[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
[H.A.S.C. No. 113-70]
MILITARY RESALE PROGRAMS OVERVIEW
__________
HEARING
BEFORE THE
SUBCOMMITTEE ON MILITARY PERSONNEL
OF THE
COMMITTEE ON ARMED SERVICES
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
NOVEMBER 20, 2013
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______
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SUBCOMMITTEE ON MILITARY PERSONNEL
JOE WILSON, South Carolina, Chairman
WALTER B. JONES, North Carolina SUSAN A. DAVIS, California
JOSEPH J. HECK, Nevada ROBERT A. BRADY, Pennsylvania
AUSTIN SCOTT, Georgia MADELEINE Z. BORDALLO, Guam
BRAD R. WENSTRUP, Ohio DAVID LOEBSACK, Iowa
JACKIE WALORSKI, Indiana NIKI TSONGAS, Massachusetts
CHRISTOPHER P. GIBSON, New York CAROL SHEA-PORTER, New Hampshire
KRISTI L. NOEM, South Dakota
Craig Greene, Professional Staff Member
Debra Wada, Professional Staff Member
Colin Bosse, Clerk
C O N T E N T S
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CHRONOLOGICAL LIST OF HEARINGS
2013
Page
Hearing:
Wednesday, November 20, 2013, Military Resale Programs Overview.. 1
Appendix:
Wednesday, November 20, 2013..................................... 23
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WEDNESDAY, NOVEMBER 20, 2013
MILITARY RESALE PROGRAMS OVERVIEW
STATEMENTS PRESENTED BY MEMBERS OF CONGRESS
Davis, Hon. Susan A., a Representative from California, Ranking
Member, Subcommittee on Military Personnel..................... 2
Wilson, Hon. Joe, a Representative from South Carolina, Chairman,
Subcommittee on Military Personnel............................. 1
WITNESSES
Bianchi, RDML Robert J., SC, USN (Ret.), Chief Executive Officer,
Navy Exchange Service Command.................................. 4
Dillon, William C., Director, Semper Fit and Exchange Services
Division, Manpower and Reserve Affairs, U.S. Marine Corps...... 8
Gordy, Thomas T., President, Armed Forces Marketing Council...... 10
Jeu, Joseph H., Director and Chief Executive Officer, Defense
Commissary Agency.............................................. 7
Nixon, Patrick B., President, American Logistics Association..... 8
Shull, Thomas C., Director and Chief Executive Officer, Army and
Air Force Exchange Service..................................... 6
Williams, Rosemary Freitas, Deputy Assistant Secretary of Defense
for Military Community and Family Policy, U.S. Department of
Defense........................................................ 3
APPENDIX
Prepared Statements:
Bianchi, RDML Robert J....................................... 58
Davis, Hon. Susan A.......................................... 29
Dillon, William C............................................ 93
Gordy, Thomas T.............................................. 128
Jeu, Joseph H................................................ 80
Nixon, Patrick B............................................. 102
Shull, Thomas C.............................................. 70
Williams, Rosemary Freitas................................... 31
Wilson, Hon. Joe............................................. 27
Documents Submitted for the Record:
National Military Family Association Statement for the Record 151
Witness Responses to Questions Asked During the Hearing:
Mrs. Davis................................................... 159
Questions Submitted by Members Post Hearing:
Mr. Wilson................................................... 163
MILITARY RESALE PROGRAMS OVERVIEW
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House of Representatives,
Committee on Armed Services,
Subcommittee on Military Personnel,
Washington, DC, Wednesday, November 20, 2013.
The subcommittee met, pursuant to call, at 2:43 p.m., in
room 2212, Rayburn House Office Building, Hon. Joe Wilson
(chairman of the subcommittee) presiding.
OPENING STATEMENT OF HON. JOE WILSON, A REPRESENTATIVE FROM
SOUTH CAROLINA, CHAIRMAN, SUBCOMMITTEE ON MILITARY PERSONNEL
Mr. Wilson. Ladies and gentlemen, the hearing will come to
order. Welcome to a meeting of the House Armed Services
Subcommittee on Military Personnel.
Today, the subcommittee will examine the military resale
programs within the Department of Defense, specifically how the
military resale community will continue to provide appreciated
benefits to service members, their families, and retirees in a
fiscally constrained environment.
The military exchanges, the commissary and the Morale,
Welfare, and Recreation programs are acknowledged as highly
valuable and appreciated benefits that support Active Duty
retention, the well-being of the military community, and the
readiness of the force. The commissaries, exchanges, and
Morale, Welfare, and Recreation programs have long provided
extraordinary savings to their patrons as well as job
opportunities for military spouses and families, which I view
as critical during the past years of economic challenges.
The continued fiscal pressures on the defense budget have
caused the Department and services to look at initiatives to
reduced appropriated funding for these programs. As Congress
debates the devastating reductions to the defense accounts that
are associated with the sequestration, it is critical that we
hear from the Department and the military resale community to
reinforce the importance of these programs to the All-Volunteer
Force, but also, how the resale community is working together
to ensure this valuable benefit is maintained even in a
fiscally constrained environment.
I remain a strong supporter of the military commissaries,
exchanges, and the Morale, Welfare, and Recreation programs and
will continue to work to ensure these programs continue to
provide the effective benefits our men and women in uniform
deserve.
I agree with President Obama, who spoke at Camp Pendleton
on August 7, 2013, where he said, quote, ``Hardworking folks
are getting furloughed, families getting by on less, fewer
ships available for your training exercises, the commissaries
your families rely on closed a day a week. We can do better
than that. That is not how a great nation should be treating
its military and military families,'' end of quote.
I would like to welcome our distinguished witnesses: first,
Ms. Rosemary Freitas Williams, the Deputy Assistant Secretary
of Defense, Military Community and Family Policy, Office of the
Under Secretary of Defense for Personnel and Readiness; Mr.
Robert J. Bianchi, Rear Admiral, retired, Chief Executive
Officer of the Navy Exchange Service Command; Thomas Shull,
Director and CEO [Chief Executive Officer] of the Army and Air
Force Exchange Program; Mr. Joseph Jeu, the Director and Chief
Executive Officer of the Defense Commissary Agency; Mr. William
C. Dillon, the Director, Semper Fit and Exchange Services,
Manpower and Reserve Affairs Department, headquarters to the
U.S. Marine Corps; Mr. Patrick B. Nixon, president, American
Logistics Association; Mr. Thomas T. Gordy, president of the
Armed Forces Marketing Council.
Mrs. Davis, do you have any opening remarks?
[The prepared statement of Mr. Wilson can be found in the
Appendix on page 27.]
STATEMENT OF HON. SUSAN A. DAVIS, A REPRESENTATIVE FROM
CALIFORNIA, RANKING MEMBER, SUBCOMMITTEE ON MILITARY PERSONNEL
Mrs. Davis. Thank you, Mr. Chairman. I also want to welcome
our witnesses today.
And, to Ms. Williams, we are pleased to have you. And I
recognize that this is your first testimony before the
subcommittee, and we certainly look forward to your statement.
And I know the chairman introduced the rest of our panel
today, and we certainly welcome all of our witnesses back. They
are familiar to most of us. And we are glad that you are here
today.
This is our annual hearing on military resale and Morale,
Welfare, and Recreation [MWR] programs. It is important that we
hold this hearing each year and especially in these difficult
economic times because the resale programs and associated MWR
programs, as well, are so important and so valuable to the
military community.
Our Nation has been at war for nearly 12 years, and while
the pace of deployment and the number of troops being sent into
harm's way is decreasing, we know that the demand for support
services is not decreasing. And, in fact, we see many accounts
where it is doing just the opposite. Necessities like food and
clothing as well as larger programs like marriage counseling,
child care, transition programs, and alcohol treatment have all
increased in need.
