United States General Accounting Office

GAO Report to Congressional Requesters

June 1998 DEFENSE

COMMISSARIES

Issues Related to the

Sale of Electronic

Scanner Data

GAO/NSIAD-98-146

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-275202 

June 26, 1998

The Honorable Constance Morella

The Honorable Roscoe Bartlett

House of Representatives

The Defense Commissary Agency (DeCA) operates approximately 300

Department of Defense commissary stores. In addition to the revenue

received from store sales, DeCA also generates revenue by selling the data

collected through its electronic scanners that register prices and goods

sold. From January 1991 to March 1996, one firm had an exclusive rights1

contract for this data.

In June 1995, DeCA solicited offers for a new 5-year, exclusive rights

scanner data contract. The winning firm, in addition to paying for the data,

was to provide DeCA expertise in implementing “category management,” a

system by which retailers manage product categories (e.g., pet foods and

beauty products) as strategic business units and track consumer

preferences in these categories. However, shortly after DeCA selected a

firm, the other competitors filed a protest with the General Services

Administration Board of Contract Appeals (GSBCA). The GSBCA upheld the

protest, which was appealed to a federal court. Subsequently, on May 19,

1998, the court vacated GSBCA’s earlier decision and granted motions to

dismiss the appeal. During the relatively lengthy litigation period, DeCA

entered into a nonexclusive2 license agreement with three firms, pursuant

to a “spot bid sale,” for the monthly use of the scanner data. Appendix I

contains a chronology of events related to the sale of DeCA’s scanner data.

In response to your request that we review DeCA’s sale of scanner data and

its implementation of category management, this report

• identifies DeCA’s total revenue from selling scanner data and compares

license revenues (amounts received after March 1996) to amounts offered

by firms responding to the June 1995 solicitation;

• examines DeCA’s implementation of category management as it relates to

requirements contained in the 1995 solicitation; and

1

According to DeCA officials, exclusive rights means that the winning firm would be the only firm to

receive and use the raw scanner data, and all other firms or individuals would be excluded from this

data.

2

Nonexclusive means that any firm obtaining a license would simply have the right to use the raw

scanner data; DeCA would retain all ownership, right, and title to the data.

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• discusses DeCA’s future plans regarding category management, scanner

data sales, and potential development of an in-house market analysis

capability.

Results in Brief DeCA collected almost $6.1 million from the sale of its scanner data from

January 1991 through March 1998. About $3.9 million, or 65 percent of the

total, was collected from the Air Force contract awarded in 1989. The

remaining 35 percent, almost $2.2 million, came from the license

agreements. DeCA received slightly over $1 million annually from these

licenses—an amount significantly less than the minimum proceeds

guaranteed by two offerors under the 1995 solicitation. The selected firm

offered a 5-year annual average minimum payment of almost $2.5 million.

DeCA officials cited several reasons for the lower amount received from the

license agreements, including the interim, nonexclusive nature of the sale

and uncertainties regarding the litigation. According to a DeCA official, a

new spot bid sale of DeCA’s scanner data had been planned before the

Court of Appeals’ May 19, 1998, ruling, and increased revenue had been

expected from this effort.

Since 1994, DeCA has been implementing the category management concept

and techniques into its operations. According to DeCA officials, the type

and level of category management assistance contained in the 1995

solicitation is no longer necessary. DeCA reorganized its buying function in

mid-1994 to model the type of organization required to support the

category management concept. Subsequently, it implemented a category

management planning process; trained personnel; established product

categories and completed many category plans; and began efforts to

improve or replace data information and collection systems, including

acquiring new store scanners. According to DeCA officials, existing

category management capabilities need refinement, but the capabilities

envisioned in the solicitation are no longer appropriate, resulting in the

decision to cancel the requirement for category management services.

With resolution of the litigation associated with the 1995 solicitation, DeCA

still plans to continue licensing its raw scanner data to multiple buyers.

