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STATEMENT BY:
WILLIAM E. STANLEY, Jr.
CHAIRMAN
AMERICAN LOGISTICS ASSOCIATION

 BEFORE THE SUBCOMMITTEE ON TOTAL FORCE
ARMED SERVICES COMMITTEE
UNITED STATES HOUSE OF REPRESENTATIVES
SECOND SESSION, 108^TH CONGRESS

 HEARINGS ON
PATRON AND INDUSTRY PERSPECTIVES ON MILITARY
EXCHANGES, COMMISSARIES AND MORALE WELFARE AND
RECREATION PROGRAMS

 MARCH 3, 2004
 

Mr. Chairman and Members of the Subcommittee: 

The American Logistics Association (ALA) is most grateful to this Subcommittee for its strong leadership in preserving and improving the commissary, exchange and MWR benefits for service members, military retirees and their families.

It is an honor to be here today as Chairman of the Board of ALA representing over 400 of America's leading manufacturers, over 100 brokers and distributors and the more than 2,000 individual members who are actively engaged in providing goods and services to the military resale and MWR activities. Our members include companies listed on the Fortune 500 list such as The Clorox Company, PepsiCo, Goodyear Tire Company, Starbucks, Home Depot, Kellogg, Procter & Gamble, H. J. Heinz, Campbell Soup Company, and Johnson & Johnson.  Our members are also small businesses such as George Weston Bakeries, Sundrella Furniture, Mother's Cookie Company and Eagle Family Foods.

ALA members supply goods and services to the military community and employ several thousand spouses, family members and retired service members.  ALA member firms, including brokers, manufacturers and distributors, offer employment opportunities on a wide range of full-time and part-time positions located on or near U.S. military installations around the world.  Military resale and MWR activities also offer jobs and careers.

I want to reaffirm ALA's strong commitment to maintaining the commissary and exchange benefit as an integral part of the total non-pay compensation package for service members and their families.  We support these dynamic programs as they provide a broad range of consumable products, goods and services for military personnel and their families including essential MWR program funding, which benefits the entire military community.

Our association actively supports and promotes programs that enhance the Quality of Life for our military service members, retirees and their families.  Exchanges are a key component of the Quality of Life of uniformed service members.  Currently, authorized patrons are limited in their choice and selection of merchandise sold in exchanges.  The Armed Services Exchange Regulation (ASER) delineates who is authorized to use the exchange benefit and what can or cannot be sold by the exchanges.  Mr. Chairman, we believe  shoppers should have a choice without restrictions of merchandise sold in exchanges. Our military members want and deserve access to products to meet their families' needs without restrictions.  Military patrons should not be relegated to a second-class status relative to product choice and availability. 

Many of the restrictions are outdated.  For example, while TV size and format limits were lifted, exchanges still cannot sell projection televisions or TV's costing over $3,500 in CONUS.  Today, the price-per-inch of a 43-inch projection TV is more affordable than a 40-inch picture tube TV.  In addition, digital TV technology has advanced to the degree that consumers can now purchase digital projection TV's (not sold in exchanges) at a lower price than digital tube TV's currently sold in exchanges. While analog projection TV's volume has been trending downward since 1999, digital projection television volume increased nearly 400 percent over the same period.  Volume growth estimates for digital projection televisions suggest a more modest growth pattern over the next 3-5 years, as advances in plasma technology make plasma TV's more affordable.   Given that the Federal Government has directed that by FY '06 all television transmission must be digital, the ASER restrictions for all televisions are counterproductive and should be eliminated. 

Moreover, military customers are forced to purchase popular projection televisions at commercial retail prices that often come with significantly higher interest rates.  Many of these military patrons are young families utilizing credit for the first time and therefore, high interest rates can easily get them into financial difficulty.  Mr. Chairman, ALA strongly supports lifting all ASER restrictions on exchange stock assortments.   

The ALA supports the primacy of exchange and commissary stores in all military housing areas.  We believe that the current policy regarding this issue is appropriate.  Civilian retail outlets should not have authority to operate in military housing areas without the consent of the Board of Directors from the appropriate resale agency. 

