[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]





 
                         [H.A.S.C. No. 114-81]
                         
                      VIEWS ON COMMISSARY REFORM

                               __________

                                HEARING

                               BEFORE THE

                   SUBCOMMITTEE ON MILITARY PERSONNEL

                                 OF THE

                      COMMITTEE ON ARMED SERVICES

                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD

                            JANUARY 13, 2016


                                     
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                   SUBCOMMITTEE ON MILITARY PERSONNEL

                    JOSEPH J. HECK, Nevada, Chairman
WALTER B. JONES, North Carolina      SUSAN A. DAVIS, California
JOHN KLINE, Minnesota                ROBERT A. BRADY, Pennsylvania
MIKE COFFMAN, Colorado               NIKI TSONGAS, Massachusetts
THOMAS MacARTHUR, New Jersey, Vice   JACKIE SPEIER, California
    Chair                            TIMOTHY J. WALZ, Minnesota
ELISE M. STEFANIK, New York          BETO O'ROURKE, Texas
PAUL COOK, California
STEPHEN KNIGHT, California
               Dave Giachetti, Professional Staff Member
                Craig Greene, Professional Staff Member
                           Colin Bosse, Clerk
                           
                            C O N T E N T S

                              ----------                              
                                                                   Page

              STATEMENTS PRESENTED BY MEMBERS OF CONGRESS

Davis, Hon. Susan A., a Representative from California, Ranking 
  Member, Subcommittee on Military Personnel.....................     1
Heck, Hon. Joseph J., a Representative from Nevada, Chairman, 
  Subcommittee on Military Personnel.............................     1

                               WITNESSES

Goldberg, Brooke, Deputy Director for Government Relations, 
  Military Officers Association of America.......................     8
Gordy, Thomas T., President, Armed Forces Marketing Council......     4
Huck, Eileen, Government Relations Deputy Director, National 
  Military Family Association....................................     6
Nixon, Patrick B., President, American Logistics Association.....     2

                                APPENDIX

Prepared Statements:

    Goldberg, Brooke.............................................    95
    Gordy, Thomas T..............................................    62
    Heck, Hon. Joseph J..........................................    27
    Huck, Eileen.................................................    84
    Nixon, Patrick B.............................................    28

Documents Submitted for the Record:

    Testimony of American Federation of Government Employees.....   109

Witness Responses to Questions Asked During the Hearing:

    [There were no Questions submitted during the hearing.]

Questions Submitted by Members Post Hearing:

    Mr. Jones....................................................   117
    
    
                       VIEWS ON COMMISSARY REFORM

                              ----------                              

                  House of Representatives,
                       Committee on Armed Services,
                        Subcommittee on Military Personnel,
                       Washington, DC, Wednesday, January 13, 2016.
    The subcommittee met, pursuant to call, at 10:30 a.m., in 
room 2118, Rayburn House Office Building, Hon. Joseph J. Heck 
(chairman of the subcommittee) presiding.

OPENING STATEMENT OF HON. JOSEPH J. HECK, A REPRESENTATIVE FROM 
      NEVADA, CHAIRMAN, SUBCOMMITTEE ON MILITARY PERSONNEL

    Dr. Heck. Well, good morning. I want to welcome everyone 
today to today's Military Personnel Subcommittee's hearing on 
commissary reform. We are here today to hear from military 
service organizations and the grocery retail industry on the 
value of the commissary system to beneficiaries and the effects 
of any possible changes to the commissary's business model. As 
we are all well aware, commissary benefits are a valued part of 
our current and retired service member's compensation package 
and contribute to their and their family's overall quality of 
life.
    The Military Personnel Subcommittee is taking every 
opportunity to thoroughly review and discuss the way forward on 
any commissary reform, and is committed to retaining the 
commissary benefit while improving the business practices of 
the commissary system and at the same time reducing its 
dependence on appropriated funds.
    Our purpose today is to gain an understanding from the 
panel on their views of the possible effects to the 
beneficiaries or to the business practices of our industry 
partners of any changes to the commissary system business 
model.
    Before I introduce my panel, I would like to offer 
Congresswoman Davis an opportunity to make any opening remarks.
    [The prepared statement of Dr. Heck can be found in the 
Appendix on page 27.]

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

    Mrs. Davis. Thank you very much, Mr. Chairman. And thank 
you to all of our witnesses. Good to see all of you here today. 
Our panel represents beneficiaries as well as retail industry 
partners that work with the commissary system.
    I think we can all agree that what is paramount in this 
discussion is that the commissary benefit must be maintained. 
How that happens, though, and what the system will look like is 
what we are here to discuss. Change is never easy, we know, but 
in today's fiscal environment, it is required. This committee 
certainly has met several times since the release of the Boston 
Consulting Group [BCG] report, and we have heard from the BCG, 
as well as the Department of Defense [DOD], on ways to sustain 
the commissary benefit even when we know and we hear that many 
feel that the commissary system is just not sustainable as it 
is currently today.
    I was pleased to hear from DOD leadership that they concur 
with the report. Regardless of how much reform is done to 
create a more efficient business model, keeping the savings 
that are realized today for patrons is critical.
    As we wait to see what the Department will submit to 
Congress for this year's NDAA [National Defense Authorization 
Act], I would encourage all of us, all of you to work with the 
DOD and help us reform a system that will endure into the 
future.
    I look forward to hearing from our witnesses as we work to 
responsibly and efficiently protect the commissary benefit for 
our service members and families.
    Thank you, Mr. Chairman.
    Dr. Heck. Thank you, Mrs. Davis.
    I now ask unanimous consent that the following testimony be 
entered into the record from the American Federation of 
Government Employees. Without objection, so ordered.
    [The information referred to can be found in the Appendix 
on page 109.]
    Dr. Heck. I also want to let our panel know that votes are 
scheduled some time between 11:15 and 11:30. We will push to 
11:30 until the clock actually runs to zero on the vote. My 
goal is to get the hearing completed so we don't have to hold 
you here while we go vote.
    We are joined again today by an outstanding panel. We will 
give each witness the opportunity to make opening comments and 
each member an opportunity to question the witnesses. I 
respectfully ask the witnesses to summarize to the greatest 
extent possible the high points of their written testimony in 
no more than 5 minutes. Your complete written statements will 
be entered into the hearing record. As a reminder, the lights 
in front of you will turn yellow when you have one minute 
remaining and red when your time has concluded.
    We are joined today by Mr. Patrick Nixon, President of the 
American Logistics Association; Mr. Tom Gordy, President of the 
Armed Forces Marketing Council; Ms. Eileen Huck, Government 
Relations Deputy Director for the National Military Family 
Association; and Ms. Brooke Goldberg, Deputy Director for 
Government Relations, Military Officers Association of America.
    With that, Mr. Nixon, you are recognized for 5 minutes.

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

    Mr. Nixon. Thank you, Mr. Chairman, distinguished ranking 
member, Mrs. Davis, committee members, and staff. It is an 
honor once again to appear before you representing the member 
companies of the American Logistics Association and to provide 
views on commissary reform.
    Mr. Chairman, we are always open to new go-to-market 
strategies, however, we need to play the cards that we actually 
have been dealt. Until the new FYDP [Future Years Defense 
Program] is approved, we are facing a $1 billion reduction in 
commissary funding in 2017. The GAO [Government Accountability 
Office] review on privatization is supposed to be completed 
February 1st. We don't know what that is going to say. Until 
DOD submits its report requested by the 2016 NDAA on key topics 
to include a new twist, budget neutrality, we do not know the 
way ahead. But Mr. Chairman, with these negative headwinds, it 
is not a time to put one's head in the sand, and we are not the 
association of no. We are, in fact, bolstered by positive 
indicators.
    First, Mr. Chairman, you and Chairman Thornberry have 
consistently said that the funding levels for defense should be 
driven by strategy, and not the other way around. As a subset 
of national defense, this translates directly for resale 
programs as well. This committee has affirmed its belief in the 
value of the resale benefit and its commitment to preserving 
it. It is the next iteration of this evolution taking concepts 
to practice where we face the most peril.
    Mr. Chairman, on the DOD side, there is a new sheriff in 
town. Peter Levine as the Deputy Chief Management Officer has 
presented a more tempered view of the way ahead. He has also 
stated the strategy needs to drive the budget. We also 
understand that DOD feels the need to conduct a series of 
pilots to sort out an alternative universe for military resale. 
This is where we say, proceed with extreme caution.
    Mr. Chairman, I have been in this business for a long time 
and I have concluded that there are three pillars of influence 
that must be measured in any strategic discussion moving a 
resale program forward: patron confidence, supplier confidence, 
and retailer confidence.
    Patron confidence in the current business model is rock 
solid. In the commissary, it is goods at cost with a surcharge. 
It is the ultimate company store. The patron invests in the 
system through the surcharge, they build their own stores. It 
is a brand name business. Items only make it in the system if 
they have a demonstrated retail presence in the private sector, 
they only remain in the system if they have a demonstrated 
customer preference. Its strength is predictability. In a pilot 
that proposes to change product pricing, whether by store or 
region, can you improve on the current level of predictability? 
If you introduced a private label program that requires a 
retailer to price, position, and promote a product line with 
artificial customer preference in order to make a profit, can 
you improve on the current level of predictability? What are 
you going to tell the patron? This is their store. This is the 
model they trust.
    Supplier confidence is equally important. Brand name goods 
at cost create a one-of-a-kind business environment. It is the 
ultimate supply and demand ecology. Patron preference drives 
what is on the shelf and what stays on the shelf. There are no 
hidden retail activities like sliding fees, promotional 
skimming, or advertising pools. Under audited price warranties, 
the military retailer gets the best pricing from the 
manufacturer. Manufacturers contribute almost $500 million in 
costs to offset annually the system through promotional trade 
spending, stocking, display building, inventory management, and 
special military events. The introduction of a different 
pricing model and private label changes the game. What will be 
the reduction in support from industry if you change the model? 
What will be the cost to the retailer to develop, position, 
price, and promote a private label introduction, once again, 
with artificial patron preference built in? You will be 
removing proven name brand value items to position private 
label items to make a profit. What will be the impact on 
supplier confidence as these pilots proceed?
    Finally, there is retailer confidence. First, the exchanges 
are probably saying, why am I here in this discussion? This is 
a commissary issue. The fact is the carefully constructed 
economic ecology and the military resale system is forever 
interlocked. During the last government shutdown when 
commissaries were closed, exchanges dropped sales 30 percent. 
Exchanges are extremely interested in proposed commissary 
pilots. What if they fail? What will be the impact of patron 
confidence on their traffic and sales?
    On the commissary side, this is uncharted territory. They 
have done an exceptional job at administering the cherished 
military benefit, but becoming a retailer is different. They 
have weathered a government shutdown, employee furloughs, and 
now they await a privatization study, a budget neutral 
discussion, and the outlook of a non-appropriated fund 
workforce. Reminds me of the saying, the beatings will continue 
until morale improves.
    When it is all said and done, these discussions will be 
critical for preserving this important benefit or moving 
forward. I commit the resources and expertise of the American 
Logistics Association to make this move forward successful.
    Thank you for this opportunity to participate, and I look 
forward to our discussions, Mr. Chairman.
    [The prepared statement of Mr. Nixon can be found in the 
Appendix on page 28.]
    Dr. Heck. Thank you, Mr. Nixon.
    Mr. Gordy.

