Defense Commissaries: Additional Small Business Opportunities
Should Be Explored (12-DEC-02, GAO-03-160).
Some grocery supermarket companies have been charging food
product manufacturers "slotting fees" to place products in stores
and have involved large product manufacturers in making decisions
about what products to sell. These practices have raised concerns
about anticompetitive behavior and may be adversely affecting
small businesses. GAO was asked (1) if the Defense Commissary
Agency is using these practices in managing military
commissaries; (2) what proportion of products sold by
commissaries are produced by small businesses; and (3) if small
businesses face barriers in selling products through commissaries
and how opportunities for small business could be improved.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-03-160
ACCNO: A05705
TITLE: Defense Commissaries: Additional Small Business
Opportunities Should Be Explored
DATE: 12/12/2002
SUBJECT: Competition
Sales
Small business
Military facilities
Commercial products
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GAO-03-160
Report to the Ranking Minority Member, Committee on Small Business and
Entrepreneurship, U. S. Senate
United States General Accounting Office
GAO
December 2002 DEFENSE COMMISSARIES
Additional Small Business Opportunities Should Be Explored
GAO- 03- 160
The Defense Commissary Agency does not charge slotting fees, and agency
staff, not product manufacturers, decide which products to sell and where
they will be placed on commissary shelves.
GAO estimates that slightly more than half of the companies producing
products that the agency sold are small businesses. According to GAO
estimates, these businesses produced about 24 percent, or about 10,900 of
45,200 products sold by commissaries from August 2000 through May 2001,
generating about 7 percent of commissary sales during the period.
Federal law requires that a name brand product must have been sold on a
regional basis through grocery stores or other retail operations before
the agency may purchase it for resale without competition. This
requirement apparently poses a legal hurdle to small businesses whose name
brand product distribution may be limited because the agency cannot accept
their products for resale.
GAO identified two ways in which opportunities for small businesses might
be increased. First, the legal hurdle to purchasing name brand products
that have limited distribution could be removed. Agency officials are
capable of deciding which products to sell without this requirement.
Second, the agency could sell private label products, such as the Kroger
Company*s *Big K* brand or Safeway Stores* *Safeway Select* brand and
obtain these products from both large and small businesses. In 2001,
private label products constituted over 20 percent of industry unit sales
and 16 percent of dollar sales. Private label products are sold at lower
prices than brand name products and could potentially increase savings for
commissary customers. Agency officials recognize there could be some
potential benefits if the agency were to offer private label products.
However, the officials said it would be difficult to initiate and operate
a private label program. Further, they are concerned that if the agency
attempted to sell private label products, its current suppliers would
increase their prices and withdraw some of the support they now provide
commissaries, perhaps reducing the overall benefits of commissary
shopping. GAO noted that the agency has not done a thorough study of the
potential for private label products to serve commissary customers. The
agency*s Director agreed with GAO that a study of the benefits and costs
of developing private label products would be reasonable to undertake to
determine if such a program could enhance the commissary benefit.
The Department of Defense concurred with GAO*s recommendations and plans
to implement them.
DEFENSE COMMISSARIES
Additional Small Business Opportunities Should Be Explored
www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 160. To view the full report,
click on the link above. For more information, contact Lawrence Dyckman at
202- 512- 9692 or dyckmanl@ gao. gov. Highlights of GAO- 03- 160, a report
to
the Ranking Minority Member, Committee on Small Business and
Entrepreneurship, U. S. Senate
December 2002
Some grocery supermarket companies have been charging food product
manufacturers *slotting fees* to place products in stores and have
involved large product manufacturers in making decisions about what
products to sell. These practices have raised concerns about
anticompetitive behavior and may be adversely affecting small businesses.
GAO was asked (1) if the Defense Commissary Agency is using these
practices in managing military commissaries; (2) what proportion of
products sold by commissaries are produced by small businesses; and (3) if
small businesses face barriers in selling products through commissaries
and how opportunities for small business could be improved.
GAO is recommending that the Department of Defense study the benefits and
costs of developing private label products for sale through commissaries.
GAO also suggests that the department consult with the Small Business
Administration on the removal of a legal hurdle that that may deter some
small businesses from dealing with commissaries.
Page i GAO- 03- 160 Defense Commissary Opportunities Letter 1
Results in Brief 2 Background 5 Conclusions 15 Recommendations for
Executive Action 16 Agency Comments and Our Evaluation 16
Appendix I Objectives, Scope, and Methodology 18
Appendix II Examples of the Terms of DeCA*s Performance- Based Agreements
20
Appendix III Steps in DeCA*s Category Management Process 21
Appendix IV Top 20 Private Label Product Categories in the Supermarket
Industry, 2001 23
Appendix V Comments from the Department of Defense 24
Appendix VI GAO Contact and Staff Acknowledgments 26
Tables
Table 1: DeCA*s Performance- Based Agreements for 2000 and 2001 7 Table 2:
Estimated Percent of Small and Foreign Businesses and
Sales of Products by DeCA Commissaries, August 2000 through May 2001 10
Abbreviation
DeCA Defense Commissary Agency Contents
Page 1 GAO- 03- 160 Defense Commissary Opportunities
December 12, 2002 The Honorable Christopher Bond Ranking Minority Member
Committee on Small Business and Entrepreneurship United States Senate
Dear Senator Bond: For well over a decade, the U. S. retail grocery
industry has increasingly required grocery store suppliers to pay a
variety of fees to place their products in stores. These fees, called
*slotting fees* or *slotting allowances,* help determine which products
supermarkets will sell and where they will place those products on their
shelves. Proponents of slotting fees maintain that the fees help pay the
costs of introducing new products to the marketplace, such as the costs of
reallocating shelf space and reprogramming scanner equipment and that the
fees help allocate the risk of product failure between suppliers and
retailers. Some retailers view slotting fees as a way to reduce their risk
in trying a new product and say that a manufacturer*s willingness to pay
slotting fees indicates the manufacturer*s confidence in a product*s
success. Opponents of the practice, including some product suppliers and
small business groups, maintain that it can prevent smaller manufacturers
from competing if they cannot afford the fees.
