr. Heck. I also want to let our panel know that votes are
scheduled some time between 11:15 and 11:30. We will push to
11:30 until the clock actually runs to zero on the vote. My
goal is to get the hearing completed so we don't have to hold
you here while we go vote.
We are joined again today by an outstanding panel. We will
give each witness the opportunity to make opening comments and
each member an opportunity to question the witnesses. I
respectfully ask the witnesses to summarize to the greatest
extent possible the high points of their written testimony in
no more than 5 minutes. Your complete written statements will
be entered into the hearing record. As a reminder, the lights
in front of you will turn yellow when you have one minute
remaining and red when your time has concluded.
We are joined today by Mr. Patrick Nixon, President of the
American Logistics Association; Mr. Tom Gordy, President of the
Armed Forces Marketing Council; Ms. Eileen Huck, Government
Relations Deputy Director for the National Military Family
Association; and Ms. Brooke Goldberg, Deputy Director for
Government Relations, Military Officers Association of America.
With that, Mr. Nixon, you are recognized for 5 minutes.
STATEMENT OF PATRICK B. NIXON, PRESIDENT, AMERICAN LOGISTICS
ASSOCIATION
Mr. Nixon. Thank you, Mr. Chairman, distinguished ranking
member, Mrs. Davis, committee members, and staff. It is an
honor once again to appear before you representing the member
companies of the American Logistics Association and to provide
views on commissary reform.
Mr. Chairman, we are always open to new go-to-market
strategies, however, we need to play the cards that we actually
have been dealt. Until the new FYDP [Future Years Defense
Program] is approved, we are facing a $1 billion reduction in
commissary funding in 2017. The GAO [Government Accountability
Office] review on privatization is supposed to be completed
February 1st. We don't know what that is going to say. Until
DOD submits its report requested by the 2016 NDAA on key topics
to include a new twist, budget neutrality, we do not know the
way ahead. But Mr. Chairman, with these negative headwinds, it
is not a time to put one's head in the sand, and we are not the
association of no. We are, in fact, bolstered by positive
indicators.
First, Mr. Chairman, you and Chairman Thornberry have
consistently said that the funding levels for defense should be
driven by strategy, and not the other way around. As a subset
of national defense, this translates directly for resale
programs as well. This committee has affirmed its belief in the
value of the resale benefit and its commitment to preserving
it. It is the next iteration of this evolution taking concepts
to practice where we face the most peril.
Mr. Chairman, on the DOD side, there is a new sheriff in
town. Peter Levine as the Deputy Chief Management Officer has
presented a more tempered view of the way ahead. He has also
stated the strategy needs to drive the budget. We also
understand that DOD feels the need to conduct a series of
pilots to sort out an alternative universe for military resale.
This is where we say, proceed with extreme caution.
Mr. Chairman, I have been in this business for a long time
and I have concluded that there are three pillars of influence
that must be measured in any strategic discussion moving a
resale program forward: patron confidence, supplier confidence,
and retailer confidence.
Patron confidence in the current business model is rock
solid. In the commissary, it is goods at cost with a surcharge.
It is the ultimate company store. The patron invests in the
system through the surcharge, they build their own stores. It
is a brand name business. Items only make it in the system if
they have a demonstrated retail presence in the private sector,
they only remain in the system if they have a demonstrated
customer preference. Its strength is predictability. In a pilot
that proposes to change product pricing, whether by store or
region, can you improve on the current level of predictability?
If you introduced a private label program that requires a
retailer to price, position, and promote a product line with
artificial customer preference in order to make a profit, can
you improve on the current level of predictability? What are
you going to tell the patron? This is their store. This is the
model they trust.
Supplier confidence is equally important. Brand name goods
at cost create a one-of-a-kind business environment. It is the
ultimate supply and demand ecology. Patron preference drives
what is on the shelf and what stays on the shelf. There are no
hidden retail activities like sliding fees, promotional
skimming, or advertising pools. Under audited price warranties,
the military retailer gets the best pricing from the
manufacturer. Manufacturers contribute almost $500 million in
costs to offset annually the system through promotional trade
spending, stocking, display building, inventory management, and
special military events. The introduction of a different
pricing model and private label changes the game. What will be
the reduction in support from industry if you change the model?
What will be the cost to the retailer to develop, position,
price, and promote a private label introduction, once again,
with artificial patron preference built in? You will be
removing proven name brand value items to position private
label items to make a profit. What will be the impact on
supplier confidence as these pilots proceed?
Finally, there is retailer confidence. First, the exchanges
are probably saying, why am I here in this discussion? This is
a commissary issue. The fact is the carefully constructed
economic ecology and the military resale system is forever
interlocked. During the last government shutdown when
commissaries were closed, exchanges dropped sales 30 percent.
Exchanges are extremely interested in proposed commissary
pilots. What if they fail? What will be the impact of patron
confidence on their traffic and sales?
On the commissary side, this is uncharted territory. They
have done an exceptional job at administering the cherished
military benefit, but becoming a retailer is different. They
have weathered a government shutdown, employee furloughs, and
now they await a privatization study, a budget neutral
discussion, and the outlook of a non-appropriated fund
workforce. Reminds me of the saying, the beatings will continue
until morale improves.
When it is all said and done, these discussions will be
critical for preserving this important benefit or moving
forward. I commit the resources and expertise of the American
Logistics Association to make this move forward successful.
Thank you for this opportunity to participate, and I look
forward to our discussions, Mr. Chairman.
[The prepared statement of Mr. Nixon can be found in the
Appendix on page 28.]
Dr. Heck. Thank you, Mr. Nixon.
Mr. Gordy.
STATEMENT OF THOMAS T. GORDY, PRESIDENT, ARMED FORCES MARKETING
COUNCIL
Mr. Gordy. Chairman Heck, Ranking Member Davis, and
distinguished members of the Personnel Subcommittee, thank you
for your commitment to our warriors and their families, who
continue to tirelessly serve and sacrifice in defense of our
Nation. And thank you for the opportunity to share views on
behalf of the Armed Forces Marketing Council regarding efforts
to reform the commissary benefit.
As you are aware, to date there are no specific reforms
that have been publicly proposed by the DOD since the NDAA was
passed and signed into law last month, but from that law, we
are very grateful for the committee's work to establish
benchmarks for any potential reform efforts, which include
ensuring high levels of customer satisfaction, the provision of
high-quality products, and the sustainment of discount savings.
As we begin our discussion today, we believe it is helpful
to remember that it was Congress who established this benefit
as a non-pay compensation benefit for military personnel. The
model that Congress forged is one that is as brilliant as it is
simple: offering products at cost plus 6 percent to provide
military families a non-pay compensation benefit.
While no specific formal proposals have been offered to the
committee over the course of the past 2 years, suggestions have
been offered for commissary reform by both the Military
Compensation and Retirement Modernization Committee and the
Boston Consulting Group that would alter the model. The
suggestions call for a more complex operational model through
untested and under-analyzed pricing schemes and adjustments to
product assortment, which will require growth in both personnel
and operational costs.
Since it is highly unlikely that appropriations will be
increased to cover these costs, the revenue will have to be
generated, and it can only come from one source, and that is
the military family.
The suggestions that have been offered are based on
assumptions that product and pricing schemes are manageable and
would still offer a benefit to military families, but even the
suggestions have a caveat that they need to be further
analyzed. We agree. And we also believe that full spectrum
analysis should be conducted on all efforts that would change
DeCA's [Defense Commissary Agency's] fundamental mission and
seek to generate revenue from military families.
We also believe that accountability for the commissary
benefit should remain with Congress. We hope that if the reform
test pilots begin to fail to meet established benchmarks, and
if the DOD fails to act in an expeditious manner to protect the
benefit, that Congress will step in to do so.
We appreciate the committee's approach that permanent
changes to title 10 will be based on concepts that are proven
to be beneficial and efficacious to the long-term viability of
the commissary benefit. Since commissaries are only one part of
the military quality-of-life ecosystem on military bases, which
also include the military exchanges and MWR [Moral, Welfare,
and Recreation] programs, and that there is an interdependent
relationship between these three organizations, we agree with
Congress that any effort to reform commissaries should weigh
the impacts on exchanges and MWR.