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

    Mr. Gordy. Chairman Heck, Ranking Member Davis, and 
distinguished members of the Personnel Subcommittee, thank you 
for your commitment to our warriors and their families, who 
continue to tirelessly serve and sacrifice in defense of our 
Nation. And thank you for the opportunity to share views on 
behalf of the Armed Forces Marketing Council regarding efforts 
to reform the commissary benefit.
    As you are aware, to date there are no specific reforms 
that have been publicly proposed by the DOD since the NDAA was 
passed and signed into law last month, but from that law, we 
are very grateful for the committee's work to establish 
benchmarks for any potential reform efforts, which include 
ensuring high levels of customer satisfaction, the provision of 
high-quality products, and the sustainment of discount savings.
    As we begin our discussion today, we believe it is helpful 
to remember that it was Congress who established this benefit 
as a non-pay compensation benefit for military personnel. The 
model that Congress forged is one that is as brilliant as it is 
simple: offering products at cost plus 6 percent to provide 
military families a non-pay compensation benefit.
    While no specific formal proposals have been offered to the 
committee over the course of the past 2 years, suggestions have 
been offered for commissary reform by both the Military 
Compensation and Retirement Modernization Committee and the 
Boston Consulting Group that would alter the model. The 
suggestions call for a more complex operational model through 
untested and under-analyzed pricing schemes and adjustments to 
product assortment, which will require growth in both personnel 
and operational costs.
    Since it is highly unlikely that appropriations will be 
increased to cover these costs, the revenue will have to be 
generated, and it can only come from one source, and that is 
the military family.
    The suggestions that have been offered are based on 
assumptions that product and pricing schemes are manageable and 
would still offer a benefit to military families, but even the 
suggestions have a caveat that they need to be further 
analyzed. We agree. And we also believe that full spectrum 
analysis should be conducted on all efforts that would change 
DeCA's [Defense Commissary Agency's] fundamental mission and 
seek to generate revenue from military families.
    We also believe that accountability for the commissary 
benefit should remain with Congress. We hope that if the reform 
test pilots begin to fail to meet established benchmarks, and 
if the DOD fails to act in an expeditious manner to protect the 
benefit, that Congress will step in to do so.
    We appreciate the committee's approach that permanent 
changes to title 10 will be based on concepts that are proven 
to be beneficial and efficacious to the long-term viability of 
the commissary benefit. Since commissaries are only one part of 
the military quality-of-life ecosystem on military bases, which 
also include the military exchanges and MWR [Moral, Welfare, 
and Recreation] programs, and that there is an interdependent 
relationship between these three organizations, we agree with 
Congress that any effort to reform commissaries should weigh 
the impacts on exchanges and MWR.
    While the budgetary pressures of ongoing deficits and the 
sequester have forced DOD to make painful cuts to numerous 
programs, we recognize that resale is not immune to the pursuit 
of efficiencies. We have always held that efficiencies can be 
achieved within the commissary system, and should occur as long 
as they do not result in higher prices and diminished benefits 
for military families.
    We agree with DOD's Deputy Chief Management Officer, Peter 
Levine, that efficiencies should drive the budget, and are 
encouraged by this new approach within DOD.
    As we consider commissary reform, it is important to 
remember the words of Lee Scott, the former CEO [chief 
executive officer] and current board member of Walmart, who 
said, rule number one of retailing is don't aggravate your 
customer. Unfortunately, some have learned this truth the hard 
way. Two examples include Walmart's clean store policy and JC 
Penny's attempt to offer everyday low prices to its customers, 
both of which resulted in significant sales declines and the 
firing of senior leaders. They listened to their consultants 
and even their customer surveys, but the changes ended up 
aggravating customers, who either purchased less and/or shopped 
elsewhere. Therefore, we approach reform efforts cautiously due 
to these recent real world examples which demonstrate how 
sensitive the retail marketplace is to change.
    As BCG discovered, even a 5 percent increase in prices in 
the commissary would result in 26 percent decrease in traffic. 
In other words, to generate $143 million in revenue would cost 
DeCA $1.3 billion in lost sales. That should serve as caution 
to anyone interested in commissary reform that efforts should 
be fully analyzed and evaluated and carefully implemented. 
Thus, reform efforts should be a game of inches, proceeding 
slowly and only implementing concepts that can be easily 
reversed if negative effects begin to occur.
    Chairman Heck, I look forward to your questions in 
discussing specific suggestions for reform with you and the 
committee. I yield back.
    [The prepared statement of Mr. Gordy can be found in the 
Appendix on page 62.]
    Dr. Heck. Thank you.
    Ms. Huck.

STATEMENT OF EILEEN HUCK, GOVERNMENT RELATIONS DEPUTY DIRECTOR, 
              NATIONAL MILITARY FAMILY ASSOCIATION

    Ms. Huck. Chairman Heck, Ranking Member Davis, and members 
of the subcommittee, thank you for the opportunity to present 
testimony on the military resale system and its value to 
military families.
    Military families tell us that the commissary is one of 
their most valued benefits. While we understand and appreciate 
the need for efficiency and fiscal restraint, we caution 
against making changes to commissary funding levels or 
operations that put at risk a benefit many families rely upon.
    When discussing the commissary benefit, it is important 
first to understand what that benefit really is. Our 
association has argued that the commissary benefit is not just 
the existence of a brick-and-mortar grocery store on an 
installation; rather, the benefit is the savings that service 
members and families see when they shop at the commissary. 
Those savings are a vital non-pay benefit relied on by many 
military families, especially junior service members and those 
families in remote or high-cost locations. Any proposal to 
alter the commissary operating structure or reduce its funding 
level must, in our view, also preserve the savings. Those 
savings are not insignificant.
    The Defense Commissary Agency, or DeCA, reports that 
families who regularly shop at the commissary save 30 percent 
over civilian grocery stores. We recognize that individual 
families' level of savings will vary based on their location 
and shopping habits. However, DeCA's mandate to sell groceries 
at cost plus 6 percent provides all military families with the 
assurance that they will be able to put food on the table at a 
reasonable cost regardless of where they are stationed.
    The unique challenges of military life increase the 
importance of the commissary benefit. Due largely to frequent 
military-ordered moves, military spouse unemployment rates are 
far higher than their civilian counterparts. For this reason, 
many military families must get by on a single income. Many 
junior families actually qualify for nutrition assistance 
through the Women, Infants, and Children, or WIC, program. 
Commissary savings allow those families to stretch their food 
dollars and help ensure that even the most junior service 
members can feed their families.
    We hear often from military families who tell us how much 
they value the commissary benefit. When we posted an article on 
our Web site about recent proposals to cut commissary funding, 
dozens of military families wrote back to share their 
experiences with the commissary. One military spouse wrote, 
``We are a family of six and have been in the military for 17 
years. The commissary is something we have relied on at every 
duty station we have been. We are currently stationed in Alaska 
and use the commissary and the exchange on a weekly basis. With 
the prices in Alaska being higher than what we are used to, the 
comfort of the commissary made it easier to make sure I have 
all I need to feed my family.''
    Several recent proposals regarding the commissary include 
plans to reduce the appropriation and use revenues generated by 
commissary sales to operate the resale system. We ask you to 
consider, if such a plan is adopted, what would happen if 
revenues were to decrease. This concern is not unfounded. Last 
year the Department commissioned the RAND Corporation to study 
what would be the effects of increased commissary prices. Not 
surprisingly, RAND found that if prices increased, fewer 
military families would choose to shop at the commissary, 
leading to a reduction in commissary revenue. We fear that 
faced with lower revenues, DeCA would be forced to reduce 
operating hours, lay off employees, and ultimately close stores 
in order to cut operating costs.
    We are gratified that the DOD has expressed a commitment to 
preserving commissary savings in its recent factsheet on the 
resale system. However, much depends on how DOD defines what it 
calls the tangible and intangible elements of the benefit, and 
what metrics it uses to ensure its goals are met.
    We ask Congress to require transparency from the Department 
as it develops plans to optimize the resale system. Military 
families deserve the assurance that any changes to the military 
resale system prioritize their well-being.
    In closing, we note that maximizing revenue has never been 
a priority for the commissary, nor should it be. The mission of 
the commissary is to provide military families with a vital 
non-pay benefit, the savings they realize by shopping there. In 
our view, DeCA has fulfilled this essential mission effectively 
and well. Before making any changes to the commissary's 
operations, we ask that you first consider the impact on 
military families, who rely on commissary savings to help 
ensure they are ready and able to support their service member.
    Thank you very much for the opportunity.
    [The prepared statement of Ms. Huck can be found in the 
Appendix on page 84.]
    Dr. Heck. Thank you.
    Ms. Goldberg.