Many large grocery retailers have also adopted a business technique called
*category management* for assessing the sales potential of products within
a particular category, such as ice cream or other frozen foods, selecting
the products with the best potential and allocating shelf space to these
products. Retailers may manage product categories themselves, with
recommendations from suppliers; select various *category captains*
(usually the leading manufacturers for each product category) to help them
manage the categories; or turn over management of the categories to the
category captains. While proponents of category management view it as
having potentially significant benefits for suppliers, retailers, and
consumers, others are concerned that when a retailer relies heavily on a
category captain, anticompetitive behavior may arise.
The Department of Defense operates supermarket- type stores called
commissaries for the use of active and retired military personnel and
their families. Managed by the Defense Commissary Agency (DeCA), these
commissaries number about 280 worldwide, with sales totaling about
United States General Accounting Office Washington, DC 20548
Page 2 GAO- 03- 160 Defense Commissary Opportunities
$5 billion per year. DeCA*s overall goal is to provide quality products at
the lowest possible cost. Like commercial supermarkets, commissaries sell
name brand products and nonbranded products such as produce, fresh fish,
and ground beef. DeCA encourages small businesses to sell products through
commissaries. Even so, to assure that DeCA can supply the name brand
products its customers desire, federal law allows DeCA (as well as other
federal agencies) to purchase name brand products without competition and
without setting aside a portion of this business for small businesses. The
Small Business Administration generally considers businesses with 500 or
fewer employees to be small businesses. 1
You asked us how DeCA is managing its product purchases. Specifically, you
asked us to determine the extent to which (1) DeCA requires grocery
suppliers to pay for shelf space in commissaries, (2) DeCA*s large
suppliers select the products that are sold by commissaries, (3) products
sold by commissaries are produced by small businesses and foreign
businesses, and (4) small businesses face barriers to selling their
products in commissaries as well as whether opportunities for small
businesses could be improved.
The Defense Commissary Agency does not require its suppliers to pay for
shelf space in commissaries; the agency accepts and stocks products for
sale without charging slotting fees. However, in recent years the agency
participated in a small number of promotional arrangements, called
*performance- based agreements,* under which its suppliers paid a
negotiated fee for preferred product display space. In calendar year 2001,
for example, the Defense Commissary Agency had 14 performance- based
agreements covering products sold by 10 of over 2,700 of its suppliers.
These agreements were negotiated separately from decisions to stock
products, according to agency officials. The revenue from these
performance- based agreements* about $1.2 million in 2001* has been used
to fund commissary construction. The agency discontinued offering its
suppliers performance- based agreements for 2002 to assure that revenue
obtained through these agreements was not limiting vendors* capability to
reduce product prices and because the Congress had provided for funding
commissary construction.
1 Exceptions, among others, include breakfast cereal manufacturing, fats
and oils refining and blending, and specialty canning* 1,000 employees or
fewer; and cookie and cracker manufacturing, and cane sugar refining* 750
employees or fewer. Results in Brief
Page 3 GAO- 03- 160 Defense Commissary Opportunities
The Defense Commissary Agency*s large suppliers do not select the products
that the commissaries sell; instead, agency officials have sole
responsibility for category management decisions. When the agency assesses
the performance of a category of products, such as frozen dinners or ice
cream, it relies on market data that it obtains from an independent
source. The agency also obtains product sales data and selection and
display recommendations from suppliers within that category. These
suppliers include both leading manufacturers* such as Kraft Foods, Inc.,
and General Mills, Inc.* and other companies selling and distributing
products in that category that decide to participate in the review. The
agency reconsiders its selections if requested to do so by suppliers.
Based on a statistical sample, we estimate that 53 percent of businesses
producing products which the agency sold were small businesses and that
these businesses produced about 24 percent or about 10,900 of 45,200
products sold by commissaries, during the period we sampled. We also
estimate that the sale of these products totaled about $214 million, or
about 7 percent of the dollar sales of commissaries during the period. In
addition, we estimate that about 13 percent of the businesses producing
products which the agency sold are foreign businesses and that these
businesses produced about 6,500 products, or about 14 percent of the
products sold by commissaries during the period. We also estimate that the
sales of products produced by foreign companies totaled about $551 million
or about 17 percent of the dollar sales of commissaries over the period.
These estimates are based on a statistical sample of 700 of approximately
45,200 products sold by commissaries during the 10- month period from
August 2000 through May 2001.
Businesses face a legal hurdle in selling brand name products to the
Defense Commissary Agency for resale. Federal law requires that a name
brand product must have been sold on a regional or national basis through
grocery stores or other retail operations consisting of multiple outlets
before the agency can purchase a product for resale without competition.
Agency officials do not know precisely how often companies may be affected
because companies do not inform the agency when they decide not to propose
products for acceptance. Also, some small businesses may not sell to the
commissary system because it appears to present less opportunity than
other large grocery supermarket companies since the assortment of products
which commissaries stock is smaller in comparison, the distances between
commissaries is greater, and the costs of distributing products to
commissaries may be increased. Nevertheless, agency officials said that
they are eager to add products from small businesses and are looking for
products with positive sales records, as
Page 4 GAO- 03- 160 Defense Commissary Opportunities
well as companies with the financial capability to sustain operations and
the production capacity to meet demand for their products if accepted.
Because the legal requirement apparently limits the consideration of
products proposed by small businesses, the agency may wish to consult with
the Small Business Administration on whether to suggest to Congress that
the provision be modified or removed from the law.
There also would be opportunities for small businesses if the agency were
to sell private label products. Major grocery retailers, except for the
agency, have developed successful private label products* private label
products have grown to account for over 20 percent of industry unit sales
and a 16 percent share of dollar sales in 2001, according to industry
data. Private label products have low prices compared to name brand
products and have also provided retailers with higher profit margins
according to industry information. Agency officials recognize that private
label products are successful and that commissary customers are very
likely to buy private label products if they are offered at commissaries.
Yet, agency officials also commented that a private label program could be
difficult for the agency to initiate and implement. They said that
introducing private label products could cause the agency*s current
suppliers to raise prices and withdraw the labor support they now provide
and thereby raise the possibility that the overall benefits of commissary
shopping may be reduced. We believe these issues would need to be
carefully considered to determine if private label products are in the
best interest of commissary customers. The agency*s Director agreed that
it would be reasonable to perform a study to determine if a private label
product program could enhance the commissary benefit. Because the sale of
private label products is a significant and successful competitive trend
in grocery retailing, provides products at the lowest possible cost, and
offers opportunities for small businesses, GAO is recommending that the
Department of Defense assess the benefits, costs, and implementation
issues associated with selling private label products through
commissaries.
