STATEMENT OF
RDML WILLIAM J. MAGUIRE
COMMANDER
NAVY EXCHANGE SERVICE COMMAND
BEFORE
THE
HOUSE ARMED SERVICES COMMITTEE
SUBCOMMITTEE ON TOTAL FORCE
3 MARCH 2004
Mr. Chairman, Secretary Abell
and distinguished Members of the Total Force
Subcommittee. It is a privilege to appear
before you today for my final Testimony to
this Congress on behalf of the Navy Exchange
Service Command (NEXCOM). I am proud to
represent the Navy Exchange Service Command
and its 15,000 dedicated associates to
provide this Subcommittee an overview of the
Quality of Life enhancements we provide our
military men and women, reservists,
retirees, and their families. This, after
all, is the Total Force. Quality of Life is
essential to recruitment, retention, and
readiness and our programs are an essential
part of that support, providing a very
valuable form of non-pay compensation to our
Navy families around the world, no matter
where they are located, afloat and ashore.
Navy
Exchanges were established in 1946 with the
objective of improving Sailors' Quality of
Life and to provide non-pay compensation as
part of a total benefits package. While our
stores, merchandise assortments, and
services have continually evolved and
improved over the years, one thing has
remained unchanged - the ability of the Navy
Exchanges to meet their mission by providing
quality and savings to Sailors and to
support their MWR programs. Last year we
provided Sailors and their families with
average savings of 15.8% before sales tax,
while still contributing $49 million to
their Morale, Welfare and Recreation
programs. The additional sales tax savings,
which averages 6.4%, significantly increases
the savings to our valued customers. Our
Sailors are not only our valued patrons;
they are truly stakeholders in their own
Navy Exchange system. (Not only Sailors, but
retirees and Reserves)
Five Years of Continued
Improvement
I am pleased to report that during
the past 5 years, we have increased our
retail sales by 32% and our total sales by
24%, surpassing many of our commercial
counterparts. Our projection for 2003
retail sales is $1.6 billion, up 6.7%
compared to 2002. In FY03 the Ships Store
program generated $118 million in sales and
returned $17.2 million in profits back to
ships for their recreation and morale
programs. Sales at our recently renovated
stores continue to drive our total sales
increases. In 2003 we experienced the
following sales increases over the prior
year: Little Creek up 27%, Pearl Harbor up
27%, Oceana up 13% and Sigonella up 21%.
Our exchange operating profit, which measures the performance of our stores, has shown a significant increase of 51% since 1998. Our FY03 exchange operating profit is projected to be $204 million, a 12.7% increase compared to 2002. Primary reasons for this significant rise are increased sales at our retail stores and a greater profit margin from our retail gasoline operations.
Over that same timeframe, our Customer Satisfaction Index (CSI) continued to improve. Our 2003 CSI score was 76, an eleven-point increase since we began the survey in 1999. Our customers help define the actions we are taking through their input to our CSI. . Based on what they tell us, we are identifying and expanding our high priority merchandise categories, making ongoing improvements in our merchandise assortment, and working to further improve and expand our Uniform Shops. As we implement Retek, our new retail software package, our buyers' visibility of in-stock conditions and sales history improves, giving them the ability to further tailor stock assortments to local demographics. To continue to meet our mission and provide reduced prices and a steady dividend stream to MWR, we are focusing significant efforts on better ways of becoming more efficient and effective in what we do. Our ability to increase sales and sustain our operating profit is a direct result of improvements to our back room operations. We are realizing the benefits of implementing Retek and we continue to refine and improve our ways of doing business. Our customers tell us they want convenient one-stop shopping, and we are working with the Defense Commissary Agency (DeCA) to co-locate our facilities wherever possible. As we renovate our stores, we are consolidating locations into one convenient shopping experience.