 STATEMENT OF BROOKE GOLDBERG, DEPUTY DIRECTOR FOR GOVERNMENT 
      RELATIONS, MILITARY OFFICERS ASSOCIATION OF AMERICA

    Ms. Goldberg. Chairman Heck, Ranking Member Davis, and 
distinguished members of the subcommittee, thank you for 
holding this hearing on commissary reform.
    Your defense of this landmark benefit that has supported 
military personnel and their families for generations is 
critical to its continued existence today.
    I am pleased to be here to represent more than 390,000 MOAA 
[Military Officers Association of America] members and as an 
Air Force spouse of 13 years. I am a regular patron of the 
commissary and have depended on it during 11 years of my 
husband's Active service, including 10 deployments for OIF 
[Operation Iraqi Freedom], and now that he is a reservist.
    Repeatedly, advocates come to the Hill to protect this 
benefit and it has remained protected because of your efforts 
and support. That support exists because it has intrinsic and 
real value, and provides a consistent and dependable benefit 
that would be costly to replace.
    Our service members, retirees, wounded warriors, widows, 
and families know no matter how big or small the town, how far 
it is from family or familiar surroundings, the commissary will 
be there. It provides the consistent products, savings, and 
community they have come to know and rely on from the first day 
they stepped through the gate.
    The amount of money appropriated for the commissary costs 
taxpayers the equivalent of a 2 percent pay raise to the entire 
military, but the monetary value to the E-5 with 8 years of 
service and a family of four is equivalent to a 9 percent pay 
raise. That amount is higher for the most junior enlisted. 
Imagine the value it has to an 82-year-old widow on a fixed 
income, or the wounded warrior and family trying to get back on 
their feet and find a new normal.
    In times of austerity, we should not be looking to cut a 
benefit that the currently serving, wounded, widows, and 
retirees so greatly rely upon and earned access to when we 
can't afford to replace it with something equally good or 
better.
    We are gratified that the Department of Defense has heard 
the call from patrons and recognized that the savings is the 
benefit, and higher prices or surcharges will hurt them or make 
them stop shopping at the commissary altogether.
    DOD says it is focused on maintaining the patron benefit. 
We hope this includes using DeCA's current market basket 
calculation methods for savings. It is important to not 
reinvent what patron benefit is. If DOD uses new metrics to 
determine a current savings levels that will be used as metric 
going forward, we will not be measuring apples to apples. DeCA 
currently compares thousands of items in its market basket 
study against private grocers, and calculates an average 
savings of 30 percent. When Boston Consulting Group measured 
just 50 items in their market basket, it found a much lower 
savings level.
    We believe changing the market basket study could result in 
a reduced benefit by excluding comparison of items commonly 
purchased by patrons in calculating the savings measured. 
Therefore, maintaining consistency with previous calculations 
is imperative to maintaining the benefit that patrons know and 
rely on.
    DeCA has been repeatedly asked to find efficiencies in 
providing this benefit, and they have done so. However, at some 
point, we think they will be forced to find them where it will 
be unpalatable to patrons either through price increases, 
changes in service, or changes in quality.
    The cut to the second destination transportation subsidy in 
Asia last year recently demonstrated the potential costs passed 
on to patrons, with a bag of romaine lettuce costing more than 
$10 in Guam. Those stationed overseas at the pleasure of their 
government should not be stuck with the bill for shipping 
resources to their location.
    Proposals to merge the commissary and the exchanges are 
common. Most have not occurred, because it is difficult when 
businesses use different backroom logistics, different business 
goals, and operating restrictions. We simply don't know what we 
don't know. How will this affect product quality, savings, and 
customer satisfaction levels? If for the worse, how will that 
affect foot traffic for the exchange, affecting MWR dividends, 
affecting patron trust, access, and sustainment of support and 
quality-of-life programs? How will this impact the employment 
and earning power of approximately 10,000 military-affiliated 
employees, including more than 4,000 military spouses?
    Maintaining the benefit at levels patrons can depend on, 
provide quality products, customer satisfaction and savings, 
with accessible hours and service should be the priority, and 
we thank this committee for outlining those benchmarks in the 
National Defense Authorization Act. We think those benchmarks 
are the best metric, which all new proposals should be 
evaluated against.
    Thank you for this opportunity to share the views of MOAA 
and its members. I am happy to answer any of your questions, 
and I yield the rest of my time.
    [The prepared statement of Ms. Goldberg can be found in the 
Appendix on page 95.]
    Dr. Heck. Great. Thank you all very much for your testimony 
and for all of you staying within the 5-minute timeframe. I 
think it is the first for this panel.
    I will ask Ms. Huck and Ms. Goldberg first. The committee 
has heard from DOD that military families desire the option of 
purchasing a private label product from their commissaries, and 
the studies done by BCG recommended that commissaries should 
offer private label products. Since private label products are 
uniformly offered in retail grocery outlets, do you believe 
that military patrons should be afforded the same choice as 
outside the gate, and why or why not?
    Ms. Huck. Mr. Chairman, our concern is that DeCA does not 
have the expertise to develop a private label product, and we 
are concerned about what the extra expenses and logistical 
responsibilities would be incurred if DeCA were to be required 
to provide a private label product.
    Right now the commissary sells name brand items that 
patrons are familiar with and they have the assurance that 
those items are of high quality and low cost. We are concerned 
that asking DeCA to develop a private label product would not 
give patrons that same assurance of quality.
    Dr. Heck. Okay. Ms. Goldberg.
    Ms. Goldberg. I think that Eileen covered all of the things 
that I also would cover.
    Dr. Heck. Great. Thank you.
    I will ask Mr. Nixon and Mr. Gordy. I understand that you 
both, both organizations have concerns and disagreements with 
some of the BCG findings. If you could list your top one or two 
concerns with a particular finding, please do so.
    Mr. Nixon. Quickly, Mr. Chairman, I would characterize the 
results from the BCG report as kind of the good, the bad, and 
the ugly. Their pricing survey was certainly very limited when 
you consider that the Defense Commissary Agency does a full 
comparison item by item, UPC [Universal Product Code], weighted 
by volume, regionalized, they do local surveys on meat and 
produce to calculate the 30 percent savings. So it was kind of 
disingenuous to go out and take a small sample and come back 
and say here is more what the savings range is.
    The other thing is they really kind of almost talked with 
disdain about the nonretail aspects of the Defense Commissary 
Agency, that, you know, they have these anomalies of vendor 
stocking and contracted-out functions within the store. The 
fact is that is the way Congress constructed the system, that 
is the way DOD conducted it, and it has a lot of difference 
anomalies to it that are built-in inefficiencies because it is 
a Federal agency. They, you know, they have inherently 
nongovernmental function surveys. They went through the A-76 
process, outsourced a lot of their functions, shelf stocking, 
receiving, storage and handling, custodial. A lot of those are 
awarded at a premium under Javits-Wagner-O'Day, so it costs 
more to operate in the environment.
    So in a retail operation, you would never operate a store 
that way. I think the BCG kind of missed that, that they are 
doing what they are doing because that is how they were set up 
to operate. There are more efficient ways to do it if you want 
to make them a retailer, but you need to make them a retailer 
first.
    Dr. Heck. Mr. Gordy.
    Mr. Gordy. I would say the top two items of concern for us 
related to the BCG report would be the private label products 
and variable pricing.
    First of all, the private label product, the main concern 
there is currently you have name brand products being put into 
the stores, and for those products to get into that store, as 
Mr. Nixon said in his opening testimony, there is about $500 
million of industry support that goes to ensure that those 
products are stocked. Well, first of all, that they are 
ordered, that they are stocked, that they are marketed, that 
they are promoted. These are activities that take place in 
every commissary every single day that is funded by industry.
    To institute a private label product is going to have two 
effects: number one, DeCA is now going to have to--what makes 
private label successful in the civilian marketplace is the 
amount of actual marketing that goes into getting the patron to 
buy those products. So DeCA is now going to have to add to 
their cost and add to their staffing people who have to go out 
and market these products. Then they are also going to have 
somebody stock those products. And then they will have someone 
go in there and then they will have to do the promotions and 
the other--the displays and things like that to get the patrons 
to buy them.
    Well, if DeCA is now going to take on those functions 
within the store, which is currently being provided by industry 
today, and these products are going to compete with the 
national brands, the national brand manufacturers are going to 
say, if DeCA is now going to provide this in-store support, 
which we are currently providing today, which we don't provide 
to any other retailer, then we are no longer going to provide 
it for DeCA.
    So that is a conversation that has not taken place. No one 
has asked the manufacturers what will change. If you look at 
the BCG report, they list all the people that they consulted. 
They did not consult the industry, who are the third leg of the 
three-legged stool of delivery of this benefit. So they are 
missing a major piece of the pie here.
    And in order to make variable pricing work within the 
commissary, they are going to have to institute variable 
pricing, which allows DeCA now to raise prices on products. 
This becomes a slippery slope. Today DOD can say, we are going 
to keep our hands tightly held on this and we are only going to 
do what--generate enough revenue just to help offset a little 
bit of cost. We don't know what will happen 5 to 10 years from 
now with the future leaders within DOD.
    Dr. Heck. Thank you. Thanks very much.
    Mrs. Davis.
    Mrs. Davis. Thank you, Mr. Chairman. And perhaps I can 
continue with this conversation a little bit about the 
labeling, because I do remember in sitting here, you know, as a 
consumer when we had this discussion with BCG, we know that, 
you know, we all adopt, if you will, certain companies now and 
have some faith in their label. So you know, it seemed like, 
well, okay, you know, I think our military families, and you 
would subscribe to this, certainly have faith in the 
commissary. I mean, they have great faith in the commissary. 
They would transfer that in some ways.