Further, DeCA hopes to continue selling scanner data to multiple buyers

and further refine its category management system. Officials stated that

DeCA has no plan or desire to develop an in-house market analysis

capability for the purpose of selling refined DeCA scanner data products to

vendors and suppliers.

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Background Commissaries are supermarket-type grocery stores operated primarily for

military personnel. As part of the armed forces’ overall compensation

package, these stores sell food and household items tax free at cost, plus a

5-percent surcharge. Commissaries use point-of-sale electronic scanners to

record sales and collect specific data on items sold (e.g., the brand name,

quantity, and price). Raw scanner data has considerable commercial value

when it is processed into product movement and other reports and sold to

DeCA’s suppliers and vendors.

The first contract for the sale of commissary scanner data was awarded in

October 1989 by the Air Force under 10 U.S.C. 2487,3

 2 years before the

October 1991 consolidation of all service commissaries under DeCA. The

5-year contract gave the contractor exclusive rights to the scanner data.

The contract was implemented in early 1991 following a delay due to a

protest and ended in March 1996.

In June 1995, DeCA solicited offers for a new contract. The solicitation

called for a basic performance period of 3 years—1996 through

1998—with two 1-year options. The winning firm would receive exclusive

rights to the scanner data and pay DeCA the higher of (1) a guaranteed

minimum annual sum or (2) a percentage of the contractor’s gross receipts

from selling information derived from the scanner data. Unlike the terms

of the previous contract, the 1995 solicitation also required the awardee to

(1) help DeCA develop a category management system, (2) train DeCA

personnel in category management concepts and techniques, and

(3) provide category management consultation and analysis services to

DeCA.

DeCA received proposals from four firms and subsequently made its

selection in October 1995. In November 1995, the firms that were not

selected filed a protest with the GSBCA, arguing that the procurement was

for automated data processing services and that DeCA did not have the

required delegation of procurement authority from the General Services

Administration. One firm subsequently withdrew from the protest. In

February 1996, the GSBCA ruled in favor of the protesters, declaring that the

award was void. The contract awardee subsequently appealed this

decision to the Court of Appeals (Federal Circuit). On May 19, 1998, the

court vacated GSBCA’s earlier decision and granted motions to dismiss the

appeal.

3

Congress enacted this law in 1986 to authorize the sale of commissary scanner data using competitive

procedures.

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In early May 1996, DeCA announced its decision, pending the outcome of

the litigation, to license the rights to the use of the scanner data on a

monthly, nonexclusive basis. The highest bid received established the

monthly price for all purchasers. Each firm wanting to purchase the

scanner data was issued a license valid until 30 days following the

resolution of the litigation.

Revenue Summary

and Comparison

From 1991 through March 1996, DeCA received about $3.9 million, or an

annual average of almost $750,000, from the sale of scanner data under the

contract awarded in 1989. In 1995, the last full year of the contract, DeCA

collected over $1.1 million. DeCA’s revenue from this contract increased

each year as the contractor’s total product sales increased.

In May 1996, DeCA decided to license the use of its scanner data on a

monthly basis because of the ongoing litigation at the time. Since then,

each of three firms has paid DeCA $30,000 per month (the highest bid) for

the scanner data—a total of almost $2.2 million for the 2 years ending

March 1998. At the time of the bid, DeCA anticipated resolution of the

litigation within 8 to 18 months, at which time the licenses would

terminate. Table 1 lists the revenue collected annually by DeCA from each

scanner sale source.

Table 1: Scanner Revenue Collected

Annually by Source

Year 1989 contract

License

agreements Total

1991 $315,417 0 $315,417

1992 501,278 0 501,278

1993 772,556 0 772,556

1994 1,009,076 0 1,009,076

1995 1,118,235 0 1,118,235

1996 214,020a $810,000b 1,024,020

1997 0 1,080,000 1,080,000

1998 0 270,000c 270,000

Total $3,930,582 $2,160,000 $6,090,582

aJanuary through March 1996.

bApril through December 1996.

cJanuary through March 1998.