The Department of Defense reviewed a draft of this report, concurred with
our recommendations and stated that it will implement them.
Page 5 GAO- 03- 160 Defense Commissary Opportunities
DeCA commissaries are in business to provide a significant non- pay
compensation benefit to military families; they sell food and household
items tax free at cost plus a 5 percent surcharge. Military servicemen,
retirees, and their families consider the opportunity to shop and save
through the commissary a highly important benefit of military service.
DeCA is striving to achieve an overall savings of 30 percent for its
patrons compared to retail supermarket prices. DeCA*s operating expenses
are paid primarily through an annual appropriation of about $1 billion.
DeCA was formed in 1991, and its headquarters are at Fort Lee, Virginia.
Under federal law, DeCA may purchase name brand products without
competition and thereby supply its customers with products they prefer. 2
Also, when purchasing products without seeking competition, requirements
regarding purchases from small businesses become inapplicable. 3 For the
remainder of the products which commissaries sell for which there is not
demonstrated customer preference for a specific brand, DeCA follows
federal procurement requirements, seeking competition and striving to
purchase a portion of its products from small businesses.
The Federal Trade Commission has been reviewing slotting and category
management practices as part of its responsibility for preventing business
practices that may have a harmful effect on competition. 4 Within the
commission, the Bureau of Competition is responsible for investigating
such illegal practices, and for taking enforcement action if it finds
illegal activity. The Bureau of Competition views slotting allowances as
covering a very broad range of business conduct, some of which* such as
2 10 U. S. C. 2304( c)( 5). 3 Although not required, DOD sets a goal for
the portion of DeCA resale dollars that small business suppliers are to
receive* based on the companies with DeCA resale agreements. These
companies include brokers and distributors (who represent multiple
manufacturing companies both large and small) and the individual
manufacturers who deal directly with DeCA. For fiscal year 2002, DeCA*s
goal was that 14.5 percent of sales would be attributable to the resale
agreements with small businesses, and 14.9 percent was achieved.
4 Federal Trade Commission, Report on the Federal Trade Commission
Workshop on Slotting Allowances and Other Marketing Practices in the
Grocery Industry (Washington, D. C.: Feb. 2001). The report stated that
commission staff prepared it and said *It does not necessarily reflect the
views of the Commission or any individual Commissioner.* The commission*s
workshop report contained little information about the amounts of the fees
and their frequency of use and concluded that much more information needs
to be obtained about slotting practices. Background
Page 6 GAO- 03- 160 Defense Commissary Opportunities
commercial bribery 5 *are unlawful. Other slotting practices are legal in
competitive markets, according to the Federal Trade Commission, such as
ordinary price discounts that are passed through to consumers. The Deputy
Director of the Bureau of Competition has testified that slotting
allowances are unlikely to harm competition when there are payments of
reasonable amounts to compensate a retailer for stocking a new unproven
product. On the other hand, the Deputy Director also advised that slotting
practices may be of competitive concern if they involve the exclusion of
rivals. 6 The following fees illustrate those in use in the industry
according to the Federal Trade Commission*s workshop report on slotting
practices and industry studies:
Slotting allowances* lump- sum, up- front payments from a manufacturer
or producer to a retailer to have a new product carried by the retailer
and placed on its shelves. Pay to stay fees* fees paid by a manufacturer
to keep existing products
on retailers* shelves. Display fees* fees paid by a manufacturer for
shelf space and for placing
products in particular locations within a store, such as on eye- level
shelves or on displays at the end of shelves. There are concerns that some
payments may limit or disadvantage a rival*s access to shelf space.
Failure fees* fees paid by a manufacturer to a retailer in the event that
a
product does not sell as well as expected and must be removed from store
shelves and inventory.
DeCA does not as a matter of course require companies supplying grocery
products to make payments to obtain shelf space in commissaries. DeCA
accepts and stocks products for sale without charge and in so doing has
not joined in the grocery industry practice of requiring up- front
slotting fee payments for shelf space.
5 Commercial bribery occurs when an under the table payment to a
retailer*s purchasing agent for placing a product on a store shelf goes
into the agent*s pocket. 6 Federal Trade Commission, Slotting Allowances
and the Antitrust Laws, Testimony of Willard K. Tom, Deputy Director,
Bureau of Competition, before the Committee on the Judiciary, U. S. House
of Representatives (Washington, D. C.: Oct. 20, 1999). In addition, the
Federal Trade Commission staff report indicates that, among other things,
the exclusion of competitors is cause for antitrust concern only if it
impairs the health of the competitive process and that the exclusion of
individual firms is not a competitive concern if the relevant market as a
whole remains competitive. The staff report also states that this
perspective flows from the principle, often repeated by the Supreme Court,
that antitrust laws are intended to protect *competition* rather than
*competitors.* DeCA Does Not Use
Up- Front Slotting Fees
Page 7 GAO- 03- 160 Defense Commissary Opportunities
Although DeCA does not use up- front slotting fees, DeCA has entered into
promotional arrangements, called *performance- based agreements,* under
which suppliers paid DeCA fees for allowing specific promotional
activities. DeCA used these agreements to increase the funds available for
commissary construction. The agreements were based on suppliers* proposals
and negotiations with DeCA, and the agreements authorized suppliers to
place products on special merchandizing racks, on end- of- aisle displays,
and on in- aisle display cases. The agreements were negotiated separately
from decisions to stock products, according to DeCA officials. DeCA
entered relatively few performance- based agreements, and they provided
modest income as table 1 indicates.
Table 1: DeCA*s Performance- Based Agreements for 2000 and 2001 Year
Number of
agreements Product categories Estimated DeCA revenue
2000 18 Candy, pet supplies, breakfast foods, butter, margarine, baked
goods, cheese, drinks, snack foods, and home care products
$1.7 million 2001 14 International products, snack foods,
baked goods, drinks, frozen foods, health foods, kitchen aids, and
insecticides
$1.2 million Source: GAO*s analysis of DeCA information.