While the budgetary pressures of ongoing deficits and the
sequester have forced DOD to make painful cuts to numerous
programs, we recognize that resale is not immune to the pursuit
of efficiencies. We have always held that efficiencies can be
achieved within the commissary system, and should occur as long
as they do not result in higher prices and diminished benefits
for military families.
We agree with DOD's Deputy Chief Management Officer, Peter
Levine, that efficiencies should drive the budget, and are
encouraged by this new approach within DOD.
As we consider commissary reform, it is important to
remember the words of Lee Scott, the former CEO [chief
executive officer] and current board member of Walmart, who
said, rule number one of retailing is don't aggravate your
customer. Unfortunately, some have learned this truth the hard
way. Two examples include Walmart's clean store policy and JC
Penny's attempt to offer everyday low prices to its customers,
both of which resulted in significant sales declines and the
firing of senior leaders. They listened to their consultants
and even their customer surveys, but the changes ended up
aggravating customers, who either purchased less and/or shopped
elsewhere. Therefore, we approach reform efforts cautiously due
to these recent real world examples which demonstrate how
sensitive the retail marketplace is to change.
As BCG discovered, even a 5 percent increase in prices in
the commissary would result in 26 percent decrease in traffic.
In other words, to generate $143 million in revenue would cost
DeCA $1.3 billion in lost sales. That should serve as caution
to anyone interested in commissary reform that efforts should
be fully analyzed and evaluated and carefully implemented.
Thus, reform efforts should be a game of inches, proceeding
slowly and only implementing concepts that can be easily
reversed if negative effects begin to occur.
Chairman Heck, I look forward to your questions in
discussing specific suggestions for reform with you and the
committee. I yield back.
[The prepared statement of Mr. Gordy can be found in the
Appendix on page 62.]
Dr. Heck. Thank you.
Ms. Huck.
STATEMENT OF EILEEN HUCK, GOVERNMENT RELATIONS DEPUTY DIRECTOR,
NATIONAL MILITARY FAMILY ASSOCIATION
Ms. Huck. Chairman Heck, Ranking Member Davis, and members
of the subcommittee, thank you for the opportunity to present
testimony on the military resale system and its value to
military families.
Military families tell us that the commissary is one of
their most valued benefits. While we understand and appreciate
the need for efficiency and fiscal restraint, we caution
against making changes to commissary funding levels or
operations that put at risk a benefit many families rely upon.
When discussing the commissary benefit, it is important
first to understand what that benefit really is. Our
association has argued that the commissary benefit is not just
the existence of a brick-and-mortar grocery store on an
installation; rather, the benefit is the savings that service
members and families see when they shop at the commissary.
Those savings are a vital non-pay benefit relied on by many
military families, especially junior service members and those
families in remote or high-cost locations. Any proposal to
alter the commissary operating structure or reduce its funding
level must, in our view, also preserve the savings. Those
savings are not insignificant.
The Defense Commissary Agency, or DeCA, reports that
families who regularly shop at the commissary save 30 percent
over civilian grocery stores. We recognize that individual
families' level of savings will vary based on their location
and shopping habits. However, DeCA's mandate to sell groceries
at cost plus 6 percent provides all military families with the
assurance that they will be able to put food on the table at a
reasonable cost regardless of where they are stationed.
The unique challenges of military life increase the
importance of the commissary benefit. Due largely to frequent
military-ordered moves, military spouse unemployment rates are
far higher than their civilian counterparts. For this reason,
many military families must get by on a single income. Many
junior families actually qualify for nutrition assistance
through the Women, Infants, and Children, or WIC, program.
Commissary savings allow those families to stretch their food
dollars and help ensure that even the most junior service
members can feed their families.
We hear often from military families who tell us how much
they value the commissary benefit. When we posted an article on
our Web site about recent proposals to cut commissary funding,
dozens of military families wrote back to share their
experiences with the commissary. One military spouse wrote,
``We are a family of six and have been in the military for 17
years. The commissary is something we have relied on at every
duty station we have been. We are currently stationed in Alaska
and use the commissary and the exchange on a weekly basis. With
the prices in Alaska being higher than what we are used to, the
comfort of the commissary made it easier to make sure I have
all I need to feed my family.''
Several recent proposals regarding the commissary include
plans to reduce the appropriation and use revenues generated by
commissary sales to operate the resale system. We ask you to
consider, if such a plan is adopted, what would happen if
revenues were to decrease. This concern is not unfounded. Last
year the Department commissioned the RAND Corporation to study
what would be the effects of increased commissary prices. Not
surprisingly, RAND found that if prices increased, fewer
military families would choose to shop at the commissary,
leading to a reduction in commissary revenue. We fear that
faced with lower revenues, DeCA would be forced to reduce
operating hours, lay off employees, and ultimately close stores
in order to cut operating costs.
We are gratified that the DOD has expressed a commitment to
preserving commissary savings in its recent factsheet on the
resale system. However, much depends on how DOD defines what it
calls the tangible and intangible elements of the benefit, and
what metrics it uses to ensure its goals are met.
We ask Congress to require transparency from the Department
as it develops plans to optimize the resale system. Military
families deserve the assurance that any changes to the military
resale system prioritize their well-being.
In closing, we note that maximizing revenue has never been
a priority for the commissary, nor should it be. The mission of
the commissary is to provide military families with a vital
non-pay benefit, the savings they realize by shopping there. In
our view, DeCA has fulfilled this essential mission effectively
and well. Before making any changes to the commissary's
operations, we ask that you first consider the impact on
military families, who rely on commissary savings to help
ensure they are ready and able to support their service member.
Thank you very much for the opportunity.
[The prepared statement of Ms. Huck can be found in the
Appendix on page 84.]
Dr. Heck. Thank you.
Ms. Goldberg.
STATEMENT OF BROOKE GOLDBERG, DEPUTY DIRECTOR FOR GOVERNMENT
RELATIONS, MILITARY OFFICERS ASSOCIATION OF AMERICA
Ms. Goldberg. Chairman Heck, Ranking Member Davis, and
distinguished members of the subcommittee, thank you for
holding this hearing on commissary reform.
Your defense of this landmark benefit that has supported
military personnel and their families for generations is
critical to its continued existence today.
I am pleased to be here to represent more than 390,000 MOAA
[Military Officers Association of America] members and as an
Air Force spouse of 13 years. I am a regular patron of the
commissary and have depended on it during 11 years of my
husband's Active service, including 10 deployments for OIF
[Operation Iraqi Freedom], and now that he is a reservist.
Repeatedly, advocates come to the Hill to protect this
benefit and it has remained protected because of your efforts
and support. That support exists because it has intrinsic and
real value, and provides a consistent and dependable benefit
that would be costly to replace.
Our service members, retirees, wounded warriors, widows,
and families know no matter how big or small the town, how far
it is from family or familiar surroundings, the commissary will
be there. It provides the consistent products, savings, and
community they have come to know and rely on from the first day
they stepped through the gate.
The amount of money appropriated for the commissary costs
taxpayers the equivalent of a 2 percent pay raise to the entire
military, but the monetary value to the E-5 with 8 years of
service and a family of four is equivalent to a 9 percent pay
raise. That amount is higher for the most junior enlisted.
Imagine the value it has to an 82-year-old widow on a fixed
income, or the wounded warrior and family trying to get back on
their feet and find a new normal.
In times of austerity, we should not be looking to cut a
benefit that the currently serving, wounded, widows, and
retirees so greatly rely upon and earned access to when we
can't afford to replace it with something equally good or
better.
We are gratified that the Department of Defense has heard
the call from patrons and recognized that the savings is the
benefit, and higher prices or surcharges will hurt them or make
them stop shopping at the commissary altogether.
DOD says it is focused on maintaining the patron benefit.
We hope this includes using DeCA's current market basket
calculation methods for savings. It is important to not
reinvent what patron benefit is. If DOD uses new metrics to
determine a current savings levels that will be used as metric
going forward, we will not be measuring apples to apples. DeCA
currently compares thousands of items in its market basket
study against private grocers, and calculates an average
savings of 30 percent. When Boston Consulting Group measured
just 50 items in their market basket, it found a much lower
savings level.