    But on the other hand, I hear exactly what you are saying. 
And I was struck that, Ms. Huck, you were saying that they 
don't have the expertise. It is not that they don't have the 
wherewithal to have the expertise, but the system hasn't been 
set up that way, and so there is really a gap there.
    I think what I am wondering is how if you were tasked with 
trying to develop a process, and because it would be over time, 
to test this on a number of ways in which you were consulted 
and you were part of that, how would you do that? What do you 
think that we should be listening out for if, in fact, people 
say, you know, let's give it a try?
    Mr. Nixon. I would say the first thing is a business 
system. This pricing model requires a sophisticated business 
system to manage price elasticity between the brand name and 
private labels and things that patrons are used to seeing out 
in the private sector. That system is currently being deployed 
at the Defense Commissary Agency. The first model that would 
give them the capability to even begin to look at this 
capability will be probably in the third quarter of this year.
    So they will just begin to have the capability then. They 
will have to start testing it. As with any system deployment, 
if it is delayed, then that capability is delayed. That is the 
first thing, because you can't do this on a pencil and paper. 
And so they need the system. They will have that in place.
    Mrs. Davis. Have you all been consulted about developing 
that system?
    Mr. Nixon. This is a system that they procured through the 
government process. It is a commercial off-the-shelf. I don't 
have any qualms about the system. And it is replacing a lot of 
antiquated systems they had down there when I was down there, 
so they finally got around to replacing those. And then the 
expertise, it is not just the system, it is the expertise to 
manage in that environment. And they don't have it. And it is 
not their fault----
    Mrs. Davis. Right.
    Mr. Nixon [continuing]. They just weren't constructed to 
manage in that environment. So those are capabilities.
    But, my concern is they are going to bring in--you know, we 
are going to figure out, well, how do we do variable pricing 
and private label? They don't know. They'll bring a consultant 
in that says, well, here is how you raise prices, and here is 
my bill and make sure you raise them high enough to pay it. You 
know, that it is kind of the path we are going on right now. It 
will take a while for them to develop that capability.
    Mrs. Davis. Thank you.
    Mr. Gordy. Absolutely. You know, even if you take a look at 
the Boston Consulting Group's report, they lay out that DeCA is 
going to have to first bring in a manager, and then they are 
going to have to bring in analysts to manage--the way that they 
characterize it is you need one analyst for every two 
categories, and there are numerous categories within the 
commissary. So how many of these analysts are going to be 
required to be able to do this?
    Then you have to manage the savings. The way the savings, 
according to their survey, they went outside the gate at some 
commissaries, particular ones, and they measured the price of 
goods around each base that they tested. Well, you can't do 
that at every single base. How much time and effort is that 
going to take to maintain that level of savings comparatively 
to outside the gate at each base?
    So some of the challenge of price rationalization, 
particularly trying to raise prices in certain parts of the 
country and then lower it in other parts of the country, that 
is going to take a lot of work to be able to pull off.
    Mrs. Davis. Yeah. I appreciate that, Mr. Gordy. Thank you.
    I am just wondering just in terms of the delivery and to 
families and, you know, the decisions that people make, of 
course, every day, and sometimes it takes a period of time for 
people to, like, transfer their loyalty, what is it about that 
delivery to families that you think especially needs attention?
    Ms. Goldberg. I think there are a few things----
    Mrs. Davis. Given that maybe all--some of these--you know, 
so many of these very important contingencies and issues would 
be worked out.
    Ms. Goldberg. Are you asking specifically about private 
label and variable pricing? I think that any time you mess with 
the savings level, any time that families perceive that there 
is a threat to the savings that they receive when they go in 
the door, and an alteration to the delivery of the system, that 
you risk their loyalty. They really rely on knowing exactly 
what they are getting when they walk through that door, whether 
that door is at Stuttgart or in Guam or near Seattle or at Fort 
Sill. They rely on that consistency.
    And so when you change things, you risk them leaving and 
not coming back, which then affects a whole lot of other 
systems that we rely on to support our military families.
    Mrs. Davis. Okay. I think my time is up, Ms. Huck. Maybe we 
will follow up later. Thank you.
    Dr. Heck. Mr. Walz.
    Mr. Walz. Thank you, Chairman, for holding this. And thank 
each of you for being here and your testimony of what you do. I 
think about it, with all the stress of military life, grocery 
shopping should not be one of them. And thanks to all of you, 
it hasn't been, and I think that is very important to keep in 
mind.
    I think you started to hit on that, Ms. Goldberg is hitting 
on it, of all the things involved in it, that there is a strong 
psychological benefit here, and I think we need to again, I 
don't say that justify wastefulness where we can find 
efficiencies; I say it because it is a reality of military 
life. So I appreciate that. And I think it is probably because 
of the due diligence of the chairman and the ranking member of 
thinking about this.
    And I don't know if this means anything or not, but since I 
have been on this committee, I have had more opportunity to 
look for cost savings in the commissary than the F-35, and that 
is somewhat--it is a little chip on my shoulder about that. If 
we are looking for cost savings, there is other places, but I 
do think it is right to look at these things and ask. And I 
think you are asking all the right questions with----
    Ms. Goldberg, how would you--and I know maybe you can't 
quantify it. How high would you say, because I am thinking 
about this, how do we explain to the civilian sector how 
important the commissary is? How high do your members place the 
commissary benefit?
    Ms. Goldberg. I don't have a specific numerical answer for 
you, but consistently when MOAA has surveyed its members, and 
other advocacy groups as well, there have been lots of studies 
on this, service members and their families, retirees rank the 
commissary very high, one of their most favorite benefits, 
along with health care. It is critical.
    Mr. Walz. I find myself talking to civilian people not 
quite understanding what our obsession is with the grocery 
store, but it is real, and especially--and I ask you this: are 
we getting into the wrong territory here if we separate CONUS 
[contiguous United States] with OCONUS [outside the continental 
United States] on the benefit of it, because I think that 
psychological effect is even stronger overseas? And I am 
asking, is there things we can do here because of the 
availability of private sector, or is that the wrong way to go 
about it?
    Ms. Goldberg. I agree that the need for commissaries OCONUS 
is very, very obvious. And there are a lot of questions about 
CONUS, but the reliance on commissaries stateside is still 
very, very important. Families rely on it. It is not just a 
grocery store. It is a place where military families meet up, 
whether they are in a high density area or a very remote area.
    Here in the DC area, military families are spread out all 
over the National Capital Region, but the commissary is one 
place where they have in common.
    And the price matching, or the price--not the price 
matching, but the price savings on goods is really, really 
critical. I have tons of grocery shopping choices. When I moved 
here, I will tell you, I was shocked when a package of bacon 
cost $8 at my local private grocery store, but I went to the 
commissary, and it was roughly the same price it had been at 
the commissary that I went to in Florida. That mattered.
    Mr. Walz. Yeah it does matter. And I think all of you are 
hitting on something. Again, it is not stuck in that not afraid 
of change type of issue, but I still am not sure, and I think 
each of you hit on this, the unintended consequences of a 
change like this have not been studied, and I think there is a 
willingness to put it into a ledger sheet and a business model 
and say this is how it is going to turn out, and I worry about 
that, because, again, as I said, of all those stresses of 
military life, consistency on certain things is absolutely 
critical for those families.
    And I would come back to that hit on the employment piece 
and maybe--I am not sure if this is the right group to talk to 
on this, the MWR funds and all that, this piece gets left out 
of that too, and as a senior enlisted soldier, how critical 
that is on where that--that is going to have be made up 
somewhere, and I am really not interested in watching our 
soldier's family do bake sales to fund, you know, ski rentals 
or whatever it might be. So I do think--and I ask my colleagues 
to take that into consideration, maybe asking the industry 
folks to do a little bit better about that. With those BCG 
recommendations, how does it affect your business model? I 
mean, can you summarize? What is going to change, the top line 
things that will change?
    Mr. Nixon. Obviously the first thing that I mentioned 
earlier and Mr. Gordy did as well is the level of industry 
support. Around $500 million industry puts in annually to 
offset the cost of operations. A lot of it has a historical 
perspective from the standpoint of vendor stocking, but a lot 
of it is--you know, the difference in this model is all 
promotional dollars go to the shelf. You know, there aren't any 
fees skimmed off that are in the retail environment, slotting 
fees and other pools that money go into.
    So a manufacturer has a certainty when they put a promotion 
together, that price goes into the shelf. It is the ultimate 
supply and demand economy. They are going head to head with 
their other brand name counterparts with competition on the 
shelf, and the patron decides what items stay and what items 
go.
    When you start changing the model onto the private sector 
side, there is manipulation in what is on the shelf. The 
private label items are price-positioned and promoted by a 
retailer, because it is a house brand. And it is artificial 
patron preference, because they position them next to the brand 
name, whether they have any sale or not, because that is what 
they want to sell, because that is where they make their money.
    Mr. Walz. Don't you think it is interesting the first thing 
you come to, and it is very obvious in this industry, these are 
the things you hit on directly as the major influence, and yet 
that industry wasn't consulted as part of the discussion. 
Doesn't that seem like a glaring hole? I know you mentioned it, 
but I am fascinated, because I kind of anticipated this was 
going to be your answer. The biggest thing that is going to 
change, that part wasn't taken in.
    Mr. Nixon. Yes, sir.
    Mr. Walz. All right. I yield back.
    Dr. Heck. Thank you.
    Ms. Stefanik.
    Ms. Stefanik. Thank you, Mr. Chairman. And thank you to the 
witnesses for your testimony today.
    I want to address my first question to Ms. Huck and Ms. 
Goldberg to further delve into the impact on military families. 