NEXCOM's
consistently enhanced performance
demonstrates that we are a laser-focused,
proactive organization and that is a direct
result of our continuing drive to improve
our organization and the products and
services we provide our Sailors. The main
drivers to our continuous improvement are
our store renovation program, information
technology modernization and most
importantly, a performance driven team of
associates. We have developed a financial
roadmap to the future, our Cornerstone
Document, to examine our past, present and
future financial condition. Our Cornerstone
Document is not just a tool to be used to
monitor the pulse of our organization, it is
a compact we have with the Department of the
Navy and our customers to deliver an
improved benefit to them that will last for
decades to come. It is our commitment to
our Total Force.
Delivering Savings and Quality
of Life Benefits to the Navy Family
The Navy Exchange Program
serves Sailors and their families around the
world with products and services through our
Navy Exchange stores, Ships Stores, Navy
Lodges, Navy Uniform Program and Personal
Telecommunications Program. With 109 main
stores around the world, Navy Exchanges
offer the widest selection possible to
provide convenience, savings and
satisfaction to our diverse population. Our
merchandise strategy is to serve as a high
volume discount store for our young enlisted
members and their families at prices they
can afford, and as a department store to our
higher-ranking members and retirees. The
Navy Exchange is a unique retailer that buys
consumables, hardlines and apparel in
opening, moderate and some higher price
points. An example of this is our apparel
lines. Over eighty percent of our sales in
apparel are from opening to moderate price
point merchandise, in both dollars and
units. Our own opening price point, "Basic
Concepts" brand offers quality clothing and
accessories at very affordable prices.
While our moderate price point, "Modern
Images" brand line of casual clothing for
men and women has styles and quality
comparable to department store lines. The
higher end of apparel, 16% of our sales, is
met by offering name brand clothing at
discount prices. No commercial retailer
outside the gate can make this claim or
serve all our customers as well as the Navy
Exchange. Providing such a broad range of
products and services to such a diverse
population is a challenge, but it is one we
gladly embrace and aggressively strive to
improve.
The Navy Exchange is much more than a store. The complexity of our business is greater than traditional retailers with 16 different store models we support, each involving a different assortment of merchandise. Besides our main stores, we operate mini marts, fleet stores, autoports, bookstores, and recruit stores just to name a few. We also provide optical shops, photo services, long term parking services, hair care, laundry/dry cleaning, gasoline stations, flower shops and auto repair services. In eleven overseas locations where a commissary operation is not available, but the need still exists, NEXCOM operates stores with the cooperative support of DeCA. These stores carry a mix of Exchange and Commissary type merchandise. We call these unique stores NEXMARTS. Last year these locations showed a sales increase of 9.7%, proving that they continue to provide a needed benefit to our military family. We also operate one retail store in Orlando, Florida currently using the BXMart model concept.
Our Ships Store program is expeditionary, sea-based and provides essential Quality of Life services to Sailors and Marines serving on fleet ships around the world. Since Congress authorized a Ships Store operation in 1909, the program has taken care of our Sailors and Marines. Whenever our Sailors are called to sea, our Ship Stores program goes with them. The tempo of fleet operations remains high and we go where our customers go. Over 50% of our ships are at sea and approximately 30% are forward deployed. We provide retail stores, vending machines, barbershops and laundry facilities to make seagoing life better. Ships Stores are operated using appropriated funds and generate dividends to support shipboard MWR programs that are so vital to building morale and readiness of our Sailors at sea. Our afloat telecommunications program, which provides that vital underway phone link home to our deployed Sailors and Marines, continues to be one of the biggest shipboard morale boosters.
Whether our patrons are on permanent change of station orders, temporary duty, or leisure travel, our customers can enjoy the hospitality and award winning service of a Navy Lodge at an average savings of 43% compared to commercial lodging. With over 3,000 rooms in 42 locations worldwide, our guests are assured of clean, comfortable and affordable accommodations, all available through the convenience of our toll free central reservation number, 1-800-NAVY-INN, or online through our web page. During the past year, our Navy Lodges answered the call when reservists needed temporary lodging before their units were deployed. The Navy Lodge program is funded almost entirely through self-generated revenues.