In addition, our review showed the following: Only one company had
performance- based agreements in both years. In calendar year 2001, the
14 performance- based agreements covered
products sold by 10 of over 2,700 of DeCA*s suppliers. DeCA*s
performance- based agreements were not structured in a manner
that excluded the sale of other suppliers* products. Appendix II contains
examples illustrating the performance terms and the basis for payments
that DeCA received through its performance- based agreements.
While there have been relatively few performance- based agreements, the
concept has raised some concerns. In a 1998 report on DeCA contracting
activities, the Department of Defense expressed concern that (1) DeCA*s
agreements were a form of selling space in commissaries, which is not
authorized, and (2) that the agreements were a cost to the suppliers who
may pass on those costs to military customers through increased product
Page 8 GAO- 03- 160 Defense Commissary Opportunities
prices. 7 While DeCA officials disagreed with these perspectives, DeCA
decided not to enter additional performance- based agreements for 2002.
DeCA officials stated that they took this action to assure there was not
any possibility that the agreements were limiting their suppliers*
capability to reduce product prices, and because revenue needed for
commissary construction had been secured through congressional action. 8
DeCA officials select the products that commissaries sell* the agency does
not use its large suppliers to select products for commissaries. DeCA
officials do use category management techniques when selecting products,
and DeCA officials have sole responsibility for category management
decisions. DeCA adopted category management in the mid- 1990s because this
technique was being recognized as a significant improvement in grocery
industry management practice. DeCA*s category managers and buyers who are
assigned to DeCA*s Marketing Business Unit, located primarily at Fort Lee,
Virginia, implement these techniques. DeCA has divided its grocery
business into about 170 categories of like products, and it completed 164
reviews of individual product categories from January 2001 through August
2002. Appendix III identifies the general steps in DeCA*s category
management process, and DeCA*s role within this process.
DeCA category managers and buyers have the lead role in DeCA*s category
management process. DeCA category managers and buyers told us that they
use data from Information Resources, Inc., 9 as a foundation for making
grocery product selection decisions. Information Resources, Inc., supplies
DeCA with sales data for each product in a category for the commissary
market, as well as comparative sales data from other grocery retailers.
This information allows DeCA*s category managers and buyers to have an
overview of the performance of each product over several time periods. In
addition, DeCA category managers and buyers meet individually with their
suppliers during a category review and are provided with product
presentations and sales data developed by the supplier or purchased by the
supplier, along with the suppliers* product selection and
7 Department of Defense, Procurement Management Review: Defense Commissary
Agency (Washington, D. C.: Nov. 10, 1998). 8 National Defense
Authorization Act for fiscal year 2002.
9 Information Resources, Inc., is a leading source of statistical data on
supermarkets and their products. It purchases point of sale data for
analysis from industry retailers. DeCA Officials Are
Responsible for Product Selection Decisions
Page 9 GAO- 03- 160 Defense Commissary Opportunities
display recommendations. Suppliers who make presentations to DeCA during a
category review typically include both leading manufacturers such as Kraft
Foods, Inc.; General Mills, Inc.; and PepsiCo, Inc.; and distributors,
brokers, and other companies selling and distributing products in a
category that decide to participate in the review. According to DeCA
officials, they do not discuss or share the content of meetings with
individual companies with the representatives of other companies that
participate in a category review. After DeCA announces the results of a
category review including any changes in its selections and the
distribution of its products, DeCA will reconsider its selections if
requested to do so by suppliers.
Based on a statistical sample, we estimate that 53 percent of businesses
producing products that DeCA sold are small businesses and that these
businesses produced about 24 percent of the products (about 10,900
products, plus or minus 1,500) sold by commissaries from August 2000
through May 2001. We estimate that the sale of these products totaled
about $214 million, or about 7 percent of commissary sales, and we are 95
percent confident that the total lies between $76 million and $352
million. In addition, we estimate that about 13 percent of the businesses
producing products that DeCA sold are foreign businesses and estimate that
these businesses produced about 14 percent or about 6,500 of the products
sold by commissaries during the period. We are 95 percent confident that
the total lies between 5, 300 and 7,800. We also estimate that the sales
of products produced by foreign companies totaled about $551 million, or
about 17 percent of the dollar sales of commissaries, and we are 95
percent confident that the total lies between $287 million and $815
million. For our statistical sample, we selected 700 of approximately
45,200 products sold by commissaries during the 10- month period. 10 Table
2 provides additional details.
10 We identified the parent company, if any, for 669 of the products we
sampled. Some 138 small companies, 164 large companies, and 40 foreign
companies supplied these 669 products. Commissaries Sale of
Products from Small Businesses and Foreign Companies
Page 10 GAO- 03- 160 Defense Commissary Opportunities
Table 2: Estimated Percent of Small and Foreign Businesses and Sales of
Products by DeCA Commissaries, August 2000 through May 2001
Dollars in millions
Business type a Percent 95- percent
confidence interval Total
95- percent confidence
interval
Small 53 44 to 54 Products 24 21 to 27 10,900 9,400 to
12,400 Dollar sales of products 7 2 to 11 $214 $76 to $352 Foreign 13 10
to 17
Products 14 12 to 17 6,500 5,300 to 7,800 Dollar sales of products 17 9 to
25 $551 $287 to $815 a While we could estimate the proportion of small and
foreign businesses, we could not reliably estimate the total number of
businesses. To do so would require knowledge of the number of products in
the population associated with each parent company identified in the
sample. The list from which the samples were drawn included product, but
not company, identification, and the population of companies that produce
products sold by DeCA is not known. Commissaries sales from August 2000
through May 2001 totaled $3.278 billion dollars.
Source: GAO*s analysis of DeCA data.
We developed estimates of this business activity because this data was not
available from DeCA. DeCA collects data on its suppliers with which it has
resale agreements. These suppliers include a mix of companies, some of
which produce products and others that are the distributors of products
produced by other companies. DeCA*s database identifies the companies that
supplied it with each product, and its data includes either the producer
or the distributor, but not both.