So I represent Fort Drum, where the military resale benefit is 
such an important fabric of the military community.
    You, Ms. Goldberg, talked about, very articulately, that 
the goal should not be maximizing revenue; the benefit are the 
savings for our military families. What are the secondary and 
tertiary effects that weren't included in the BCG report or 
weren't included in the panel today of the impact of this 
proposed reorganization?
    Ms. Goldberg. Thank you for your question. We talked about 
it a little bit in our statement for the record, along with my 
testimony. The interlocking mechanism of the commissary and the 
exchange is a very fine-tuned, harmonic relationship. The 
commissary brings foot traffic to the exchange. The exchange is 
another gathering place for people that operates with a profit 
margin that provides dividends to Morale, Welfare, and 
Recreation activities on the installation, and those could fund 
a variety of programs, and it is really critical to providing 
extra support and quality-of-life programs to military 
families.
    When you start to take that apart and they lose faith in 
the commissary benefit, they might not go to the exchange. That 
reduces the dividends. That reduces the programs. All of a 
sudden military families may feel that there really aren't 
support programs for them anymore or that those programs are 
not important or valued by the Department of Defense or their 
community. And that really is a morale, I mean, it is 
detrimental to morale and readiness, and that is not a place, I 
think, that we want to go.
    Ms. Stefanik. Ms. Huck.
    Ms. Huck. I would add that the system is very 
interdependent in the sense that the large commissaries with a 
lot of volume help support economies of scale that support 
commissaries overseas and in remote locations here in the 
United States. And so our concern is that any change to the 
system that makes families less likely to use the commissaries 
in these locations, such as here in the National Capital 
Region, will lead to less revenue available to support those 
commissaries in locations where families not only rely on the 
savings, but rely on the physical aspect of the store on the 
installation.
    There are many locations even here in the United States and 
certainly overseas where families have few shopping options and 
certainly few affordable shopping options, and so we are very 
concerned about how any change to the commissary system will 
affect those families who are in locations where the physical 
presence of the store is critical to their well-being.
    Ms. Stefanik. Thank you. I also wanted to just note that I 
think one of the most significant statements that has been made 
from the panel is what Ms. Goldberg said, that these savings 
account for a 2 percent to a 9 percent pay raise for our 
military families. That is significant in these challenging 
economic times.
    I want to turn to Mr. Gordy and Mr. Nixon. BCG, obviously 
one of their proposals was a private label. And Ms. Huck 
pointed out the fact that DeCA does not have the experience, 
the expertise, let alone the logistics capabilities. Can you 
elaborate on that and the challenges that would provide and the 
logistical issues that we would have to overcome to make that 
transition?
    Mr. Nixon. Yes, ma'am. First of all, just to kind of set 
the playing field. DeCA did not introduce private label not 
because it didn't want to. Prior to last year's change in the 
law, there was a brand name exception to the Competition and 
Contracting Act, and so if you bought brand name products 
directly from a manufacturer, you didn't have to compete each 
order, but it developed into the signature of the commissary 
system is, was brand name and those brand names were found 
everywhere in the world that you went.
    Private label is a company developed and supported brand. 
And we talked about they don't have the expertise to develop 
their own private label. DeCA is not big enough to develop a 
private label. They just--you know, it wouldn't be cost-
effective, they wouldn't be able to manage the quality. So they 
will buy someone else's private label and put it in the store, 
but as a house brand, then they must price it, they must 
promote it, they must position it. And it is artificial 
positioning.
    You know, the day it is put in the store, it doesn't have 
customer preference. They are going to give it artificial 
customer preference, because they want to sell it because they 
are making money on it. And that is primarily what private 
label does in the private sector.
    So, yes, you can get from here to there. It is eyes wide 
open. Make sure we understand what is going on when we move 
into this environment and what actually is taking place is they 
are putting a brand in with artificial preference to mark it up 
to make money.
    Ms. Stefanik. Thank you. My time has expired.
    Dr. Heck. Mr. O'Rourke.
    Mr. O'Rourke. Thank you, Mr. Chairman. This is my fourth or 
fifth hearing or briefing or roundtable on this issue in 
addition to the excellent briefing and background work that my 
staff has done, and I feel like I am just beginning to scratch 
the surface of an issue that is far more complex than it 
appeared at the outset.
    And, for example, Ms. Goldberg, I have really been looking 
at the numbers and those things that we can measure, but you 
brought up a really important point: there is a social dynamic 
to this, there is a quality-of-life aspect that is perhaps 
immeasurable. You talked about military families having a 
secure, consistent place where they can meet and be with each 
other and share something that is unique to service, and I 
think that is important and something that needs to factor into 
our decisions and calculations.
    But I would like, with the 4 minutes that remain, for each 
of you to take a minute--I am probably never going to achieve 
the depth that you have on this subject. Mr. Gordy, you 
mentioned that as we move forward, we should look at this as a 
game of inches. Mr. Nixon, you talked about ensuring that we 
measure this appropriately as we pilot things. Ms. Huck, you 
talked about apples to oranges. Can you just take a minute and 
tell me and the committee what we should be measuring going 
forward? What are the key measures or metrics, understanding we 
won't get all the quality-of-life aspects, that will tell us 
whether the changes that are coming forward are working or not?
    And, Mr. Gordy, it looks like you are ready. We will start 
with you.
    Mr. Gordy. Sure. You know, what is really interesting about 
this is why we are here, it has all been driven by the budget, 
and so much of what is in DeCA's budget are things that DeCA 
will never be able to make more efficient, because it is money 
that they give to other programs within the Department of 
Defense, such as on-base support, which they can't control how 
efficient those things are or whether or not those costs get 
reduced.
    I think if we are going to change the model from what we 
have today from having national name brand products at cost 
plus 6 percent--1 percent for spoilage, 5 percent for 
surcharge--if we are going to abandon that model to move to a 
more complex model, we need to make sure that we have covered 
every area and understand every potential cost and every 
potential risk that might be faced as we move forward.
    Not say that these things shouldn't be tested, but they 
should be tested in small bits, and making sure that if these 
things start to fail, that we pull back. So that would be my--
--
    Mr. O'Rourke. Let me ask Mr. Nixon, is--the Walmart golden 
rule of don't aggravate the customer seems to be very 
important. Would that be the primary metric, customer 
satisfaction, in the commissaries?
    Mr. Nixon. Absolutely. One of the benchmarks I said was 
customer confidence, and clearly customer confidence is very 
high in the system right now because it is predictable. 
Everyone knows it is goods at cost, everyone knows what the 
surcharge goes for. When you start tweaking that and people no 
longer know exactly what is going where, what has been marked 
up, and why are these new products in that don't have 
demonstrated customer preference, why are they showing up, you 
start changing customer confidence, you start changing the 
predictability of the system.
    And I think that is the benchmark of the system right now, 
it is predictability and the fact that its savings are 
audited--it is the patron satisfaction is done independently, 
and it is a valued store, and it is viewed as their store, and 
we have to keep that in mind. This is that--the Defense 
Commissary Agency is managing their store.
    Mr. O'Rourke. And for Ms. Huck and Ms. Goldberg, I have 
about a minute left, does customer satisfaction get to some of 
the issues you raised, Ms. Goldberg, that might reflect 
military families' understanding of the value of those 
commissaries, if we are measuring that?
    And, Ms. Huck, if there is time remaining, what are the 
apples-to-apples comparison we want to look at?
    Ms. Goldberg. I don't know that I would rate savings, 
quality, or customer satisfaction against each other. I think 
they are all equally critical and they play an important role, 
and this committee really hit the nail on the head in setting 
those as benchmarks for measuring how this benefit is treated 
going forward, knowing that a decrease in any single one of 
those areas could really start dissecting the entire system and 
making it fall apart.
    Ms. Huck. I would add that we are very focused on 
transparency when it comes to making any changes to the 
commissary system. Right now, as Mr. Gordy and Mr. Nixon have 
pointed out, the system as it is structured is very clear. 
Families understand essentially how items are priced.
    Any changes to that that are not clear to families, I 
think, is going to really inspire a lack of confidence in the 
system and the quality in the store that right now they rely 
upon. So we are asking for transparency in any changes that DOD 
makes moving forward.
    Mr. O'Rourke. Thank you. Thank you for your answers.
    Mr. Chairman, I yield back.
    Dr. Heck. Mr. MacArthur.
    Mr. MacArthur. Thank you, Mr. Chairman.
    Thank you for being here. You have all very ably 
represented your members, and I was struck by one thing that 
each of you said. Mr. Nixon, that we need to avoid this trap 
that the beatings will continue until morale improves; Mr. 
Gordy, that we should avoid aggravating our customers; Ms. 
Goldberg, that this is the single highest valued benefit that 
members identify; and, Ms. Huck, that those overseas at the 
pleasure of their government should not foot the bill. And I 
think for me, those are all pretty important measures of how we 
should approach this.
    I would associate myself with some of Mr. Walz's comments, 
not the F-35 comment, but grocery shopping should not become 
stressful when we have got a lot of other issues that our 
military families have to deal with.
    And before I pose a question, there are three things I 
think we should remember. One, we have had these four or five 
hearings now, and we are talking about how many hundredths of 1 
percent of the military budget we can save, and I think we have 
to keep that perspective. We are talking about a lot of 
dollars, but relatively a very, very small percentage of our 
defense budget.
    And, two, that the benefit to our service members goes 
beyond just the commissary benefit. Ms. Goldberg, you have 
mentioned--and I got your quotes backwards, actually, but you 
recognized that as I said it. But there are other benefits that 
come from this commissary benefit than just financial, and 
