Report to the Ranking Minority

Member, Committee on Small Business

and Entrepreneurship, U.S. Senate

United States General Accounting Office

GAO

December 2002 DEFENSE

COMMISSARIES

Additional

Small Business

Opportunities

Should Be Explored

GAO-03-160
The Defense Commissary Agency does not charge slotting fees, and agency

staff, not product manufacturers, decide which products to sell and where

they will be placed on commissary shelves.

GAO estimates that slightly more than half of the companies producing

products that the agency sold are small businesses. According to GAO

estimates, these businesses produced about 24 percent, or about 10,900 of

45,200 products sold by commissaries from August 2000 through May 2001,

generating about 7 percent of commissary sales during the period.

Federal law requires that a name brand product must have been sold on a

regional basis through grocery stores or other retail operations before the

agency may purchase it for resale without competition. This requirement

apparently poses a legal hurdle to small businesses whose name brand

product distribution may be limited because the agency cannot accept their

products for resale.

GAO identified two ways in which opportunities for small businesses might

be increased. First, the legal hurdle to purchasing name brand products that

have limited distribution could be removed. Agency officials are capable of

deciding which products to sell without this requirement.

Second, the agency could sell private label products, such as the Kroger

Company’s “Big K” brand or Safeway Stores’ “Safeway Select” brand and

obtain these products from both large and small businesses. In 2001, private

label products constituted over 20 percent of industry unit sales and 16

percent of dollar sales. Private label products are sold at lower prices than

brand name products and could potentially increase savings for commissary

customers. Agency officials recognize there could be some potential benefits

if the agency were to offer private label products. However, the officials said

it would be difficult to initiate and operate a private label program. Further,

they are concerned that if the agency attempted to sell private label

products, its current suppliers would increase their prices and withdraw

some of the support they now provide commissaries, perhaps reducing the

overall benefits of commissary shopping. GAO noted that the agency has not

done a thorough study of the potential for private label products to serve

commissary customers. The agency’s Director agreed with GAO that a study

of the benefits and costs of developing private label products would be

reasonable to undertake to determine if such a program could enhance the

commissary benefit.

The Department of Defense concurred with GAO’s recommendations and

plans to implement them.

DEFENSE COMMISSARIES

Additional Small Business Opportunities

Should Be Explored

www.gao.gov/cgi-bin/getrpt?GAO-03-160.

To view the full report, click on the link above.

For more information, contact Lawrence

Dyckman at 202-512-9692 or

dyckmanl@gao.gov.

Highlights of GAO-03-160, a report to

the Ranking Minority Member,

Committee on Small Business and

Entrepreneurship, U.S. Senate

December 2002

Some grocery supermarket

companies have been charging

food product manufacturers

“slotting fees” to place products in

stores and have involved large

product manufacturers in making

decisions about what products to

sell. These practices have raised

concerns about anticompetitive

behavior and may be adversely

affecting small businesses. GAO

was asked (1) if the Defense

Commissary Agency is using these

practices in managing military

commissaries; (2) what proportion

of products sold by commissaries

are produced by small businesses;

and (3) if small businesses face

barriers in selling products through

commissaries and how

opportunities for small business

could be improved.

GAO is recommending that the

Department of Defense study the

benefits and costs of developing

private label products for sale

through commissaries. GAO

also suggests that the department

consult with the Small Business

Administration on the removal of a

legal hurdle that that may deter

some small businesses from

dealing with commissaries.
Page i GAO-03-160 Defense Commissary Opportunities

Letter 1

Results in Brief 2

Background 5

Conclusions 15

Recommendations for Executive Action 16

Agency Comments and Our Evaluation 16

Appendix I Objectives, Scope, and Methodology 18

Appendix II Examples of the Terms of DeCA’s

Performance-Based Agreements 20

Appendix III Steps in DeCA’s Category Management Process 21

Appendix IV Top 20 Private Label Product Categories in the

Supermarket Industry, 2001 23

Appendix V Comments from the Department of Defense 24

Appendix VI GAO Contact and Staff Acknowledgments 26

Tables

Table 1: DeCA’s Performance-Based Agreements for 2000 and 2001 7

Table 2: Estimated Percent of Small and Foreign Businesses and

Sales of Products by DeCA Commissaries, August 2000

through May 2001 10

Abbreviation

DeCA Defense Commissary Agency

Contents
Page 1 GAO-03-160 Defense Commissary Opportunities

December 12, 2002

The Honorable Christopher Bond

Ranking Minority Member

Committee on Small Business and Entrepreneurship

United States Senate

Dear Senator Bond:

For well over a decade, the U.S. retail grocery industry has increasingly

required grocery store suppliers to pay a variety of fees to place their

products in stores. These fees, called “slotting fees” or “slotting

allowances,” help determine which products supermarkets will sell and

where they will place those products on their shelves. Proponents of

slotting fees maintain that the fees help pay the costs of introducing new

products to the marketplace, such as the costs of reallocating shelf space

and reprogramming scanner equipment and that the fees help allocate the

risk of product failure between suppliers and retailers. Some retailers view

slotting fees as a way to reduce their risk in trying a new product and

say that a manufacturer’s willingness to pay slotting fees indicates the

manufacturer’s confidence in a product’s success. Opponents of the

practice, including some product suppliers and small business groups,

maintain that it can prevent smaller manufacturers from competing if they

cannot afford the fees.

Many large grocery retailers have also adopted a business technique

called “category management” for assessing the sales potential of products

within a particular category, such as ice cream or other frozen foods,

selecting the products with the best potential and allocating shelf space to

these products. Retailers may manage product categories themselves, with

recommendations from suppliers; select various “category captains”

(usually the leading manufacturers for each product category) to help

them manage the categories; or turn over management of the categories to

the category captains. While proponents of category management view

it as having potentially significant benefits for suppliers, retailers, and

consumers, others are concerned that when a retailer relies heavily on a

category captain, anticompetitive behavior may arise.