Exchange merchandise sales is a major source of funding for DOD's MWR programs.  Each year exchanges provide hundreds of millions of dollars in dividends that are returned to the military communities. Without these dividends, MWR activities would not be able to fulfill their mission and as a result, many worthy programs such as child-care centers and youth programs would be negatively impacted.

Exchange consolidation is an issue of significant concern to our members.  ALA does not support this initiative unless a substantive business-based analysis is completed that clearly demonstrates the change will not degrade the current benefit to the patron or the MWR dividend.   In addition, any change cannot adversely affect the military resale industry and the stakeholders must agree that actions taken will achieve projected efficiencies.   ALA also views with concern the impact this proposed merger may have on our small business members.  Today, there are three DOD military exchange markets.  Any merger may have a damaging impact on small businesses, as the number of contractual opportunities will diminish, effectively limiting competition and subsequently reducing the benefit.

Mr. Chairman, many industry members believe exchange consolidation may be a precursor of a merged exchange and commissary system.  Such consolidation under a non-appropriated funding (NAF) arrangement would eventually erode both the commissary and the exchange benefit, as the cost to the customer would have to increase to sustain the operation, significantly affecting the value of the benefit. In ALA's view, consolidation of exchanges and commissaries should not occur unless there is a substantive business-based analysis that the change will not, in any way, degrade the current benefit to the patron, the MWR dividend, or negatively influence the military resale industry. 

Mr. Chairman, the ALA also has concerns about proposals to add private label products to the commissary stock assortment and to introduce variable pricing strategies in order to generate alternative funding for commissaries.  The ALA believes that the introduction of private label and variable pricing in commissaries will lead to significant increased costs to the patron and a degradation of the benefit.  Therefore, ALA strongly opposes private label products and variable pricing in commissaries.

DOD has directed the Defense Commissary Agency (DeCA) to issue a contract solicitation to study DeCA's Pricing Strategies to determine the feasibility of introducing variable pricing.  The tasking memorandum issued by DOD cites research that "suggests opportunities to improve customer satisfaction and lower appropriated fund costs by expanding the Best Value Item (BVI) program (rather than introducing "private label" products)."  The DOD memo states that the research also suggests "a strong case for the continued availability of the leading national brand products and introducing variable pricing to better manage the price gap between the leading national brand and the BVI, while maintaining a 30 percent savings on both national and best value items."

Under a variable pricing model, the implications for DeCA indicate that prices of goods sold in commissaries would increase by establishing a shelf price that contains a margin.  The margin or profit generated by selling items to patrons with a marked-up price would be utilized to offset the appropriation necessary to operate commissary stores.  In effect, DOD seeks to transfer the cost of providing the commissary benefit to the patron.  DOD's goal of initiating variable pricing on BVI while maintaining a 30 percent overall savings for the military patron would generate little, if any, revenue with which to offset the current appropriation. 

The application of category management practices designed to optimize unit movement and patron savings has enabled DeCA to establish an overall stock assortment that is highly value oriented.  In addition, DeCA has utilized the Best Value Item designation to promote its overall value orientation and to provide the consumer with an attractive alternative to private label products offered by civilian retailers.  In civilian business models that utilize variable pricing, a stock assortment provides flexibility to increase margins on some items while maintaining competitive prices on core items.  Commissaries are not authorized to carry many of those items in their stock assortment, such as Styrofoam Coolers, umbrellas, alarm clocks and reading glasses. Adding a margin to items in the DeCA assortment (especially to items that carry the BVI designation) will substantially alter the value perception of the military patron and affect item movement.

Since the military patron tends to be a price-value shopper, the imposition of an increase of only a few cents on the price of an item will create significant changes in demand patterns.  As such, expanding the BVI program and adding a margin to the shelf price of those items, as suggested by DOD, is not a viable strategy to generate a meaningful offset to the current appropriation due to the potential decrease in volume.  In addition, an expansion of the BVI program would most likely come at the expense of small businesses that do not possess the economies of scale to compete with larger companies.