there are other benefits to the U.S. economy. It benefits our 
service members, it also benefits U.S. suppliers, it benefits 
the U.S. economy, and any changes have downstream effects.
    And, thirdly, we are about to consider meaningful changes 
to the healthcare system of our service members. And there is a 
compounding effect, I think, when we do too many things at one 
time, and so I think we need to be very cautious.
    And that leads me to this question I would ask each of you. 
What improvements would you advocate to the system, the 
commissary system, that would not hurt morale, that would not 
cause aggravation, that would not be seen as a decline in 
benefits, and that wouldn't ruin the downstream benefits that 
you have described? In other words, what changes do you see 
that cause no harm to this system?
    Mr. Nixon. Well, yes, sir. That is an excellent question. 
And I would say that--and I think because many of the things 
that are in the back office environment fall into the too-hard-
to-do box initially, they focused on the front end of something 
that is a little easier to do, and so I think that is where the 
focus is. I think there are so many things that can be done on 
the back end.
    You know, these are all business environments that order 
computers, supplies, store supplies, consulting contracts, 
major systems award, these are all business systems that manage 
inventory and throughput and front-end systems. I would 
probably look at--short of making DeCA a non-appropriated fund 
activity, is there an opportunity to loosen some of the 
procurement regulations on them to let them operate a little 
more in the quasi-government environment to let them 
participate with the other business operations, and----
    Mr. MacArthur. I am going to stop you there. I get the 
point, and it is a good one.
    Mr. Gordy.
    Mr. Gordy. I would just have to echo what he was saying, 
Mr. Nixon was saying. I mean, if you take a look at the 
exchanges, the--particularly AP's just went through a 
restructuring, they were looking at about having a $50 million 
dividend. They went through a restructuring. Their dividend is 
now back in the--or remained in the $200 million level, or 
close to that. So there are things that can be done inhouse 
that have no impact. It is just about running it more 
efficiently. So----
    Mr. MacArthur. And, Ms. Huck, we have got just about 45 
seconds more.
    Ms. Huck. I would answer what we would ask you not to do, 
which is make changes that affect the shopping experience for 
the military family and the service members who shop there. 
There are certainly efficiencies that can occur at the--above 
the store level that might make the system run more 
efficiently, and we would certainly be open to that, but 
anything that affects the shopping experience of the military 
family or service member, we think the value--the quality of 
the shopping experience itself and the access in terms of 
operating hours is an important part of the benefit.
    Mr. MacArthur. And Ms. Goldberg.
    Ms. Goldberg. I concur with the previous statements, that 
the changes should be relatively invisible to the patron, 
unless they are improvements.
    Mr. MacArthur. All right. Thank you all.
    I yield back.
    Dr. Heck. Mr. Coffman.
    Mr. Coffman. Thank you, Mr. Chairman.
    Well, I have somewhat of a different view. First of all, 
let me just say thank you all for supporting our military 
families. I have 21 years combined military service, Active 
Duty, enlisted, United States Army, infantry officer of the 
United States Marine Corps, five overseas deployments.
    I support these reforms. And I think that they are not 
going to compromise the benefit for our families. But they are 
threatening for the people who run the system, and I understand 
that, and change is always difficult. And so if you--in your 
opposition, I really strongly suggest and would love to hear 
more about your ideas to make this system more efficient. We 
have got to challenge government everywhere. We have got to 
challenge government to be more--you know, to be able to 
deliver services more efficiently, and no area of government 
ought to be immune from that, and so that is my concern. And I 
challenge you all to do that.
    Mr. Chairman, I yield back.
    Dr. Heck. Thank you.
    You know, I understand that there certainly is the monetary 
savings is critically important, and I think the points that 
have been brought up about making sure we have the correct 
market basket and the correct analysis is critically important. 
As you mentioned, Ms. Goldberg, DeCA talks about a 30 percent 
savings, the BCG group with their modified basket had it 
somewhere around 20 percent or a little bit less.
    Needless to say, there is a break point at which if there 
is not enough savings, people are going to walk. So for the 
sake of argument, let's say we want to maintain--we set a 
benchmark that the market basket savings has to be 30 percent. 
If variable pricing allows that 30 percent savings to be 
maintained over what is available outside the gate, whether you 
are shopping in a high-priced area or a lower priced area in 
the economy, as long as the service member and their family is 
getting that 30 percent savings over what is available outside 
the gate, what would be the downside to the pilot program of 
trying variable pricing? Ms. Goldberg.
    Ms. Goldberg. I would defer to the business mechanics of 
that to the colleagues at the other end of the table, but as 
long as the savings is maintained and when the customer walks 
in the door, they receive that same consistent benefit, whether 
that commissary is in a remote location or overseas or in a 
high-density area, I don't see a downside as long as we can 
maintain that savings and not have the fallout of lost 
employees and other issues that could affect other military 
members.
    Dr. Heck. Ms. Huck.
    Ms. Huck. Mr. Chairman, I would say that Brooke actually 
made the point in her statement earlier that she had the 
confidence when she moved here to a high-cost area that the 
cost of her groceries would be the same here as it was when she 
lived in Florida. And that is our concern when we talk about 
variable pricing and setting the savings level based on what is 
available outside the gate versus a national standard, you run 
the risk that families in high-cost areas are actually going to 
ultimately be paying more, because the 30 percent of the cost 
in the DC area is a different value than 30 percent when you 
are talking about a lower cost area.
    So part of, I think, what makes the commissary so appealing 
right now to families is that reassurance that wherever they 
go, the prices are going to be consistent, and we would be 
concerned about anything that might potentially take that 
assurance away from families.
    Dr. Heck. And so I would ask, is that a reasonable 
expectation that if you are living in San Francisco, you are 
going to pay the same amount for a grocery that you might be 
purchasing if you live in Tupelo, Mississippi? I mean, just for 
the sake, you know--again, the idea is that the level of 
savings should be based upon maintaining the foot traffic in 
the commissary, which means there has to be a savings over what 
that person would spend if they go outside the gate.
    Ms. Huck. Our concern would be that the pay, leaving 
housing allowance out of the equation, your pay is the same 
whether you are in Tupelo, Mississippi, or in San Diego. And so 
we don't want to see families who are in high-cost areas put at 
a disadvantage.
    Dr. Heck. Okay. Mr. Gordy.
    Mr. Gordy. Mr. Chairman, the way, you know, I look at the 
price rationalization is, again, you are going to have winners 
and losers, and in the areas where there is going to be the 
loser, people that, for instance, here in the Northern Virginia 
area, people in the San Diego area, people in Pearl Harbor, 
they are going to see the cost of the products go up.
    Now, most of us have a grocery budget, right? If the prices 
go up in the commissary doesn't mean our budget goes up; it 
means we still spend the same amount of money on groceries 
whether, you know, if something is 5 percent higher or whether 
it is 5 percent lower. That budget is the budget.
    For the families in these higher cost areas, they are going 
to end up having to--they are going to end up buying less, and 
that is part of the challenge, in these areas, where BCG said 
even a 5 percent price increase will result in a 26 percent 
reduction in traffic. So we have to measure, if we are going to 
increase the price 1 percent, 2 percent, 3 percent, what is 
going to be the adverse impact.
    And then when they also talk about rationalizing prices 
across categories. Now, I will tell you, I came and dropped my 
testimony off on Monday. I was on my way home. I said, oh, I am 
near Fort Myer, let me pop into the commissary. I called my 
wife, what do we need? She said stock up on meat. And they are 
talking about raising prices on meat. My wife knows, if there 
wasn't a good deal on meat, she wouldn't tell me to stop at the 
commissary and do that, but that is what a lot of military 
families do, they stock up at the commissaries.
    And if the prices go up in these high-cost areas and it 
doesn't make sense to drive, for me it is 27 miles to the 
nearest commissary from my house, and my wife and I--every 2 
months we go to a commissary and we stock up. We bought a 
freezer for that purpose. If the prices go up, it doesn't make 
it worth the trip anymore. And so that is the challenge that 
many military families are going to have to--that is the 
question that they are going to have to ask themselves, is it 
now worth the trip.
    Dr. Heck. My time has expired.
    Mrs. Davis, any other questions?
    Mrs. Davis. Oh, thank you, Mr. Chairman. And I know that 
the votes have started.
    The one thing I would just want to add to this discussion, 
I think, and I was telling the--actually, I think San Diego is 
cheaper than here, at least when I go to the grocery store, but 
fresh fruits and vegetables, I mean, that is what we really 
want our families to access, and to use farm products from 
local areas. And I know when you are overseas certainly--I 
guess in Japan, I don't know that I had a lot of fresh fruits 
and vegetables, but I am just trying to make sure that we throw 
that into the discussion and that we ask some appropriate 
questions about that too so that our families really know that 
that is important.
    And I don't know that there would be anything different 
around there. It is not a labeling issue. It is not something 
where, you know, families have said, that is something that we 
are willing to consider, again, given the right kind of studies 
that are done to look at that issue, but I certainly want to be 
sure that we don't, you know, eliminate all the issues around 
fresh fruits and vegetables and the farm-to-table issues that 
are very important throughout the country and certainly very 
important to our military families. Thank you.
    Dr. Heck. Well, since they have called votes, I want to 
thank our panel for taking the time to be here with us this 
morning and for your excellent testimony. Please, you know, 
stay in touch with the members of the subcommittee as we move 
forward. I want to assure everyone that our goal is to find 
efficiencies, create a benefit that is sustainable and valued 
by our service members. And we are all awaiting the GAO report 
and DOD's recommendations, and I am sure there will be another 
hearing once those come out. So, again, thank you all very 
much.
    This meeting is adjourned.
    [Whereupon, at 11:33 a.m., the subcommittee was adjourned.]