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Annual revenue from the license agreements is less than two offers

received in response to the 1995 solicitation and about $1.4 million less

than the offer made by the selected firm. Specifically, the selected firm

offered an annual average payment of almost $2.5 million over the 5-year

period—1996 through 2000—covered by DeCA’s solicitation.

According to DeCA officials, following DeCA’s technical evaluation of the

offers received, two firms were tied and one was rejected because its

technical score was not high enough to be considered. The tie

breaker—guaranteed revenue—was invoked for the two remaining firms.

The revenue guaranteed to DeCA by one firm was less than the amount

currently being received under the license agreements, whereas the firm

that was eventually selected offered more revenue. The highest offer, in

terms of guaranteed revenue, was made by the rejected offeror.

According to officials from DeCA, the revenue from the license agreements

was lower than amounts guaranteed under the 1995 solicitation primarily

because of the expected short-term and nonexclusive nature of the

licenses and uncertainties regarding the litigation. In addition, the value of

the monthly data was reduced for two firms because DeCA could not

provide the historical sales data from the 1989 contract, which had granted

the contractor exclusive rights to that information. Thus, the value of the

monthly data for these firms was reduced because certain trend analyses

and other reports, which require about 1 year of data to produce, could not

be generated from the licensed data.

Category Management

Implementation

Category management is a relatively new marketing concept that has been

evolving in the U.S. retail industry since the late 1980s and early 1990s. It is

a mechanism and process to manage product categories as strategic

business units or entities and attempts to shift the traditional management

approach from “sell what you purchase” to “buy what sells.” Customized

merchandising and marketing plans, called category plans, are developed

through a cooperative retailer/supplier process for specific product

categories, such as soft drinks, pet foods, and beauty products.

Information developed from raw scanner data and other sources is

assessed to determine category strategies and consider how prices,

advertising, and promotional efforts compare with the competition.

DeCA, aware of the increasing use of category management in the retail

marketplace, decided to adopt the concept in order to remain competitive

and meet the needs of its customers. Thus, in June 1994, DeCA reorganized

Page 5 GAO/NSIAD-98-146 Defense Commissaries
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its buying organization to model the type of operation needed to support

category management. DeCA also evaluated in-house category management

capabilities and found it had little experience in the area.

During this period, DeCA started the planning process to develop a new

solicitation for the sale of scanner data. DeCA decided to use an

exchange/sale-type contract. In exchange for DeCA’s product movement or

scanner data, the contractor would provide monetary payments and

services to assist DeCA in (1) developing a category management capability,

(2) training personnel in category management concepts and techniques,

and (3) providing category management consultation and analysis

services.

After the selection of the winning offeror was protested in November 1995,

DeCA continued to implement category management. As a result, DeCA

believes it has developed most of the capability sought under the 1995

solicitation through the use of in-house and outside resources.

Specifically, DeCA has

• completed the reorganization of its buying function, called the Marketing

Business Unit, and increased its staffing from 83 to 122 by transferring

positions obtained from regional consolidation;

• implemented a category management planning process, using a food

industry association study;

• developed a category management template, a key document in the

category management process, to collect movement and other data on

products from vendors and suppliers;

• identified 118 product categories to manage as business units and

completed 72 associated category plans; and

• initiated actions to improve or replace data information and collection

systems,4

 including new front-end scanners.

Although progress has been made, DeCA does not have some capabilities

that would likely exist if the 1995 award had not been protested. For

example, DeCA does not currently have (1) direct access to private sector

comparative market information or causal information5

 or (2) a routine

4

DeCA is modernizing a number of systems, including new scanners for all commissaries. Other

programs include the Defense Commissary Information System and Telecommunications

Modernization. These core business improvements complement, but are not driven, by the

implementation of category management.

5

Comparative market data analyzes DeCA sales of same or similar product categories to private sector

stores in competitive geographic areas; causal data provides consumer demographics and information

on the effectiveness of product promotions and sales displays in commissary stores.