The transition to a smaller force and the continued support
that our military service members and their families will need
is important if we are to ensure that the quality of life that
they have earned is provided for. The reality of the current
budget is upon us, and efforts to look at eliminating
commissary and exchange benefits as a way to reduce costs are
again being considered. Yet, we know that the commissary
remains the most valued benefit by service members, retirees,
and their families.
And except primarily for second-destination funds, the
exchanges actually provide a monetary benefit back to its
customers through the dividends that support MWR programs. And
the sad fact remains, however, that budget reviews tend to look
only at the bottom line and fail to assess the secondary or
even the unintended consequences of their recommendations.
That said, the commissaries and exchanges and MWR programs
have a fiduciary duty to ensure that they are providing the
most cost-efficient benefit. Because commissaries are supported
by taxpayer dollars and exchanges are supported by service
member dollars, both systems need to ensure that they are doing
all that they can to best utilize the resources that are
provided.
So I look forward to an open and frank discussion on these
issues. The dedication and the commitment of our military
resale employees have provided to military families under these
ongoing and challenging conditions. They have been outstanding,
and we are thankful for their contributions.
Thank you so much, Mr. Chairman. I look forward to our
witnesses.
[The prepared statement of Mrs. Davis can be found in the
Appendix on page 29.]
Mr. Wilson. Thank you, Mrs. Davis.
I now ask unanimous consent that a statement from the
National Military Family Association be included for the
record.
Without objection, so ordered.
[The information referred to can be found in the Appendix
on page 151.]
Mr. Wilson. Ms. Williams, we will begin with your
testimony.
As a reminder, please keep your statements to 3 minutes. We
have your written statements for the record. Following your
testimony, each subcommittee member will participate with
questions in rounds of 5 minutes each until adjournment.
STATEMENT OF ROSEMARY FREITAS WILLIAMS, DEPUTY ASSISTANT
SECRETARY OF DEFENSE FOR MILITARY COMMUNITY AND FAMILY POLICY,
U.S. DEPARTMENT OF DEFENSE
Ms. Williams. Thank you, Chairman Wilson, Ranking Member
Davis, for your strong support of the quality-of-life programs
for military members, their families, and survivors. Your
leadership and emphasis have kept the focus on the programs
that help keep our military strong and resilient.
Today, perhaps more than ever, the members of our military
community need to count on the resolve and commitment you have
so consistently displayed over the years for the very programs
they continue to depend on so heavily.
I am honored and humbled by the opportunity to serve as the
Deputy Assistant Secretary of Defense for Military Community
and Family Policy. Although I was sworn in just a little over 4
months ago, I bring to this position a passion for those who
serve and the people who support them.
My husband served as a marine for 20 years and deployed
shortly after we were married, so I feel a special bond with
those who must endure the heartache of family separations, the
worry and fear of multiple deployments, and challenges of
frequent moves. These experiences, as well as my professional
work with the Veterans Administration and military family
nonprofits, reinforce to me the value of the programs that now
fall into my portfolio--rather, excuse me, they do not fall
``into'' them; they fall ``in'' the portfolio. Excuse me.
My written statement highlights some major recent
achievements within the military family, community and family
policy organization. The statement then shifts the focus to the
current outlook for us and our resale partners in today's
reduced budget environment. Finally, it provides a quick
preview of some preliminary results from our Task Force on
Common Services as well as some other transformational
initiatives that hold great potential for our future.
As you well know, these are trying times for our military
community. Our people face unique challenges associated with
their military service: over a decade of engagement in hostile
operations overseas; multiple frequent deployments, many for
extended periods of time; uprooting the family for a move to a
different location for the needs of the service member; and the
continued uncertainty about the budget and funding levels. Our
civilian members have not been spared: furloughs that cut into
the family paycheck, hiring freezes, and elimination of pay
raises and awards.
Keeping in mind that sequestration has only been in effect
about 6 months. And without some relief, the Department faces 9
more years of steeper funding cuts and ever more unprecedented
fiscal uncertainty. At the very time of our community's
greatest need, these funding cutbacks pose great risk to the
programs and services on which our military members and their
families depend on for resilience.
Do not get me wrong. We are willing to do our part. My
written statement shows that we are looking for efficiencies
and ways to transform our programs to meet these fiscal
realities. But we can't expect the service members, past and
present, and their families to shoulder this burden alone and
to meet these challenges with even more of their personal
sacrifices.
I look forward to working with this subcommittee to meet
the needs of our military community, and thank you for your
continued support. I welcome your questions.
[The prepared statement of Ms. Williams can be found in the
Appendix on page 31.]
Mr. Wilson. Thank you very much, Ms. Williams.
And Admiral Bianchi.
STATEMENT OF RDML ROBERT J. BIANCHI, SC, USN (RET.), CHIEF
EXECUTIVE OFFICER, NAVY EXCHANGE SERVICE COMMAND
Admiral Bianchi. Chairman Wilson, Ranking Member Davis, and
distinguished members of the subcommittee, I appreciate the
opportunity to appear before you today.
Maintaining our Nation's commitment to our military members
and their families' quality of life remains a key factor in
ensuring a strong military and an All-Volunteer Force. As a
nonappropriated funded entity, it is important to note that
NEXCOM [Navy Exchange Service Command] kept faith and
maintained that commitment through the recent government
shutdown. Navy exchanges and Navy lodges remained open, sending
a strong signal to our service members and military families
that their needs had not been forgotten.
The NEXCOM enterprise has broad reach and touches many
aspects of Navy life. Every day, our military families around
the world rely on us for quality products, uniforms, casual
dining, hair care, auto services, gas, laundry, that touch of
home, and more.
We provide lodging for our military families when they
change duty stations. For sailors and marines at sea, we
provide essential items and funds to support their recreational
needs. We help sailors and families stay connected with
personal calling at sea and Internet and cellular services
ashore.
And at overseas locations, NEXCOM delivers the commissary
and exchange benefit where a standalone commissary is not
economical and provides school lunches for the Department of
Defense education activity.
Unlike other government programs, we operate as a true
business. We have always and will continue to drive internal
efficiencies to reduce costs and seek new opportunities to
drive top-line sales. Recently, we consolidated buildings and
automation in our Northeast Distribution Center, attriting 50
full-time positions while increasing our throughput by 10
percent. Our store lighting retrofits are yielding over 9
million kilowatts in energy savings annually, with a cost
avoidance of over $800,000.
Through our partnerships with AAFES [Army Air Force
Exchange Service], the Marine Corps, DeCA [Defense Commissary
Agency], Coast Guard, Veterans Canteen, and our own Navy MWR,
we will continue to implement joint efforts that reduce costs
in our programs.
While we are a nonappropriated funded entity, we do receive
limited appropriated funds, and primarily these for overseas
support. Based on the savings we provide Navy families and our
dividends that support Navy quality of life, we actually
provide a 6-to-1 payback on that appropriated fund investment.
With the pressures on appropriations, we are concerned
about potential reductions in appropriated fund support to our
programs. As such, your continued support for sustaining
second-destination transportation funding is critical to our
ability to serve these families overseas.
Through our customer satisfaction surveys and feedback on
social media, we know our military families value and
appreciate the benefits we provide. A recent social media
posting summed it up best: ``I like shopping at the NEX [Navy
Exchange] because it is a safe environment. I like going into
the store and being made to feel like family.''
We can't do this alone. I want to acknowledge the dedicated
support we receive from our industry partners and from you on
the committee.
I look forward to your questions and thank you very much.
[The prepared statement of Admiral Bianchi can be found in
the Appendix on page 58.]
Mr. Wilson. Thank you very much, Admiral.
Mr. Shull.