The Department of Defense operates supermarket-type stores called

commissaries for the use of active and retired military personnel and their

families. Managed by the Defense Commissary Agency (DeCA), these

commissaries number about 280 worldwide, with sales totaling about

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-03-160 Defense Commissary Opportunities

$5 billion per year. DeCA’s overall goal is to provide quality products at

the lowest possible cost. Like commercial supermarkets, commissaries

sell name brand products and nonbranded products such as produce, fresh

fish, and ground beef. DeCA encourages small businesses to sell products

through commissaries. Even so, to assure that DeCA can supply the name

brand products its customers desire, federal law allows DeCA (as well as

other federal agencies) to purchase name brand products without

competition and without setting aside a portion of this business for small

businesses. The Small Business Administration generally considers

businesses with 500 or fewer employees to be small businesses.1

You asked us how DeCA is managing its product purchases. Specifically,

you asked us to determine the extent to which (1) DeCA requires grocery

suppliers to pay for shelf space in commissaries, (2) DeCA’s large

suppliers select the products that are sold by commissaries, (3) products

sold by commissaries are produced by small businesses and foreign

businesses, and (4) small businesses face barriers to selling their products

in commissaries as well as whether opportunities for small businesses

could be improved.

The Defense Commissary Agency does not require its suppliers to pay for

shelf space in commissaries; the agency accepts and stocks products for

sale without charging slotting fees. However, in recent years the agency

participated in a small number of promotional arrangements, called

“performance-based agreements,” under which its suppliers paid a

negotiated fee for preferred product display space. In calendar year 2001,

for example, the Defense Commissary Agency had 14 performance-based

agreements covering products sold by 10 of over 2,700 of its suppliers.

These agreements were negotiated separately from decisions to

stock products, according to agency officials. The revenue from these

performance-based agreements—about $1.2 million in 2001—has been

used to fund commissary construction. The agency discontinued offering

its suppliers performance-based agreements for 2002 to assure that

revenue obtained through these agreements was not limiting vendors’

capability to reduce product prices and because the Congress had

provided for funding commissary construction.

 1

 Exceptions, among others, include breakfast cereal manufacturing, fats and oils refining

and blending, and specialty canning—1,000 employees or fewer; and cookie and cracker

manufacturing, and cane sugar refining—750 employees or fewer.

Results in Brief
Page 3 GAO-03-160 Defense Commissary Opportunities

The Defense Commissary Agency’s large suppliers do not select the

products that the commissaries sell; instead, agency officials have sole

responsibility for category management decisions. When the agency

assesses the performance of a category of products, such as frozen dinners

or ice cream, it relies on market data that it obtains from an independent

source. The agency also obtains product sales data and selection and

display recommendations from suppliers within that category. These

suppliers include both leading manufacturers—such as Kraft Foods, Inc.,

and General Mills, Inc.—and other companies selling and distributing

products in that category that decide to participate in the review. The

agency reconsiders its selections if requested to do so by suppliers.

Based on a statistical sample, we estimate that 53 percent of businesses

producing products which the agency sold were small businesses and

that these businesses produced about 24 percent or about 10,900 of

45,200 products sold by commissaries, during the period we sampled. We

also estimate that the sale of these products totaled about $214 million, or

about 7 percent of the dollar sales of commissaries during the period. In

addition, we estimate that about 13 percent of the businesses producing

products which the agency sold are foreign businesses and that these

businesses produced about 6,500 products, or about 14 percent of the

products sold by commissaries during the period. We also estimate that

the sales of products produced by foreign companies totaled about

$551 million or about 17 percent of the dollar sales of commissaries over

the period. These estimates are based on a statistical sample of 700 of

approximately 45,200 products sold by commissaries during the 10-month

period from August 2000 through May 2001.

Businesses face a legal hurdle in selling brand name products to the

Defense Commissary Agency for resale. Federal law requires that a name

brand product must have been sold on a regional or national basis through

grocery stores or other retail operations consisting of multiple outlets

before the agency can purchase a product for resale without competition.

Agency officials do not know precisely how often companies may be

affected because companies do not inform the agency when they decide

not to propose products for acceptance. Also, some small businesses may

not sell to the commissary system because it appears to present less

opportunity than other large grocery supermarket companies since the

assortment of products which commissaries stock is smaller in

comparison, the distances between commissaries is greater, and the costs

of distributing products to commissaries may be increased. Nevertheless,

agency officials said that they are eager to add products from small

businesses and are looking for products with positive sales records, as
Page 4 GAO-03-160 Defense Commissary Opportunities

well as companies with the financial capability to sustain operations and

the production capacity to meet demand for their products if accepted.

Because the legal requirement apparently limits the consideration of

products proposed by small businesses, the agency may wish to consult

with the Small Business Administration on whether to suggest to Congress

that the provision be modified or removed from the law.

There also would be opportunities for small businesses if the agency were

to sell private label products. Major grocery retailers, except for the

agency, have developed successful private label products—private label

products have grown to account for over 20 percent of industry unit sales

and a 16 percent share of dollar sales in 2001, according to industry data.

Private label products have low prices compared to name brand products

and have also provided retailers with higher profit margins according to

industry information. Agency officials recognize that private label

products are successful and that commissary customers are very likely to

buy private label products if they are offered at commissaries. Yet, agency

officials also commented that a private label program could be difficult for

the agency to initiate and implement. They said that introducing private

label products could cause the agency’s current suppliers to raise prices

and withdraw the labor support they now provide and thereby raise the

possibility that the overall benefits of commissary shopping may be

reduced. We believe these issues would need to be carefully considered to

determine if private label products are in the best interest of commissary

customers. The agency’s Director agreed that it would be reasonable to

perform a study to determine if a private label product program could

enhance the commissary benefit. Because the sale of private label

products is a significant and successful competitive trend in grocery

retailing, provides products at the lowest possible cost, and offers

opportunities for small businesses, GAO is recommending that the

Department of Defense assess the benefits, costs, and implementation

issues associated with selling private label products through

commissaries.

The Department of Defense reviewed a draft of this report, concurred with

our recommendations and stated that it will implement them.
Page 5 GAO-03-160 Defense Commissary Opportunities

DeCA commissaries are in business to provide a significant non-pay

compensation benefit to military families; they sell food and household

items tax free at cost plus a 5 percent surcharge. Military servicemen,

retirees, and their families consider the opportunity to shop and save

through the commissary a highly important benefit of military service.