The Navy Uniform program provides authorized uniforms to Navy personnel, both active and reserves. Additionally, through one of many cooperative efforts with the other military exchange services, we provide in-store uniform support to the other services at some locations. In another cooperative effort, the Navy Exchange Uniform Support Center provides the same mail order service available to the active and reserve Sailors to the Marine Corps. The Uniform Support Center offers a worldwide mail order service and online web store; both are fast, convenient and easy to use. Navy Uniforms are just a phone call away using our 24/7 toll free telephone numbers or few clicks away using the internet. When what our Sailors need is not in stock in any of our Uniform Shops, we ship those products direct to their door with free standard shipping.
The performance of the Navy in Operations ENDURING FREEDOM (OEF) and IRAQI FREEDOM (OIF) was nothing short of outstanding and I am proud of the support we provided these dedicated and loyal service members. Operations in theater saw the surging of six Carrier Strike Groups, threeAmphibious Readiness Groups, two Task Forces and various other ships to the Persian Gulf. For the Ships Store program, the 72 ships represented a logistics challenge that we successfully met through an effective partnership with our vendor community, real heroes in providing logistics support. In partnership with base security and supply personnel, our Ships Store team worked with vendors across the United States who willingly arranged special deliveries of merchandise, redirecting merchandise and making after hours, weekend deliveries to meet emergent fleet needs. The end result was that each ship left the pier fully loaded and ready to meet the Quality of Life needs the war fighters demand. Likewise in the theater of operations, our resupply channels operated successfully to continue to provide merchandise to ships that had to remain on station to prosecute the war. Working with our vendor partners, we were able to provide wounded service men and women with care packages. In our advertising, we provided awareness that the Navy Exchange was here to support the families of those deployed with the every day essentials in a safe and friendly environment and with styles and quality comparable to department store lines. Our Uniform Support Center's mail order service and online web store proved to be invaluable in serving the myriad of deploying Sailors and Marines in support of OIF and OEF, both active and reserve, as well as Soldiers and Airmen for common items such as the Battle Dress Uniform. Our dedicated staff is meeting the needs of our forward deployed service members on a daily basis. In recognition of the sacrifices and outstanding service of our Sailors and Marines, NEXCOM provided 116,965 free $10 prepaid phone cards to 115 ships that either participated in OIF or were deployed during the holiday season. We also provided 12,950 free cards to the Bureau of Medicine and Surgery for distribution to Rota Naval Hospital and CONUS hospitals to provide to service personnel who were being treated for injuries suffered in OIF action.
A key element to the future viability of the Navy Exchange system is capitalization. After an extensive NEXCOM Headquarters review, and in full partnership with our shore activity hosts, we invested over $56 million in capitalization projects with return on investments that will further improve our operating profit and MWR dividend. One investment made last year, a new store at Little Creek Amphibious Base in Norfolk, VA, is already exceeding sales expectation. This project helps illustrate the tenets of our capital project investment strategy developed through customer feedback - consolidation of multiple NEX locations into one, co-location with the Commissary where possible, store sizing to meet that specific local customer base, and expanded sales space for greater merchandise selection and customer circulation space. By addressing the facility issues most important to our Sailors and their families, we have experienced a sales lift and customer satisfaction at recapitalized locations. As we continue our recapitalization plan in the future, we are confident we will continue to make smart investments that improve service to our customers and our bottom line.
To provide our customers the name brand services they desire, we rely on our Public Private Ventures (PPVs). NEXCOM continues to expand its food services program by partnering with the commercial industry. One of our most recent accomplishments is the development of the Pentagon's food service operations, offering a variety of options from food courts to sit down tablecloth service in the Executive Dining Room. In addition, NEXCOM was just awarded the food service contract for the Defense Intelligence Agency where we will provide name brand food sources for their food courts and catering services. NEXCOM has also experienced great success by using our existing contracts to support the Marine Corps, Coast Guard and Navy Morale, Welfare and Recreation program. Some of our current initiatives include: Taco Bell and Kentucky Fried Chicken at Rota, Spain opened at the end of February 2004; development of a freestanding Applebee's Restaurant and replacement of a McDonald's at North Island, California; a food court consisting of Popeye's Chicken, Del Taco and Subway at Gricignano, Italy and a food court featuring Taco Bell, Kentucky Fried Chicken, Subway, Freshens Yogurt and Starbucks Coffee at Naval Hospital Portsmouth, Virginia. All are examples where NEXCOM continues to meet the needs of our military customers.