We believe changing the market basket study could result in
a reduced benefit by excluding comparison of items commonly
purchased by patrons in calculating the savings measured.
Therefore, maintaining consistency with previous calculations
is imperative to maintaining the benefit that patrons know and
rely on.
DeCA has been repeatedly asked to find efficiencies in
providing this benefit, and they have done so. However, at some
point, we think they will be forced to find them where it will
be unpalatable to patrons either through price increases,
changes in service, or changes in quality.
The cut to the second destination transportation subsidy in
Asia last year recently demonstrated the potential costs passed
on to patrons, with a bag of romaine lettuce costing more than
$10 in Guam. Those stationed overseas at the pleasure of their
government should not be stuck with the bill for shipping
resources to their location.
Proposals to merge the commissary and the exchanges are
common. Most have not occurred, because it is difficult when
businesses use different backroom logistics, different business
goals, and operating restrictions. We simply don't know what we
don't know. How will this affect product quality, savings, and
customer satisfaction levels? If for the worse, how will that
affect foot traffic for the exchange, affecting MWR dividends,
affecting patron trust, access, and sustainment of support and
quality-of-life programs? How will this impact the employment
and earning power of approximately 10,000 military-affiliated
employees, including more than 4,000 military spouses?
Maintaining the benefit at levels patrons can depend on,
provide quality products, customer satisfaction and savings,
with accessible hours and service should be the priority, and
we thank this committee for outlining those benchmarks in the
National Defense Authorization Act. We think those benchmarks
are the best metric, which all new proposals should be
evaluated against.
Thank you for this opportunity to share the views of MOAA
and its members. I am happy to answer any of your questions,
and I yield the rest of my time.
[The prepared statement of Ms. Goldberg can be found in the
Appendix on page 95.]
Dr. Heck. Great. Thank you all very much for your testimony
and for all of you staying within the 5-minute timeframe. I
think it is the first for this panel.
I will ask Ms. Huck and Ms. Goldberg first. The committee
has heard from DOD that military families desire the option of
purchasing a private label product from their commissaries, and
the studies done by BCG recommended that commissaries should
offer private label products. Since private label products are
uniformly offered in retail grocery outlets, do you believe
that military patrons should be afforded the same choice as
outside the gate, and why or why not?
Ms. Huck. Mr. Chairman, our concern is that DeCA does not
have the expertise to develop a private label product, and we
are concerned about what the extra expenses and logistical
responsibilities would be incurred if DeCA were to be required
to provide a private label product.
Right now the commissary sells name brand items that
patrons are familiar with and they have the assurance that
those items are of high quality and low cost. We are concerned
that asking DeCA to develop a private label product would not
give patrons that same assurance of quality.
Dr. Heck. Okay. Ms. Goldberg.
Ms. Goldberg. I think that Eileen covered all of the things
that I also would cover.
Dr. Heck. Great. Thank you.
I will ask Mr. Nixon and Mr. Gordy. I understand that you
both, both organizations have concerns and disagreements with
some of the BCG findings. If you could list your top one or two
concerns with a particular finding, please do so.
Mr. Nixon. Quickly, Mr. Chairman, I would characterize the
results from the BCG report as kind of the good, the bad, and
the ugly. Their pricing survey was certainly very limited when
you consider that the Defense Commissary Agency does a full
comparison item by item, UPC [Universal Product Code], weighted
by volume, regionalized, they do local surveys on meat and
produce to calculate the 30 percent savings. So it was kind of
disingenuous to go out and take a small sample and come back
and say here is more what the savings range is.
The other thing is they really kind of almost talked with
disdain about the nonretail aspects of the Defense Commissary
Agency, that, you know, they have these anomalies of vendor
stocking and contracted-out functions within the store. The
fact is that is the way Congress constructed the system, that
is the way DOD conducted it, and it has a lot of difference
anomalies to it that are built-in inefficiencies because it is
a Federal agency. They, you know, they have inherently
nongovernmental function surveys. They went through the A-76
process, outsourced a lot of their functions, shelf stocking,
receiving, storage and handling, custodial. A lot of those are
awarded at a premium under Javits-Wagner-O'Day, so it costs
more to operate in the environment.
So in a retail operation, you would never operate a store
that way. I think the BCG kind of missed that, that they are
doing what they are doing because that is how they were set up
to operate. There are more efficient ways to do it if you want
to make them a retailer, but you need to make them a retailer
first.
Dr. Heck. Mr. Gordy.
Mr. Gordy. I would say the top two items of concern for us
related to the BCG report would be the private label products
and variable pricing.
First of all, the private label product, the main concern
there is currently you have name brand products being put into
the stores, and for those products to get into that store, as
Mr. Nixon said in his opening testimony, there is about $500
million of industry support that goes to ensure that those
products are stocked. Well, first of all, that they are
ordered, that they are stocked, that they are marketed, that
they are promoted. These are activities that take place in
every commissary every single day that is funded by industry.
To institute a private label product is going to have two
effects: number one, DeCA is now going to have to--what makes
private label successful in the civilian marketplace is the
amount of actual marketing that goes into getting the patron to
buy those products. So DeCA is now going to have to add to
their cost and add to their staffing people who have to go out
and market these products. Then they are also going to have
somebody stock those products. And then they will have someone
go in there and then they will have to do the promotions and
the other--the displays and things like that to get the patrons
to buy them.
Well, if DeCA is now going to take on those functions
within the store, which is currently being provided by industry
today, and these products are going to compete with the
national brands, the national brand manufacturers are going to
say, if DeCA is now going to provide this in-store support,
which we are currently providing today, which we don't provide
to any other retailer, then we are no longer going to provide
it for DeCA.
So that is a conversation that has not taken place. No one
has asked the manufacturers what will change. If you look at
the BCG report, they list all the people that they consulted.
They did not consult the industry, who are the third leg of the
three-legged stool of delivery of this benefit. So they are
missing a major piece of the pie here.
And in order to make variable pricing work within the
commissary, they are going to have to institute variable
pricing, which allows DeCA now to raise prices on products.
This becomes a slippery slope. Today DOD can say, we are going
to keep our hands tightly held on this and we are only going to
do what--generate enough revenue just to help offset a little
bit of cost. We don't know what will happen 5 to 10 years from
now with the future leaders within DOD.
Dr. Heck. Thank you. Thanks very much.
Mrs. Davis.
Mrs. Davis. Thank you, Mr. Chairman. And perhaps I can
continue with this conversation a little bit about the
labeling, because I do remember in sitting here, you know, as a
consumer when we had this discussion with BCG, we know that,
you know, we all adopt, if you will, certain companies now and
have some faith in their label. So you know, it seemed like,
well, okay, you know, I think our military families, and you
would subscribe to this, certainly have faith in the
commissary. I mean, they have great faith in the commissary.
They would transfer that in some ways.
But on the other hand, I hear exactly what you are saying.
And I was struck that, Ms. Huck, you were saying that they
don't have the expertise. It is not that they don't have the
wherewithal to have the expertise, but the system hasn't been
set up that way, and so there is really a gap there.
I think what I am wondering is how if you were tasked with
trying to develop a process, and because it would be over time,
to test this on a number of ways in which you were consulted
and you were part of that, how would you do that? What do you
think that we should be listening out for if, in fact, people
say, you know, let's give it a try?
Mr. Nixon. I would say the first thing is a business
system. This pricing model requires a sophisticated business
system to manage price elasticity between the brand name and
private labels and things that patrons are used to seeing out
in the private sector. That system is currently being deployed
at the Defense Commissary Agency. The first model that would
give them the capability to even begin to look at this
capability will be probably in the third quarter of this year.
So they will just begin to have the capability then. They
will have to start testing it. As with any system deployment,
if it is delayed, then that capability is delayed. That is the
first thing, because you can't do this on a pencil and paper.
And so they need the system. They will have that in place.
Mrs. Davis. Have you all been consulted about developing
that system?