STATEMENT OF THOMAS C. SHULL, DIRECTOR AND CHIEF EXECUTIVE
OFFICER, ARMY AND AIR FORCE EXCHANGE SERVICE
Mr. Shull. Mr. Chairman, Ranking Member Davis, and members
of the subcommittee, thank you for the opportunity to speak
today.
Since this is my first appearance before the committee,
please allow me to introduce myself. I am the son of a career
Army officer. After graduating from West Point, I served for
more than a decade as a soldier before embarking on a career in
business, primarily in retail. In the past, I have served as a
CEO of a major retailer, a large direct marketing corporation,
and a top regional packaged goods company. Joining the Army and
Air Force Exchange Service has been like coming home. There is
no greater honor than serving those who serve.
Although we are bringing a fresh approach to the 118-year-
old exchange benefit, our passion for serving the military
family and saving the American taxpayer money remains
steadfast.
We have taken a proactive approach to reduce costs. In the
last 17 months alone, the Exchange has lowered overhead
expenses by $100 million. We have decreased full-time staffing
by more than 3,000 while simultaneously reducing costs related
to transportation, utilities, travel, supplies, and personnel
moves. Drawing upon commercial best practices, dividends to MWR
have gone up approximately 10 percent, as expenses, especially
overhead, continue to go down.
As we improve efficiencies we continue to exceed shoppers'
expectations. On August 1, the Exchange announced a major
investment in an enhanced Web site with improved order of
fulfillment. Online and off, the Exchange is intensifying the
presence of national brands such as Michael Kors, Ralph Lauren,
Apple, Under Armour, Estee Lauder, New Balance, and Walt
Disney. Thanks to a recent agreement with Disney, for the first
time in the organization's history, the Exchange is now
offering first-run movies in the continental United States.
Our associates bring a special skill set and passion to our
theaters, restaurants, and stores, and many have a direct
connection with those they serve. Today, 30 percent of the
Exchange team identifies themselves as a spouse or other family
member; 13 percent are veterans; and 434 wounded warriors serve
in our ranks.
I want to thank my fellow military resale partners,
vendors, and military support organizations. We stand united
with you in our common pursuit to enhance the military
community's quality of life.
Mr. Chairman, Ms. Davis, and other members of the
subcommittee, please allow me to thank you for the continued
support that you give us each day. Together, we ensure that
wherever service members are, an exchange is there to support
them. Our operations increase the combat potential of America's
forces and enhance the probability of mission success for our
troops and our country.
I look forward to your questions.
[The prepared statement of Mr. Shull can be found in the
Appendix on page 70.]
Mr. Wilson. Thank you very much, Mr. Shull.
And Mr. Jeu.
STATEMENT OF JOSEPH H. JEU, DIRECTOR AND CHIEF EXECUTIVE
OFFICER, DEFENSE COMMISSARY AGENCY
Mr. Jeu. Chairman Wilson, Ranking Member Davis, members of
the subcommittee, I am pleased to update you on DeCA's progress
this past year.
We have been engaged in a number of initiatives to improve
the delivery of the commissary benefit as well as assisting the
Department in improving the quality of life of service members
and their families. While detailed more fully in my statement
submitted for the record, those projects include enhancing our
sustainability program, revitalizing our construction program,
implementing online ordering and curbside pickup, and providing
a venue for the Department to deploy the Healthy Base
Initiative program.
It has been a year filled with challenges which
significantly impacted commissary patrons. However, these
challenges demonstrated that the commissary continued to play
an important role in the economic well-being of our military
families.
A prime example would be what happened on October 1st, the
first day of the government shutdown. That day was our highest
sale day ever, totaling over $30.5 million. This amount is
double our normal business day, with our military families
coming to the commissary to stock up. With both the Department-
wide hiring freeze and employee furloughs required to meet
sequestration requirements and the recent government shutdown,
customer service suffered greatly. With DeCA's high turnover
rate of lower-graded employees, over two-thirds of our store
fell below the level required to effectively run the store.
While the Department has provided hiring freeze relief, the
cure was not immediate because of the new employee vetting time
lag.
The closure of your stores for 1 day a week for 6 weeks
impacted customers further. Customer complaints rose by over 50
percent and hit an all-time high during the furlough. The
recent shutdown also hampered commissary patrons, our
employees, and our suppliers.
Although we encountered some challenges associated with the
sequestration and government shutdowns, we are forging ahead
with ongoing initiatives to seek innovative, efficient method
of commissary benefit delivery.
In closing, I would like to thank the members of the
subcommittee as well as each Member of Congress for their
continued support of the commissary benefit. I will be happy to
answer any questions you may have.
[The prepared statement of Mr. Jeu can be found in the
Appendix on page 80.]
Mr. Wilson. Thank you very much, Mr. Jeu.
And we proceed to Mr. Dillon.
STATEMENT OF WILLIAM C. DILLON, DIRECTOR, SEMPER FIT AND
EXCHANGE SERVICES DIVISION, MANPOWER AND RESERVE AFFAIRS, U.S.
MARINE CORPS
Mr. Dillon. Chairman Wilson, Ranking Member Davis, and
distinguished members of the subcommittee, thank you for
inviting me here today to discuss Marine Corps exchange and
retail programs.
The Marine Corps Exchange is a vital part of the overall
non-pay compensation package for marines and their families. We
measure our success by our ability to provide unparalleled
customer service, premier facilities, and valued goods and
services at savings, while also returning a significant
dividend to the Marine Corps community. I am also proud to note
that nearly 30 percent of our retail employees are military
family members.
Marine Corps retail programs are not immune from fiscal
challenges, but challenges we believe bring great opportunity.
The Marine Corps Exchange aims to execute programs in the most
resourceful way as part of our regular business practice. We
are assessing our business and support capabilities to increase
these efficiencies. We are also collaborating with our sister
services whenever possible and leveraging our partnership with
industry. Many of these efforts have already provided
significant cost savings, and we look forward to additional
opportunities to expand efficiency.
With Marine Corps Exchange, marines and families can rely
upon a high-quality product at a fair, competitive price and
know that the proceeds are reinvested in the community,
creating a stronger Marine Corps.
I appreciate the subcommittee's oversight and continued
strong support of retail activities, and I look forward to your
questions.
[The prepared statement of Mr. Dillon can be found in the
Appendix on page 93.]
Mr. Wilson. Thank you very much, Mr. Dillon.
We now proceed to President Nixon.
STATEMENT OF PATRICK B. NIXON, PRESIDENT, AMERICAN LOGISTICS
ASSOCIATION
Mr. Nixon. I like that title, sir.
Thank you, Mr. Chairman. It is an honor to be here today
representing the ALA and our affiliate organization, the
Coalition to Save Our Military Shopping Benefit.
The sun never sets on the military resale system. Every
day, thousands of exchange and commissary employees and
industry members work hard to take care of our military. It is
a partnership that brings together the best of the private
sector and the best of the public sector to care for the best
people in the world.
And this subcommittee can be proud of its support and
advocacy for a program that serves so many with so much at so
little cost. And we are grateful to you for fully supporting
funding for these programs in this year's budget.
We owe it to our military people to do the right thing
right now. The specter of the sequester must be lifted
immediately, and budget stability must be returned to the
Department of Defense [DOD].
It has been a tough year, particularly for commissary
employees. They must feel like they live in Antarctica, with
hiring freezes, pay freezes, funding freezes, and travel
freezes, yet they continue to deliver.
On the exchange front, we are concerned about the
unintended consequences of sustainability and local procurement
legislation and the impacts of the Bangladesh Fire and Safety
Accord. In addition, it is time to refresh the Armed Services
Exchange Regulation to better reflect the marketplace, from
Internet sales to outdated rules on automobile sales.