DeCA is striving to achieve an overall savings of 30 percent for its patrons

compared to retail supermarket prices. DeCA’s operating expenses are

paid primarily through an annual appropriation of about $1 billion. DeCA

was formed in 1991, and its headquarters are at Fort Lee, Virginia.

Under federal law, DeCA may purchase name brand products without

competition and thereby supply its customers with products they prefer.2

Also, when purchasing products without seeking competition,

requirements regarding purchases from small businesses become

inapplicable.3

 For the remainder of the products which commissaries sell

for which there is not demonstrated customer preference for a specific

brand, DeCA follows federal procurement requirements, seeking

competition and striving to purchase a portion of its products from

small businesses.

The Federal Trade Commission has been reviewing slotting and category

management practices as part of its responsibility for preventing business

practices that may have a harmful effect on competition.4

 Within the

commission, the Bureau of Competition is responsible for investigating

such illegal practices, and for taking enforcement action if it finds illegal

activity. The Bureau of Competition views slotting allowances as covering

a very broad range of business conduct, some of which—such as

 2

 10 U.S.C. 2304(c)(5).

3

 Although not required, DOD sets a goal for the portion of DeCA resale dollars that small

business suppliers are to receive—based on the companies with DeCA resale agreements.

These companies include brokers and distributors (who represent multiple manufacturing

companies both large and small) and the individual manufacturers who deal directly with

DeCA. For fiscal year 2002, DeCA’s goal was that 14.5 percent of sales would be

attributable to the resale agreements with small businesses, and 14.9 percent was achieved.

4

 Federal Trade Commission, Report on the Federal Trade Commission Workshop on

Slotting Allowances and Other Marketing Practices in the Grocery Industry (Washington,

D.C.: Feb. 2001). The report stated that commission staff prepared it and said “It does not

necessarily reflect the views of the Commission or any individual Commissioner.” The

commission’s workshop report contained little information about the amounts of the fees

and their frequency of use and concluded that much more information needs to be

obtained about slotting practices.

Background
Page 6 GAO-03-160 Defense Commissary Opportunities

commercial bribery5—are unlawful. Other slotting practices are legal in

competitive markets, according to the Federal Trade Commission, such as

ordinary price discounts that are passed through to consumers. The

Deputy Director of the Bureau of Competition has testified that slotting

allowances are unlikely to harm competition when there are payments of

reasonable amounts to compensate a retailer for stocking a new unproven

product. On the other hand, the Deputy Director also advised that slotting

practices may be of competitive concern if they involve the exclusion of

rivals.6

 The following fees illustrate those in use in the industry according

to the Federal Trade Commission’s workshop report on slotting practices

and industry studies:

• Slotting allowances—lump-sum, up-front payments from a manufacturer

or producer to a retailer to have a new product carried by the retailer and

placed on its shelves.

• Pay to stay fees—fees paid by a manufacturer to keep existing products

on retailers’ shelves.

• Display fees—fees paid by a manufacturer for shelf space and for placing

products in particular locations within a store, such as on eye-level shelves

or on displays at the end of shelves. There are concerns that some

payments may limit or disadvantage a rival’s access to shelf space.

• Failure fees—fees paid by a manufacturer to a retailer in the event that a

product does not sell as well as expected and must be removed from store

shelves and inventory.

DeCA does not as a matter of course require companies supplying grocery

products to make payments to obtain shelf space in commissaries. DeCA

accepts and stocks products for sale without charge and in so doing has

not joined in the grocery industry practice of requiring up-front slotting fee

payments for shelf space.

 5

 Commercial bribery occurs when an under the table payment to a retailer’s purchasing

agent for placing a product on a store shelf goes into the agent’s pocket.

6

 Federal Trade Commission, Slotting Allowances and the Antitrust Laws, Testimony

of Willard K. Tom, Deputy Director, Bureau of Competition, before the Committee on the

Judiciary, U.S. House of Representatives (Washington, D.C.: Oct. 20, 1999). In addition, the

Federal Trade Commission staff report indicates that, among other things, the exclusion of

competitors is cause for antitrust concern only if it impairs the health of the competitive

process and that the exclusion of individual firms is not a competitive concern if the

relevant market as a whole remains competitive. The staff report also states that this

perspective flows from the principle, often repeated by the Supreme Court, that antitrust

laws are intended to protect “competition” rather than “competitors.”

DeCA Does Not Use

Up-Front Slotting Fees
Page 7 GAO-03-160 Defense Commissary Opportunities

Although DeCA does not use up-front slotting fees, DeCA has entered into

promotional arrangements, called “performance-based agreements,” under

which suppliers paid DeCA fees for allowing specific promotional

activities. DeCA used these agreements to increase the funds available

for commissary construction. The agreements were based on suppliers’

proposals and negotiations with DeCA, and the agreements authorized

suppliers to place products on special merchandizing racks, on

end-of-aisle displays, and on in-aisle display cases. The agreements

were negotiated separately from decisions to stock products, according

to DeCA officials. DeCA entered relatively few performance-based

agreements, and they provided modest income as table 1 indicates.

Table 1: DeCA’s Performance-Based Agreements for 2000 and 2001

Year

Number of

agreements Product categories

Estimated DeCA

revenue

2000 18 Candy, pet supplies, breakfast foods,

butter, margarine, baked goods,

cheese, drinks, snack foods, and home

care products

$1.7 million

2001 14 International products, snack foods,

baked goods, drinks, frozen foods,

health foods, kitchen aids, and

insecticides

$1.2 million

Source: GAO’s analysis of DeCA information.

In addition, our review showed the following:

• Only one company had performance-based agreements in both years.

• In calendar year 2001, the 14 performance-based agreements covered

products sold by 10 of over 2,700 of DeCA’s suppliers.

• DeCA’s performance-based agreements were not structured in a manner

that excluded the sale of other suppliers’ products. Appendix II contains

examples illustrating the performance terms and the basis for payments

that DeCA received through its performance-based agreements.

