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STATEMENT BY
JOSEPH B. OLDING
PRESIDENT, COMMISSARY DIVISION
 WEBCO GENERAL PARTNERSHIP

 BEFORE THE SUBCOMMITTEE ON TOTAL FORCE
HOUSE ARMED SERVICES COMMITTEE
UNITED STATES HOUSE OF REPRESENTATIVES

 PERSPECTIVES ON VARIABLE PRICING
FOR MILITARY COMMISSARIES

MARCH 3, 2004

Mr. Chairman and members of the Subcommittee on Total Force, my name is Joe Olding, President of Webco General Partnership, Commissary Division, a military resale broker.  I have been involved with the grocery business for over 35 years and the military resale system for over 25 years.   I have worked for a large grocery retailer, several Top 100 manufacturers and am now a partner in one of the larger military resale brokers.  I have chaired the ALA Commissary Council for a total of five years and since DeCA's inception have served on the Board of Directors of the American Logistics Association on three different occasions most recently completing my last term as Vice Chairman in 2002.  I have been interviewed by the Dove Group about elements of the DeCA study on variable pricing and private label.  Through this experience, I believe I have developed an excellent understanding of the differences and similarities between grocery retailers and DeCA, and how they interact with manufacturers.

Following are my insights into the recent recommendation by the Department of Defense (DoD) for the Defense Commissary Agency (DeCA) to study variable pricing business models.

Variable Pricing is used by retailers to draw customers into their establishment with the primary purpose of increasing overall profits.  Grocery retailers will vary markups on items or categories to attract targeted customers to their stores.   For example, if a certain retailer wants to attract the young family, they may reduce markup on disposable infant diapers.  Of course any reduction in markup is usually offset by increased markups in another category.  Variable Pricing Models in most instances result in retail prices in excess of their cost and as I said total sales and profits are enhanced.

Manufacturers of consumer package goods develop comprehensive distribution, promotional programs designed to encourage retailers to promote their specific product needs.  Typically, a manufacturer will like to see their products promoted with a reflected price reduction three to four times a year.  The manufacture will offer promotional discounts to the retailer to encourage them to promote their products.  The retailer will usually qualify for promotional monies if they meet specific manufacturer requirements for obtaining these funds such as advertising, price reduction to the customer and highlighted display of the manufacturer's products, etc.  Of course, it is in the retailer's interest to utilize as many manufacturer promotional offers that are available.  However, even when retailers qualify for promotional monies they oftentimes do not pass all of it along to their customers. The complexity of managing this process is exponentially increased by the numerous manufacturers selling product to the retailer.  The process of utilizing manufacturer promotional resources within a retailer's variable pricing model requires a high level of sophistication both in terms of people skills and business systems to be successful.

DeCA's current pricing model, on the other hand, relies on marketplace competition among manufacturers to establish best product pricing which is directly passed along to the consumer. As I am sure you are aware, the current pricing model has produced savings to the military patrons in excess of 30%.  My experience with consumer goods manufacturers is that they are more willing to invest promotional dollars when they are assured customer or patron receives the benefit.  In my opinion, DeCA captures a higher relative percent of manufacturer promotional spending because they pass 100% of the savings along to patrons.

Our understanding is that DoD has asked DeCA to review five separate elements in a study on variable pricing and value brands.  Let me address two areas of interest by the consulting group on variable pricing; Variable Pricing on Value Items and Comprehensive Variable Pricing across all categories.

A Variable Pricing Program targeted on Value Price Products will essentially raise prices to those patrons who can least afford it; the young military family with a limited budget.  These families are the ones who are utilizing value brands more than people with higher income.  One might compare the effect of a variable pricing model targeted on value brands as a federal income tax only applied to lower income wage earners while the program benefits the entire population. 

A complete Variable Pricing Program would raise the prices of most products to the DeCA patrons.  While the amount of the price increase could be varied by category, the fact remains that prices will increase, decreasing patron savings.  In addition, DeCA's implementation of variable pricing could also negatively impact on the amount of promotional monies made available by the manufacturer community.  Manufacturers would become more selective in offering promotions if they feel that any of those savings now targeted for the patron will be utilized to reduce appropriations.  This would effectively further raise prices and reduce patron savings.  Implementation of a variable pricing program by DeCA, will require further investment in personnel and business systems.  In my opinion, DeCA currently does not have the systems or trained personnel to implement a Variable Pricing Program.  At the end of the day, DeCA's net cost of product will rise, and the cost of managing the purchasing functions will rise, requiring increased appropriations, and savings to Military Patrons will decline, a formula for diluting the benefit.

I would also like to make a couple of comments about the value brand/private label piece of DeCA's study.

DeCA and its suppliers have through the category management process defined and filled value brand patron needs for all of its major categories.  It is my experience that these value brands typically provide DeCA's patrons a higher savings compared to outside the gate's private label brands (store brands) and competing national brands.  The net effect is that overall DeCA's patron savings have increased as a result of properly positioned value brands.

The use of branded products by DeCA to successfully meet patrons needs in all segments including value is a very efficient (less cost) and effective (more savings) business model.  The introduction of private label (store brands) to DeCA would only provide competing items for patron's whose needs are already met by the value brands.  Furthermore, a private label program would increase DeCA's personnel cost to manage such a program.

DeCA has, since its inception, remained focused on serving the military patrons needs.  Specifically, refining stock assortments, and pursuing increased patron savings. Successfully working with their trading partners has secured savings in excess of 30% for their customers.  The current business model is working very well in supporting the number one or number two benefit for our military people and their families.

Today the commissary benefit is defined as selling all authorized commissary categories of goods at cost plus a five percent surcharge. I strongly recommend, for the benefit of the military patrons, that this definition does not change, which it would if variable pricing were approved.