And even though the commissary and exchange employees
operate in the cold world of budgetary whipsaw, they continue
to give a warm welcome to millions of patrons every day. We
salute them for all they do each and every day.
Today, it is in vogue to talk about efficiency, to talk
about hiring veterans and military family members, to talk
about keep taking care of people in a constrained environment.
This may be new to a lot of defense programs, but it is not new
to the military resale programs.
Exchanges and commissaries have been taking major costs
over the past decade--taking out major costs over the past
decade and hiring thousands of veterans and family members.
Hundreds of millions in annual cost have been pared from these
programs, and managers have it in their DNA to continue to cut
cost. Commissaries are sharing in the continuing resolution,
sequestration, and budget pain and have taken more than their
fair share of reductions.
But that may not be enough to feed the budget beast. Some
defense planners want more. They seek to reduce the commissary
budget far beyond that being asked for any other defense
program. DOD shouldn't punish success. That will send the wrong
message to the rest of DOD.
Congress established the Compensation Commission to
carefully and methodically weigh and balance costs. This
commission should be allowed to do its work and present a
sensible and coherent package and roadmap to the administration
and the Congress and not arbitrarily hack away at any
particular program without careful analysis and consultation
with Congress.
ALA's economic report issued earlier this year elucidates
many of the contributions of these programs with a high return
to the DOD and the Nation for the resources provided. We don't
fear analysis. We fear no analysis. It is like the Old West
hero, Paladin, with a twist: Have facts, will travel.
The military resale program should be emulated, not
decimated. My prepared statement lists the multitude of reasons
that the system must be maintained and allowed to prosper. The
President said that ``closing commissaries is not the way a
great Nation should treat its military and their families.'' We
couldn't agree more.
I look forward to your questions.
[The prepared statement of Mr. Nixon can be found in the
Appendix on page 102.]
Mr. Wilson. Thank you very much, Mr. Nixon.
Now we proceed to President Tom Gordy.
STATEMENT OF THOMAS T. GORDY, PRESIDENT, ARMED FORCES MARKETING
COUNCIL
Mr. Gordy. Thank you, Mr. Chairman. And I agree with
everything he said.
Good afternoon, Mr. Chairman, Ranking Member Davis, and
distinguished members of the Personnel Subcommittee. And thank
you for the invitation to offer comments on behalf of the
members of the Armed Forces Marketing Council regarding the
military resale services and the financial benefits they
provide to support the quality of life of our service members
and their families.
Today, the commissaries and exchanges continue to deliver a
world-class non-pay compensation benefit to military families.
While there have been strong headwinds in the form of furloughs
and diminishing budgets as a result of sequestration and
continuing resolutions as well as the government shutdown, the
leaders and the associates of the resale systems are to be
commended for the great work they have done in a very
challenging year.
As we delve into the issues pertaining to military resale
today, I would like to make it clear that, in the view of the
Armed Forces Marketing Council, the commissaries and exchanges
are not broken. In fact, they do their part, in partnership
with industry, to become more efficient so that they may lower
costs and find ways to continue providing significant savings
to military families. It is the nature of the business that
they do so.
However, due to declining budgets, they are being asked to
consider significant cuts to their appropriated support that go
beyond efficiencies to a real degradation and/or elimination of
the benefit for military patrons, particularly those in CONUS.
While we understand the plight of the Department of Defense
and the budgetary challenges it and the military services face,
we are also aware and sympathetic to the fact that reductions
in taxpayer dollars will get passed on to the military families
in the form of higher prices or a complete loss of benefit. In
other words, it would be taxing military families for the
delivery of their own benefit or breaking faith with them.
There are two numbers that I would like you to keep in mind
today. The first is $600 million. That is the approximate level
of appropriated support proposed to be cut from DeCA's budget,
resulting in the closure of CONUS stores as called for in the
Resource Management Directive, plus the amount of overseas
shipping that some had discussed earlier in the year from being
cut from the exchanges.
The second number is $2.1 billion. That is the estimated
amount of non-pay compensation military families would lose if
those cuts and associated closures were to be implemented.
We are very concerned that the short-term budget decisions
made today that degrade or eliminate the resale benefit will
have adverse long-term impacts on our military families as well
as our ability to retain a ready All-Volunteer Force.
Chairman Wilson, thank you once again for the opportunity
to provide insights on military resale today, and I look
forward to your discussion.
[The prepared statement of Mr. Gordy can be found in the
Appendix on page 128.]
Mr. Wilson. Thank you very much, Mr. Gordy.
And we will begin now with questions. And Craig Greene, we
note that he will maintain the time carefully, including on me.
As we begin, normally, we hear from you. I can give you a
report, multigenerational. My mother-in-law, a very proud
Marine widow, and my wife, a very proud National Guard retiree
wife, were at Fort Jackson last week. It was world-class at the
commissary and very meaningful.
And then, for our family, I particularly appreciate the
overseas capability. And I wish more Americans understood how
important it is to have a system that is domestic and overseas.
And we have part of our family, Navy, serving in Southern
Europe. And then today is a special day. My youngest son is
celebrating his birthday in Central Asia. So it is--but I know
this, that they have capabilities of having a very positive
lifestyle due to your service, so I want to thank you.
Mr. Jeu, we have been told that an independent study was
directed as part of the Resource Management Directive [RMD] to
propose changes to the Defense Commissary Agency operations
that would accommodate an operating cost reduction as well as
focusing on commissary operations, primarily on overseas,
reducing appropriated funding.
What is the status of the study, and when will the
Department be able to share the results?
Mr. Jeu. Mr. Chairman, with the sequestration, the
Department is reviewing all of its programs, and nothing,
including commissary, is off the table.
And I can tell you, the Department has not made its
decision regarding the RMD, and I believe it is inappropriate
for me to discuss any of the details of the RMD at this time.
Mr. Wilson. Well, as soon as you can release it, please let
us know. Because, again, I agree with Mr. Gordy, this is a
world-class provision, appreciation of our military families.
Another question, Mr. Jeu: What initiatives has the Defense
Commissary Agency taken to become more efficient in
anticipation of reduced appropriated funding?
Mr. Jeu. Mr. Chairman, DeCA has a long history of becoming
a model agency. Over the years, we have taken an effort to
become more efficient. And, in fact, over the past 20 years, we
were able to reduce our funding requirement by $700 million
and, also, we reduced our inventory by $500 million.
Some of the examples are we eliminated warehouse functions
and we went directly to vendor-delivered, relying on the
private sector. By doing so, we were able to eliminate
positions as well as eliminate stock funds. Or the other one
would be centralizing accounting, voucher functions and
automating.
And so we have a long history. Even then, every day we are
looking for more and more and greater efficiency. And so I
think we are very proud of what we have done.
And a final thought is, we do not have any low-hanging
fruit. I think there is some misperception out there; perhaps
there is some magic out there for DeCA to do. Sir, all those
are gone, and what we have left is minor efficiencies.
Mr. Wilson. Thank you very much.
And, Mr. Nixon and Mr. Gordy, has there been dialogue with
the private-sector resale community to help increase
efficiencies as a resale community to ensure the commissary
benefit is sustained?
Mr. Nixon. Yes. And, Mr. Chairman, this is really a model
for a partnership between the public sector and the private
sector for looking for efficiencies in operations. And,
continually, there are standing committees that work with the
leadership of all of the resale commands to look for
opportunities to improve supply-chain efficiency.
And particularly, most recently, a blue-ribbon panel to
look at supply-chain efficiencies has been established, led by
David Sisk from Procter & Gamble. It is working with each one
of the resale commands to identify opportunities to bring best
business practices into the military resale business channel
and drive efficiencies.
But it is important to note that, because these operations
work as businesses, every decision they make is based on
efficiency and effectiveness. It is in their DNA, and they do
it each and every day. This is just an additional opportunity
to partner with them to look for additional opportunities.
