STATEMENT OF
Lloyd Johnson
Chairman
Armed Forces Marketing
Council
BEFORE THE
TOTAL FORCE SUBCOMMITTEE
COMMITTEE ON ARMED SERVICES
UNITED STATES HOUSE OF REPRESENTATIVES
MARCH
3, 2004
Mr. Chairman and members of
the Subcommittee on Total Force:
My name is Lloyd Johnson, Chairman of the
Armed Forces Marketing Council (AFMC). The
Council was incorporated in April 1969 as a
non-profit business league, composed of
firms representing manufacturers who supply
consumer products to military resale
activities worldwide. (A list of firms
serving on the Council is at
Exhibit 1.)
The AFMC mission
is as follows:
-
Promote
unity of effort through a cooperative
working relationship among the Congress, the
military, and the industry.
-
Provide
a forum for addressing industry issues.
-
Assure
worldwide availability of quality consumer
products at the best possible prices.
-
Assure
continued congressional support and funding
of the resale system.
-
Assist
in maintaining the resale system as an
integral part of military life.
-
Promote
awareness of sales and marketing agency
services to the military resale system.
Council firms subscribe to a
code of ethics requiring that each member
firm maintain the highest level of integrity
and professional conduct, critical to the
continuation of successful service to the
Armed Forces and American manufacturers.
Military sales and marketing
agencies, comprised largely of small,
privately-held businesses, were formed in
response to the need by manufacturers for
efficient, specialized sales representation
to this unique, worldwide military resale
market. These firms have developed
marketing and merchandising programs
specifically tailored to the military resale
system, and those services are offered at a
lower cost to manufacturers
than those same manufacturers could provide
using their own resources. If that were not
the case, the firms belonging to the AFMC
would not exist.
In fact, many AFMC firms have
been in business since the mid 1940's, which
has clearly resulted in better services and
lower prices to the military patron for
many, many years on a wide range of goods.
Through the link they form between the
resale system and the manufacturers, they
have also helped to assure the continuous
availability of the complete array of
consumer products normally available to the
civilian market.
AFMC firms represent over 400
manufacturers, both large and small. (See
Exhibit 2.) Our firms have a total
of over 2,800 people working directly in the
stores and with the various headquarters,
side by side with our military partners, to
make sure that the right products are on the
shelf in the right quantities and at low
prices. By so doing, they have played a
significant role in helping the resale
system become part of the fabric of military
life. In fact, surveys confirm that
commissaries are the #1 non-pay benefit to
military families, even surpassing health
care.
It is important to convey to
you, the members of the Subcommittee on
Total Force, that the AFMC members see
themselves:
-
"stakeholders" in the
military resale system
-
As
interested in and concerned about the
continued viability and health of the resale
system
-
As
having a perspective based on many decades
of experience in servicing the military
resale system
Mr. Chairman, as always, the
AFMC is keenly interested in doing its part
to assure the continuation of the military
resale system and the current value it
provides to our Service members and their
families. We hope the information and
perspectives offered today will be of use to
you in your review of the resale system.
The importance of the
commissaries and exchanges to the Armed
Forces community including active duty,
National Guard, reserves, and retirees,
cannot be overstated. They play a critical
role in recruitment, retention, and
readiness. This is especially true when you
consider that the United States relies on a
volunteer force that is only
modestly compensated and operates
in some extremely dangerous
locations around the world in the
current war on terrorism. Add to that the
intensely stressful conditions under which
our Armed Forces have been working these
past two and a half years, and the case for
continuing important benefit programs is
extremely compelling. In fact, any effort
to diminish the availability and value of
the commissary and exchange benefit seems
indefensible to the members of the AFMC.
Privatization of
Commissaries and Contracting Out
The AFMC is concerned with
repeated overtures either to privatize the
commissary system, or to contract out
additional functions. We believe this
threatens the very existence of the military
resale system, or at the very least would
interfere with their ability to provide
needed goods and services at the lowest
possible prices.
Both Congress and the DoD
have over the years considered numerous
proposals to privatize commissaries in their
entirety, and have repeatedly rejected them
as unworkable or counterproductive. We hope
that rejection continues, because
privatization would undermine an institution
which has, since its inception in the early
nineteenth century, been an integral part of
the total compensation for military members
regardless of status or rank, and which just
last year was codified in law. Mr.
Chairman, I have attached at Exhibit 3
a position paper entitled "The Case for
Military Commissaries" which addresses this
subject in greater detail.