While there have been relatively few performance-based agreements, the

concept has raised some concerns. In a 1998 report on DeCA contracting

activities, the Department of Defense expressed concern that (1) DeCA’s

agreements were a form of selling space in commissaries, which is not

authorized, and (2) that the agreements were a cost to the suppliers who

may pass on those costs to military customers through increased product
Page 8 GAO-03-160 Defense Commissary Opportunities

prices.7 While DeCA officials disagreed with these perspectives,

DeCA decided not to enter additional performance-based agreements

for 2002. DeCA officials stated that they took this action to assure there

was not any possibility that the agreements were limiting their suppliers’

capability to reduce product prices, and because revenue needed for

commissary construction had been secured through congressional action.8

DeCA officials select the products that commissaries sell—the agency

does not use its large suppliers to select products for commissaries. DeCA

officials do use category management techniques when selecting products,

and DeCA officials have sole responsibility for category management

decisions. DeCA adopted category management in the mid-1990s because

this technique was being recognized as a significant improvement in

grocery industry management practice. DeCA’s category managers and

buyers who are assigned to DeCA’s Marketing Business Unit, located

primarily at Fort Lee, Virginia, implement these techniques. DeCA has

divided its grocery business into about 170 categories of like products,

and it completed 164 reviews of individual product categories from

January 2001 through August 2002. Appendix III identifies the general

steps in DeCA’s category management process, and DeCA’s role within

this process.

DeCA category managers and buyers have the lead role in DeCA’s category

management process. DeCA category managers and buyers told us that

they use data from Information Resources, Inc.,9

 as a foundation for

making grocery product selection decisions. Information Resources, Inc.,

supplies DeCA with sales data for each product in a category for the

commissary market, as well as comparative sales data from other grocery

retailers. This information allows DeCA’s category managers and buyers

to have an overview of the performance of each product over several

time periods. In addition, DeCA category managers and buyers meet

individually with their suppliers during a category review and are provided

with product presentations and sales data developed by the supplier or

purchased by the supplier, along with the suppliers’ product selection and

 7

 Department of Defense, Procurement Management Review: Defense Commissary

Agency (Washington, D.C.: Nov. 10, 1998).

8

 National Defense Authorization Act for fiscal year 2002.

9

 Information Resources, Inc., is a leading source of statistical data on supermarkets and

their products. It purchases point of sale data for analysis from industry retailers.

DeCA Officials Are

Responsible for Product

Selection Decisions
Page 9 GAO-03-160 Defense Commissary Opportunities

display recommendations. Suppliers who make presentations to DeCA

during a category review typically include both leading manufacturers

such as Kraft Foods, Inc.; General Mills, Inc.; and PepsiCo, Inc.; and

distributors, brokers, and other companies selling and distributing

products in a category that decide to participate in the review. According

to DeCA officials, they do not discuss or share the content of meetings

with individual companies with the representatives of other companies

that participate in a category review. After DeCA announces the results

of a category review including any changes in its selections and the

distribution of its products, DeCA will reconsider its selections if

requested to do so by suppliers.

Based on a statistical sample, we estimate that 53 percent of

businesses producing products that DeCA sold are small businesses and

that these businesses produced about 24 percent of the products (about

10,900 products, plus or minus 1,500) sold by commissaries from

August 2000 through May 2001. We estimate that the sale of these products

totaled about $214 million, or about 7 percent of commissary sales, and

we are 95 percent confident that the total lies between $76 million and

$352 million. In addition, we estimate that about 13 percent of the

businesses producing products that DeCA sold are foreign businesses and

estimate that these businesses produced about 14 percent or about

6,500 of the products sold by commissaries during the period. We are

95 percent confident that the total lies between 5,300 and 7,800. We also

estimate that the sales of products produced by foreign companies totaled

about $551 million, or about 17 percent of the dollar sales of commissaries,

and we are 95 percent confident that the total lies between $287 million

and $815 million. For our statistical sample, we selected 700 of

approximately 45,200 products sold by commissaries during the 10-month

period.10 Table 2 provides additional details.

 10 We identified the parent company, if any, for 669 of the products we sampled. Some

138 small companies, 164 large companies, and 40 foreign companies supplied these

669 products.

Commissaries Sale of

Products from Small

Businesses and

Foreign Companies
Page 10 GAO-03-160 Defense Commissary Opportunities

Table 2: Estimated Percent of Small and Foreign Businesses and Sales of Products

by DeCA Commissaries, August 2000 through May 2001

Dollars in millions

Business typeaPercent

95-percent

confidence

interval Total

95-percent

confidence

interval

Small 53 44 to 54

Products 24 21 to 27 10,900 9,400 to

12,400

Dollar sales of products 7 2 to 11 $214 $76 to $352

Foreign 13 10 to 17

Products 14 12 to 17 6,500 5,300 to 7,800

Dollar sales of products 17 9 to 25 $551 $287 to $815

a

While we could estimate the proportion of small and foreign businesses, we could not reliably

estimate the total number of businesses. To do so would require knowledge of the number of

products in the population associated with each parent company identified in the sample. The list

from which the samples were drawn included product, but not company, identification, and the

population of companies that produce products sold by DeCA is not known. Commissaries sales from

August 2000 through May 2001 totaled $3.278 billion dollars.

Source: GAO’s analysis of DeCA data.

We developed estimates of this business activity because this data was not

available from DeCA. DeCA collects data on its suppliers with which it has

resale agreements. These suppliers include a mix of companies, some of

which produce products and others that are the distributors of products

produced by other companies. DeCA’s database identifies the companies

that supplied it with each product, and its data includes either the

producer or the distributor, but not both.