Mr. Gordy. I would just like to also add that the
memberships of the ALA, all of our members are members of the
ALA, but our members are specifically brokers who represent
manufacturers. And the brokers themselves hire employees who
work in the stores so that DeCA does not have to hire
employees. And so many of the folks who stock the stores are
paid for through the private sector, and our folks are part of
that solution.
And these are efforts that have been going on for decades;
these are not new. And this is to help DeCA find ways that it
can help reduce its appropriated support. And so when you take
a look at the commissaries and the exchanges, it is clearly a
public-private partnership so that this benefit can be
delivered in a world-class way.
Mr. Wilson. And with the technological advances of barcode,
QR code, it is really exciting to me to see what can be done
for military families with greater efficiency worldwide. And,
indeed, I have a personal interest in that.
At this time, we will proceed to Ms. Davis.
Mrs. Davis. Thank you, Mr. Chairman.
And, Ms. Williams, again, it is good to have you here.
I know from the remarks and your presentation that there
has been a review of military family support programs under the
Task Force on Common Services. And you mentioned a number of
areas of interest there. Could you very briefly, I guess,
summarize for us some of the preliminary findings?
And one of the things I found interesting about that, it
sounded like there are some changes that are being recommended,
and at the same time people are saying, oh, why haven't we done
this before? You know, we could have brought folks together and
managed this better.
Could you talk a little bit about that task force's
findings?
Ms. Williams. Yes, ma'am.
As you mentioned, the Task Force on Common Services, it was
established to review the total cost of providing common
services for service member and family support programs DOD-
wide. So it is really not the installation level, ma'am, it is
more of the global look, how we deliver and not what we
deliver, if you will.
They concluded the 5 months of the weekly meetings and
really intense study of the overhead functions. And at the end
of the day, we are compiling a final report on the discussions,
if you will. And within that report, which will be ready by the
end of this year, we will have a good sense of the
recommendations well laid-out.
Concurrent to that, if you will, we have launched the data-
gathering piece. So, respectfully, if you and I decide it is a
good idea to combine something, we still need the data to prove
the business case. So by bringing all this data in concurrently
and building a business case, it is an easier sell and an
easier way to move forward on these recommendations if they all
stick, if you will.
That report, where it is the business case, will be done
this time next year. It is rather intensive. They looked at 15
separate functions. One good example would be in fact, this one
has already launched. There were a lot of ``a-ha'' moments in
the meetings, as I understand it. The services have agreed to
create a common standard chart of accounts. So it is sort of
dry stuff.
But at the end of the day, if we can get all the services
together in one effort, there are some significant efficiencies
there. And that is what we are looking at, ma'am, is
efficiencies.
Mrs. Davis. Can you actually evaluate which of those
efficiencies are the ones that are going to help make your case
more than perhaps others?
Ms. Williams. Yes, ma'am. It is a very exciting time,
actually. And it is the first time the services have gotten
together and really taken a hard look at these overhead
functions.
And they--we all face the same battle. You know, we are cut
down to bone. We have no--we have nothing left to cut. So if we
are going to limit the impact on the end-user, our service
members and families, in some cases retirees, how do we do
that? How do we deliver these with minimum impact? There is
going to be impact, no question, but how do we minimize that
impact?
So, yes, ma'am, we have great confidence in that.
Mrs. Davis. We have a hard time when it comes to scoring
items trying to show that in the long term we actually save
money although in the short term perhaps there is some
additional cost there.
Ms. Williams. Yes, ma'am. And we really are looking at it
for efficiencies first, and the business case, obviously, the
money follows, as well, the savings follow, as well.
Mrs. Davis. To the rest of you, one of the things that
frustrates me is making the case to our colleagues that, in
fact, we actually have to get our act together here in Congress
and deal with this budget in order for you to facilitate and to
be able to prepare for the work that we expect you to do, that
is being done every day. And we know the charges that you have
and the commitment that you have to doing that properly.
How can you, I guess, encapsulate, sort of, the need to get
that done so that the benefits that we provide our men and
women who serve and their families actually reaches them? If
you had--I guess it is sort of the elevator speech. I mean,
what is it that you want Members of Congress to know that is
going to kind of move them to understand that we need to get
our act together here?
Ms. Williams. I will take a stab at it, if I may, ma'am.
A couple of things. Now more than ever, our military and
their families need the programs and services we provide. After
12 years--and now more and more are coming home, which means
there is going to be greater need for these programs and
resources. And it is only slightly ironic that we are talking
about pulling them back. We have nothing left to cut.
So when we talk about daycare, for instance, here is a
really solid example. Many of our installations and bases are
in places where quality daycare is just not available. And
quality daycare is not just about people going to work. It is
also about respite. It is about taking care of the family, and
resiliency, the mental and health--mental and physical well-
being of our community.
In the general public, in the general population, our
childcare centers are--8 to 10 percent are nationally
accredited. In the military, 97 to 98 percent are. It is
remarkable. It is considered the gold standard for child care
by organizations such as Child Care Aware.
Our fitness programs are not just about keeping fit and
passing the PT, which, of course, is very important; it is
togetherness for families. It is burning adrenaline for those
hard-charging single members that maybe can get themselves in a
pickle out off the installation if they are not careful, if
they are not burning off that energy. And these are state-of-
the-art. So when you are--so there is not only--it is not just
a readiness issue and a resilience issue; this is also a
national security issue and a moral imperative, if you will.
And we can lay that out in a number of different ways for
you, if you would like. I know National Military Family
Association has done a remarkable job capturing some of those
anecdotes and some of those situations on the installation
level, and they are quite powerful, ma'am.
Mrs. Davis. Thank you.
Mr. Wilson. Thank you, Mrs. Davis.
We now proceed to Congressman Joe Heck of Nevada.
Dr. Heck. Thanks, Mr. Chairman.
Thank you all for being here. And as someone who has used
commissaries and exchanges throughout Europe, Iraq,
Afghanistan, and all across this country, I can attest to what
a valuable service and benefit they are. In fact, we still shop
at the Nellis Commissary once a month. So it certainly is an
important benefit.
But, with that, I mean, as you all have clearly stated, we
face fiscal challenges. And while nobody wants to, as has been
said, you know, balance the budget on the backs of our service
members or our veterans, there are going to be some hard
decisions to make.
And so, Mr. Jeu, I would ask you, you know, some of the
ideas that have been thrown about specifically for the Defense
Commissary Agency is increasing the surcharge from 5 percent to
10 percent or going to an enhanced commissary where you may
have some other items that you could sell at a profit to help
offset expenses or eliminating the second-destination
transportation charges and increasing prices by 2 to 3 percent
to cover those costs.
Do you have an opinion on those three potential items to
help offset the costs?
Mr. Jeu. First of all, I have to say that the commissary
benefit is part of non-pay compensation package, and it is
valued by military members as the number one or number two.
All those options you mentioned, while it is viable, it has
direct impact on military family members. Because what that
will do is it will shift cost burden onto our military
families. So, in each of those scenarios, the savings will go
down by whether 5 percent or 3 percent, whatever the percentage
you want to change, savings will go down by that much. So,
therefore, the burden has now shifted----
Dr. Heck. But I guess some could argue that that small--and
I am not saying I am pro any of these. But, you know, if we,
let's say, increased the surcharge from 5 to 10 percent. In
your written testimony, you say that a family of four saves, on
average, about $4,500 a year at the commissary. So they would
save $4,275 or lose $225 a year. Sure, you know, to an E-3, E-
4, that is going to be a big thing.
Mr. Jeu. Yes, sir.
Dr. Heck. But to higher ranks, it wouldn't necessarily be a
big thing. And if that shift is what allows the programs to
continue to function, we have to look at the cost-benefit of
each one of these. And I would encourage you to take that kind
of a perspective.