Page 6 GAO/NSIAD-98-146 Defense Commissaries
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support arrangement with a private sector category management

consultant. In September 1996, citing the progress made in implementing

category management, DeCA officials canceled the requirement for category

management services contained in the 1995 solicitation. During the period

in which litigation was ongoing, DeCA relied on information provided by

vendors and suppliers for comparative and causal information as category

plans were prepared and revised.

Future Plans DeCA plans to continue its existing programs to upgrade and replace

information systems and equipment. Further, DeCA hopes to continue the

licensing of scanner data to multiple buyers and further refine its category

management system by adopting the best practices and characteristics of

the private sector’s category management procedures and processes.

Before the recent Court of Appeals’ ruling, DeCA had also planned to

conduct another spot bid sale in the near future in response to direction

from the Office of the Secretary of Defense.

Ultimately, DeCA would like to establish a relationship with a scanner data

processor modeled after the practices followed in the private retail sector

to provide periodic category management consultation and analysis work.

Officials stated that DeCA has no plan or desire to develop an in-house

market analysis capability for the purpose of selling refined DeCA scanner

data products to vendors and suppliers.

Conclusions Due to several factors, such as uncertainties regarding the litigation

associated with the 1995 solicitation, the annual revenue of $1 million that

DeCA has received from its scanner data license agreements is considerably

less than the potential minimum proceeds guaranteed by offers to the 1995

solicitation.

DeCA began implementing category management in 1994 and continued the

process utilizing both in-house and outside resources. Although DeCA

presently lacks some of the capabilities included in the 1995 solicitation,

DeCA officials believe that sufficient progress had been achieved to warrant

the cancellation of the requirement for the level of category management

services thought appropriate at that time. DeCA hopes to continue selling

scanner data to multiple buyers and refining its category management

system.

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Agency Comments In written agency comments, the Department of Defense stated that our

report accurately presents the facts associated with these issues. (See 

app. II.)

Scope and

Methodology

To accomplish our objectives regarding DeCA’s sale of electronic scanner

data and the status, implementation, and future plans associated with

category management, we conducted work primarily at offices in the

Office of the Secretary of Defense in Washington, D.C.; DeCA headquarters

at Fort Lee, Virginia; and the offices of the three remaining firms that

submitted offers for the 1995 category management solicitation. These

firms are located in Bethesda, Maryland; McLean, Virginia; and Chicago,

Illinois.

To compare the revenue that DeCA received under the previous Air Force

contract and the revenue received under the license agreements, we

obtained the amount of payments received by DeCA from firms for scanner

data between January 1991 through March 1998.

To document DeCA’s progress in implementing category management, we

reviewed the June 1995 solicitation and data documenting DeCA’s present

category management capability. We also reviewed DeCA’s newly

developed category management policies, procedures, category plans,

personnel training, and plans to improve or replace data information and

collection systems. We obtained data on DeCA’s progress in acquiring

capabilities that were sought under the category management solicitation

from DeCA officials in the agency’s newly formed Marketing Business Unit.

To assess how DeCA plans to structure future awards for the sale of raw

scanner data and perform market analysis, we held discussions with DeCA’s

top management, contract managers, and attorneys concerning plans to

(1) continue licensing the data, (2) establish a relationship with a scanner

data processor modeled after practices followed in the private sector,

(3) comply with the court decision, (4) continue selling to multiple

sources, and (5) develop an in-house market analysis capability.

We performed our work in accordance with generally accepted

government auditing standards.

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We are sending copies of this report to interested congressional

committees, Members of Congress, the Secretary of Defense, and the

Directors of DeCA and the Office of Management and Budget.

If you have any questions regarding this report, please contact me at

(202) 512-8412. Major contributors to this report are listed in appendix III.