We could not compare commissary sales of the products of small

business with private sector grocery supermarkets because the data

that are available are too limited. While scanner data on industry sales

are available, this information does not identify the size of the companies

that supply the products, according to industry officials. Also, the

U.S. Census Bureau, which conducts economic surveys of manufacturing,

does not collect data on the extent that the products of small businesses

are sold through individual commercial grocery retailers. Census Bureau

data shows that grocery manufacturing is diversified, with over

22,000 companies participating in the sector, and that over 21,000 of these

companies had 500 or fewer employees. Yet, the industry is more

concentrated at the top—the 50 largest companies in the sector accounted
Page 11 GAO-03-160 Defense Commissary Opportunities

for about 51 percent of the $422 billion in shipments attributed to this

sector of the economy in 1997 (the latest data available).11

Businesses face a legal hurdle in selling brand name products through

commissaries—a provision of law requires a minimum level of sales before

DeCA can consider a brand name product for purchase. In addition, the

commissary system has certain physical characteristics that limit the

number of products that commissaries sell and increase the costs of

distributing products to commissaries. These characteristics affect the

opportunities of businesses, including small businesses, to present and sell

products through commissaries.

In general, federal policy concerning small businesses is to (1) foster their

development and (2) to eliminate barriers to their growth. As indicated by

the Small Business Act and the U.S. Small Business Administration, the

United States is committed to preserving full and free competition that

leads to free entry into business to keep capitalism efficient and foster

innovation. Also, according to the administration, the growth of small

businesses is vital to preserve competition, and its Office of Advocacy was

created to help discourage barriers to small business development and

growth. Furthermore, according to the administration, policymakers

should find ways to level the playing field for all businesses without

compromising statutory or agency specific goals.

In considering products for sale in commissaries, DeCA is bound by a

provision of federal law that requires a name brand product to have been

sold on a regional or national basis through grocery stores or other retail

operations consisting of multiple outlets before DeCA may purchase these

products on a non-competitive basis for resale.12 This limitation was

enacted in 1997, and a congressional committee considering this

legislation specifically stated in referring to this provision that discount

 11 The 1997 data is from the U.S. Census Bureau’s 1997 Economic Census: Manufacturing

Subject Series, the latest economic census performed (Washington, D.C.: 1997). The next

economic census of U.S. businesses is being conducted by the Census Bureau starting in

January 2002 and will be reported starting in 2004.

12 10 U.S.C. 2486 (e).

Barriers Small Businesses

May Face in Doing

Business with DeCA
Page 12 GAO-03-160 Defense Commissary Opportunities

brands that are not sold by major commercial grocery or retail store

chains would not qualify as brand name products.13

DeCA officials said that the provision has, in part, had the effect of limiting

their consideration of products that have not yet achieved a regional

distribution, including products produced by small businesses. DeCA

officials do not know precisely how often companies may be affected

because companies do not inform DeCA when they are discouraged from

proposing products for acceptance by DeCA for this reason. DeCA seeks

products with positive sales records and companies with the financial

capability to sustain operations and the production capacity to meet

demand for their products if accepted for sale. DeCA does not accept a

product with an indifferent sales record or a product that may not be as

attractive to customers as those that are already in DeCA’s assortment.

Nevertheless, DeCA officials said that they occasionally accept products

that appear to be popular in regional and local areas even with relatively

limited distribution—they are looking for and eager to add products from

small businesses that are innovative or distinctive. In addition, DeCA

officials said each product accepted for sale must earn its place on the

shelf and continue to sell well to maintain its place in a commissary store

and the commissary system. When a product is added to DeCA’s

assortment, a competing product may need to be removed to make shelf

space available.

In addition, other factors affect whether or not a small business sells

products through commissaries. The commissary system differs, in part,

from some large grocery supermarket companies in the following respects:

the assortment of products, the distances between stores, and the costs of

distributing products to stores. According to DeCA information, DeCA’s

assortment of products is limited by the physical size of commissaries—

commissary stores are about one fourth smaller on average than typical

commercial grocery supermarkets. Also, commissaries are shopped

intensively twice per month on days after military paydays, and DeCA

plans its stock assortment to assure that commissaries have sufficient

quantities of the items in highest demand to meet these bimonthly

shopping peaks. Due to these characteristics, an average commissary

stocks about 11,500 items—as much as 40 percent fewer grocery items

 13 Committee on National Security, House of Representatives, House Report 105-132,

National Defense Authorization Act for Fiscal Year 1998 (Washington D.C.:

June 16, 1997).
Page 13 GAO-03-160 Defense Commissary Opportunities

than large grocery supermarkets, according to DeCA information. In

addition, the wide spacing of commissaries limits their sales in regional

and local markets compared to other large supermarkets chains in

metropolitan areas that have high concentrations of supermarket

stores. Nearly half of all DeCA sales occur at about 55 of the largest

commissary stores distributed across the continental U.S. at major military

bases. Moreover, DeCA does not have centralized warehouses or a

product distribution system within the United States, as do other large

supermarket chains. Therefore, DeCA requires that its suppliers deliver or

arrange to deliver products for sale, and these deliveries must be frequent

enough to assure that at least a minimum quantity of each product is on

the shelf each day. To meet these requirements, many of DeCA’s suppliers

pay a distributor to warehouse and deliver products to commissaries.

These increased distribution costs may affect the decision of a small

business to sell products through commissaries.

Private label products are successful in the supermarket industry,

providing quality products at low cost, but DeCA does not now offer

private label products.14 DeCA officials recognize the strength of the

industry trends in selling private label products, and that commissary

customers would likely purchase significant quantities of private label

products. The sale of private label products would also provide some

opportunity for small businesses. According to officials of the Private

Label Manufacturers Association, as many as half of the association’s

membership of 3,200 companies may have 500 or fewer employees.15

However, DeCA officials identified operational issues that they believe

may undercut the benefits of having commissaries sell private label

products. DeCA’s Director’s said that a study may clarify whether a private

label program would be in the best interests of commissary customers.

Private label products have become a major form of retail trade in the

grocery industry. Private label products, such as those sold by the major

grocery retailers Kroger Co.; Albertson’s, Inc.; Safeway Stores; Wal-Mart;

 14 Private-label products are goods produced by a manufacturer under contract with a

retailer, which distributes them exclusively under its own label. Also known as house

brands, private-label products let a supermarket offer products that can only be found in

its stores.

15 Some large companies that produce name brand products also produce private-label

products to use excess capacity in their plants.