Mr. Nixon. This is a system that they procured through the
government process. It is a commercial off-the-shelf. I don't
have any qualms about the system. And it is replacing a lot of
antiquated systems they had down there when I was down there,
so they finally got around to replacing those. And then the
expertise, it is not just the system, it is the expertise to
manage in that environment. And they don't have it. And it is
not their fault----
Mrs. Davis. Right.
Mr. Nixon [continuing]. They just weren't constructed to
manage in that environment. So those are capabilities.
But, my concern is they are going to bring in--you know, we
are going to figure out, well, how do we do variable pricing
and private label? They don't know. They'll bring a consultant
in that says, well, here is how you raise prices, and here is
my bill and make sure you raise them high enough to pay it. You
know, that it is kind of the path we are going on right now. It
will take a while for them to develop that capability.
Mrs. Davis. Thank you.
Mr. Gordy. Absolutely. You know, even if you take a look at
the Boston Consulting Group's report, they lay out that DeCA is
going to have to first bring in a manager, and then they are
going to have to bring in analysts to manage--the way that they
characterize it is you need one analyst for every two
categories, and there are numerous categories within the
commissary. So how many of these analysts are going to be
required to be able to do this?
Then you have to manage the savings. The way the savings,
according to their survey, they went outside the gate at some
commissaries, particular ones, and they measured the price of
goods around each base that they tested. Well, you can't do
that at every single base. How much time and effort is that
going to take to maintain that level of savings comparatively
to outside the gate at each base?
So some of the challenge of price rationalization,
particularly trying to raise prices in certain parts of the
country and then lower it in other parts of the country, that
is going to take a lot of work to be able to pull off.
Mrs. Davis. Yeah. I appreciate that, Mr. Gordy. Thank you.
I am just wondering just in terms of the delivery and to
families and, you know, the decisions that people make, of
course, every day, and sometimes it takes a period of time for
people to, like, transfer their loyalty, what is it about that
delivery to families that you think especially needs attention?
Ms. Goldberg. I think there are a few things----
Mrs. Davis. Given that maybe all--some of these--you know,
so many of these very important contingencies and issues would
be worked out.
Ms. Goldberg. Are you asking specifically about private
label and variable pricing? I think that any time you mess with
the savings level, any time that families perceive that there
is a threat to the savings that they receive when they go in
the door, and an alteration to the delivery of the system, that
you risk their loyalty. They really rely on knowing exactly
what they are getting when they walk through that door, whether
that door is at Stuttgart or in Guam or near Seattle or at Fort
Sill. They rely on that consistency.
And so when you change things, you risk them leaving and
not coming back, which then affects a whole lot of other
systems that we rely on to support our military families.
Mrs. Davis. Okay. I think my time is up, Ms. Huck. Maybe we
will follow up later. Thank you.
Dr. Heck. Mr. Walz.
Mr. Walz. Thank you, Chairman, for holding this. And thank
each of you for being here and your testimony of what you do. I
think about it, with all the stress of military life, grocery
shopping should not be one of them. And thanks to all of you,
it hasn't been, and I think that is very important to keep in
mind.
I think you started to hit on that, Ms. Goldberg is hitting
on it, of all the things involved in it, that there is a strong
psychological benefit here, and I think we need to again, I
don't say that justify wastefulness where we can find
efficiencies; I say it because it is a reality of military
life. So I appreciate that. And I think it is probably because
of the due diligence of the chairman and the ranking member of
thinking about this.
And I don't know if this means anything or not, but since I
have been on this committee, I have had more opportunity to
look for cost savings in the commissary than the F-35, and that
is somewhat--it is a little chip on my shoulder about that. If
we are looking for cost savings, there is other places, but I
do think it is right to look at these things and ask. And I
think you are asking all the right questions with----
Ms. Goldberg, how would you--and I know maybe you can't
quantify it. How high would you say, because I am thinking
about this, how do we explain to the civilian sector how
important the commissary is? How high do your members place the
commissary benefit?
Ms. Goldberg. I don't have a specific numerical answer for
you, but consistently when MOAA has surveyed its members, and
other advocacy groups as well, there have been lots of studies
on this, service members and their families, retirees rank the
commissary very high, one of their most favorite benefits,
along with health care. It is critical.
Mr. Walz. I find myself talking to civilian people not
quite understanding what our obsession is with the grocery
store, but it is real, and especially--and I ask you this: are
we getting into the wrong territory here if we separate CONUS
[contiguous United States] with OCONUS [outside the continental
United States] on the benefit of it, because I think that
psychological effect is even stronger overseas? And I am
asking, is there things we can do here because of the
availability of private sector, or is that the wrong way to go
about it?
Ms. Goldberg. I agree that the need for commissaries OCONUS
is very, very obvious. And there are a lot of questions about
CONUS, but the reliance on commissaries stateside is still
very, very important. Families rely on it. It is not just a
grocery store. It is a place where military families meet up,
whether they are in a high density area or a very remote area.
Here in the DC area, military families are spread out all
over the National Capital Region, but the commissary is one
place where they have in common.
And the price matching, or the price--not the price
matching, but the price savings on goods is really, really
critical. I have tons of grocery shopping choices. When I moved
here, I will tell you, I was shocked when a package of bacon
cost $8 at my local private grocery store, but I went to the
commissary, and it was roughly the same price it had been at
the commissary that I went to in Florida. That mattered.
Mr. Walz. Yeah it does matter. And I think all of you are
hitting on something. Again, it is not stuck in that not afraid
of change type of issue, but I still am not sure, and I think
each of you hit on this, the unintended consequences of a
change like this have not been studied, and I think there is a
willingness to put it into a ledger sheet and a business model
and say this is how it is going to turn out, and I worry about
that, because, again, as I said, of all those stresses of
military life, consistency on certain things is absolutely
critical for those families.
And I would come back to that hit on the employment piece
and maybe--I am not sure if this is the right group to talk to
on this, the MWR funds and all that, this piece gets left out
of that too, and as a senior enlisted soldier, how critical
that is on where that--that is going to have be made up
somewhere, and I am really not interested in watching our
soldier's family do bake sales to fund, you know, ski rentals
or whatever it might be. So I do think--and I ask my colleagues
to take that into consideration, maybe asking the industry
folks to do a little bit better about that. With those BCG
recommendations, how does it affect your business model? I
mean, can you summarize? What is going to change, the top line
things that will change?
Mr. Nixon. Obviously the first thing that I mentioned
earlier and Mr. Gordy did as well is the level of industry
support. Around $500 million industry puts in annually to
offset the cost of operations. A lot of it has a historical
perspective from the standpoint of vendor stocking, but a lot
of it is--you know, the difference in this model is all
promotional dollars go to the shelf. You know, there aren't any
fees skimmed off that are in the retail environment, slotting
fees and other pools that money go into.
So a manufacturer has a certainty when they put a promotion
together, that price goes into the shelf. It is the ultimate
supply and demand economy. They are going head to head with
their other brand name counterparts with competition on the
shelf, and the patron decides what items stay and what items
go.
When you start changing the model onto the private sector
side, there is manipulation in what is on the shelf. The
private label items are price-positioned and promoted by a
retailer, because it is a house brand. And it is artificial
patron preference, because they position them next to the brand
name, whether they have any sale or not, because that is what
they want to sell, because that is where they make their money.
Mr. Walz. Don't you think it is interesting the first thing
you come to, and it is very obvious in this industry, these are
the things you hit on directly as the major influence, and yet
that industry wasn't consulted as part of the discussion.
Doesn't that seem like a glaring hole? I know you mentioned it,
but I am fascinated, because I kind of anticipated this was
going to be your answer. The biggest thing that is going to
change, that part wasn't taken in.
Mr. Nixon. Yes, sir.
Mr. Walz. All right. I yield back.
Dr. Heck. Thank you.
Ms. Stefanik.
Ms. Stefanik. Thank you, Mr. Chairman. And thank you to the
witnesses for your testimony today.
I want to address my first question to Ms. Huck and Ms.
Goldberg to further delve into the impact on military families.
So I represent Fort Drum, where the military resale benefit is
such an important fabric of the military community.