DOD's proposal does not address the fundamental issue of price elasticity, nor does it address the cost of developing and administering a complex pricing model.  If any revenue were generated by the application of variable pricing, it would be substantially offset by the cost of software and the cost to train or hire the skilled personnel required to manage and maintain the price models.

Mr. Chairman, taking promotional offerings into account, a variable pricing strategy removes all incentives for manufacturers to offer DeCA their lowest available prices.  Currently, manufacturers are encouraged to offer their lowest promoted prices to DeCA in order to stimulate sales volume.  Under variable pricing, manufacturers will lose the ability to effectively manage price points as well as the guarantee that all of their promotional dollars will be passed directly to consumers.  While price elasticity varies by category, in general, volume declines as prices increase beyond their equilibrium point.  In an environment where items are currently sold at the procured cost, the imposition of a mark-up would result in sales volume decreases.  As volume falls, manufacturers will be forced to increase prices (or decrease promotional frequency and depth of promotions) consistent with their practices for the civilian retail trade and as a result prices to patrons will rise.

ALA believes price increases to the patron resulting from the introduction of variable pricing would have the greatest impact on shoppers who are the most price sensitive.  The most price sensitive shoppers in commissaries tend to be the lower ranking enlisted and retiree families.  Therefore, the burden of offsetting the appropriation would then be born by those who benefit most from the lowest price and who can least afford increased prices in the commissary.

Mr. Chairman, in an era when the DOD has been raising the basic pay of military members to increase their rate of compensation, why shift the burden of operating commissaries to the patron and, in effect, reduce their disposable income?  Such a move would lessen the Quality of Life of military families who count on the commissary as a means to achieve significant savings on the purchase of grocery items. Today, a family of four can save $2,400 per year by shopping at the commissary. This privilege is ranked as most important non-pay compensation benefit for military families.  ALA believes that shifting the burden of operating commissaries to the military service member, retirees and their families will undoubtedly be viewed as eroding a highly valued benefit of military service.  Also, shifting the burden to the military patron is clearly against Congressional intent as expressed in Section 2486, Title 10, USC which mandates items be sold at the procured cost (plus a surcharge to fund construction and renovations and one percent added to the shelf price to cover shrinkage). Simply stated, variable pricing in commissaries will not work.

Base Realignment And Closure (BRAC) issues also are of significant concern to our members.  ALA urges Members of Congress to protect the interests of all beneficiaries impacted by base closures and realignments, including Guard and Reserve, retirees and their families.  Mr. Chairman, we support preserving Quality of Life benefits such as commissaries, exchanges, MWR/Services, child-care, medical facilities and certain family services for the military community that remains at a BRAC installation.    The precedents for this consideration are Fort Meade, MD and the Joint Training Facility, Fort Worth, TX.  While both installations were closed or realigned under previous BRAC rounds, Quality of Life programs in those respective areas are larger today than when each served as an active duty facility.  

Recognizing that the commissary shopping privilege is ranked as a highly desired and important non-pay compensation benefit for military families, the delivery model requires a new look when a BRAC installation is transformed into a Guard and Reserve base.  In recognition of DOD's new focus on the National Guard and Reserve force mission and Congressional approval last year of unlimited commissary shopping privileges for Guard/Reserve, retirees and their families, ALA believes the interests of all beneficiaries should be included in the demographic criteria for preserving commissaries and other Quality of Life programs at BRAC installations.

Maintaining a dynamic military community with outstanding Quality of Life programs is essential in today's climate of repeated deployments, often back-to-back, ever increasing workloads and greater sacrifices for service members and their families.   Eliminating commissaries, exchanges and other family services at BRAC installations is, in our view, unwise and sends the wrong message to our military service members, Guard and Reserve, retirees and their families.  We urge Congress not to let this happen.

Without the continued support of the Congress of the United States, we believe the benefits now afforded to our military community will be eroded and our service members, retirees and their families will suffer.

Thank you, Mr. Chairman, and Members of the Subcommittee for providing industry the opportunity to present its views on these critically important topics.  More importantly, thank you for your stewardship of these important benefits that are essential to our military families' Quality of Life.