      
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                            A P P E N D I X

                            January 13, 2016

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                            January 13, 2016

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              QUESTIONS SUBMITTED BY MEMBERS POST HEARING

                            January 13, 2016

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                    QUESTIONS SUBMITTED BY MR. JONES

    Mr. Jones. Military compensation continues to receive considerable 
scrutiny. What are the major concerns identified by your constituents 
over commissary reforms?
    Mr. Nixon. While DOD has said that they don't want to reduce the 
commissary benefit, the principle concern is that management savings 
initiatives will prove illusory and cuts will have to be absorbed by 
the patrons in the form of higher prices or reduced quality. For 
example, the fiscal year 2017 budget proposal reduced commissary 
funding by $221 million. Were Congress to accept this reduction, we are 
concerned that reform and efficiency initiatives will fall short and 
leave the patron holding the bag. Second, there continues to be active 
talk of privatization of the stores. Our concern here is that it will 
be either tested or mandated system-wide. Privatization carries major 
risks for patrons and the Government. If it fails, you won't be able to 
reconstruct the system. We are also concerned about predictability for 
patrons. Commissary patrons are accustomed to high levels of savings 
and high quality. The efforts by the DOD to institute more generic 
brands and experiment with price variations either by region or 
commodity may weaken the patrons' confidence in the benefit. And, 
success or impact of these pilot programs needs to be measured against 
a solid verified baseline and quickly reversed if there is a negative 
impact on the benefit. As patrons lose confidence, they will migrate. 
The system will lose economies of scale and that will result in price 
spirals and sacrifices in quality. Elaboration on these concerns and 
other concerns with these reforms are presented in out prepared 
testimony.
    Mr. Jones. What measurements should be imposed to determine if 
commissary reforms are beneficial or harmful to the commissary benefit?
    Mr. Nixon. We need to ensure that solid, understandable and 
sensible metrics are put in place that gauge the impact to patrons. The 
commissary agency already has in place a solid, time-tested method of 
measuring savings to patrons and other benefits to the Government from 
commissary programs. This should be verified and used as the baseline 
to which alternative pricing models are measured. There needs to be 
careful analysis against this baseline before any pricing variation 
pilots are implemented. As any pilot programs are implemented, the 
impact needs to be measured against this baseline.
    Mr. Jones. Recognizing that there continue to be supporters of the 
privatization commissaries and zeroing out the appropriated funding, 
how would you propose to reduce the appropriated cost of commissaries?
    Mr. Nixon. Commissary appropriations already have dropped 40 
percent or $600 million per year in real terms from when the Defense 
Commissary Agency was founded in 1991. 180 of the 420 stores that 
existed in 1991 have closed. Much of this is attributable to base 
closures in the U.S. and overseas. However a great deal of the decrease 
has been through efficiencies in operation. For example, in 1996, DeCA 
outsourced their distribution to the private sector that decreased 
operating costs and returned nearly $500 million to the stock funds of 
the DOD. In our prepared statement, we lay out the miniscule fraction 
of personnel costs and the overall defense budget that commissaries use 
and the high return that the DOD and the taxpayer realize from this 
investment. All of these facts have been outlined in several reports 
including a report commissioned by DOD to the Rand Corporation. The DOD 
and the Armed Services Committees of the House and Senate have stated 
that there should be no decrease in the level of savings that patrons 
realize by shopping at the stores. Because commissary costs have been 
cut so drastically over the years, it is difficult to see where costs 
can be cut without impacting the benefits to the patrons. DOD 
commissioned another study to look at reducing costs. The Boston 
Consulting Group identified several areas where they thought costs 
could be reduced. We have reviewed this report in detail. There are 
some efficiencies to be gained but major efficiencies outlined in the 
report require major changes to the system that have been enacted or 
implemented over many years. Each of the efficiencies in the report 
need to be closely examined and carefully implemented. Changes to 
purchasing and supply chain practices need to be carefully implemented 
considering the real world impact on existing relationships between 
manufacturers, brokers and distributors and the disruption of 
promotions, deals and discounts that have grown up over the years. We 
certainly don't want to implement a program that results in gains in 
one area but corresponding losses on another side of the supply chain. 
Another major element of the BCG report is savings in employee salaries 
by making them nonappropriated fund employees. While there possibly 
could be some savings here, it will impact the existing pay and 
benefits of thousands of workers. The BCG report suggests new pricing 
models for patrons and introduction of private label in addition to the 
value brands that are already available in commissaries. Here, there 
need to be sold metrics to measure the impact to patrons before 
entering into any new arrangement. DOD is required to submit a report 
by March 1 on areas where they can gain efficiencies, using the BCG 
report and other sources. We look forward to reviewing this report and 
providing our views on areas where industry and the DOD can work 
cooperatively together with the dual goals of making the system as 
efficient as possible and not reducing the benefits to patrons.
    Mr. Jones. Military compensation continues to receive considerable 
scrutiny. What are the major concerns identified by your constituents 
over commissary reforms?
    Mr. Gordy. The primary concern for commissary reform is adverse 
impact any reforms may have on the benefit provided through the 
commissaries, particularly if prices are increased. Secondarily, if the 
benefit is diminished, we are concerned about the impact on traffic in 
the commissaries and, subsequently, in the exchanges.
    Protecting the military resale ecosystem and the benefits they 
provide directly to the patron as well as indirectly through Morale, 
Welfare and Recreation programs is foundational.
    The Armed Forces Marketing Council is very grateful to the 
Committee for establishing benchmarks for reform that would protect the 
benefit by maintaining consistent levels of savings.
    We are also concerned about the introduction of private label 
products in the commissary, which would shift DeCA from an elegant, yet 
simple model of offering national brands at cost to a more complex and 
costly model of introducing private label products sold at a mark-up. 
Increased costs will come from the management and oversight personnel 
that will have to be employed to manage the program, as well as the 
shipping, stocking, and marketing of the products. We believe that this 
effort has been oversold as a means of reducing DeCA's appropriation 
and that a true, full-spectrum analysis has yet to be conducted to 
understand not only the direct costs of implementing such a program, 
but the indirect costs that will come as a result of industry partners 
reducing the in-store service and marketing and advertising support, 
which is not currently provided to other retailers.
    Mr. Jones. What measurements should be imposed to determine if 
commissary reforms are beneficial or harmful to the commissary benefit?
    Mr. Gordy. We believe that protecting the savings and model are 
key. Efficiencies can be achieved in DeCA without affecting the 
benefit.
    Measurements should include what Congress has already established 
as benchmarks:
    1--Provision of high quality products.
    2--Maintain high-levels of customer satisfaction.
    3--Sustainment of discount savings.
    Even while these three benchmarks may be achieved while instituting 
reforms, it does not necessarily mean that patrons will continue to 
shop. Monitoring patron behavior in response to reforms is also 
important. If the reforms are discouraging patrons from shopping, then 
consideration for a quick reversal of the reform should be made.
    Mr. Jones. Recognizing that there continue to be supporters of the 
privatization commissaries and zeroing out the appropriated funding, 
how would you propose to reduce the appropriated cost of commissaries?
    Mr. Gordy. The AFMC does not believe the commissary benefit can be 
delivered without appropriated support. However, we do believe that 
reductions in the appropriation can be made through more efficient 
management of DeCA.
    We believe there needs to be a rebalancing of the workforce between 
store-level and above-store-level staff. A review of above store-level 
staffing should be conducted to determine if requirements can be met 