We could not compare commissary sales of the products of small business
with private sector grocery supermarkets because the data that are
available are too limited. While scanner data on industry sales are
available, this information does not identify the size of the companies
that supply the products, according to industry officials. Also, the U. S.
Census Bureau, which conducts economic surveys of manufacturing, does not
collect data on the extent that the products of small businesses are sold
through individual commercial grocery retailers. Census Bureau data shows
that grocery manufacturing is diversified, with over 22,000 companies
participating in the sector, and that over 21,000 of these companies had
500 or fewer employees. Yet, the industry is more concentrated at the top*
the 50 largest companies in the sector accounted
Page 11 GAO- 03- 160 Defense Commissary Opportunities
for about 51 percent of the $422 billion in shipments attributed to this
sector of the economy in 1997 (the latest data available). 11
Businesses face a legal hurdle in selling brand name products through
commissaries* a provision of law requires a minimum level of sales before
DeCA can consider a brand name product for purchase. In addition, the
commissary system has certain physical characteristics that limit the
number of products that commissaries sell and increase the costs of
distributing products to commissaries. These characteristics affect the
opportunities of businesses, including small businesses, to present and
sell products through commissaries.
In general, federal policy concerning small businesses is to (1) foster
their development and (2) to eliminate barriers to their growth. As
indicated by the Small Business Act and the U. S. Small Business
Administration, the United States is committed to preserving full and free
competition that leads to free entry into business to keep capitalism
efficient and foster innovation. Also, according to the administration,
the growth of small businesses is vital to preserve competition, and its
Office of Advocacy was created to help discourage barriers to small
business development and growth. Furthermore, according to the
administration, policymakers should find ways to level the playing field
for all businesses without compromising statutory or agency specific
goals.
In considering products for sale in commissaries, DeCA is bound by a
provision of federal law that requires a name brand product to have been
sold on a regional or national basis through grocery stores or other
retail operations consisting of multiple outlets before DeCA may purchase
these products on a non- competitive basis for resale. 12 This limitation
was enacted in 1997, and a congressional committee considering this
legislation specifically stated in referring to this provision that
discount
11 The 1997 data is from the U. S. Census Bureau*s 1997 Economic Census:
Manufacturing Subject Series, the latest economic census performed
(Washington, D. C.: 1997). The next economic census of U. S. businesses is
being conducted by the Census Bureau starting in January 2002 and will be
reported starting in 2004.
12 10 U. S. C. 2486 (e). Barriers Small Businesses
May Face in Doing Business with DeCA
Page 12 GAO- 03- 160 Defense Commissary Opportunities
brands that are not sold by major commercial grocery or retail store
chains would not qualify as brand name products. 13
DeCA officials said that the provision has, in part, had the effect of
limiting their consideration of products that have not yet achieved a
regional distribution, including products produced by small businesses.
DeCA officials do not know precisely how often companies may be affected
because companies do not inform DeCA when they are discouraged from
proposing products for acceptance by DeCA for this reason. DeCA seeks
products with positive sales records and companies with the financial
capability to sustain operations and the production capacity to meet
demand for their products if accepted for sale. DeCA does not accept a
product with an indifferent sales record or a product that may not be as
attractive to customers as those that are already in DeCA*s assortment.
Nevertheless, DeCA officials said that they occasionally accept products
that appear to be popular in regional and local areas even with relatively
limited distribution* they are looking for and eager to add products from
small businesses that are innovative or distinctive. In addition, DeCA
officials said each product accepted for sale must earn its place on the
shelf and continue to sell well to maintain its place in a commissary
store and the commissary system. When a product is added to DeCA*s
assortment, a competing product may need to be removed to make shelf space
available.
In addition, other factors affect whether or not a small business sells
products through commissaries. The commissary system differs, in part,
from some large grocery supermarket companies in the following respects:
the assortment of products, the distances between stores, and the costs of
distributing products to stores. According to DeCA information, DeCA*s
assortment of products is limited by the physical size of commissaries*
commissary stores are about one fourth smaller on average than typical
commercial grocery supermarkets. Also, commissaries are shopped
intensively twice per month on days after military paydays, and DeCA plans
its stock assortment to assure that commissaries have sufficient
quantities of the items in highest demand to meet these bimonthly shopping
peaks. Due to these characteristics, an average commissary stocks about
11,500 items* as much as 40 percent fewer grocery items
13 Committee on National Security, House of Representatives, House Report
105- 132, National Defense Authorization Act for Fiscal Year 1998
(Washington D. C.: June 16, 1997).
Page 13 GAO- 03- 160 Defense Commissary Opportunities
than large grocery supermarkets, according to DeCA information. In
addition, the wide spacing of commissaries limits their sales in regional
and local markets compared to other large supermarkets chains in
metropolitan areas that have high concentrations of supermarket stores.
Nearly half of all DeCA sales occur at about 55 of the largest commissary
stores distributed across the continental U. S. at major military bases.
Moreover, DeCA does not have centralized warehouses or a product
distribution system within the United States, as do other large
supermarket chains. Therefore, DeCA requires that its suppliers deliver or
arrange to deliver products for sale, and these deliveries must be
frequent enough to assure that at least a minimum quantity of each product
is on the shelf each day. To meet these requirements, many of DeCA*s
suppliers pay a distributor to warehouse and deliver products to
commissaries. These increased distribution costs may affect the decision
of a small business to sell products through commissaries.
Private label products are successful in the supermarket industry,
providing quality products at low cost, but DeCA does not now offer
private label products. 14 DeCA officials recognize the strength of the
industry trends in selling private label products, and that commissary
customers would likely purchase significant quantities of private label
products. The sale of private label products would also provide some
opportunity for small businesses. According to officials of the Private
Label Manufacturers Association, as many as half of the association*s
membership of 3,200 companies may have 500 or fewer employees. 15 However,
DeCA officials identified operational issues that they believe may
undercut the benefits of having commissaries sell private label products.
DeCA*s Director*s said that a study may clarify whether a private label
program would be in the best interests of commissary customers.
Private label products have become a major form of retail trade in the
grocery industry. Private label products, such as those sold by the major
grocery retailers Kroger Co.; Albertson*s, Inc.; Safeway Stores; Wal-
Mart;
14 Private- label products are goods produced by a manufacturer under
contract with a retailer, which distributes them exclusively under its own
label. Also known as house brands, private- label products let a
supermarket offer products that can only be found in its stores.