Mr. Jeu. Absolutely, I think senior leaders are taking all
this into consideration. Yes, sir.
Dr. Heck. To the exchange directors, somebody has to help
me understand why we have to have three, you know, separate
exchange directorates. And just like we have Defense
Commissary, why don't we have Defense Exchange?
Admiral Bianchi. Sir, I think the primary reason that we
operate in this manner is that we are, at least in my case, I
am an integral part of the Navy. I am an Echelon 3 command
under the direction of the Secretary of the Navy, and I am
involved in more than just retail. While we have the retail
component, I also am part of the messaging, the strategic
messaging of the Department, the family and personnel readiness
aspect. And so I believe if you asked my senior leadership,
they would say that I am woven into the fabric of the Navy
leadership and Navy mission readiness.
That being said, this question has been raised many times,
and we have undertaken and we are constantly in the process of
looking at areas where we may be able to have cooperative
efforts where we can save money. There are numerous examples I
could state for you where we have joint contracting efforts and
so forth.
But I think the bottom line is that we each are optimizing
our operations. And just like you wouldn't necessarily kludge
Ford and GM together and necessarily get a better organization
out of it, I think this allows us to meet the needs of our
service members while still maintaining operational
efficiencies cooperatively without having to create one mega
organization, so to speak.
Dr. Heck. Any of the other exchange reps want to just ditto
it, or do you have something else to add on that issue?
Mr. Dillon. Yes, sir. I would just like to offer that, from
the Marine Corps standpoint, you may or may not be aware of the
fact that we already are a combined operation. Not only do I
have responsibility for the exchange, but I also have
responsibility for MWR programs.
Years ago, we consolidated those functions so that we could
become more efficient. All of our back-office functions serve
both the exchange as well as the MWR programs. So we have taken
that step to become as efficient as possible.
We are looking at additional reductions in efficiencies and
overhead as I speak today. But as part of the studies that we
have done in the past, actually from a Marine Corps standpoint,
to combine the operations it would actually cost us more money
than it does to operate our exchange and our MWR today.
Dr. Heck. Thank you.
Thanks, Mr. Chair. Yield back.
Mr. Wilson. Thank you, Dr. Heck.
We now proceed to Congresswoman Madeleine Bordallo of the
beautiful territory of Guam.
Ms. Bordallo. Oh, thank you very much, Mr. Chairman. I
always appreciate that because Guam is a small place and it is
not mentioned very often.
I want to thank you for calling this. I remember going to
the hearing last year, same--I think you have an annual hearing
on this.
And I want to thank all the witnesses for their testimony
today.
I am going to focus on commissaries and exchanges. And
being brought up on Guam, I visited commissaries and exchanges
for many, many decades. And most recently on travels, a CODEL
[congressional delegation] to Australia and Singapore, I was
able to go into--we had a few minutes before boarding the plane
to come back to Washington, so we visited a commissary and the
exchange there. And, believe me, you have made a great deal of
progress from the very first days. Now you see all these
displays and merchandise and eateries, all very up-to-date. I
saw those luxury goods. I was tempted.
And so, Mr. Jeu, I think this question would be to you. And
I have noticed that you put out a policy--Director's policy
here. I am going to ask you, I am aware of the policy on
sustainability. Now, while I appreciate your efforts to develop
this policy, I did notice specific goals and targets for the
acquisition of sustainable products.
So can you please comment on how your agency intends to
monitor any objectives you may have in place to provide fresh
and healthy products to military families and how your agency
will maintain awareness of these goals across the many
individual commissary stores?
Also, could you please comment on the criteria used to
determine when DeCA will choose to pursue locally grown
products? In the last NDAA [National Defense Authorization
Act], I introduced a green grocery amendment. And so I am
wondering, how is this going and how much of this policy have
you implemented so far?
Mr. Jeu. Okay. I think that, in terms of a study, I believe
this falls under another office.
But in terms of our purchase through local, we try to buy
locally whenever it makes sense. We look at price, quality, and
customer preference. And I say price because, particularly in
overseas, it is a little bit more sensitive in overseas area,
and particularly like Guam as well, because the Congress
decided that cost of goods overseas should be no higher than
cost of goods in U.S. So that is why we receive a second-
destination fund.
And so, especially overseas, including Guam, we look at
price as well as quality and customer preferences, but,
whenever possible, we try to buy locally. So, in Guam's case,
we do buy from 15 local vendors from the local community for
items such as bakery items or snack items, some miscellaneous
drinks, and so on. So we----
Ms. Bordallo. Vegetables and fruits?
Mr. Jeu. In limited cases, but we do encourage those. And
we encourage not only in Guam but elsewhere throughout the U.S.
Buying locally does make sense.
For example, produce particularly. I was at Fort Jackson
commissary just last week. And when I was there, I met W.P.
Rawl & Sons. And they were there, and they were demonstrating
their produce, cooking and so on. And I met their third-
generation farmer, and he was so thankful for DeCA because we
are buying locally. And he said he is selling all the greens to
the commissary and not only at Fort Jackson but all the other
commissaries in South Carolina.
We do the same thing on seafood. We try to buy locally.
And, in fact, on the domestic seafood, sales went up by 6.6
percent. That is far outpacing the sales from other sources.
So, to summarize, really, we do try to buy locally whenever
possible, considering all those factors: quality, price, and
customer preferences.
Ms. Bordallo. Thank you, Mr. Jeu. I really appreciate that.
I am very grateful.
But, Mr. Chairman, I would like to find out--do you have--I
noticed you mentioned some statistics there, numbers and how
many farmers and so forth. And I think you particularly
mentioned Guam.
Would there be some way that you could provide us a report
on how it is going across the Nation? Would that be too
difficult? You said----
Mr. Jeu. We have 15 VAT [value-added tax] vendors, and I
could give you a list of those. And there is amount and all
those.
Ms. Bordallo. Right.
Mr. Jeu. Yes, I could do that.
Ms. Bordallo. I think the committee would appreciate to see
how this program is progressing. So if you could provide that.
[The information referred to was not available at the time
of printing.]
Ms. Bordallo. And thank you, Mr. Jeu, very much for your
comments.
Thank you, Mr. Chairman. I yield back.
Mr. Wilson. Thank you very much, Ms. Bordallo.
And we have a special Member, Congressman Brad Wenstrup. He
is doing his part for a multigenerational commissary and
exchange. He has a brand-new baby at home.
Congressman Wenstrup of Ohio.
Mr. Wenstrup. Thank you, Mr. Chairman.
Thank you all for being here.
And, you know, I will say, as a service member--I still
serve in the Reserve--that, you know, the commissary and the PX
[Post Exchange] is--there is some morale value to that, I truly
believe that, for our troops. I think it is appropriate to be
affiliated with MWR. And it also gives, I think, people,
military families, an opportunity to shop like the rest of
America even when they are not in America, and I think that
there is some benefit to that, obviously.
Just a couple of questions. You know, as I look at stores
like Walmart that are comprehensive, have everything from
clothes to groceries, it is usually in one building, and so
many times on our bases we are in two separate buildings. Is
there a history to that or is there a strategy to that, to why
we typically have two buildings between the exchange and the
commissary itself? Does anyone know?
Mr. Gordy. I believe the law, title 10, requires the
operation of separate commissaries and exchanges, and that may
be the history there, sir.
Mr. Wenstrup. Yeah, I would be curious on that because it
seems, as we are looking for places of savings, especially in
the future, if we can combine them into one facility rather
than two separate facilities. Plus, it makes shopping a little
bit easier. I mean, I think Walmart has figured it out, right?