with fewer staff.
    We also cautiously support NAFing DeCA's workforce in order to 
balance pay in the commissary system with the civilian marketplace. 
This would mean some salaries would be reduced, while there would be 
some salaries that would be increased in order to attract top quality 
talent. While this may incur increased cost in the near term to 
establish new employee management systems (ie, retirement, healthcare, 
etc), over time it will deliver savings and more efficient and 
effective workforce.
    We believe as DeCA fully implements its Enterprise Business System 
(EBS), which will replace its decades-old, antiquated system, less man-
power and less contracted support will be required to input, manage and 
maintain its enterprise system. It will make working with DeCA more 
efficient for industry and result in less manually-entered data. 
Savings will be captured as the EBS comes on line in the near term and 
as additional elements of the system are deployed in the long term.
    Mr. Jones. Military compensation continues to receive considerable 
scrutiny. What are the major concerns identified by your constituents 
over commissary reforms?
    Ms. Huck. In our view, and in the view of many military families, 
the savings that shoppers receive when shopping at the commissary is an 
important non-pay benefit. Commissary savings can be seen as part of 
the total military compensation package. Thus, any reform measure that 
would reduce the value of the savings is essentially a cut to military 
compensation. While these savings are important to all beneficiaries, 
they are especially critical to families living overseas or in remote 
or high cost locations, where there may be few affordable shopping 
options. Military families understand that the military resale system 
is complex and the various elements are interdependent. Changes to one 
aspect of the system may have unintended and unwanted influence on 
other areas. For example, the economies of scale generated by sales at 
high volume commissaries allow groceries to be sold at low cost across 
the system. Changes to the way high volume commissaries operate may 
threaten the economies of scale, leading to higher prices in those 
areas where shoppers are most dependent on the commissary. It must also 
be noted that in recent years military families have seen pay raises 
below the Employment Cost Index (ECI), caps to their Basic Allowance 
for Housing (BAH), and increased pharmacy co-pays. While each of these 
is insignificant on its own, taken together they represent a measurable 
loss in military families' purchasing power. Families are aware of 
these cuts, which makes them even more anxious about prospective 
reductions in commissary savings.
    Mr. Jones. What measurements should be imposed to determine if 
commissary reforms are beneficial or harmful to the commissary benefit?
    Ms. Huck. The first and most important metric that should be used 
when analyzing any proposed reform to the commissary system is the 
impact it will have on savings. The current practice of selling goods 
at cost plus five percent gives families the assurance that they will 
be able to feed their families affordably wherever they happen to be 
stationed. Any change to the system must be measured against the level 
of savings currently available to families who shop at the commissary. 
The recent study by the RAND Corporation demonstrated that if prices 
increase military families will be less likely to shop at the 
commissary. Thus, we would recommend that any change to commissary 
operations be followed by an analysis of sales volume across the 
system. A drop in sales and/or the number of families using the 
commissary would indicate that the reform was harmful to the commissary 
benefit.
    Mr. Jones. Recognizing that there continue to be supporters of the 
privatization commissaries and zeroing out the appropriated funding, 
how would you propose to reduce the appropriated cost of commissaries?
    Ms. Huck. We understand that reducing the commissary appropriation 
is a goal of many in the Department. In this era of fiscal restraint, 
it is reasonable to ask whether it is possible to reduce commissary 
funding without compromising the quality and value of the benefit and 
if so, how this might be accomplished. Our position has always been 
that any funding cuts should not be visible at the store level or 
affect military families' shopping experience. Military families worry 
that funding cuts will result in reduced operating hours or store 
closures. We urge Congress to oppose any reduction to the appropriation 
that would be apparent at the store level. Making it harder for 
military families to shop at the commissary is effectively a cut to the 
benefit and will paradoxically result in lower revenues as well. It may 
be possible to reduce the commissary appropriation by identifying 
changes to back-end operations that could lead to greater efficiency 
and lower cost. For example, as the Military Compensation and 
Retirement Modernization Commission (MCRMC) suggested, opportunities 
may exist to improve efficiency by consolidating certain operations 
with the military Exchanges. We would suggest exploring whether 
combining the organizations' headquarters, shipping, warehousing or 
other logistical operations would lead to significant savings without 
compromising the value of the benefit to service members and families. 
However, our Association does not have the expertise to make more 
specific cost-cutting suggestions. Organizations such as the American 
Logistics Association and the Armed Forces Marketing Council might be 
better placed to offer specific cost-cutting recommendations. While it 
may be possible to find efficiencies and reduce costs, it is the view 
of our Association that the commissary system as currently constructed 
effectively delivers a valuable benefit to military families around the 
world. In our view, the commissary appropriation is money well spent as 
it helps ensure that even the most junior service members are able to 
feed their families. We caution against any change to the system that 
would threaten this essential benefit, which again is part of the total 
military compensation package.
    Mr. Jones. Military compensation continues to receive considerable 
scrutiny. What are the major concerns identified by your constituents 
over commissary reforms?
    Ms. Goldberg. Military families and other commissary patrons 
continue to be concerned that any reform will include degradation in 
the quality of products sold at the commissary, a reduction in access 
to the commissary (i.e., reduction in store hours) or an increase in 
prices. All of these are undesirable to patrons for obvious reasons. A 
decrease in patronage at the commissary will result in a similar 
decrease in traffic at Exchanges, which in turn means reduced funding 
for Morale Welfare and Recreation programs. Over the past years, 
Service budgets have significantly reduced funding to MWR programs, to 
include closures of specific MWR activities. Reducing the funding 
stream from Exchanges will further compound the budget challenges faced 
by the respective departments. This decrease in support programs could 
adversely affect morale, recruitment and retention.
    Mr. Jones. What measurements should be imposed to determine if 
commissary reforms are beneficial or harmful to the commissary benefit?
    Ms. Goldberg. We absolutely agree that the benchmarks set for 
reform in the FY16NDAA of maintaining product quality, savings and 
customer satisfaction at current levels (or better) are imperative. A 
comprehensive customer survey and refined market-basket comparison 
would contribute to a quantifiable assessment of commissary reforms and 
efficiency initiatives. In the end, any reform should be very carefully 
scrutinized and tested in those areas to determine if those benefit 
areas will be adversely affected.
    Mr. Jones. Recognizing that there continue to be supporters of the 
privatization commissaries and zeroing out the appropriated funding, 
how would you propose to reduce the appropriated cost of commissaries?
    Ms. Goldberg. We believe that supporters of privatization do not 
have a full understanding of the complexities involved. DOD leaders 
have acknowledged privatization while maintaining the benefit at 
current levels is not possible. When the benefit at the commissary is 
reduced, there is a trickle-down effect at the Exchange, and then a 
reduction in MWR dividends for support at the installation. DeCA may be 
able to find new ways to save operating costs, and we believe they are 
in the best position to do so. Any changes should not impact the 
product quality, savings, or customer satisfaction. Commissary access 
contributes to a very board consumer base . . . active duty, family 
members and retirees--so any negative outcome of this reform will have 
a cascading effect well beyond the ``currently serving'' military 
population. Congress must be prepared to defend this benefit and 
appropriations at levels that preserve savings, quality, and customer 
satisfaction. Military families have seen reductions or stagnation in 
benefits across the board. This benefit (along with healthcare) is seen 
as a landmark benefit of military service. It has been linked to 
improved morale and we believe its erosion will be viewed as one more 
broken promise.