Defense Commissaries: Issues Related to the Sale of Electronic Scanner
Data (Letter Report, 06/26/98, GAO/NSIAD-98-146).
Pursuant to a congressional request, GAO reviewed the Defense Commissary
Agency's (DeCA) sale of scanner data and its implementation of category
management, focusing on DeCA's: (1) total revenue from selling scanner
data and the comparison of license revenues to amounts offered by firms
responding to the June 1995 solicitation; (2) implementation of category
management as it relates to requirements contained in the 1995
solicitation; and (3) future plans regarding category management,
scanner data sales, and potential development of an in-house market
analysis capability.
GAO noted that: (1) DeCA collected almost $6.1 million from the sale of
its scanner data from January 1991 through March 1998; (2) about $4
million, or 65 percent of the total, was collected from the Air Force
contract awarded in 1989; (3) the remaining 35 percent, almost $2.1
million, came from the license agreements; (4) DeCA received slightly
over $1 million annually from these licenses--an amount significantly
less than the minimum proceeds guaranteed by two offerors under the 1995
solicitation; (5) the selected firm offered a 5-year annual average
minimum payment of almost $2.5 million; (6) DeCA officials cited several
reasons for the lower amount received from the license agreements,
including the interim, nonexclusive nature of the sale and uncertainties
regarding the litigation; (7) according to a DeCA official, a new spot
bid sale of DeCA's scanner data had been planned before the Court of
Appeals' May 19, 1998, ruling, and increased revenue had been expected
from this effort; (8) since 1994, DeCA has been implementing the
category management concept and techniques into its operations; (9)
according to DeCA officials, the type and level of category management
assistance contained in the 1995 solicitation is no longer necessary;
(10) DeCA reorganized its buying function in mid-1994 to model the type
of organization required to support the category management concept;
(11) subsequently, it implemented a category management planning
process; trained personnel; established product categories and completed
many category plans; and began efforts to improve or replace data
information and collection systems, including acquiring new store
scanners; (12) according to DeCA officials, existing category management
capabilities need refinement, but the capabilities envisioned in the
solicitation are no longer appropriate, resulting in the decision to
cancel the requirement for category management services; (13) with
resolution of the litigation associated with the 1995 solicitation, DeCA
still plans to continue licensing its raw scanner data to multiple
buyers and further refine its category management system; and (14)
officials stated that DeCA has no plan or desire to develop an in-house
market analysis capability for the purpose of selling refined DeCA
scanner data products to vendors and suppliers.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: NSIAD-98-146
TITLE: Defense Commissaries: Issues Related to the Sale of
Electronic Scanner Data
DATE: 06/26/98
SUBJECT: Air Force procurement
Revenue sharing
Marketing
Litigation
Sales contracts
Post exchanges
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Cover
================================================================ COVER
Report to Congressional Requesters
June 1998
DEFENSE COMMISSARIES - ISSUES
RELATED TO THE SALE OF ELECTRONIC
SCANNER DATA
GAO/NSIAD-98-146
Defense Commissaries
(709250)
Abbreviations
=============================================================== ABBREV
ADP - Automated data processing
DeCA - Defense Commissary Agency
GSBCA - General Services Administration Board of Contract Appeals
Letter
=============================================================== LETTER
B-275202
Letter Date Goes Here
The Honorable Constance Morella
The Honorable Roscoe Bartlett
House of Representatives
The Defense Commissary Agency (DeCA) operates approximately 300
Department of Defense commissary stores. In addition to the revenue
received from store sales, DeCA also generates revenue by selling the
data collected through its electronic scanners that register prices
and goods sold. From January 1991 to March 1996, one firm had an
exclusive rights\1 contract for this data.
In June 1995, DeCA solicited offers for a new 5-year, exclusive
rights scanner data contract. The winning firm, in addition to
paying for the data, was to provide DeCA expertise in implementing
"category management," a system by which retailers manage product
categories (e.g., pet foods and beauty products) as strategic
business units and track consumer preferences in these categories.
However, shortly after DeCA selected a firm, the other competitors
filed a protest with the General Services Administration Board of
Contract Appeals (GSBCA). The GSBCA upheld the protest, which was
appealed to a federal court. Subsequently, on May 19, 1998, the
court vacated GSBCA's earlier decision and granted motions to dismiss
the appeal. During the relatively lengthy litigation period, DeCA
entered into a nonexclusive\2 license agreement with three firms,
pursuant to a "spot bid sale," for the monthly use of the scanner
data. Appendix I contains a chronology of events related to the sale
of DeCA's scanner data.