Private Label Products

Might Reduce Commissary

Prices and Provide Small

Business Opportunity
Page 14 GAO-03-160 Defense Commissary Opportunities

and Ahold USA have captured 20.7 percent of supermarket unit sales, and

16.2 percent of dollar sales according to industry data.16 These and other

grocery retailers now use their own private labels to sell thousands of

products. Examples of private label brands include the Kroger Company’s

“Big K” brand, Wal-Mart’s “Sam’s American Choice” brand, or Safeway

Stores’ “Safeway” and “Lucerne” brands. In addition, reports17 on the

supermarket industry indicate that private-label products

• may capture 24 percent of grocery industry sales by 2006;

• make business sense because they offer a 20 to 40 percent price advantage

over national brands and, in addition, provide retailers a 35 to 40 percent

margin compared to the 27 percent margin of national brands; and

• are perceived within the industry as promoting customer loyalty to a

retailer.

Sales of private label products vary significantly by product category, and

in some categories exceed 30 percent of the sales of a category. The top

20 categories of private label product sales are listed in appendix IV.

DeCA officials have been considering the industry trend toward private

label sales. In 1997, a limited evaluation of the private label concept by

DeCA staff suggested, at that time, that (1) DeCA customers appeared to

be demographically ideal purchasers of low cost private label products,

(2) a private label program would be impractical for DeCA because it may

not reduce overall prices and would require significant operations

changes; and, (3) it may be necessary for DeCA to respond to industry

trends by selectively carrying low cost alternative products.18 In July 2000,

DeCA started its “Best Value Items” program, which offers name brand

products at the lowest prices DeCA can obtain. The Best Value Items

program responds, in part, to a commissary customer’s request to DeCA’s

director for private label products, and the recognition by DeCA that

commissaries were at a competitive disadvantage compared to private

label programs in serving some customers, such as its younger service

members who desire the lowest priced products. As of September 2002,

DeCA’s Best Value Item program contained about 400 items and

 16 Information Resources, Inc., as reported by the Private Label Manufacturers Association

for 2001.

17 Standard and Poor’s, Supermarkets and Drugstores (New York, N.Y.: Aug. 2001).

18 Analyses of the financial issues and alternatives for implementing a private label concept

were not included.
Page 15 GAO-03-160 Defense Commissary Opportunities

accounted for about 2.3 percent of DeCA annual dollar sales, according

to DeCA information.

In discussing the potential for private label products, DeCA officials raised

concerns about the effects of a private label program that require serious

consideration. DeCA officials said that the private label concept may not

increase customer traffic from current levels, nor succeed in reducing

product costs overall. More specifically, DeCA officials noted that the

private label concept could be difficult for DeCA to initiate, and the

DeCA’s major suppliers may respond by raising prices on products now

sold through commissaries and withdraw the labor support that they now

provide to commissaries. According to DeCA officials, there would also be

implementation issues such as (1) the pricing of products, which may

require a change in DeCA’s legal authority if variable pricing would be

helpful; (2) the expense of advertising DeCA private label products; and

(3) controls over product quality. Due to these concerns, DeCA officials

have not performed a thorough study of the potential for selling private

label products.

On the other hand, the Department of Defense has stated that it is

important for the future of the commissary system to focus on the

emerging trends in the supermarket industry and for commissaries to be

positioned to retain their appeal. In addition, the department has in

the past expressed concern that discount retailing could lead to strong

competition for military members’ business in common markets. In

discussing the potential offered by private label products, as well as the

issues that would be involved, DeCA’s Director concluded that although

there may be difficulties associated with the application of the private

label concept to commissaries, it would be reasonable to perform a study

to determine whether the sale of private label products could enhance the

commissary benefit overall.

The legal requirement that name brand products must first be introduced

through multiple retail operations on at least a regional basis may preclude

DeCA from purchasing some small business brand name products that it

may desire to purchase. In addition, this requirement may thereby have the

effect of lessening the opportunities to implement the federal policy of

fostering the development of small businesses. We recognize that even if

this provision is removed from the law or some other adjustment is made

to the requirement to open the door to the consideration of all small

business products offered to DeCA, it is uncertain whether there will be a

positive effect on the sales of small business products in commissaries

Conclusions
Page 16 GAO-03-160 Defense Commissary Opportunities

because commissary shelf space is limited and open to competition.

Nevertheless, a change in the requirement could at least open the

opportunity for small businesses to make the case that their products

deserve a place on commissary shelves.

Private label products may provide further opportunities for DeCA to offer

its customers good alternatives in low-cost grocery retailing. The growth

of private label products in the grocery supermarket industry appears to

be a compelling trend, with thousands of private label products capturing

a portion of sales in major national supermarket chains, and significant

portions of particular product categories. Unless the potential for private

label products is examined more thoroughly than it has been thus far,

along with a review of implementation alternatives and the issues that can

be expected to arise if further steps in that direction were to be taken, the

potential for applying this successful retailing to the benefit of commissary

patrons will remain in question.

Because of the potential limitation on small businesses opportunity, GAO

recommends that the Secretary of Defense consult with the Administrator,

U.S. Small Business Administration, on the provision of law restricting

DeCA’s consideration of products that have not yet achieved regional

distribution, and together inform the Congress if small business

opportunity could be improved by removing or modifying the provision.

In addition, to evaluate the potential to better serve commissary

customers, GAO recommends that the Secretary of Defense perform a

study to examine the benefits, costs, and implementation issues associated

with the sale of private label products through commissaries, and act on

study results, as appropriate.

We requested comments from the Department of Defense on a draft of this

report. The department concurred with our recommendations and its

comments are presented in appendix V. Specifically, the department

stated that (1) it would consult with the Small Business Administration on

whether to suggest that the provision of law restricting the consideration

of products be modified or removed from law; and (2) that it will conduct

a study in 2003 to assess the potential benefits, costs and implementation

issues associated with selling private label products through

commissaries, and act on the results, as appropriate. In addition, DeCA

officials told us that they agreed with the contents of the draft report and

Recommendations for

Executive Action

Agency Comments

and Our Evaluation
Page 17 GAO-03-160 Defense Commissary Opportunities

they also provided some technical corrections and clarifications to the

draft report that we incorporated as appropriate.

We conducted our review from January 2000 through October 2002 in

accordance with generally accepted government auditing standards.

