STATEMENT BY:
MAJOR GENERAL KATHRYN G. FROST
UNITED STATES ARMY
COMMANDER, ARMY AND AIR FORCE EXCHANGE
SERVICE
BEFORE THE
TOTAL FORCE SUBCOMMITTEE
COMMITTEE ON ARMED SERVICES
UNITED STATES HOUSE OF REPRESENTATIVES
108TH CONGRESS, 2nd Session
HEARING ON
MORALE WELFARE AND RECREATION PROGRAMS
AND RESALE ACTIVITIES
3 MARCH 2004
Mr. Chairman and Members of the Subcommittee. Thank you for the opportunity to testify once again about the Army and Air Force Exchange Service (AAFES). I am here to report that the AAFES team is more committed than ever to "Serving the Best Customers in the World." In my 30 years in the Army, I have never been prouder of the performance of any of my organizations and am thrilled you have offered me this chance to once again talk about AAFES achievements.
Today, some 200,000 Soldiers and Airmen,
Sailors and Marines are deployed to hostile
regions of the world fighting for our way of
life. The Army and Air Force Exchange
Service serves along side them. From tents
on the frontier some 108 years ago, through
our Nation's wars, to military community
support throughout the 20th century, AAFES
has grown into a modern, international
retailer with 48,000 employees in over 30
countries, 5 U.S. territories, and all 50
states. Our main presence on military
installations is the Post Exchange (PX) or
Base Exchange (BX); a modern shopping center
that serves military personnel, their
families, and the retired military community
by providing quality merchandise and
services at discount prices. Sometimes
large and often small, the PX/BX provides a
full assortment of merchandise, softlines,
hardlines, and consumables - popular name
brand products and private label
merchandise. AAFES also manages thousands
of smaller operations.convenience stores,
movie theaters and fast food restaurants,
and partners with local community businesses
to provide a variety of services (dry
cleaners, barber and beauty shops, nail
salons, flower shops, etc); all the kinds of
businesses our troops would rely on in their
hometowns, if they could be there.
A multi-channel retailer, the exchange has
been in the mail-order business for 100
years. Today, we publish two big book
catalogs and numerous supplements each
year. In the last decade AAFES has fielded
an award winning on-line catalog,
www.aafes.com, that significantly
expands customer choices. AAFES manages the
catalog and on-line shopping for all the
military Services, so if America's service
members aren't near a store, we can take the
store to them. We even make shopping AAFES
easy with a proprietary credit card that we
developed and manage for all of the
exchanges - the Military Star Card. This is
the 4th largest proprietary credit card in
the U.S., with a receivable of $1.805
billion. The good news for troops is that
we offer one of the most competitive
interest rates in the country (9%)...and an
even better interest policy for those who
are deployed (6% with no payments during
deployment).
Overseas, AAFES is unique,
operating food plants in Germany, Japan,
Okinawa, and Korea, bringing popular U.S.
food products to overseas military
communities. AAFES provides these goods to
our own stores as well as to the
commissaries, hospitals and military dining
facilities. Not well known but very
important is our support to the overseas
Department of Defense school system. AAFES
provides nutritional meals on a break-even
basis to 136 schools, while maintaining meal
prices at 1997 levels.
AAFES exists not only to serve and support
the military community, but also to produce
earnings. Our businesses generate more than
$7 billion a year in revenue and our
customers are our stockholders. Some 65% of
AAFES earnings are paid as dividends to the
military Services' morale, welfare and
recreation (MWR) programs. All remaining
earnings are reinvested in the AAFES capital
program to improve our efficiency and our
customer's shopping experience, with minimal
expense to the taxpayers. America's
military enjoys the value of AAFES in many
ways, but to the man or woman in uniform,
the greatest value is the AAFES pledge to
the troops..."We Go Where You Go."
In 1995, North Atlantic Treaty Organization
(NATO) forces entered Bosnia/Herzegovina and
AAFES was there in tents, trailers and the
mud. Four years later, NATO entered Kosovo
and again AAFES answered the call. Today,
U.S. and NATO forces remain and so does the
PX. AAFES support to peacekeepers became
the norm until the world changed following
the events of September 11, 2001. Working
with our industry partners, AAFES set up in
the shadow of the Pentagon impact site and
at Ground Zero in New York to support
recovery workers. Then, as U.S. forces
arrived in far-off corners of Africa and
Central and Southwest Asia to wage war
against terrorism, AAFES opened stores to
support them in Afghanistan, Uzbekistan,
Pakistan, Kyrgyzstan, Djibouti, Qatar,
United Arab Emirates (UAE), Bahrain, Oman,
and Kuwait. AAFES remains in most of those
locations today, even with a PX in Kabul,
the capital of Afghanistan.