You, Ms. Goldberg, talked about, very articulately, that
the goal should not be maximizing revenue; the benefit are the
savings for our military families. What are the secondary and
tertiary effects that weren't included in the BCG report or
weren't included in the panel today of the impact of this
proposed reorganization?
Ms. Goldberg. Thank you for your question. We talked about
it a little bit in our statement for the record, along with my
testimony. The interlocking mechanism of the commissary and the
exchange is a very fine-tuned, harmonic relationship. The
commissary brings foot traffic to the exchange. The exchange is
another gathering place for people that operates with a profit
margin that provides dividends to Morale, Welfare, and
Recreation activities on the installation, and those could fund
a variety of programs, and it is really critical to providing
extra support and quality-of-life programs to military
families.
When you start to take that apart and they lose faith in
the commissary benefit, they might not go to the exchange. That
reduces the dividends. That reduces the programs. All of a
sudden military families may feel that there really aren't
support programs for them anymore or that those programs are
not important or valued by the Department of Defense or their
community. And that really is a morale, I mean, it is
detrimental to morale and readiness, and that is not a place, I
think, that we want to go.
Ms. Stefanik. Ms. Huck.
Ms. Huck. I would add that the system is very
interdependent in the sense that the large commissaries with a
lot of volume help support economies of scale that support
commissaries overseas and in remote locations here in the
United States. And so our concern is that any change to the
system that makes families less likely to use the commissaries
in these locations, such as here in the National Capital
Region, will lead to less revenue available to support those
commissaries in locations where families not only rely on the
savings, but rely on the physical aspect of the store on the
installation.
There are many locations even here in the United States and
certainly overseas where families have few shopping options and
certainly few affordable shopping options, and so we are very
concerned about how any change to the commissary system will
affect those families who are in locations where the physical
presence of the store is critical to their well-being.
Ms. Stefanik. Thank you. I also wanted to just note that I
think one of the most significant statements that has been made
from the panel is what Ms. Goldberg said, that these savings
account for a 2 percent to a 9 percent pay raise for our
military families. That is significant in these challenging
economic times.
I want to turn to Mr. Gordy and Mr. Nixon. BCG, obviously
one of their proposals was a private label. And Ms. Huck
pointed out the fact that DeCA does not have the experience,
the expertise, let alone the logistics capabilities. Can you
elaborate on that and the challenges that would provide and the
logistical issues that we would have to overcome to make that
transition?
Mr. Nixon. Yes, ma'am. First of all, just to kind of set
the playing field. DeCA did not introduce private label not
because it didn't want to. Prior to last year's change in the
law, there was a brand name exception to the Competition and
Contracting Act, and so if you bought brand name products
directly from a manufacturer, you didn't have to compete each
order, but it developed into the signature of the commissary
system is, was brand name and those brand names were found
everywhere in the world that you went.
Private label is a company developed and supported brand.
And we talked about they don't have the expertise to develop
their own private label. DeCA is not big enough to develop a
private label. They just--you know, it wouldn't be cost-
effective, they wouldn't be able to manage the quality. So they
will buy someone else's private label and put it in the store,
but as a house brand, then they must price it, they must
promote it, they must position it. And it is artificial
positioning.
You know, the day it is put in the store, it doesn't have
customer preference. They are going to give it artificial
customer preference, because they want to sell it because they
are making money on it. And that is primarily what private
label does in the private sector.
So, yes, you can get from here to there. It is eyes wide
open. Make sure we understand what is going on when we move
into this environment and what actually is taking place is they
are putting a brand in with artificial preference to mark it up
to make money.
Ms. Stefanik. Thank you. My time has expired.
Dr. Heck. Mr. O'Rourke.
Mr. O'Rourke. Thank you, Mr. Chairman. This is my fourth or
fifth hearing or briefing or roundtable on this issue in
addition to the excellent briefing and background work that my
staff has done, and I feel like I am just beginning to scratch
the surface of an issue that is far more complex than it
appeared at the outset.
And, for example, Ms. Goldberg, I have really been looking
at the numbers and those things that we can measure, but you
brought up a really important point: there is a social dynamic
to this, there is a quality-of-life aspect that is perhaps
immeasurable. You talked about military families having a
secure, consistent place where they can meet and be with each
other and share something that is unique to service, and I
think that is important and something that needs to factor into
our decisions and calculations.
But I would like, with the 4 minutes that remain, for each
of you to take a minute--I am probably never going to achieve
the depth that you have on this subject. Mr. Gordy, you
mentioned that as we move forward, we should look at this as a
game of inches. Mr. Nixon, you talked about ensuring that we
measure this appropriately as we pilot things. Ms. Huck, you
talked about apples to oranges. Can you just take a minute and
tell me and the committee what we should be measuring going
forward? What are the key measures or metrics, understanding we
won't get all the quality-of-life aspects, that will tell us
whether the changes that are coming forward are working or not?
And, Mr. Gordy, it looks like you are ready. We will start
with you.
Mr. Gordy. Sure. You know, what is really interesting about
this is why we are here, it has all been driven by the budget,
and so much of what is in DeCA's budget are things that DeCA
will never be able to make more efficient, because it is money
that they give to other programs within the Department of
Defense, such as on-base support, which they can't control how
efficient those things are or whether or not those costs get
reduced.
I think if we are going to change the model from what we
have today from having national name brand products at cost
plus 6 percent--1 percent for spoilage, 5 percent for
surcharge--if we are going to abandon that model to move to a
more complex model, we need to make sure that we have covered
every area and understand every potential cost and every
potential risk that might be faced as we move forward.
Not say that these things shouldn't be tested, but they
should be tested in small bits, and making sure that if these
things start to fail, that we pull back. So that would be my--
--
Mr. O'Rourke. Let me ask Mr. Nixon, is--the Walmart golden
rule of don't aggravate the customer seems to be very
important. Would that be the primary metric, customer
satisfaction, in the commissaries?
Mr. Nixon. Absolutely. One of the benchmarks I said was
customer confidence, and clearly customer confidence is very
high in the system right now because it is predictable.
Everyone knows it is goods at cost, everyone knows what the
surcharge goes for. When you start tweaking that and people no
longer know exactly what is going where, what has been marked
up, and why are these new products in that don't have
demonstrated customer preference, why are they showing up, you
start changing customer confidence, you start changing the
predictability of the system.
And I think that is the benchmark of the system right now,
it is predictability and the fact that its savings are
audited--it is the patron satisfaction is done independently,
and it is a valued store, and it is viewed as their store, and
we have to keep that in mind. This is that--the Defense
Commissary Agency is managing their store.
Mr. O'Rourke. And for Ms. Huck and Ms. Goldberg, I have
about a minute left, does customer satisfaction get to some of
the issues you raised, Ms. Goldberg, that might reflect
military families' understanding of the value of those
commissaries, if we are measuring that?
And, Ms. Huck, if there is time remaining, what are the
apples-to-apples comparison we want to look at?
Ms. Goldberg. I don't know that I would rate savings,
quality, or customer satisfaction against each other. I think
they are all equally critical and they play an important role,
and this committee really hit the nail on the head in setting
those as benchmarks for measuring how this benefit is treated
going forward, knowing that a decrease in any single one of
those areas could really start dissecting the entire system and
making it fall apart.
Ms. Huck. I would add that we are very focused on
transparency when it comes to making any changes to the
commissary system. Right now, as Mr. Gordy and Mr. Nixon have
pointed out, the system as it is structured is very clear.
Families understand essentially how items are priced.
Any changes to that that are not clear to families, I
think, is going to really inspire a lack of confidence in the
system and the quality in the store that right now they rely
upon. So we are asking for transparency in any changes that DOD
makes moving forward.
Mr. O'Rourke. Thank you. Thank you for your answers.
Mr. Chairman, I yield back.
Dr. Heck. Mr. MacArthur.
Mr. MacArthur. Thank you, Mr. Chairman.
Thank you for being here. You have all very ably
represented your members, and I was struck by one thing that
each of you said. Mr. Nixon, that we need to avoid this trap
that the beatings will continue until morale improves; Mr.
Gordy, that we should avoid aggravating our customers; Ms.