Related to privatization is
the continuing pressure on DeCA to contract
out more functions or segments of its
workforce. It is important to know that
DeCA already contracts out or
"out-sources" several functions that make
good sense from a cost and management
control standpoint. These include custodial
and shelf-stocking services, distribution
(in the U.S.), deli's and bakeries, and most
store re-sets. To force further contracting
out would seriously complicate DeCA's
ability to deliver core services, manage the
stores, and train and motivate a flexible
workforce. It is also important that DeCA
avoid potentially serious interruptions
caused by bankruptcies, strikes, and other
contractor defaults.
It is precisely for all those
reasons, that successful civilian grocery
chains do not "out-source" core
functions such as store management,
procurement, meat or produce departments,
etc., etc., any more than Congress would
consider "out-sourcing" important staff
positions on the Hill.
Finally, the timing is
completely wrong to force further
contracting out. First, DeCA is in the
beginning stages of an extensive
"re-engineering" process that seeks to
sharpen its focus, develop a more flexible
workforce, and improve efficiency (these
efforts are supported by the AFMC). Second,
the Defense Department and Congress are
tackling issues like BRAC and other force
re-structure plans that by themselves will
more than challenge DeCA to deliver the
benefit in a rapidly changing environment.
Mr. Chairman, the AFMC feels
strongly enough about this contracting-out
issue to respectfully request that the
Department of Defense be urged to provide
DeCA with temporary relief from the
requirement to compete with proposals from
outside contractors for a period of at least
five years. This would allow DeCA to
concentrate on delivering the benefit during
a dramatically changing environment from now
until 2009.
Variable Pricing
The AFMC is also concerned
about another initiative coming out of the
DoD. The DoD recently ordered DeCA to
conduct an independent study to determine
the feasibility of implementing variable
pricing in commissaries. In the directive
for the study, one of the stated objectives
of variable pricing is to produce revenue to
offset at least part of the appropriated
fund subsidy for commissary operations. We
believe that if this is ever approved, DoD
will gradually seek even higher mark-ups to
eliminate all appropriations, and that
resulting higher prices would cause the
demise of the commissary system within a
very few years.
Variable pricing is a
strategy that is used by all civilian
supermarket chains and by the military
exchange systems. But there are very good
reasons why that should NOT be
introduced in the commissary system:
· The
main reason for "variable pricing" is to
achieve specific profit objectives. DeCA,
by law and tradition, is not a profit-making
organization.
· It
is possible to change the law. But
generating a profit at DeCA in any manner,
applied to any or all items, can only
raise prices to military
families, which in turn reduces the value of
the commissary benefit. EXAMPLE: A mere
2% average mark-up on current cost prices,
would take $100,000,000 out of the pockets
of uniformed troops and their families,
retirees, reservists, and National Guard
members.
· If
selected shelf prices are raised by adding
margins to the cost prices, and others are
lowered, in equal amounts, with the intent
to allow commissaries to compete more
directly with outside-the-gate retailers on
"loss-leaders" and other traditionally
"low-margin" items, the cost of
additional staff and software to administer
such a program would add to DeCA's operating
expenses, with no overall benefit to the
patrons.
· If
a small profit margin was just added to
"Best Value Items", the revenue produced
would be minor, but the overall benefit
would still be degraded, especially for
those military families who are on the low
end of the pay scale, and tend to purchase
"budget" brands.
· If
OSD believes variable pricing can be used to
even out the differences in "savings" from
one area of the country to another, the
complexities involved with such a task are
formidable, to say the least.
Besides, why should military people pay more
for groceries in one area of the country
versus another? Since compensation is
largely uniform throughout the U.S., within
the same ranks, uniformly low
grocery prices should be the goal, not
uniform "savings" versus outside-the-gate.
· If
any shelf prices are raised because
of "variable pricing", it would remove from
the commissary environment the two
factors which drive the low cost prices that
currently prevail:
¨ COMPETITION
among manufacturers, who can see each
other's shelf pricing every week and react
accordingly with their best price
offers.
¨ Manufacturers'
ASSURANCE that the price they offer will go
directly to the patron, not to retail
margins. (Changing this paradigm, will
significantly alter DeCA's relationship with
their supplier community.)
· If
DoD's intent with variable pricing is to
reduce the current 32% savings level to 30%,
on the belief that 32% is simply
unnecessarily too high, the AFMC would point
out that depending on the surrounding area,
the savings can occasionally go as low as
15% to 20%.
The AFMC submits that for all
the reasons just mentioned, there is simply
no justification for raising prices in any
way in order to reduce the appropriated fund
support for commissaries. Our military
families will be wrongly and unfairly
penalized. Such a move would be viewed as
an erosion of the most highly valued non-pay
benefit. This is precisely the wrong thing
to do with a volunteer force already
stressed by long and dangerous deployments.