15 Some large companies that produce name brand products also produce
private- label products to use excess capacity in their plants. Private
Label Products
Might Reduce Commissary Prices and Provide Small Business Opportunity
Page 14 GAO- 03- 160 Defense Commissary Opportunities
and Ahold USA have captured 20.7 percent of supermarket unit sales, and
16.2 percent of dollar sales according to industry data. 16 These and
other grocery retailers now use their own private labels to sell thousands
of products. Examples of private label brands include the Kroger Company*s
*Big K* brand, Wal- Mart*s *Sam*s American Choice* brand, or Safeway
Stores* *Safeway* and *Lucerne* brands. In addition, reports 17 on the
supermarket industry indicate that private- label products
may capture 24 percent of grocery industry sales by 2006; make
business sense because they offer a 20 to 40 percent price advantage
over national brands and, in addition, provide retailers a 35 to 40
percent margin compared to the 27 percent margin of national brands; and
are perceived within the industry as promoting customer loyalty to a
retailer. Sales of private label products vary significantly by product
category, and in some categories exceed 30 percent of the sales of a
category. The top 20 categories of private label product sales are listed
in appendix IV.
DeCA officials have been considering the industry trend toward private
label sales. In 1997, a limited evaluation of the private label concept by
DeCA staff suggested, at that time, that (1) DeCA customers appeared to be
demographically ideal purchasers of low cost private label products, (2) a
private label program would be impractical for DeCA because it may not
reduce overall prices and would require significant operations changes;
and, (3) it may be necessary for DeCA to respond to industry trends by
selectively carrying low cost alternative products. 18 In July 2000, DeCA
started its *Best Value Items* program, which offers name brand products
at the lowest prices DeCA can obtain. The Best Value Items program
responds, in part, to a commissary customer*s request to DeCA*s director
for private label products, and the recognition by DeCA that commissaries
were at a competitive disadvantage compared to private label programs in
serving some customers, such as its younger service members who desire the
lowest priced products. As of September 2002, DeCA*s Best Value Item
program contained about 400 items and
16 Information Resources, Inc., as reported by the Private Label
Manufacturers Association for 2001. 17 Standard and Poor*s, Supermarkets
and Drugstores (New York, N. Y.: Aug. 2001).
18 Analyses of the financial issues and alternatives for implementing a
private label concept were not included.
Page 15 GAO- 03- 160 Defense Commissary Opportunities
accounted for about 2.3 percent of DeCA annual dollar sales, according to
DeCA information.
In discussing the potential for private label products, DeCA officials
raised concerns about the effects of a private label program that require
serious consideration. DeCA officials said that the private label concept
may not increase customer traffic from current levels, nor succeed in
reducing product costs overall. More specifically, DeCA officials noted
that the private label concept could be difficult for DeCA to initiate,
and the DeCA*s major suppliers may respond by raising prices on products
now sold through commissaries and withdraw the labor support that they now
provide to commissaries. According to DeCA officials, there would also be
implementation issues such as (1) the pricing of products, which may
require a change in DeCA*s legal authority if variable pricing would be
helpful; (2) the expense of advertising DeCA private label products; and
(3) controls over product quality. Due to these concerns, DeCA officials
have not performed a thorough study of the potential for selling private
label products.
On the other hand, the Department of Defense has stated that it is
important for the future of the commissary system to focus on the emerging
trends in the supermarket industry and for commissaries to be positioned
to retain their appeal. In addition, the department has in the past
expressed concern that discount retailing could lead to strong competition
for military members* business in common markets. In discussing the
potential offered by private label products, as well as the issues that
would be involved, DeCA*s Director concluded that although there may be
difficulties associated with the application of the private label concept
to commissaries, it would be reasonable to perform a study to determine
whether the sale of private label products could enhance the commissary
benefit overall.
The legal requirement that name brand products must first be introduced
through multiple retail operations on at least a regional basis may
preclude DeCA from purchasing some small business brand name products that
it may desire to purchase. In addition, this requirement may thereby have
the effect of lessening the opportunities to implement the federal policy
of fostering the development of small businesses. We recognize that even
if this provision is removed from the law or some other adjustment is made
to the requirement to open the door to the consideration of all small
business products offered to DeCA, it is uncertain whether there will be a
positive effect on the sales of small business products in commissaries
Conclusions
Page 16 GAO- 03- 160 Defense Commissary Opportunities
because commissary shelf space is limited and open to competition.
Nevertheless, a change in the requirement could at least open the
opportunity for small businesses to make the case that their products
deserve a place on commissary shelves.
Private label products may provide further opportunities for DeCA to offer
its customers good alternatives in low- cost grocery retailing. The growth
of private label products in the grocery supermarket industry appears to
be a compelling trend, with thousands of private label products capturing
a portion of sales in major national supermarket chains, and significant
portions of particular product categories. Unless the potential for
private label products is examined more thoroughly than it has been thus
far, along with a review of implementation alternatives and the issues
that can be expected to arise if further steps in that direction were to
be taken, the potential for applying this successful retailing to the
benefit of commissary patrons will remain in question.
Because of the potential limitation on small businesses opportunity, GAO
recommends that the Secretary of Defense consult with the Administrator,
U. S. Small Business Administration, on the provision of law restricting
DeCA*s consideration of products that have not yet achieved regional
distribution, and together inform the Congress if small business
opportunity could be improved by removing or modifying the provision.
In addition, to evaluate the potential to better serve commissary
customers, GAO recommends that the Secretary of Defense perform a study to
examine the benefits, costs, and implementation issues associated with the
sale of private label products through commissaries, and act on study
results, as appropriate.
We requested comments from the Department of Defense on a draft of this
report. The department concurred with our recommendations and its comments
are presented in appendix V. Specifically, the department stated that (1)
it would consult with the Small Business Administration on whether to
suggest that the provision of law restricting the consideration of
products be modified or removed from law; and (2) that it will conduct a
study in 2003 to assess the potential benefits, costs and implementation
issues associated with selling private label products through
commissaries, and act on the results, as appropriate. In addition, DeCA
officials told us that they agreed with the contents of the draft report
and Recommendations for
Executive Action Agency Comments and Our Evaluation
Page 17 GAO- 03- 160 Defense Commissary Opportunities
they also provided some technical corrections and clarifications to the
draft report that we incorporated as appropriate.