The measure of our success will be our ability to continue increasing our sales, our profitability, our contribution to MWR but, most importantly, our service to our Sailors. We could not steer the course for this success without our associates. Their dedication and commitment to serving the Navy family are evident everywhere I go. We have successfully looked to experts from the civilian sector, employing individuals from industry who provide an understanding of commercial business practices, to complement the dedicated associates who have spent their entire careers serving our Navy family and understand the unique needs of our patrons and challenges of running exchanges. Together they comprise a strong team who can successfully steer our exchange system into the future, just as we have achieved sales increases over the past five years.
In working to improve the benefit for our patrons, we appreciate the Subcommittee's past support in lifting some of the Armed Services Exchange Regulations restricting what we can sell. We continue to survey the commercial retailers annually and have received very few negative reactions from local businesses. Our latest report has just been sent forward to the Department of Defense for consideration. Of the 201 letters to local merchants and 15 letters to Chambers of Commerce in proximity of Navy Exchange locations, we only received three negative responses, two from merchants and one from a local city government. The negative responses did not identify how much of a loss they expect. We also received a supporting response from a Chamber of Commerce stating "The proposed lifting of the new ASER restrictions are deemed to have a positive impact on area military members and their families and little financial impact on local area business". The exceedingly small response to this year's survey, as well as the previous two surveys, substantially supports our position to lift the remaining ASER restrictions. Of the remaining restrictions, the one that has become most critical in today's technology is the restriction on projection televisions (TVs). The FCC has mandated that manufacturers include Digital Tuners in 50% of TV sets 36" and larger by 1 July 2004 and 100% by 1 July 2005. TV production is rapidly shifting to Digital Television (DTV) sets that can receive and display a High Definition picture. Significant technology changes have resulted in reduced costs and increased the total size of projections TVs. The result is the industry is making these TVs more affordable and desirable. Projection TVs account for 75% of DTV sales. With current TV restrictions, we are actively forcing our Service members to go off base and spend more for their TV, and more than likely, incurring very high interest rates to finance their purchase. In this era of the Global War on Terrorism, our Service members are putting their lives on the line every day. They serve their country with the utmost diligence and devotion to duty. It is essential that we serve and address their purchasing power and merchandise selection by establishing parity with the private sector by lifting the ASER restrictions.
Meeting
the Challenges
While the competition outside our
gates continues to grow and become more
aggressive in marketing to the military
customer, we are pleased to announce that
our retail sales growth exceeds our industry
counterparts.
We operate many small exchanges at remote,
isolated and overseas locations. Commercial
retailers would not operate these stores.
In most cases our stores are filling a need
that would otherwise not be met. The top
third of our stores in sales, contribute
81.2% of our sales and 80.9% of our
profits. Because of these top stores, we
are able to continue supporting the marginal
operations and still achieve an overall
profit that meets our capitalization and MWR
dividend needs. The bottom third of our
stores account financially for only 2% of
sales and 3% of net profit but they are
every bit as important as our flagship store
in Pearl Harbor because they take care of
our Navy families.
Our biggest challenge continues to be the fixed cost of our business. The cost of the Unified Department of Defense healthcare program continues to rise at a daunting pace; 2003 post-retirement medical expenses alone have increased by $3.4 million over 2002. Our Pension Plan, is over funded, but is typical of most commercial plans in that it shows increased expense as a result of the current low interest rates and the earlier three-year stock market decline. These pension fund expenses accounted for an $11 million decline in profit over 2002.
During 2003, we started closing our Roosevelt Roads store, at a cost of $14.2 million. This will impact our bottom line and dividend to MWR. During 2002, the last full year of operations at Roosevelt Roads, this store provided the Navy Exchange System with $41 million in sales, $6 million in profits, which represents $4.2M in MWR contributions.