In response to your request that we review DeCA's sale of scanner
data and its implementation of category management, this report
-- identifies DeCA's total revenue from selling scanner data and
compares license revenues (amounts received after March 1996) to
amounts offered by firms responding to the June 1995
solicitation,
-- examines DeCA's implementation of category management as it
relates to requirements contained in the 1995 solicitation, and
-- discusses DeCA's future plans regarding category management,
scanner data sales, and potential development of an in-house
market analysis capability.
--------------------
\1 According to DeCA officials, exclusive rights means that the
winning firm would be the only firm to receive and use the raw
scanner data, and all other firms or individuals would be excluded
from this data.
\2 Nonexclusive means that any firm obtaining a license would simply
have the right to use the raw scanner data; DeCA would retain all
ownership, right, and title to the data.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
DeCA collected almost $6.1 million from the sale of its scanner data
from January 1991 through March 1998. About $4 million, or 65
percent of the total, was collected from the Air Force contract
awarded in 1989. The remaining 35 percent, almost $2.1 million, came
from the license agreements. DeCA received slightly over $1 million
annually from these licenses--an amount significantly less than the
minimum proceeds guaranteed by two offerors under the 1995
solicitation. The selected firm offered a 5-year annual average
minimum payment of almost $2.5 million. DeCA officials cited several
reasons for the lower amount received from the license agreements,
including the interim, nonexclusive nature of the sale and
uncertainties regarding the litigation. According to a DeCA
official, a new spot bid sale of DeCA's scanner data had been planned
before the Court of Appeals' May 19, 1998, ruling, and increased
revenue had been expected from this effort.
Since 1994, DeCA has been implementing the category management
concept and techniques into its operations. According to DeCA
officials, the type and level of category management assistance
contained in the 1995 solicitation is no longer necessary. DeCA
reorganized its buying function in mid-1994 to model the type of
organization required to support the category management concept.
Subsequently, it implemented a category management planning process;
trained personnel; established product categories and completed many
category plans; and began efforts to improve or replace data
information and collection systems, including acquiring new store
scanners. According to DeCA officials, existing category management
capabilities need refinement, but the capabilities envisioned in the
solicitation are no longer appropriate, resulting in the decision to
cancel the requirement for category management services.
With resolution of the litigation associated with the 1995
solicitation, DeCA still plans to continue licensing its raw scanner
data to multiple buyers. Further, DeCA hopes to continue selling
scanner data to multiple buyers and further refine its category
management system. Officials stated that DeCA has no plan or desire
to develop an in-house market analysis capability for the purpose of
selling refined DeCA scanner data products to vendors and suppliers.
BACKGROUND
------------------------------------------------------------ Letter :2
Commissaries are supermarket-type grocery stores operated primarily
for military personnel. As part of the armed forces' overall
compensation package, these stores sell food and household items tax
free at cost, plus a 5-percent surcharge. Commissaries use
point-of-sale electronic scanners to record sales and collect
specific data on items sold (e.g., the brand name, quantity, and
price). Raw scanner data has considerable commercial value when it
is processed into product movement and other reports and sold to
DeCA's suppliers and vendors.
The first contract for the sale of commissary scanner data was
awarded in October 1989 by the Air Force under 10 U.S.C. 2487,\3 2
years before the October 1991 consolidation of all service
commissaries under DeCA. The 5-year contract gave the contractor
exclusive rights to the scanner data. The contract was implemented
in early 1991 following a delay due to a protest and ended in March
1996.
In June 1995, DeCA solicited offers for a new contract. The
solicitation called for a basic performance period of 3 years--1996
through 1998--with two 1-year options. The winning firm would
receive exclusive rights to the scanner data and pay DeCA the higher
of (1) a guaranteed minimum annual sum or (2) a percentage of the
contractor's gross receipts from selling information derived from the
scanner data. Unlike the terms of the previous contract, the 1995
solicitation also required the awardee to (1) help DeCA develop a
category management system, (2) train DeCA personnel in category
management concepts and techniques, and (3) provide category
management consultation and analysis services to DeCA.
DeCA received proposals from four firms and subsequently made its
selection in October 1995. In November 1995, the firms that were not
selected filed a protest with the GSBCA, arguing that the procurement
was for automated data processing services and that DeCA did not have
the required delegation of procurement authority from the General
Services Administration. One firm subsequently withdrew from the
protest. In February 1996, the GSBCA ruled in favor of the
protesters, declaring that the award was void. The contract awardee
subsequently appealed this decision to the Court of Appeals (Federal
Circuit). On May 19, 1998, the court vacated GSBCA's earlier
decision and granted motions to dismiss the appeal.