Goldberg, that this is the single highest valued benefit that
members identify; and, Ms. Huck, that those overseas at the
pleasure of their government should not foot the bill. And I
think for me, those are all pretty important measures of how we
should approach this.
I would associate myself with some of Mr. Walz's comments,
not the F-35 comment, but grocery shopping should not become
stressful when we have got a lot of other issues that our
military families have to deal with.
And before I pose a question, there are three things I
think we should remember. One, we have had these four or five
hearings now, and we are talking about how many hundredths of 1
percent of the military budget we can save, and I think we have
to keep that perspective. We are talking about a lot of
dollars, but relatively a very, very small percentage of our
defense budget.
And, two, that the benefit to our service members goes
beyond just the commissary benefit. Ms. Goldberg, you have
mentioned--and I got your quotes backwards, actually, but you
recognized that as I said it. But there are other benefits that
come from this commissary benefit than just financial, and
there are other benefits to the U.S. economy. It benefits our
service members, it also benefits U.S. suppliers, it benefits
the U.S. economy, and any changes have downstream effects.
And, thirdly, we are about to consider meaningful changes
to the healthcare system of our service members. And there is a
compounding effect, I think, when we do too many things at one
time, and so I think we need to be very cautious.
And that leads me to this question I would ask each of you.
What improvements would you advocate to the system, the
commissary system, that would not hurt morale, that would not
cause aggravation, that would not be seen as a decline in
benefits, and that wouldn't ruin the downstream benefits that
you have described? In other words, what changes do you see
that cause no harm to this system?
Mr. Nixon. Well, yes, sir. That is an excellent question.
And I would say that--and I think because many of the things
that are in the back office environment fall into the too-hard-
to-do box initially, they focused on the front end of something
that is a little easier to do, and so I think that is where the
focus is. I think there are so many things that can be done on
the back end.
You know, these are all business environments that order
computers, supplies, store supplies, consulting contracts,
major systems award, these are all business systems that manage
inventory and throughput and front-end systems. I would
probably look at--short of making DeCA a non-appropriated fund
activity, is there an opportunity to loosen some of the
procurement regulations on them to let them operate a little
more in the quasi-government environment to let them
participate with the other business operations, and----
Mr. MacArthur. I am going to stop you there. I get the
point, and it is a good one.
Mr. Gordy.
Mr. Gordy. I would just have to echo what he was saying,
Mr. Nixon was saying. I mean, if you take a look at the
exchanges, the--particularly AP's just went through a
restructuring, they were looking at about having a $50 million
dividend. They went through a restructuring. Their dividend is
now back in the--or remained in the $200 million level, or
close to that. So there are things that can be done inhouse
that have no impact. It is just about running it more
efficiently. So----
Mr. MacArthur. And, Ms. Huck, we have got just about 45
seconds more.
Ms. Huck. I would answer what we would ask you not to do,
which is make changes that affect the shopping experience for
the military family and the service members who shop there.
There are certainly efficiencies that can occur at the--above
the store level that might make the system run more
efficiently, and we would certainly be open to that, but
anything that affects the shopping experience of the military
family or service member, we think the value--the quality of
the shopping experience itself and the access in terms of
operating hours is an important part of the benefit.
Mr. MacArthur. And Ms. Goldberg.
Ms. Goldberg. I concur with the previous statements, that
the changes should be relatively invisible to the patron,
unless they are improvements.
Mr. MacArthur. All right. Thank you all.
I yield back.
Dr. Heck. Mr. Coffman.
Mr. Coffman. Thank you, Mr. Chairman.
Well, I have somewhat of a different view. First of all,
let me just say thank you all for supporting our military
families. I have 21 years combined military service, Active
Duty, enlisted, United States Army, infantry officer of the
United States Marine Corps, five overseas deployments.
I support these reforms. And I think that they are not
going to compromise the benefit for our families. But they are
threatening for the people who run the system, and I understand
that, and change is always difficult. And so if you--in your
opposition, I really strongly suggest and would love to hear
more about your ideas to make this system more efficient. We
have got to challenge government everywhere. We have got to
challenge government to be more--you know, to be able to
deliver services more efficiently, and no area of government
ought to be immune from that, and so that is my concern. And I
challenge you all to do that.
Mr. Chairman, I yield back.
Dr. Heck. Thank you.
You know, I understand that there certainly is the monetary
savings is critically important, and I think the points that
have been brought up about making sure we have the correct
market basket and the correct analysis is critically important.
As you mentioned, Ms. Goldberg, DeCA talks about a 30 percent
savings, the BCG group with their modified basket had it
somewhere around 20 percent or a little bit less.
Needless to say, there is a break point at which if there
is not enough savings, people are going to walk. So for the
sake of argument, let's say we want to maintain--we set a
benchmark that the market basket savings has to be 30 percent.
If variable pricing allows that 30 percent savings to be
maintained over what is available outside the gate, whether you
are shopping in a high-priced area or a lower priced area in
the economy, as long as the service member and their family is
getting that 30 percent savings over what is available outside
the gate, what would be the downside to the pilot program of
trying variable pricing? Ms. Goldberg.
Ms. Goldberg. I would defer to the business mechanics of
that to the colleagues at the other end of the table, but as
long as the savings is maintained and when the customer walks
in the door, they receive that same consistent benefit, whether
that commissary is in a remote location or overseas or in a
high-density area, I don't see a downside as long as we can
maintain that savings and not have the fallout of lost
employees and other issues that could affect other military
members.
Dr. Heck. Ms. Huck.
Ms. Huck. Mr. Chairman, I would say that Brooke actually
made the point in her statement earlier that she had the
confidence when she moved here to a high-cost area that the
cost of her groceries would be the same here as it was when she
lived in Florida. And that is our concern when we talk about
variable pricing and setting the savings level based on what is
available outside the gate versus a national standard, you run
the risk that families in high-cost areas are actually going to
ultimately be paying more, because the 30 percent of the cost
in the DC area is a different value than 30 percent when you
are talking about a lower cost area.
So part of, I think, what makes the commissary so appealing
right now to families is that reassurance that wherever they
go, the prices are going to be consistent, and we would be
concerned about anything that might potentially take that
assurance away from families.
Dr. Heck. And so I would ask, is that a reasonable
expectation that if you are living in San Francisco, you are
going to pay the same amount for a grocery that you might be
purchasing if you live in Tupelo, Mississippi? I mean, just for
the sake, you know--again, the idea is that the level of
savings should be based upon maintaining the foot traffic in
the commissary, which means there has to be a savings over what
that person would spend if they go outside the gate.
Ms. Huck. Our concern would be that the pay, leaving
housing allowance out of the equation, your pay is the same
whether you are in Tupelo, Mississippi, or in San Diego. And so
we don't want to see families who are in high-cost areas put at
a disadvantage.
Dr. Heck. Okay. Mr. Gordy.
Mr. Gordy. Mr. Chairman, the way, you know, I look at the
price rationalization is, again, you are going to have winners
and losers, and in the areas where there is going to be the
loser, people that, for instance, here in the Northern Virginia
area, people in the San Diego area, people in Pearl Harbor,
they are going to see the cost of the products go up.
Now, most of us have a grocery budget, right? If the prices
go up in the commissary doesn't mean our budget goes up; it
means we still spend the same amount of money on groceries
whether, you know, if something is 5 percent higher or whether
it is 5 percent lower. That budget is the budget.
For the families in these higher cost areas, they are going
to end up having to--they are going to end up buying less, and
that is part of the challenge, in these areas, where BCG said
even a 5 percent price increase will result in a 26 percent
reduction in traffic. So we have to measure, if we are going to
increase the price 1 percent, 2 percent, 3 percent, what is
going to be the adverse impact.
And then when they also talk about rationalizing prices
across categories. Now, I will tell you, I came and dropped my
testimony off on Monday. I was on my way home. I said, oh, I am
near Fort Myer, let me pop into the commissary. I called my
wife, what do we need? She said stock up on meat. And they are
talking about raising prices on meat. My wife knows, if there
wasn't a good deal on meat, she wouldn't tell me to stop at the
commissary and do that, but that is what a lot of military
families do, they stock up at the commissaries.