And the other question I have is with the kiosks that we
often see. What is the arrangement with them? Are they just
leasing space? A percentage of profits? How does that work when
we have these outside vendors that have their own kiosk within
the facilities? Does anyone know?
Admiral Bianchi. Yes, sir. We, at least for the Navy
Exchange, we basically set up short-term concession
arrangements with them. Typically, it is vendor-owned
inventory, and we get a--we negotiate a percentage, a
commission percentage, with them. It allows us to perhaps bring
in sometime some niche categories or something and offer
variety, excitement to the shopper.
So what you will usually find, I think, in most of our
exchanges is these concessionaires will rotate through so that
we provide variety, but we are negotiating favorable
commissions with them. And that goes into our bottom line, you
know, which drives the dividend.
Mr. Wenstrup. Is that the same with the chain food court?
Admiral Bianchi. Yes, sir. Well, the models are different
there. We have, just like my counterparts here, some of those
we run organically, and others are concessions with, you know,
whether it is Subway or other vendors, so that there is a
combination there.
Mr. Wenstrup. And do they lease the space, or is it all
commission? Or does it vary?
Admiral Bianchi. I can only speak for--I know in the Navy,
we provide the space. So, basically, we give them a white box,
and they come in and perform under contract, yes, sir.
Mr. Wenstrup. All right. Thank you very much.
I yield back.
Mr. Wilson. And thank you very much, Congressman Wenstrup.
And we will proceed for a second round.
And, for myself, Ms. Williams, how does the risk of
reductions to the second-destination transportation cost
increase if the Department of Defense must comply with the cuts
associated with full or partial sequestration?
Ms. Williams. Sir, so I understand your question, are we--
you are talking about possibly cutting second----
Mr. Wilson. Destination costs.
Ms. Williams. Very well. Okay, thank you. Thank you for the
clarity.
We have continually focused on improving efficiencies with
the transportation costs through efficient use of
transportation modes, cooperative efforts among the services.
And they can explain a little bit more about those
efficiencies, sir.
Frankly, the Department's stand is that DeCA and the
military services are complying with the statutory requirement
to fund the expenses of transporting commissary and exchange
supplies overseas. Further, the Army reports that second-
destination transportation is fully funded through the Future
Year Defense Plan fiscal year 2019, and we believe the other
services have made similar commitments, sir.
And, with that, I would defer to the directors.
Mr. Wilson. Thank you.
In fact, Mr. Shull, Admiral, Mr. Dillon, any comment?
Admiral Bianchi. Yes, sir. I would offer, as Ms. Williams
stated, second-destination transportation is obviously a
critical element in delivering this exchange benefit.
And I believe the ability to have the fully funded account
enables us to provide these comparable products and assortments
overseas. It is not only an important morale factor, but it is
also a necessity in many areas where these types of goods
aren't available, like in Bahrain and Djibouti, for example.
But I would also offer to you it is an efficient and
effective way to provide the merchandise. Because if you think
about it, the kids and families overseas, they need to provide
clothes for their children. They need shoes, they need other
goods. You know, we can ship it economically. We can serve, in
essence, as a distribution node for those products.
If you think about thousands of overseas folks going online
and ordering their own items and the effect that that has on
the military postal system, you know, it is kind of going to be
a pay-me-now or pay-me-later. You are going to spend more money
shipping it individually than you can if we bring, you know,
containers of jeans and so forth overseas.
So we believe we are efficient with our second-destination
transportation [SDT] dollars. We have cooperative efforts
ongoing right now with DeCA, with AAFES for van stuffing. We
have saved money over the years.
But, overall, I believe the loss of that would result in
either having to raise prices for products for those stationed
overseas, and that would drive COLA [cost of living allowance]
rates up, so there, again, you are driving a cost in a
different account but nonetheless it is a higher cost, or it
would force us to rationalize our assortments, which I think
would be going against congressional intent, which is why the
statute was put in place, I believe, back in 2006.
Mr. Wilson. Thank you.
Mr. Shull. Mr. Chairman, let me add to Admiral Bianchi's
remarks. I fully concur with what he said. And I want to add,
we were asked by the Army to take a very hard look at SDT this
last year. And, of course, I am new to the exchange, having
served for a number of years as a soldier and am now a retailer
for 28 years, in restructuring, coming into the exchange
system, I took kind of a different look at it.
We were able to reduce costs of SDT by about $20 million
this last year, and we project another $10 million. But that is
really the slack in the system, as I would describe it. That is
the inefficiency that we--partly we allowed to occur as we
ramped up to serve in a combat environment. Now that we are
drawing down, there were some efficiencies to be gained.
For example, shipping via surface versus air for various
products where, in the contingency in Europe, we needed to get
product in quicker to serve those who were in harm's way. And
so, now that we are moving into more of a peacetime
environment, we were able to look at that very rigorously and
able to reduce it.
But we are at the point where it is efficient, in my view.
And as Admiral Bianchi said, if we take more money out of the
SDT support at this juncture, we will be risking readiness and
resiliency and possibly having to increase prices and change
the product mix that we provide locally in terms of a taste of
home and having the right mix of product from the United
States.
Mr. Wilson. Thank you.
And Mr. Dillon.
Mr. Dillon. Yes, sir, I can only agree with what my
partners here have to say, first of all.
Secondly, we enjoy today because we are the small one on
the block, and we enjoy the cooperative efforts that we have
today. We generally ride often with shipments for either AAFES
or for NEX, especially. We have a lot less of an overseas
requirement than they do. And so the benefit would be
significant to us, as well, if it were to be cut because we are
enjoying that savings right now in partnering with the other
services.
Mr. Wilson. You all have brought up some terrific points.
Thank you so much. The postal, that is really on point.
Mrs. Davis.
Mrs. Davis. Thank you, Mr. Chairman.
And I know my colleague earlier mentioned bringing variety,
you know, why we have the kiosk and what those arrangements
are. And, certainly, we want to have that variety.
But I wanted to mention and ask Mr. Shull, the--my
understanding, at Fort Bliss Lifestyle Center, they brought in
a dollar store. And so, in many ways, this store is competing
with other opportunities that our military families have to
spend money that brings money back to Morale, Welfare, and
Recreation.
You know, how do we deal with this issue where we have a
potential competitor against the military operations? How do
you make those decisions?
Mr. Shull. That is a very good question, ma'am, and we are
looking at that now. We only have one Dollar Tree location. It
is in Fort Bliss. It is in the Lifestyle Center. We have a
different business model there at the Lifestyle Center, where
we do bring out--through a broker, we fill the space. And, in
this instance, we worked with a broker to fill some vacant
space with a Dollar Tree.
We are going to review that. We didn't know that--part of
the problem is, when you do that, when you work through a
broker, you don't necessarily have full control over the
merchandise assortment. So we are reviewing that merchandise
assortment to make sure that it does not conflict with our
sister agencies or with us, in terms of offering. We believe
there is something like 31 items that may compete with the
commissary. We are going to review that, and I would like to
ask to be able to get back to you on that, ma'am, in terms of
the detail.
[The information referred to can be found in the Appendix
on page 159.]
Mr. Shull. But remember, it is one location. We have 3,700
facilities, and this is one location. We will not proceed to
broaden the footprint of that kind of concept because of the
fact that we just recently learned there may be some conflict
with the offerings of DeCA and our sister exchanges and even
for our own offering.
But, again, this is a different business model. It is in
one location. We are going to look at that Dollar Tree and
evaluate whether we should have it in the mix of our--both in
terms of assortment as well as facilities.
Mrs. Davis. Uh-huh.
Do you ever hear also from DeCA or on other occasions where
perhaps it is not a Dollar Store but it is an entity that is
competing in some way with something, I guess fairly basic,
that is being offered?