In early May 1996, DeCA announced its decision, pending the outcome
of the litigation, to license the rights to the use of the scanner
data on a monthly, nonexclusive basis The highest bid received
established the monthly price for all purchasers. Each firm wanting
to purchase the scanner data was issued a license valid until 30 days
following the resolution of the litigation.
--------------------
\3 Congress enacted this law in 1986 to authorize the sale of
commissary scanner data using competitive procedures.
REVENUE SUMMARY AND COMPARISON
------------------------------------------------------------ Letter :3
From 1991 through March 1996, DeCA received nearly $4 million, or an
annual average of almost $750,000, from the sale of scanner data
under the contract awarded in 1989. In 1995, the last full year of
the contract, DeCA collected over $1.1 million. DeCA's revenue from
this contract increased each year as the contractor's total product
sales increased.
In May 1996, DeCA decided to license the use of its scanner data on a
monthly basis because of the ongoing litigation at the time. Since
then, each of three firms has paid DeCA $30,000 per month (the
highest bid) for the scanner data--a total of almost $2.2 million for
the 2 years ending March 1998. At the time of the bid, DeCA
anticipated resolution of the litigation within 8 to 18 months, at
which time the licenses would terminate. Table 1 lists the revenue
collected annually by DeCA from each scanner sale source.
Table 1
Scanner Revenue Collected Annually by
Source
License
Year 1989 contract agreements Total
------------------------- ------------- ------------- =============
1991 $315,417 0 $315,417
1992 501,278 0 501,278
1993 772,556 0 772,556
1994 1,009,076 0 1,009,076
1995 1,118,235 0 1,118,235
1996 214,020\a $810,000\b 1,024,020
1997 0 1,080,000 1,080,000
1998 0 270,000\c 270,000
======================================================================
Total $3,930,582 $2,160,000 $6,090,582
----------------------------------------------------------------------
\a January through March 1996.
\b April through December 1996.
\c January through March 19998.
Annual revenue from the license agreements is less than two offers
received in response to the 1995 solicitation and about $1.4 million
less than the offer made by the selected firm. Specifically, the
selected firm offered an annual average payment of almost $2.5
million over the 5-year period--1996 through 2000--covered by DeCA's
solicitation.
According to DeCA officials, following DeCA's technical evaluation of
the offers received, two firms were tied and one was rejected because
its technical score was not high enough to be considered. The tie
breaker--guaranteed revenue--was invoked for the two remaining firms.
The revenue guaranteed to DeCA by one firm was less than the amount
currently being received under the license agreements, whereas the
firm that was eventually selected offered more revenue. The highest
offer, in terms of guaranteed revenue, was made by the rejected
offeror.
According to officials from DeCA, the revenue from the license
agreements was lower than amounts guaranteed under the 1995
solicitation primarily because of the expected short-term and
nonexclusive nature of the licenses and uncertainties regarding the
litigation. In addition, the value of the monthly data was reduced
for two firms because DeCA could not provide the historical sales
data from the 1989 contract, which granted the contractor exclusive
rights to that information. Thus, the value of the monthly data for
these firms was reduced because certain trend analyses and other
reports, which require about 1 year of data to produce, could not be
generated from the licensed data.
CATEGORY MANAGEMENT
IMPLEMENTATION
------------------------------------------------------------ Letter :4
Category management is a relatively new marketing concept that has
been evolving in the U.S. retail industry since the late 1980s and
early 1990s. It is a mechanism and process to manage product
categories as strategic business units or entities and attempts to
shift the traditional management approach from "sell what you
purchase" to "buy what sells." Customized merchandising and marketing
plans, called category plans, are developed through a cooperative
retailer/supplier process for specific product categories, such as
soft drinks, pet foods, and beauty products. Information developed
from raw scanner data and other sources is assessed to determine
category strategies and consider how prices, advertising, and
promotional efforts compare with the competition.
DeCA, aware of the increasing use of category management in the
retail marketplace, decided to adopt the concept in order to remain
competitive and meet the needs of its customers. Thus, in June 1994,
DeCA reorganized its buying organization to model the type of
operation needed to support category management. DeCA also evaluated
in-house category management capabilities and found it had little
experience in the area.