We conducted our review from January 2000 through October 2002 in
accordance with generally accepted government auditing standards. Details
of our scope and methodology are discussed in appendix I.
As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days from
the date of this letter. We will then send copies to other appropriate
congressional committees; the Secretary of Defense; the Director, Defense
Commissary Agency; and the Director, Office of Management and Budget. We
will make copies available to others upon request. In addition, the report
will be available at no charge on the GAO Web site at http:// www. gao.
gov.
If you or your staff have any questions about this report, please call me
at (202) 512- 3841 or Charles Adams at 202- 512- 8010 or e- mail us at
dyckmanl@ gao. gov or adamsc@ gao. gov. Key contributors to this report
are listed in appendix VI.
Sincerely yours, Lawrence J. Dyckman Director, Natural Resources and
the Environment
Appendix I: Objectives, Scope, and Methodology
Page 18 GAO- 03- 160 Defense Commissary Opportunities
To determine the extent to which DeCA requires grocery suppliers to pay
for shelf space in commissaries, and DeCA*s large suppliers select the
products that are sold by commissaries, we reviewed U. S. Federal Trade
Commission documents and industry studies concerning slotting practices
and category management, reviewed DeCA documents, and interviewed DeCA and
industry officials. More specifically, we reviewed DeCA*s basic contract
with its suppliers, DeCA*s performance- based agreements for fiscal year
2000 and fiscal year 2001, DeCA category management documentation, and
studies and reports about DeCA*s history, organization, and operations 1 .
At DeCA headquarters at Fort Lee, Virginia, we met with DeCA*s Director,
and interviewed DeCA officials including among others, DeCA*s General
Counsel, category management officials, category managers, buyers, and
accounting and contracting officials. We also interviewed several of DeCA
suppliers including large distributors as well as individual companies. We
also visited commissaries located in Texas and Virginia to discuss
commissary operations and the use and management of commissary shelf
space. To determine whether small businesses face barriers in selling
their products in commissaries, we interviewed officials of DeCA*s Office
of Small and Disadvantaged Business Utilization; reviewed DeCA
correspondence on complains from small businesses; interviewed DeCA*s
regional officials involved in deciding whether the products of small
businesses would be attractive additions to DeCA selection of regional and
local products, and officials of small businesses supplying DeCA. We
contacted over 50 companies and discussed DeCA*s use of category
management, slotting fees, and sales of products from small businesses. In
addition, we interviewed officials of the Food Marketing Institute,
several industry trade associations, and the Private Label Manufacturers
Association.
To estimate commissary sales of the products of small businesses and
foreign businesses, we obtained a database from DeCA containing 45,200
products sold through commissaries over the 10- month period August 2000
through May 2001. For each product, the file contained the product*s brand
name, a commodity description, unit and dollar sales, and the Universal
Product Code. Also, at our request, DeCA officials classified each product
as being supplied by either a large or a small business based
1 For example, we reviewed reports pertinent to DeCA operations,
relationships with its suppliers, and operations including: SRA
International et al., Category Management Survey Final Report, (Arlington,
Va.: May 7, 1997) prepared for DeCA*s Marketing Business Unit; and the
Jones Commission, Office of the Assistant Secretary of Defense, DOD Study
of the Military Commissary System, (Washington, D. C.: Dec. 18, 1989).
Appendix I: Objectives, Scope, and
Methodology
Appendix I: Objectives, Scope, and Methodology
Page 19 GAO- 03- 160 Defense Commissary Opportunities
on its knowledge of its suppliers and the industry. We drew a random
sample of 700 products from DeCA*s population of products. 2 To assist in
verifying the identity of each company that produced or distributed each
product in our sample, we obtained information from the Uniform Code
Council, Inc., that enabled us to identify the company that obtained a
product*s Universal Product Code. We then matched DeCA*s product
information with the corresponding information from the Uniform Code
Council database. In some cases, the matching procedure was unsuccessful,
and we used the product brand name to identify the company that produced
or distributed the product. For the products in our sample, we verified
the parent companies, the size of each company, and identified foreign
companies. Our verification of the number of employees of each company was
based on data obtained from business sources available on the Internet and
phone calls we made to company representatives. We were able to determine
the size of the company 3 and its parent company, if any, and whether it
was foreign or domestic for 669 of the 700 products we sampled. The
proportions of small and foreign companies were estimated by determining
the number of products in the sample associated with each firm and then
using the collection of relative frequencies of each company to estimate
the percent of small and foreign companies in the population. We also used
this information to estimate the numbers of products produced by these
companies and sold by commissaries, and the dollar sales of their
products.
2 Because we followed a probability procedure based on random selections,
we are 95 percent confident that the confidence intervals in this report
include the true values in the population. All percentages we derived have
confidence intervals that extend no more than 10 percentage points away
from estimates, as do our numeric estimates, unless otherwise noted. We
used a resampling technique to derive the 95 percent confidence intervals
around the estimated proportions of small and foreign parent companies. To
do this, we generated 1, 000 repeated samples (resamples) of the same size
as the original sample (669), each time selecting products with
replacement from our original sample of products. The proportion of small
and foreign parent companies was calculated for each resample, generating
a distribution of 1,000 resampled percentages. We computed the 2.5% and
97. 5% percentile points of this distribution and used them as the
endpoints of our 95% confidence interval. Estimates and associated
confidence intervals for (1) the proportion of products from small and
foreign parent companies, (2) the total number of products from these
companies, and 3) the percent and total sales dollars of products sold
were derived using standard statistical estimation procedures.
3 Our classification of the size of companies was based on information
from the U. S. Small Business Administration.
Appendix II: Examples of the Terms of DeCA*s Performance- Based Agreements
Page 20 GAO- 03- 160 Defense Commissary Opportunities
Agreement number Length of
agreement Performance of promotion activities Basis for payments to DeCA
1 7 months 1. DeCA to expand bulk sales sections where practical. Space to
remain unchanged where previously expanded. Specific displays to be added
in the two largest store categories for 6- month period. 2. Company will
continue to have a dedicated sales
section in stores that excludes others products. 3. Two other sets of
products to be promoted for
3 months each. Company to pay a specified amount for
achievement of base annual sales volume. In addition, as sales increase
above the base annual volume, company to pay an increasing percent of
additional sales (up to 8 percent) to DeCA.