When I think of a kiosk, I think of something different,
special that comes in, that you have decided at the holiday
time or, you know, at some point would be a benefit to families
to have access to. But I can imagine that there also must be
others where there is really a competition there.
Mr. Shull. There could be, ma'am. I am not aware of any
others. We are very diligent, working through the Cooperative
Efforts Board, as a team here to make sure we don't compete
with one another or bring in businesses that might compete with
our own business.
Mrs. Davis. Right. Right.
Mr. Shull. We do need to look at the Dollar Tree issue.
This is the first time this has come up in my 18 months, and we
will take a very serious look at this and make sure it doesn't
in any way compete with, particularly, a commissary.
Mrs. Davis. Okay. Thank you very much. Appreciate it.
Ms. Williams. And, ma'am, if I might add, there is a great
deal of transparency with the concessions and the PPVs [public-
private ventures], and all of the directors are quite open in
the dialogue. The Dollar Tree, in particular, is in internal
dialogue right now, and we hope to have resolution shortly.
Mrs. Davis. Uh-huh. Great. Thank you.
And thank you all for trying to address the efficiencies.
Obviously, when we come back here next year, it is going to be
good to know, you know, was there something in the past year
that occurred that really made a difference, that was a new
innovation in the efficiency area, because we obviously need to
find those.
Mr. Jeu.
Mr. Jeu. If I could add just one more thing, I think that
we do work closely together, between commissaries and
exchanges. And I believe when we complement each other, I think
it brings strength to the resale system. I think when we
compete, which we do not, then it does not. I think it brings
system weaker.
So, fortunately, all of us work together collectively to
have a complementary system. And I think we are doing that.
Mrs. Davis. Thank you.
Mr. Wilson. And, again, thank you very much.
And thank you, Mrs. Davis.
And I do appreciate the final comment, a complementary
system which is beneficial to military families.
There being no further business, we are adjourned.
[Whereupon, at 3:48 p.m., the subcommittee was adjourned.]
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A P P E N D I X
November 20, 2013
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PREPARED STATEMENTS SUBMITTED FOR THE RECORD
November 20, 2013
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WITNESS RESPONSES TO QUESTIONS ASKED DURING
THE HEARING
November 20, 2013
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RESPONSE TO QUESTION SUBMITTED BY MRS. DAVIS
Mr. Shull. Staff from the Office of the Under Secretary of Defense
for Acquisition, Technology and Logistics met with committee staff to
relay our concerns and to ensure that the language included in Section
713 of the National Defense Authorization Act for Fiscal Year 2014 was
both acceptable to and achievable by the Department. [See page 21.]
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QUESTIONS SUBMITTED BY MEMBERS POST HEARING
November 20, 2013
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QUESTIONS SUBMITTED BY MR. WILSON
Mr. Wilson. Has the Department of Defense re-opened discussions on
consolidating exchanges? If so, what appropriated dollar savings does
the Department garner from this initiative? Mr. Shull, Mr. Bianchi, and
Mr. Dillon, has there been further discussion on developing hybrid
stores selling merchandise and groceries, similar to Walmart and
Target? Is this something that should be explored? Mr. Nixon and Mr.
Gordy, what are your perspectives regarding an exchange consolidation
or developing a hybrid model?
Ms. Williams. No, the Department has not re-opened discussions on
consolidating exchanges. Finding more effective and efficient ways to
operate is critical, and we will continue to seek efficiencies within
the military resale systems.
Mr. Wilson. Has the Department of Defense re-opened discussions on
consolidating exchanges? If so, what appropriated dollar savings does
the Department garner from this initiative? Mr. Shull, Mr. Bianchi, and
Mr. Dillon, has there been further discussion on developing hybrid
stores selling merchandise and groceries, similar to Walmart and
Target? Is this something that should be explored? Mr. Nixon and Mr.
Gordy, what are your perspectives regarding an exchange consolidation
or developing a hybrid model?
Admiral Bianchi. NEXCOM is neither aware, nor is a participant in
discussions for developing hybrid stores selling merchandise and
groceries similar to Walmart and Target. These commercial formats
benefit from one-stop shopping and cost synergies driven by an
integrated business strategy with a hybrid concept as the end state.
This is unlike military resale where commissary and exchange stores are
mature businesses operating independently. Creating military resale
hybrids would require significant investments. For example,
commissaries and exchanges are often not co-located on installations
nor operate on similar information technology platforms. Consequently,
military resale would require significant capital investments in
construction, assuming available federal land, as well as investments
in technology and other areas to retrofit and re-purpose stores to a
hybrid model. Similarly, using only one of two existing separate stores
where the commissary and exchange are apart, would require reducing
available exchange and commissary products thereby generating business
risks while diluting the current non-pay compensation resale benefit.
Navy has successfully operated a limited number of hybrids in
overseas locations--NEXMARTs--which sells both exchange and commissary
products. NEXMARTs success is driven by their creation as hybrids with
appropriations for the commissary portion of the store. Less clear in
the question is whether an explored hybrid model will be wholly non-
appropriated funded, in which case price increases would be needed to
support the model. This would change and dilute the current resale non-
pay compensation benefit. NEXCOM does not believe hybrid stores, writ
large, are a viable option to be explored for the current commissary
and exchange benefits.
Mr. Wilson. How many lifestyle centers have been completed and what
is the occupancy rate? What type of stores are occupying the life style
centers? Are any of them in direct competition with the exchange store
or the commissary for products?
Mr. Shull. Construction on one Lifestyle Center, Freedom Crossing
at Ft. Bliss, has been completed. Its occupancy is currently 83%. The
center is comprised of a variety of operations including AAFES direct
operations such as the Exchange, name brand fast food operations, and
traditional concession activities. Also included are dining and
entertainment operations with brands such as The Grand Theater, Buffalo
Wild Wings, and Texas Road House. In addition, there are complementary
retailers such as Under Armour, Things Remembered, Game Stop, Patriot
Outfitters, Dollar Tree, and others. All products sold complement the
Exchange and Commissary stock assortments.
Mr. Wilson. What is the feasibility and impact of the commissary
operating under non-appropriated funds instead of appropriated funds?
Will DeCA still be able to provide savings to military patrons? Right
now the commissary provides approximately 30% savings to patrons, can
those savings be reduced to 25%-28% and, if so, what actions would need
to be taken?
Mr. Jeu. Currently commissaries sell merchandise at cost plus a 5%
surcharge. The surcharge use is limited to building and maintaining
commissaries as well as commissary equipment purchase. Current savings
average 30.5% compared to commercial retailers. If commissaries were
operated partially funded through other than appropriated funds, DeCA
would be compelled to institute a pricing structure similar to that of
commercial grocers, with the resulting revenue used to offset the loss
of the appropriation. Patron savings would be reduced dependent on the
amount of cost recovery necessary. Numerous changes to legislation
would be required to allow the commissary system to operate under a
cost recovery model.
Mr. Wilson. Has the Department of Defense re-opened discussions on
consolidating exchanges? If so, what appropriated dollar savings does
the Department garner from this initiative? Mr. Shull, Mr. Bianchi, and
Mr. Dillon, has there been further discussion on developing hybrid
stores selling merchandise and groceries, similar to Walmart and
Target? Is this something that should be explored? Mr. Nixon and Mr.
Gordy, what are your perspectives regarding an exchange consolidation
or developing a hybrid model?
Mr. Dillon. I defer to DOD on whether it has re-opened discussion
on consolidation and on the issue of costs/savings of doing so. In
regard to hybrid stores, I have not participated in any discussions
regarding developing such stores that would sell merchandise and
groceries. I don't believe this is a viable option as combining systems
and facilities would result in a huge upfront cost with limited
opportunities for savings in the out years. In this already constrained
fiscal environment, this action could threaten the MWR dividend
significantly.