During this period, DeCA started the planning process to develop a
new solicitation for the sale of scanner data. DeCA decided to use
an exchange/sale-type contract. In exchange for DeCA's product
movement or scanner data, the contractor would provide monetary
payments and services to assist DeCA in (1) developing a category
management capability, (2) training personnel in category management
concepts and techniques, and (3) providing category management
consultation and analysis services.
After the selection of the winning offeror was protested in November
1995, DeCA continued to implement category management. As a result,
DeCA believes it has developed most of the capability sought under
the 1995 solicitation through the use of in-house and outside
resources. Specifically, DeCA has
-- completed the reorganization of its buying function, called the
Marketing Business Unit, and increased its staffing from 83 to
122 by transferring positions obtained from regional
consolidation;
-- implemented a category management planning process, using a food
industry association study;
-- developed a category management template, a key document in the
category management process, to collect movement and other data
on products from vendors and suppliers;
-- identified 118 product categories to manage as business units
and completed 72 associated category plans; and
-- initiated actions to improve or replace data information and
collection systems,\4 including new front-end scanners.
Although progress has been made, DeCA does not have some capabilities
that would likely exist if the 1995 award had not been protested.
For example, DeCA does not currently have (1) direct access to
private sector comparative market information or causal information\5
or (2) a routine support arrangement with a private sector category
management consultant. In September 1996, citing the progress made
in implementing category management, DeCA officials canceled the
requirement for category management services contained in the 1995
solicitation. During the period in which litigation was ongoing,
DeCA relied on information provided by vendors and suppliers for
comparative and causal information as category plans were prepared
and revised.
--------------------
\4 DeCA is modernizing a number of systems, including new scanners
for all commissaries. Other programs include the Defense Commissary
Information System and Telecommunications Modernization. These core
business improvements complement, but are not driven, by the
implementation of category management.
\5 Comparative market data analyzes DeCA sales of same or similar
product categories to private sector stores in competitive geographic
areas; causal data provides consumer demographics and information on
the effectiveness of product promotions and sales displays in
commissary stores.
FUTURE PLANS
------------------------------------------------------------ Letter :5
DeCA plans to continue its existing programs to upgrade and replace
information systems and equipment. Further, DeCA hopes to continue
the licensing of scanner data to multiple buyers (as is done in the
private sector) and further refine its category management system by
adopting the best practices and characteristics of the private
sector's category management procedures and processes. Before the
recent Court of Appeals' ruling, DeCA had also planned to conduct
another spot bid sale in the near future in response to direction
from the Office of the Secretary of Defense.
Ultimately, DeCA would like to establish a relationship with a
scanner data processor modeled after the practices followed in the
private retail sector to provide periodic category management
consultation and analysis work. Officials stated that DeCA has no
plan or desire to develop an in-house market analysis capability for
the purpose of selling refined DeCA scanner data products to vendors
and suppliers.
CONCLUSIONS
------------------------------------------------------------ Letter :6
Due to several factors, such as uncertainties regarding the
litigation associated with the 1995 solicitation, the annual revenue
of $1 million that DeCA has received from its scanner data license
agreements is considerably less than the potential minimum proceeds
guaranteed by offers to the 1995 solicitation.
DeCA began implementing category management in 1994 and continued the
process utilizing both in-house and outside resources. Although DeCA
presently lacks some of the capabilities included in the 1995
solicitation, DeCA officials believe that sufficient progress had
been achieved to warrant the cancellation of the requirement for the
level of category management services thought appropriate at that
time. DeCA hopes to continue selling scanner data to multiple buyers
and refining its category management system.
AGENCY COMMENTS
------------------------------------------------------------ Letter :7
In written agency comments, the Department of Defense stated that our
report accurately presents the facts associated with these issues.
(See appendix II).
SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :8
To accomplish our objectives regarding DeCA's sale of electronic
scanner data and the status, implementation, and future plans
associated with category management, we conducted work primarily at
offices in the Office of the Secretary of Defense in Washington,
D.C.; DeCA headquarters at Fort Lee, Virginia; and the offices of the
three remaining firms that submitted offers for the 1995 category
management solicitation. These firms are located in Bethesda,
Maryland; McLean, Virginia; and Chicago, Illinois.
To compare the revenue that DeCA received under the previous Air
Force contract and the revenue received under the license agreements,
we obtained the amount of payments received by DeCA from firms for
scanner data between January 1991 through March 1998.