Our greatest challenge began last year when
the U.S. decided to face down Saddam Hussein
and his Iraqi regime. This time last year,
tens of thousands of troops were pouring
into the Middle East. AAFES moved heaven
and earth to be there for them, working
around the clock to open new stores in
remote locations where there was only sand
as far as you could see. Energetic AAFES
associates built stores in trailers, tents
and prefabricated facilities, stocked and
manned them at record pace - all the while
dealing with lines that never seemed to end
- just to provide a little bit of home to
troops of all Services before they went to
war. By the time coalition forces crossed
into Iraq, AAFES had 23 stores in the
staging areas of Kuwait, Bahrain, Qatar,
Oman, and the UAE. But AAFES didn't stop
there.
Even before Baghdad fell, AAFES had a PX on
the ground in Iraq, supplying the war
fighters with much-needed personal hygiene
products, snacks, beverages, and other
essential items. AAFES had 12 stores open
for business in Iraq by July, plus a Burger
King at Baghdad International Airport.
By Christmas, AAFES was operating 31 stores
and five name-brand fast food restaurants in
Iraq, supporting an additional 85 unit-run
stores at small camps and running mobile
operations to remote and hostile locations,
generating some $21 million in December
sales.
It has taken unparalleled commitment and a
miracle of logistics to make all this
happen. Stores in Iraq are supported by an
AAFES logistical network: buying, packing,
shipping and hauling millions of dollars of
merchandise by road, rail and air along
supply lines subject to hostile fire and
frequent ambush...not to mention inevitable
port delays and competing convoy priorities.
Overshadowing the logistical accomplishment
is the dedication, endurance, and courage of
the AAFES civilian associates who have
volunteered to endure spartan living
conditions, extreme heat, and a daily enemy
threat to deliver a little bit of home to
our American heroes. Their living
conditions are no different from the troops
they support; their hours are long and
hectic, and they've been exposed to the same
mortar fire and convoy ambushes that have
threatened our troops. Today some 480 AAFES
associates are deployed in dangerous places
around the world, about 270 in Iraq. Those
who have stepped forward to deploy are true
AAFES heroes. Each of them also represents
a position at a home station that has gone
unfilled during the deployment. Those who
have remained behind have also had a
challenging year.
We began the AAFES retail year, poised to go
to war, facing a bleak economic outlook, a
weakening dollar, falling interest rates,
weak consumer confidence, and hundreds of
thousands of customers about to be
deployed. Business projections were
pessimistic. The weakness of the dollar
against foreign currency cost AAFES $52
million, and a reduced interest rate passed
on as savings to Military Star Card
customers, cost AAFES over $7 million in
finance revenue. However, aggressive
contingency operations, family focused
marketing at home, outreach to the Reserve
components, some smart business decisions,
productivity increases of over 11%,
corporate cost cutting, and a little good
luck produced an incredible result; AAFES
expects to end our fiscal year (FY) 2003
with total revenue of $7.85 billion. After
the cost of goods and other expenses are
subtracted, AAFES earnings are projected to
be $333 million, or about 1.3% higher than
last year. AAFES will pay at least $216
million in FY 03 MWR dividends. Our per
capita dividend for each Soldier and Airman
is up $57 in actual dollars, and $10.75 in
constant dollars over 10 years ago.
At the same time, AAFES has absorbed
enormous cost to deliver the AAFES benefit
to troops at war. When sailors
deploy on board ship, the ship store is
funded with appropriated dollars. In
previous contingency operations when
Soldiers and Airmen deployed, AAFES has
borne the cost of providing the PX/BX
benefit. As a result, the MWR dividend
suffered. In the first 11 months of AAFES FY
03, the cost of support to Operations
ENDURING FREEDOM and IRAQI FREEDOM was $79.7
million. Of that, some $59 million was
authorized APF reimbursement, but not funded
by DoD. Fortunately, the Department of
Defense and Congress recognized this
extraordinary cost of war and its impact on
MWR and earmarked $40 million in the
government's FY 04 supplemental to offset at
least some of the cost. Because AAFES'
fiscal year 2003 overlaps the government
fiscal year 2004 by four months, we have so
far been able to book some $13 million of
this supplement for FY 03 reimbursement. I
want to thank each of you who supported
protecting the exchange benefit by providing
at least some reimbursement for our cost to
support the troops, and look forward to your
continued support.
Given these challenges, our focus on
earnings consumed a great deal of energy at
AAFES in 2003. Value, service and support
were also evident in our pricing, special
programs, and new store openings. Seventy
four million dollars in capital were
invested in 19 new facilities and $13
million in major renovations. We opened a
new BX at Scott Air Force Base and, to
welcome home the 3rd Infantry
Division (ID), a new 145,000 square foot
shopping center was opened at Ft. Stewart in
October. This was history making. In 2003,
AAFES opened a store for the 3rd
ID in Kuwait, then one in Iraq, and finally
one at the home station.
In addition to Scott and Ft. Stewart, new
shopping centers at Camp Humphries, Korea
(May 03), Tinker AFB, OK (Jan 03) and
shoppettes at Ft. Jackson, SC and Conn
Barracks, Schweinfurt, Germany were opened.
AAFES has under construction 25 major
projects valued at $104 million that are
scheduled for opening throughout 2004.