Details of our scope and methodology are discussed in appendix I.

As agreed with your office, unless you publicly announce its contents

earlier, we plan no further distribution of this report until 30 days from the

date of this letter. We will then send copies to other appropriate

congressional committees; the Secretary of Defense; the Director, Defense

Commissary Agency; and the Director, Office of Management and Budget.

We will make copies available to others upon request. In addition, the

report will be available at no charge on the GAO Web site at

http://www.gao.gov.

If you or your staff have any questions about this report, please call me at

(202) 512-3841 or Charles Adams at 202-512-8010 or e-mail us at

dyckmanl@gao.gov or adamsc@gao.gov. Key contributors to this report

are listed in appendix VI.

Sincerely yours,

Lawrence J. Dyckman

Director, Natural Resources and

 the Environment
Appendix I: Objectives, Scope, and

Methodology

Page 18 GAO-03-160 Defense Commissary Opportunities

To determine the extent to which DeCA requires grocery suppliers to pay

for shelf space in commissaries, and DeCA’s large suppliers select the

products that are sold by commissaries, we reviewed U.S. Federal Trade

Commission documents and industry studies concerning slotting practices

and category management, reviewed DeCA documents, and interviewed

DeCA and industry officials. More specifically, we reviewed DeCA’s basic

contract with its suppliers, DeCA’s performance-based agreements for

fiscal year 2000 and fiscal year 2001, DeCA category management

documentation, and studies and reports about DeCA’s history,

organization, and operations1

. At DeCA headquarters at Fort Lee, Virginia,

we met with DeCA’s Director, and interviewed DeCA officials including

among others, DeCA’s General Counsel, category management officials,

category managers, buyers, and accounting and contracting officials. We

also interviewed several of DeCA suppliers including large distributors as

well as individual companies. We also visited commissaries located in

Texas and Virginia to discuss commissary operations and the use and

management of commissary shelf space. To determine whether small

businesses face barriers in selling their products in commissaries, we

interviewed officials of DeCA’s Office of Small and Disadvantaged

Business Utilization; reviewed DeCA correspondence on complains from

small businesses; interviewed DeCA’s regional officials involved in

deciding whether the products of small businesses would be attractive

additions to DeCA selection of regional and local products, and officials of

small businesses supplying DeCA. We contacted over 50 companies and

discussed DeCA’s use of category management, slotting fees, and sales of

products from small businesses. In addition, we interviewed officials of

the Food Marketing Institute, several industry trade associations, and the

Private Label Manufacturers Association.

To estimate commissary sales of the products of small businesses and

foreign businesses, we obtained a database from DeCA containing

45,200 products sold through commissaries over the 10-month period

August 2000 through May 2001. For each product, the file contained the

product’s brand name, a commodity description, unit and dollar sales, and

the Universal Product Code. Also, at our request, DeCA officials classified

each product as being supplied by either a large or a small business based

 1

 For example, we reviewed reports pertinent to DeCA operations, relationships with its

suppliers, and operations including: SRA International et al., Category Management Survey

Final Report, (Arlington, Va.: May 7, 1997) prepared for DeCA’s Marketing Business Unit;

and the Jones Commission, Office of the Assistant Secretary of Defense, DOD Study of the

Military Commissary System, (Washington, D.C.: Dec. 18, 1989).

Appendix I: Objectives, Scope, and

Methodology
Appendix I: Objectives, Scope, and

Methodology

Page 19 GAO-03-160 Defense Commissary Opportunities

on its knowledge of its suppliers and the industry. We drew a random

sample of 700 products from DeCA’s population of products.2

 To assist in

verifying the identity of each company that produced or distributed each

product in our sample, we obtained information from the Uniform Code

Council, Inc., that enabled us to identify the company that obtained a

product’s Universal Product Code. We then matched DeCA’s product

information with the corresponding information from the Uniform Code

Council database. In some cases, the matching procedure was

unsuccessful, and we used the product brand name to identify the

company that produced or distributed the product. For the products in our

sample, we verified the parent companies, the size of each company, and

identified foreign companies. Our verification of the number of employees

of each company was based on data obtained from business sources

available on the Internet and phone calls we made to company

representatives. We were able to determine the size of the company3

 and

its parent company, if any, and whether it was foreign or domestic for 669

of the 700 products we sampled. The proportions of small and foreign

companies were estimated by determining the number of products in the

sample associated with each firm and then using the collection of relative

frequencies of each company to estimate the percent of small and foreign

companies in the population. We also used this information to estimate the

numbers of products produced by these companies and sold by

commissaries, and the dollar sales of their products.

 2

 Because we followed a probability procedure based on random selections, we are

95 percent confident that the confidence intervals in this report include the true values in

the population. All percentages we derived have confidence intervals that extend no more

than 10 percentage points away from estimates, as do our numeric estimates, unless

otherwise noted. We used a resampling technique to derive the 95 percent confidence

intervals around the estimated proportions of small and foreign parent companies. To do

this, we generated 1,000 repeated samples (resamples) of the same size as the original

sample (669), each time selecting products with replacement from our original sample of

products. The proportion of small and foreign parent companies was calculated for each

resample, generating a distribution of 1,000 resampled percentages. We computed the 2.5%

and 97.5% percentile points of this distribution and used them as the endpoints of our

95% confidence interval. Estimates and associated confidence intervals for (1) the

proportion of products from small and foreign parent companies, (2) the total number of

products from these companies, and 3) the percent and total sales dollars of products sold

were derived using standard statistical estimation procedures.

3

 Our classification of the size of companies was based on information from the U.S. Small

Business Administration.
Appendix II: Examples of the Terms of

DeCA’s Performance-Based Agreements

Page 20 GAO-03-160 Defense Commissary Opportunities

Agreement

number

Length of

agreement Performance of promotion activities Basis for payments to DeCA

1 7 months 1. DeCA to expand bulk sales sections where practical.

Space to remain unchanged where previously

expanded. Specific displays to be added in the two

largest store categories for 6-month period.

2. Company will continue to have a dedicated sales

section in stores that excludes others products.

3. Two other sets of products to be promoted for

3 months each.