2 1 year DeCA to provide display of specific products at specified
commissaries. Company to make minimum specified
quarterly payments. Above minimum target sales, company to increase total
payments based on pounds of product sold. 3 16 months Company to place
freezers in specified number of
commissaries for display of company products. Company to make specified
payment at end of performance period. 4 1 year DeCA to promote and display
specified products on
various timetables such as once per quarter, and two times over one year
period.
Company to pay specified amount for each primary display plus a bonus
based on percent of invoiced dollar sales, with the percent increasing at
specified sales amounts. 5 1 year 1. Off shelf displays to occur in each
of 24 display
periods. DeCA to allocate space for company to build and maintain
displays. Only company brands to be placed on company display equipment.
2. DeCA to provide a minimum of 1 endcap or shoparound display in
specified stores. In other specified
stores, DeCA to provide a table, rack, or other display space for company
use. 3. DeCA to promote two specific brand products. 4. Competitors to
have *proper allocation* of shelf
space. Company shelf space to be based on sales volume and agreed formula.
Company to pay specified quarterly cash payment.
Company to provide various promotions of a specified value in
coordination with DeCA*s category manager.
6 1 year DeCA to execute specified number of primaries/ power buys in
various product categories. Company to make specified payments to
DeCA per agreement based on performance. Also, incentive payments added
when sales reach or exceed 105 percent of base. 7 1 year 1. DeCA to allow
racks for display of company
products. Rack types specified in agreement. 2. Specific products to be
displayed in off the shelf
locations a specified number of times per year. Company to pay a specified
amount
per rack. 8 1 year DeCA to use company display rack at all commissaries
for company product. DeCA to follow company specified annual promotion
plan.
Company to make specified payments to DeCA for each rack placed in use.
Source: GAO*s analysis of DeCA*s performance based agreements.
Appendix II: Examples of the Terms of DeCA*s Performance- Based Agreements
Appendix III: Steps in DeCA*s Category Management Process
Page 21 GAO- 03- 160 Defense Commissary Opportunities
The basic steps in DeCA*s category management reviews, based on GAO*s
analysis of DeCA documents and interviews with DeCA officials, are as
follows:
1. DeCA announces a category review including the goals of the review, and
invites companies supplying products to supply information and analyses of
product sales and trends within the category.
2. DeCA conducts individual meetings with interested companies, including
manufacturers, brokers, and broker- distributors, at Fort Lee, Virginia.
DeCA receives information developed by participating companies and listens
to company presentations and recommendations for the category.
3. DeCA*s category buyer obtains market information from Information
Resources, Inc., on the performance of products within the category. This
information is gathered from cash register scanner data, and it shows for
each product such data as number of items sold, dollar value of sales, and
changes from prior periods. The data provides a basis for comparative
analyses of sales patterns.
4. DeCA*s buyer analyzes data provided by Information Resources, Inc.,
along with data and recommendations submitted by participating companies.
Based on the buyer*s analysis, the buyer prepares a schedule of its
category decisions indicating which products will be added, which will be
retained with or without distribution changes, and which will be deleted
from inventory.
5. DeCA officials develop and sign- off on shelving plans called *plan- o-
grams* illustrating how nationally distributed products are to be arranged
and that provide shelf space for products that have been specifically
selected to meet regional and local demand. These plans are used as guides
for resetting products on the shelves of individual commissary stores.
Under DeCA*s supervision and with the participation of product
distributors, brokers, and manufacturers representatives, products on the
shelves of individual commissary stores are periodically reset based on
DeCA*s display plans.
6. DeCA releases its category review decisions and solicits comments from
companies participating in the category. Appendix III: Steps in DeCA*s
Category
Management Process
Appendix III: Steps in DeCA*s Category Management Process
Page 22 GAO- 03- 160 Defense Commissary Opportunities
7. DeCA responds in writing to each company that objects to DeCA*s
decisions (an objection to a DeCA decision is termed a *reclama*), and
usually provides a brief explanation for its decision.
8. After a 90- day period, DeCA removes deleted items from its stock
system.
Appendix IV: Top 20 Private Label Product Categories in the Supermarket
Industry, 2001
Page 23 GAO- 03- 160 Defense Commissary Opportunities
Dollar volume leaders Dollar value
1. Milk $6.4 billion 2. Cheese 2. 3 billion 3. Fresh bread & rolls 2. 1
billion 4. Fresh eggs 1.6 billion 5. Ice cream/ sherbet 1.0 billion 6.
Carbonated beverages 909 million 7. Juice/ Beverages* refrigerated 714
million 8. Vegetables 688 million 9. Frozen plain vegetables 680 million
10. Sugar 629 million 11. Bottled juices 573 million 12. Cold cereal 496
million 13. Cups and plates 486 million 14. Butter 484 million 15. Canned/
bottled fruit 446 million 16. Entree/ side dishes 443 million 17. Food and
trash bags 433 million 18. Luncheon meats 415 million 19. Breakfast meats
408 million 20. Cookies 407 million
Source: Information Resources, Inc., data as reported by the Private Label
Manufacturers Association.
Appendix IV: Top 20 Private Label Product Categories in the Supermarket
Industry, 2001
Appendix V: Comments from the Department of Defense
Page 24 GAO- 03- 160 Defense Commissary Opportunities
Appendix V: Comments from the Department of Defense
Appendix V: Comments from the Department of Defense
Page 25 GAO- 03- 160 Defense Commissary Opportunities
Appendix VI: GAO Contact and Staff Acknowledgments
Page 26 GAO- 03- 160 Defense Commissary Opportunities
Charles M. Adams, (202) 512- 8010 In addition to the name above, Nancy
Crothers, Robert Crystal, James Dishmon, Curtis Groves, Frank Papineau,
and Sidney Schwartz made key contributions to this report. Appendix VI:
GAO Contact and Staff
Acknowledgments GAO Contact Acknowledgments
(360028)
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