Store Closures
Mr. Chairman, the DoD
recently directed DeCA to prepare plans to
close several commissary stores and continue
to monitor several others for possible
closure. This action was based primarily on
the failure of those stores to meet unit
cost goals, and on their perceived close
proximity to other stores. This initiative
sparked considerable opposition within the
military community, and by several senior
officers, enough so that the plan seems to
be shelved for the time being.
The Armed Forces Marketing
Council, while applauding efforts by both
OSD and DeCA to continually strive to
streamline operations and reduce costs, is
concerned that the criteria and procedures
for future efforts to close commissary
stores do not give sufficient consideration
to the quality of life needs and overall
welfare of the military community. We,
therefore, ask that the Department of
Defense be urged to ensure that quality of
life, not budget pressures, be the
overriding consideration in any decision
involving establishment, continuation, or
closure of a commissary store.
Military Exchange
Services Consolidation
The DoD has established the
Unified Exchange Task Force (UETF) and
charged it with developing a detailed plan
for consolidating the existing exchange
services into a single "optimized" Armed
Services Exchange System. Mr. Chairman,
while we recognize that there may be
selected functions suitable for integration,
it is the consensus of the Armed Forces
Marketing Council, based on
what we know today,
that the risks of complete exchange
consolidation into a single entity outweigh
the potential or perceived benefits. We
remain opposed to such consolidation until a
compelling business case has been put forth
to support it (e.g. lower prices, better
selection, and increased MWR earnings), the
risk environment has been significantly
diminished, and, above all, that in no way
would the current level of service for the
patron be degraded.
We have submitted as
Exhibit 4, a paper outlining what we
believe are the criteria for successful
achievement of total consolidation, and a
list of significant risks inherent in full
integration. We have also submitted in
Exhibit 5, a paper prepared by a
professor at the University of Virginia,
that supports total integration. Also see
Exhibit 6, a paper prepared by two
professors at William & Mary that raises
many unanswered questions about the logic in
Exhibit 5-- questions which we strongly
believe should be answered with facts and
figures, not just intuitive reasoning. We
also want to draw attention to two recent
articles earlier this year in the Wall
Street Journal that
explain why such a low percentage of
"Mega-Mergers" actually work to the benefit
of stakeholders.
Finally, DoD officials may
point to the success of DeCA in
consolidating four separate commissary
systems into one in 1991. That was a
successful venture, and one that the AFMC
supported once the case for integration was
clear and convincing.
However, DeCA experienced
many "growing pains" in the 1991-93
period, that resulted from consolidating
systems that had only one "big box" store on
each of 400 bases, and stock assortments
that were common on about three quarters of
the 15,000 or so active stock-keeping-units
(SKU's). The Exchanges have 40,000 + active
SKU's in a combination of main stores, troop
stores, convenience stores, military
clothing stores, liquor stores, gas
stations, etc. They also manage
restaurants, movie theaters, hotels,
concessions, etc. The job of consolidating
all those separate businesses, is enormously
complex! And doing so in a way that will
avoid major interruption in delivering the
benefit is a very risky task at best.
Relief
from ASER Restrictions
The AFMC supports the lifting
of ASER restrictions that prohibit AAFES,
NEXCOM, and MCX from selling the latest
types of advanced-technology TV's, and from
offering sufficient facilities to sell the
kind of furniture normally purchased by
military families. The necessary studies
have now been completed regarding the
potential adverse impact on civilian
retailers, and the overwhelming
conclusion is that such an impact is
zero or very minimal. Because the demand
for this merchandise is well established,
and because the troops need and deserve the
ability to buy this merchandise at low
prices, using low-interest Exchange credit
cards with all kinds of financial
safeguards, the AFMC strongly supports the
lifting of these restrictions. We urge the
Congress to act promptly on the DoD request
for relief.
Summary
Mr. Chairman, the Armed
Forces Marketing Council continues to
support the resale system benefit largely as
it exists today, not because we oppose
change, but because it works. But we also
support efforts to improve efficiency and
effectiveness, because our men and women in
uniform, their families, retirees,
reservists, and National Guard members,
deserve no less from their government and
the citizens of this country. It is worth
repeating that the resale system is the most
highly valued benefit within the Armed
Forces community.
We wish to reaffirm our
long-standing belief that the resale system
is a core function of DoD which contributes
immeasurably to recruitment, retention,
readiness and a sense of community that are
all part of the fabric of military life.
In view of the billions of
dollars spent on development and procurement
of the best weapons and material for our
armed forces, the resale system represents a
reasonable cost to take care of the
singularly most important element of these
armed forces -- people!
Thank you, Mr. Chairman and
members of the Subcommittee on Total Force,
for your on-going oversight and support of
the military resale system, and for the
opportunity to offer the Armed Forces
Marketing Council's comments to you today.
I stand ready to take any questions you may
have.