Company to pay a specified amount for

achievement of base annual sales volume.

In addition, as sales increase above the

base annual volume, company to pay an

increasing percent of additional sales

(up to 8 percent) to DeCA.

2 1 year DeCA to provide display of specific products at specified

commissaries.

Company to make minimum specified

quarterly payments. Above minimum target

sales, company to increase total payments

based on pounds of product sold.

3 16 months Company to place freezers in specified number of

commissaries for display of company products.

Company to make specified payment at

end of performance period.

4 1 year DeCA to promote and display specified products on

various timetables such as once per quarter, and

two times over one year period.

Company to pay specified amount for each

primary display plus a bonus based

on percent of invoiced dollar sales, with

the percent increasing at specified sales

amounts.

5 1 year 1. Off shelf displays to occur in each of 24 display

periods. DeCA to allocate space for company to

build and maintain displays. Only company brands

to be placed on company display equipment.

2. DeCA to provide a minimum of 1 endcap or shoparound display in specified stores. In other specified

stores, DeCA to provide a table, rack, or other

display space for company use.

3. DeCA to promote two specific brand products.

4. Competitors to have “proper allocation” of shelf

space. Company shelf space to be based on sales

volume and agreed formula.

• Company to pay specified quarterly

cash payment.

• Company to provide various promotions

of a specified value in coordination with

DeCA’s category manager.

6 1 year DeCA to execute specified number of primaries/power

buys in various product categories.

Company to make specified payments to

DeCA per agreement based on

performance. Also, incentive payments

added when sales reach or exceed

105 percent of base.

7 1 year 1. DeCA to allow racks for display of company

products. Rack types specified in agreement.

2. Specific products to be displayed in off the shelf

locations a specified number of times per year.

Company to pay a specified amount

per rack.

8 1 year DeCA to use company display rack at all commissaries

for company product.

DeCA to follow company specified annual promotion

plan.

Company to make specified payments to

DeCA for each rack placed in use.

Source: GAO’s analysis of DeCA’s performance based agreements.

Appendix II: Examples of the Terms of

DeCA’s Performance-Based Agreements
Appendix III: Steps in DeCA’s Category

Management Process

Page 21 GAO-03-160 Defense Commissary Opportunities

The basic steps in DeCA’s category management reviews, based on

GAO’s analysis of DeCA documents and interviews with DeCA officials,

are as follows:

1. DeCA announces a category review including the goals of the review,

and invites companies supplying products to supply information and

analyses of product sales and trends within the category.

2. DeCA conducts individual meetings with interested companies,

including manufacturers, brokers, and broker-distributors, at

Fort Lee, Virginia. DeCA receives information developed by

participating companies and listens to company presentations

and recommendations for the category.

3. DeCA’s category buyer obtains market information from Information

Resources, Inc., on the performance of products within the category.

This information is gathered from cash register scanner data, and it

shows for each product such data as number of items sold, dollar value

of sales, and changes from prior periods. The data provides a basis for

comparative analyses of sales patterns.

4. DeCA’s buyer analyzes data provided by Information Resources, Inc.,

along with data and recommendations submitted by participating

companies. Based on the buyer’s analysis, the buyer prepares a

schedule of its category decisions indicating which products will be

added, which will be retained with or without distribution changes,

and which will be deleted from inventory.

5. DeCA officials develop and sign-off on shelving plans called

“plan-o-grams” illustrating how nationally distributed products are to

be arranged and that provide shelf space for products that have been

specifically selected to meet regional and local demand. These plans

are used as guides for resetting products on the shelves of individual

commissary stores. Under DeCA’s supervision and with the

participation of product distributors, brokers, and manufacturers

representatives, products on the shelves of individual commissary

stores are periodically reset based on DeCA’s display plans.

6. DeCA releases its category review decisions and solicits comments

from companies participating in the category.

Appendix III: Steps in DeCA’s Category

Management Process
Appendix III: Steps in DeCA’s Category

Management Process

Page 22 GAO-03-160 Defense Commissary Opportunities

7. DeCA responds in writing to each company that objects to DeCA’s

decisions (an objection to a DeCA decision is termed a “reclama”), and

usually provides a brief explanation for its decision.

8. After a 90-day period, DeCA removes deleted items from its

stock system.
Appendix IV: Top 20 Private Label Product

Categories in the Supermarket Industry, 2001

Page 23 GAO-03-160 Defense Commissary Opportunities

Dollar volume leaders Dollar value

 1. Milk $6.4 billion

 2. Cheese 2.3 billion

 3. Fresh bread & rolls 2.1 billion

 4. Fresh eggs 1.6 billion

 5. Ice cream/sherbet 1.0 billion

 6. Carbonated beverages 909 million

 7. Juice/Beverages–refrigerated 714 million

 8. Vegetables 688 million

 9. Frozen plain vegetables 680 million

10. Sugar 629 million

11. Bottled juices 573 million

12. Cold cereal 496 million

13. Cups and plates 486 million

14. Butter 484 million

15. Canned/bottled fruit 446 million

16. Entrée/side dishes 443 million

17. Food and trash bags 433 million

18. Luncheon meats 415 million

19. Breakfast meats 408 million

20. Cookies 407 million

Source: Information Resources, Inc., data as reported by the Private Label Manufacturers

Association.

Appendix IV: Top 20 Private Label Product

Categories in the Supermarket Industry, 2001
Appendix V: Comments from the Department

of Defense

Page 24 GAO-03-160 Defense Commissary Opportunities

Appendix V: Comments from the Department

of Defense
Appendix V: Comments from the Department

of Defense

Page 25 GAO-03-160 Defense Commissary Opportunities
Appendix VI: GAO Contact and Staff

Acknowledgments

Page 26 GAO-03-160 Defense Commissary Opportunities

Charles M. Adams, (202) 512-8010

In addition to the name above, Nancy Crothers, Robert Crystal, James

Dishmon, Curtis Groves, Frank Papineau, and Sidney Schwartz made key

contributions to this report.

Appendix VI: GAO Contact and Staff

Acknowledgments

GAO Contact

Acknowledgments

(360028)
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