And if the prices go up in these high-cost areas and it
doesn't make sense to drive, for me it is 27 miles to the
nearest commissary from my house, and my wife and I--every 2
months we go to a commissary and we stock up. We bought a
freezer for that purpose. If the prices go up, it doesn't make
it worth the trip anymore. And so that is the challenge that
many military families are going to have to--that is the
question that they are going to have to ask themselves, is it
now worth the trip.
Dr. Heck. My time has expired.
Mrs. Davis, any other questions?
Mrs. Davis. Oh, thank you, Mr. Chairman. And I know that
the votes have started.
The one thing I would just want to add to this discussion,
I think, and I was telling the--actually, I think San Diego is
cheaper than here, at least when I go to the grocery store, but
fresh fruits and vegetables, I mean, that is what we really
want our families to access, and to use farm products from
local areas. And I know when you are overseas certainly--I
guess in Japan, I don't know that I had a lot of fresh fruits
and vegetables, but I am just trying to make sure that we throw
that into the discussion and that we ask some appropriate
questions about that too so that our families really know that
that is important.
And I don't know that there would be anything different
around there. It is not a labeling issue. It is not something
where, you know, families have said, that is something that we
are willing to consider, again, given the right kind of studies
that are done to look at that issue, but I certainly want to be
sure that we don't, you know, eliminate all the issues around
fresh fruits and vegetables and the farm-to-table issues that
are very important throughout the country and certainly very
important to our military families. Thank you.
Dr. Heck. Well, since they have called votes, I want to
thank our panel for taking the time to be here with us this
morning and for your excellent testimony. Please, you know,
stay in touch with the members of the subcommittee as we move
forward. I want to assure everyone that our goal is to find
efficiencies, create a benefit that is sustainable and valued
by our service members. And we are all awaiting the GAO report
and DOD's recommendations, and I am sure there will be another
hearing once those come out. So, again, thank you all very
much.
This meeting is adjourned.
[Whereupon, at 11:33 a.m., the subcommittee was adjourned.]
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A P P E N D I X
January 13, 2016
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PREPARED STATEMENTS SUBMITTED FOR THE RECORD
January 13, 2016
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[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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DOCUMENTS SUBMITTED FOR THE RECORD
January 13, 2016
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[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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QUESTIONS SUBMITTED BY MEMBERS POST HEARING
January 13, 2016
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QUESTIONS SUBMITTED BY MR. JONES
Mr. Jones. Military compensation continues to receive considerable
scrutiny. What are the major concerns identified by your constituents
over commissary reforms?
Mr. Nixon. While DOD has said that they don't want to reduce the
commissary benefit, the principle concern is that management savings
initiatives will prove illusory and cuts will have to be absorbed by
the patrons in the form of higher prices or reduced quality. For
example, the fiscal year 2017 budget proposal reduced commissary
funding by $221 million. Were Congress to accept this reduction, we are
concerned that reform and efficiency initiatives will fall short and
leave the patron holding the bag. Second, there continues to be active
talk of privatization of the stores. Our concern here is that it will
be either tested or mandated system-wide. Privatization carries major
risks for patrons and the Government. If it fails, you won't be able to
reconstruct the system. We are also concerned about predictability for
patrons. Commissary patrons are accustomed to high levels of savings
and high quality. The efforts by the DOD to institute more generic
brands and experiment with price variations either by region or
commodity may weaken the patrons' confidence in the benefit. And,
success or impact of these pilot programs needs to be measured against
a solid verified baseline and quickly reversed if there is a negative
impact on the benefit. As patrons lose confidence, they will migrate.
The system will lose economies of scale and that will result in price
spirals and sacrifices in quality. Elaboration on these concerns and
other concerns with these reforms are presented in out prepared
testimony.
Mr. Jones. What measurements should be imposed to determine if
commissary reforms are beneficial or harmful to the commissary benefit?
Mr. Nixon. We need to ensure that solid, understandable and
sensible metrics are put in place that gauge the impact to patrons. The
commissary agency already has in place a solid, time-tested method of
measuring savings to patrons and other benefits to the Government from
commissary programs. This should be verified and used as the baseline
to which alternative pricing models are measured. There needs to be
careful analysis against this baseline before any pricing variation
pilots are implemented. As any pilot programs are implemented, the
impact needs to be measured against this baseline.
Mr. Jones. Recognizing that there continue to be supporters of the
privatization commissaries and zeroing out the appropriated funding,
how would you propose to reduce the appropriated cost of commissaries?
Mr. Nixon. Commissary appropriations already have dropped 40
percent or $600 million per year in real terms from when the Defense
Commissary Agency was founded in 1991. 180 of the 420 stores that
existed in 1991 have closed. Much of this is attributable to base
closures in the U.S. and overseas. However a great deal of the decrease
has been through efficiencies in operation. For example, in 1996, DeCA
outsourced their distribution to the private sector that decreased
operating costs and returned nearly $500 million to the stock funds of
the DOD. In our prepared statement, we lay out the miniscule fraction
of personnel costs and the overall defense budget that commissaries use
and the high return that the DOD and the taxpayer realize from this
investment. All of these facts have been outlined in several reports
including a report commissioned by DOD to the Rand Corporation. The DOD
and the Armed Services Committees of the House and Senate have stated
that there should be no decrease in the level of savings that patrons
realize by shopping at the stores. Because commissary costs have been
cut so drastically over the years, it is difficult to see where costs
can be cut without impacting the benefits to the patrons. DOD
commissioned another study to look at reducing costs. The Boston
Consulting Group identified several areas where they thought costs
could be reduced. We have reviewed this report in detail. There are
some efficiencies to be gained but major efficiencies outlined in the
report require major changes to the system that have been enacted or
implemented over many years. Each of the efficiencies in the report
need to be closely examined and carefully implemented. Changes to
purchasing and supply chain practices need to be carefully implemented
considering the real world impact on existing relationships between
manufacturers, brokers and distributors and the disruption of
promotions, deals and discounts that have grown up over the years. We
certainly don't want to implement a program that results in gains in
one area but corresponding losses on another side of the supply chain.
Another major element of the BCG report is savings in employee salaries
by making them nonappropriated fund employees. While there possibly
could be some savings here, it will impact the existing pay and
benefits of thousands of workers. The BCG report suggests new pricing
models for patrons and introduction of private label in addition to the
value brands that are already available in commissaries. Here, there
need to be sold metrics to measure the impact to patrons before
entering into any new arrangement. DOD is required to submit a report
by March 1 on areas where they can gain efficiencies, using the BCG
report and other sources. We look forward to reviewing this report and
providing our views on areas where industry and the DOD can work
cooperatively together with the dual goals of making the system as
efficient as possible and not reducing the benefits to patrons.
Mr. Jones. Military compensation continues to receive considerable
scrutiny. What are the major concerns identified by your constituents
over commissary reforms?
Mr. Gordy. The primary concern for commissary reform is adverse
impact any reforms may have on the benefit provided through the
commissaries, particularly if prices are increased. Secondarily, if the
benefit is diminished, we are concerned about the impact on traffic in
the commissaries and, subsequently, in the exchanges.
Protecting the military resale ecosystem and the benefits they
provide directly to the patron as well as indirectly through Morale,
Welfare and Recreation programs is foundational.
The Armed Forces Marketing Council is very grateful to the
Committee for establishing benchmarks for reform that would protect the
benefit by maintaining consistent levels of savings.
We are also concerned about the introduction of private label
products in the commissary, which would shift DeCA from an elegant, yet
simple model of offering national brands at cost to a more complex and
costly model of introducing private label products sold at a mark-up.
Increased costs will come from the management and oversight personnel
that will have to be employed to manage the program, as well as the
shipping, stocking, and marketing of the products. We believe that this
effort has been oversold as a means of reducing DeCA's appropriation
and that a true, full-spectrum analysis has yet to be conducted to
understand not only the direct costs of implementing such a program,
but the indirect costs that will come as a result of industry partners
reducing the in-store service and marketing and advertising support,
which is not currently provided to other retailers.
Mr. Jones. What measurements should be imposed to determine if
commissary reforms are beneficial or harmful to the commissary benefit?