To document DeCA's progress in implementing category management, we
reviewed the June 1995 solicitation and data documenting DeCA's
present category management capability. We also reviewed DeCA's
newly developed category management policies, procedures, category
plans, personnel training, and plans to improve or replace data
information and collection systems. We obtained data on DeCA's
progress in acquiring capabilities that were sought under the
category management solicitation from DeCA officials in the agency's
newly formed Marketing Business Unit.
To assess how DeCA plans to structure future awards for the sale of
raw scanner data and perform market analysis, we held discussions
with DeCA's top management, contract managers, and attorneys
concerning plans to (1) continue licensing the data, (2) establish a
relationship with a scanner data processor modeled after practices
followed in the private sector, (3) comply with the court decision,
(4) continue selling to multiple sources, and (5) develop an in-house
market analysis capability.
We performed our work in accordance with generally accepted
government auditing standards.
---------------------------------------------------------- Letter :8.1
We are sending copies of this report to interested congressional
committees and Members of Congress, the Secretary of Defense, and the
Directors of DeCA and the Office of Management and Budget. If you
have any questions regarding this report, please contact me at (202)
512-8412. Major contributors to this report are listed in appendix
III.
David R. Warren, Director
Defense Management Issues
CHRONOLOGY OF EVENTS
=========================================================== Appendix I
1986: Congress enacted 10 U.S.C. 2487, which authorizes the sale of
commissary raw scanner data using competitive procedures.
1989: The Air Force, on behalf of the various commissary agencies of
the military services, awarded a 5-year contract for the sale of raw
scanner data to a single contractor. The contract gave the
contractor exclusive rights to the data but did not include providing
category management services. This contract was protested to the
General Services Administration Board of Contract Appeals (GSBCA),
causing a start-up delay.
January 1991: After a delay of 16 months, the Air Force contract
started.
October 1991: The military services' commissaries were consolidated
under the Defense Commissary Agency (DeCA). An agreement between the
contractor and DeCA recognized that the new agency was organized
differently from the previous military services' commissary systems.
Accordingly, the contract was again delayed to permit the contractor
to purchase and deploy the computers necessitated by the new
organizational structure and DeCA's different information
requirements.
June 1995: DeCA issued a solicitation for a new contract to sell
scanner data and obtain category management services. The contractor
would make an annual payment and receive exclusive rights to DeCA's
scanner data.
October 1995: DeCA made its selection from the four proposals that
were received.
November 1995: All three unsuccessful offerors filed a protest with
the GSBCA, arguing that the contract was for automated data
processing services and that DeCA did not have the required
delegation of procurement authority. (One firm subsequently dropped
out of the appeal.)
February 1996: The GSBCA agreed that DeCA did not have a required
delegation of procurement authority and upheld the protest, declaring
that the contract was void ab initio.
March 1996: The former 1989 Air Force contract expired. Also, the
successful offeror under the 1995 solicitation appealed GSBCA's
decision to the Court of Appeals (Federal Circuit), arguing that DeCA
did have proper authority to award the contract.
May 1996: To continue scanner-generated revenue, DeCA announced its
spot bid sale as an interim measure. DeCA entered into a license
arrangement with one firm.
September 1996: DeCA entered into license agreements with the
remaining two firms. Also, the firm that DeCA had selected under the
1995 solicitation filed a lawsuit in Federal District Court to stop
the licensing of DeCA's scanner data to other firms. The firm argued
that it had an exclusive license to scanner data. At this time, DeCA
canceled the 1995 requirement for category management services.
October 1996: Reflecting DeCA's cancellation of the category
management requirement, the Department of Justice filed a motion to
dismiss the March 1996 appeal as moot. Also, the District Court
ruled that DeCA may license data to other firms. This decision was
appealed to the Court of Appeals (4th Circuit).
July 1997: The Court of Appeals (4th Circuit) affirmed the District
Court's ruling that DeCA may license scanner data to others as an
interim measure.
May 1998: The Court of Appeals (Federal Circuit) vacated GSBCA's
February 1996 decision and granted motions to dismiss.
(See figure in printed edition.)Appendix II
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
=========================================================== Appendix I
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III
NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C.
------------------------------------------------------- Appendix III:1
James Wiggins, Associate Director
Foy Wicker, Assistant Director
Jennifer Thomas, Evaluator-in-Charge
OFFICE OF THE GENERAL COUNSEL
------------------------------------------------------- Appendix III:2
Raymond J. Wyrsch, Senior Attorney
*** End of document. ***