David R. Warren, Director

Defense Management Issues

Page 9 GAO/NSIAD-98-146 Defense Commissaries
Contents

Letter 1

Appendix I 

Chronology of Events

12

Appendix II 

Comments From the

Department of

Defense

14

Appendix III 

Major Contributors to

This Report

15

Table Table 1: Scanner Revenue Collected Annually by Source 4

Abbreviations

DeCA Defense Commissary Agency

GSBCA General Services Administration Board of Contract Appeals

Page 10 GAO/NSIAD-98-146 Defense Commissaries
Page 11 GAO/NSIAD-98-146 Defense Commissaries
Appendix I 

Chronology of Events

1986: Congress enacted 10 U.S.C. 2487, which authorizes the sale of

commissary raw scanner data using competitive procedures.

1989: The Air Force, on behalf of the various commissary agencies of the

military services, awarded a 5-year contract for the sale of raw scanner

data to a single contractor. The contract gave the contractor exclusive

rights to the data but did not include providing category management

services. This contract was protested to the General Services

Administration Board of Contract Appeals (GSBCA), causing a start-up

delay.

January 1991: After a delay of 16 months, the Air Force contract started.

October 1991: The military services’ commissaries were consolidated

under the Defense Commissary Agency (DeCA). An agreement between the

contractor and DeCA recognized that the new agency was organized

differently from the previous military services’ commissary systems.

Accordingly, the contract was again delayed to permit the contractor to

purchase and deploy the computers necessitated by the new

organizational structure and DeCA’s different information requirements.

June 1995: DeCA issued a solicitation for a new contract to sell scanner

data and obtain category management services. The contractor would

make an annual payment and receive exclusive rights to DeCA’s scanner

data.

October 1995: DeCA made its selection from the four proposals that were

received.

November 1995: All three unsuccessful offerors filed a protest with the

GSBCA, arguing that the contract was for automated data processing

services and that DeCA did not have the required delegation of procurement

authority. (One firm subsequently dropped out of the appeal.)

February 1996: The GSBCA agreed that DeCA did not have a required

delegation of procurement authority and upheld the protest, declaring that

the contract was void ab initio.

March 1996: The former 1989 Air Force contract expired. Also, the

successful offeror under the 1995 solicitation appealed GSBCA’s decision to

the Court of Appeals (Federal Circuit), arguing that DeCA did have proper

authority to award the contract.

Page 12 GAO/NSIAD-98-146 Defense Commissaries
Appendix I 

Chronology of Events

May 1996: To continue scanner-generated revenue, DeCA announced its

spot bid sale as an interim measure. DeCA entered into a license

arrangement with one firm.

September 1996: DeCA entered into license agreements with the

remaining two firms. Also, the firm that DeCA had selected under the 1995

solicitation filed a lawsuit in Federal District Court to stop the licensing of

DeCA’s scanner data to other firms. The firm argued that it had an exclusive

license to scanner data. At this time, DeCA canceled the 1995 requirement

for category management services.

October 1996: Reflecting DeCA’s cancellation of the category

management requirement, the Department of Justice filed a motion to

dismiss the March 1996 appeal as moot. Also, the District Court ruled that

DeCA may license data to other firms. This decision was appealed to the

Court of Appeals (4th Circuit).

July 1997: The Court of Appeals (4th Circuit) affirmed the District

Court’s ruling that DeCA may license scanner data to others as an interim

measure.

May 1998: The Court of Appeals (Federal Circuit) vacated GSBCA’s

February 1996 decision and granted motions to dismiss.

Page 13 GAO/NSIAD-98-146 Defense Commissaries
Appendix II 

Comments From the Department of Defense

Page 14 GAO/NSIAD-98-146 Defense Commissaries
Appendix III 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

James Wiggins, Associate Director

Foy Wicker, Assistant Director

Jennifer Thomas, Evaluator-in-Charge

Office of the General

Counsel

Raymond J. Wyrsch, Senior Attorney

(709250) Page 15 GAO/NSIAD-98-146 Defense Commissaries
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