A Valued Benefit
Our patrons are primarily the Navy active duty, reservists, retirees and their families located around the world. Each of them looks to the exchanges to serve them throughout their careers and into retirement, wherever their duty requires them to go. Exchanges are not only provided because it is the right thing to do but also because, as supported by research, these programs positively and directly affect the recruitment, retention, and performance of our people. As confirmed by the January 2003 Status of Forces report, Sailors are more satisfied with Exchanges and Commissaries than any other Quality of Life benefits. Today we are needed more than ever. We are there on the ships when they are deployed to meet their health and comfort needs. We are there to take care of the families they must leave behind. As our reservists answer the call to duty, we are there to meet their needs also. Our Sailors view their exchanges as a valuable non-compensation benefit and an important factor affecting their career decision.
The population of retirees continues to grow. They are an integral part of our Navy family and we need to ensure the products and services we offer are what they want. With the potential for more base closures, our opportunities to serve our retirees may become fewer. They view exchanges as part of their entitlements for the many years of loyal service they provided our country. Where possible, we will continue to provide them a place where than can shop and save money.
Our Navy
Exchange System is in many ways a family
business, operated for the benefit of Navy
families by Navy families. Twenty eight
percent of our associates are military
family members, earning an average salary of
$22,654. Many of the concessionaires we
partner with also employ military family
members.
Exchange Consolidation
NEXCOM is participating in Department of
Defense's Unified Exchange Task Force (UETF)
effort to develop a plan for integration of
the three service exchanges. We are
participating actively and openly to help
shape the future of a combined exchange
system. We will act aggressively to
safeguard our patrons' benefits: MWR
dividends, price and selection. We will be
vigilant in ensuring that NEXCOM associates
have fair and equal access to employment in
any combined exchange system. These are
our three basic tenets. We are committed to
the 19 operating precepts developed in
conjunction with the other Exchange
Commanders. First and foremost, exchange
integration must result in measurable
improvement in the current level of value
defined by merchandise selection,
merchandise availability, price savings,
customer satisfaction and MWR support. In
order for this effort to succeed the Unified
Exchange must operate on a common
Information Technology Platform (IT)
platform and support the same critical best
business practices. As long as the process
follows the operating precepts we
established, I am confident that Congress
will have accurate information to determine
if the consolidation effort should proceed.
Throughout January, the UETF work teams, comprised of representatives from each of the exchange services, began their work by developing a baseline assessment of current operations for all three exchanges. The process framework is good; however; we do have concerns that a full due diligence will be difficult with the aggressive timelines for data collection/decision making. We also recognize that normalizing data across the service exchanges will be challenging but we are confident we can work through these difficulties.
As we have reported, our Sailors are dependent upon on the Exchange benefit and we cannot lose sight of this in the process. We feel strongly that risk mitigation strategies must be addressed, particularly the risk to top-line sales. We have received assurances from the UETF that risk mitigation would be addressed and we look forward to seeing the plan. Many documented studies have shown that the majority of merged companies experience revenue declines that far outweigh the benefits of any consolidation.
Our associates are very dedicated to providing the exchange benefit, but have concerns about their future. These concerns were captured in our 2003 Associate Satisfaction Index (ASI). Our 2003 Headquarters/Administrative results were 63, one point below our 2002 score. The ASI showed the uncertainty and personal concerns about potential Exchange Consolidation as evidenced by a drop of 22 points (from 72 to 50) on the question "I feel good about the future of the company", even in a year when our company performance has been very strong.
While we are actively engaged in helping shape the future structure and operations of a possible combined exchange, we will continue our focus on providing our customers the right products and services at the right price. Serving our Sailors, our retirees and their families will always be our number one priority. This is the covenant we have made to our Navy.
In conclusion, our Navy Exchange System is financially strong and is meeting the needs of our Sailors and their families around the world everyday, today and into the future. Our strong performance is a direct result of the strong support of our patrons, our dedicated associates, our industry partners and the support of each of you on the Subcommittee and in Congress. Together we can protect the benefit and maintain the commitment we made to the men and women who have served, and continue to serve, our country so well.
Thank you for the opportunity to address the Subcommittee. I will be pleased to respond to any questions you may have.
2120 Rayburn House Office Building
Washington, D.C. 20515
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