At the same time, the AAFES restaurant
portfolio was expanded to 36 options with
the signing of contracts with three
additional fast food restaurants chains -
Einstein Brothers bagels, Greek Odyssey Café
and Big Vinny's sandwiches. Last year, a
total of 149 restaurants opened including 85
Name Brand Fast Food outlets. AAFES
currently operates 1,904 food operations
worldwide.
AAFES is proud of its accomplishments in
2003 and even prouder that industry has
recognized our achievements. Some of the
awards we have received in 2003 include a
third consecutive award as Consumer
Electronics Retailer of the Year (an award
we share this year with our sister military
exchange services), the Private Label
Manufacturers Association (PLMA) Salute to
Excellence Award (co-winners with the Navy
Exchange Service) for the development of the
"Exchange Select" brand, and Home Fashion
Products Association's (HFPA) 2004 Retailer
of the Year award for international service,
which AAFES will receive later this month.
AAFES was acknowledged by the Travel Channel
for operating the 2nd Best Fast
Food Restaurant and the number one War Zone
restaurant on the planet, the Kosovo Burger
King. AAFES received operational and
developmental awards from Pizza Hut, Taco
Bell, Blimpies, Godfather's Pizza, Cinnabon,
Charlie's Grilled Subs, Captain D's Seafood,
and Burger King. In addition, AAFES swept
all four International awards presented by
Popeye's Chicken and Biscuits Restaurants.
However, the most significant award was the
recent presentation to AAFES of the American
Spirit award by the National Retail
Federation (NRF) at their annual convention
for our support of the troops in contingency
operations. According to the NRF, the award
is given only under extraordinary
circumstances for exceptional achievement
and has been given previously only to former
Presidents Carter and Bush and Senator
Robert Dole.
We are celebrating our 2003 success, but we
recognize that challenges lie ahead. We
continue to work closely with the Unified
Exchange Task Force and our sister exchange
services on the exchange consolidation
initiative as directed by the Deputy
Secretary of Defense.
At the same time, we are preparing to
transform ourselves in the face of potential
force re-stationing actions overseas and to
respond to projected costs both in terms of
accelerated depreciation, local national
workforce displacement, relocation, and lost
sales. We know we face similar challenges
as a result of Base Realignment and Closure
(BRAC) actions. Both these costs will
significantly impact the MWR dividend. Your
support will be essential to ensure that
Soldiers and Airmen do not bear the cost of
these actions with a reduced MWR dividend.
To counter all of these challenges, we are
focused on growing our business and reducing
our costs. The purchase of an Enterprise
Merchandising and Planning software solution
will allow us to improve our supply
chain as well as reduce our costs. We have
linked our strategic plan to a Balanced
Scorecard to establish corporate priorities,
assist in goal setting, and establish
accountability. We are in the second year
of Market Based Pay for the management
workforce which is migrating the company
from "across the board" pay raises to merit
increases, in order to control personnel
cost and, at the same time, reward good
performers. We are refreshing our stock
assortment, looking for ways to better serve
small communities, and revitalizing our
marketing effort to ensure customers are
educated about all of their AAFES benefits.
We have asked the Office of the Secretary of
Defense (OSD) to lift some of the remaining
assortment restrictions currently prohibited
by the Armed Service Exchange Regulation (ASER).
As military families are asked to sacrifice
more and more, we believe they should be
allowed to make major purchases in their
local exchanges, which offer quality
merchandise, lower prices, and the
industry's most favorable credit terms.
At the same
time, we will continue to support the troops
wherever they go. In the past year, I have
traveled the world and observed the
ever-improving AAFES benefit to the military
community. New facilities are underway at
home and overseas. In Korea, we expect to
open a new store at Camp Stanley this year
and we are building a long overdue BX at
Osan Air Base. In Germany, we should break
ground this year on the largest AAFES
facility in the world at Ramstein Air Base
for the Kaiserslautern Military Community.
We are constantly upgrading, renovating, and
improving our facilities. Thanks to second
destination transportation support, we have
been able to hold prices on merchandise
overseas to AAFES stateside value.
Now in our second century of service, AAFES
remains committed to serving the "best
customers in the world" wherever they go.
Just like our brave men and women in
uniform, AAFES is in Iraq and other
locations for the long haul. As you visit
these deployed locations, I hope you will
all take the time to visit a PX or BX, greet
our wonderful customers, make a purchase or
two, and say a special thanks to the AAFES
associates delivering this benefit to
American heroes.
As I celebrate my 30th year in the Army, I am convinced the exchange benefit has never been more important and AAFES has never been more relevant. This subcommittee (in one form or the other) has been with us through good times and the bad, and I believe you can share my pride in the retail history AAFES has made this year; unprecedented support on the battlefield; energetic engagement back home, and an incredible bottom line. With your support, AAFES will continue to provide the quality of life benefit that Soldiers, Airmen, retirees and their families deserve.
2120 Rayburn House Office Building
Washington, D.C. 20515
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