Mr. Gordy. We believe that protecting the savings and model are
key. Efficiencies can be achieved in DeCA without affecting the
benefit.
Measurements should include what Congress has already established
as benchmarks:
1--Provision of high quality products.
2--Maintain high-levels of customer satisfaction.
3--Sustainment of discount savings.
Even while these three benchmarks may be achieved while instituting
reforms, it does not necessarily mean that patrons will continue to
shop. Monitoring patron behavior in response to reforms is also
important. If the reforms are discouraging patrons from shopping, then
consideration for a quick reversal of the reform should be made.
Mr. Jones. Recognizing that there continue to be supporters of the
privatization commissaries and zeroing out the appropriated funding,
how would you propose to reduce the appropriated cost of commissaries?
Mr. Gordy. The AFMC does not believe the commissary benefit can be
delivered without appropriated support. However, we do believe that
reductions in the appropriation can be made through more efficient
management of DeCA.
We believe there needs to be a rebalancing of the workforce between
store-level and above-store-level staff. A review of above store-level
staffing should be conducted to determine if requirements can be met
with fewer staff.
We also cautiously support NAFing DeCA's workforce in order to
balance pay in the commissary system with the civilian marketplace.
This would mean some salaries would be reduced, while there would be
some salaries that would be increased in order to attract top quality
talent. While this may incur increased cost in the near term to
establish new employee management systems (ie, retirement, healthcare,
etc), over time it will deliver savings and more efficient and
effective workforce.
We believe as DeCA fully implements its Enterprise Business System
(EBS), which will replace its decades-old, antiquated system, less man-
power and less contracted support will be required to input, manage and
maintain its enterprise system. It will make working with DeCA more
efficient for industry and result in less manually-entered data.
Savings will be captured as the EBS comes on line in the near term and
as additional elements of the system are deployed in the long term.
Mr. Jones. Military compensation continues to receive considerable
scrutiny. What are the major concerns identified by your constituents
over commissary reforms?
Ms. Huck. In our view, and in the view of many military families,
the savings that shoppers receive when shopping at the commissary is an
important non-pay benefit. Commissary savings can be seen as part of
the total military compensation package. Thus, any reform measure that
would reduce the value of the savings is essentially a cut to military
compensation. While these savings are important to all beneficiaries,
they are especially critical to families living overseas or in remote
or high cost locations, where there may be few affordable shopping
options. Military families understand that the military resale system
is complex and the various elements are interdependent. Changes to one
aspect of the system may have unintended and unwanted influence on
other areas. For example, the economies of scale generated by sales at
high volume commissaries allow groceries to be sold at low cost across
the system. Changes to the way high volume commissaries operate may
threaten the economies of scale, leading to higher prices in those
areas where shoppers are most dependent on the commissary. It must also
be noted that in recent years military families have seen pay raises
below the Employment Cost Index (ECI), caps to their Basic Allowance
for Housing (BAH), and increased pharmacy co-pays. While each of these
is insignificant on its own, taken together they represent a measurable
loss in military families' purchasing power. Families are aware of
these cuts, which makes them even more anxious about prospective
reductions in commissary savings.
Mr. Jones. What measurements should be imposed to determine if
commissary reforms are beneficial or harmful to the commissary benefit?
Ms. Huck. The first and most important metric that should be used
when analyzing any proposed reform to the commissary system is the
impact it will have on savings. The current practice of selling goods
at cost plus five percent gives families the assurance that they will
be able to feed their families affordably wherever they happen to be
stationed. Any change to the system must be measured against the level
of savings currently available to families who shop at the commissary.
The recent study by the RAND Corporation demonstrated that if prices
increase military families will be less likely to shop at the
commissary. Thus, we would recommend that any change to commissary
operations be followed by an analysis of sales volume across the
system. A drop in sales and/or the number of families using the
commissary would indicate that the reform was harmful to the commissary
benefit.
Mr. Jones. Recognizing that there continue to be supporters of the
privatization commissaries and zeroing out the appropriated funding,
how would you propose to reduce the appropriated cost of commissaries?
Ms. Huck. We understand that reducing the commissary appropriation
is a goal of many in the Department. In this era of fiscal restraint,
it is reasonable to ask whether it is possible to reduce commissary
funding without compromising the quality and value of the benefit and
if so, how this might be accomplished. Our position has always been
that any funding cuts should not be visible at the store level or
affect military families' shopping experience. Military families worry
that funding cuts will result in reduced operating hours or store
closures. We urge Congress to oppose any reduction to the appropriation
that would be apparent at the store level. Making it harder for
military families to shop at the commissary is effectively a cut to the
benefit and will paradoxically result in lower revenues as well. It may
be possible to reduce the commissary appropriation by identifying
changes to back-end operations that could lead to greater efficiency
and lower cost. For example, as the Military Compensation and
Retirement Modernization Commission (MCRMC) suggested, opportunities
may exist to improve efficiency by consolidating certain operations
with the military Exchanges. We would suggest exploring whether
combining the organizations' headquarters, shipping, warehousing or
other logistical operations would lead to significant savings without
compromising the value of the benefit to service members and families.
However, our Association does not have the expertise to make more
specific cost-cutting suggestions. Organizations such as the American
Logistics Association and the Armed Forces Marketing Council might be
better placed to offer specific cost-cutting recommendations. While it
may be possible to find efficiencies and reduce costs, it is the view
of our Association that the commissary system as currently constructed
effectively delivers a valuable benefit to military families around the
world. In our view, the commissary appropriation is money well spent as
it helps ensure that even the most junior service members are able to
feed their families. We caution against any change to the system that
would threaten this essential benefit, which again is part of the total
military compensation package.
Mr. Jones. Military compensation continues to receive considerable
scrutiny. What are the major concerns identified by your constituents
over commissary reforms?
Ms. Goldberg. Military families and other commissary patrons
continue to be concerned that any reform will include degradation in
the quality of products sold at the commissary, a reduction in access
to the commissary (i.e., reduction in store hours) or an increase in
prices. All of these are undesirable to patrons for obvious reasons. A
decrease in patronage at the commissary will result in a similar
decrease in traffic at Exchanges, which in turn means reduced funding
for Morale Welfare and Recreation programs. Over the past years,
Service budgets have significantly reduced funding to MWR programs, to
include closures of specific MWR activities. Reducing the funding
stream from Exchanges will further compound the budget challenges faced
by the respective departments. This decrease in support programs could
adversely affect morale, recruitment and retention.
Mr. Jones. What measurements should be imposed to determine if
commissary reforms are beneficial or harmful to the commissary benefit?
Ms. Goldberg. We absolutely agree that the benchmarks set for
reform in the FY16NDAA of maintaining product quality, savings and
customer satisfaction at current levels (or better) are imperative. A
comprehensive customer survey and refined market-basket comparison
would contribute to a quantifiable assessment of commissary reforms and
efficiency initiatives. In the end, any reform should be very carefully
scrutinized and tested in those areas to determine if those benefit
areas will be adversely affected.
Mr. Jones. Recognizing that there continue to be supporters of the
privatization commissaries and zeroing out the appropriated funding,
how would you propose to reduce the appropriated cost of commissaries?
Ms. Goldberg. We believe that supporters of privatization do not
have a full understanding of the complexities involved. DOD leaders
have acknowledged privatization while maintaining the benefit at
current levels is not possible. When the benefit at the commissary is
reduced, there is a trickle-down effect at the Exchange, and then a
reduction in MWR dividends for support at the installation. DeCA may be
able to find new ways to save operating costs, and we believe they are
in the best position to do so. Any changes should not impact the
product quality, savings, or customer satisfaction. Commissary access
contributes to a very board consumer base . . . active duty, family
members and retirees--so any negative outcome of this reform will have
a cascading effect well beyond the ``currently serving'' military
population. Congress must be prepared to defend this benefit and
appropriations at levels that preserve savings, quality, and customer
satisfaction. Military families have seen reductions or stagnation in
benefits across the board. This benefit (along with healthcare) is seen
as a landmark benefit of military service. It has been linked to
improved morale and we believe its erosion will be viewed as one more
broken promise.