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37–318 2008

[H.A.S.C. No. 110–32]

OVERVIEW OF MILITARY RESALE

PROGRAMS

HEARING

BEFORE THE

MILITARY PERSONNEL SUBCOMMITTEE

OF THE

COMMITTEE ON ARMED SERVICES

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

HEARING HELD

MARCH 13, 2007
(II)

MILITARY PERSONNEL SUBCOMMITTEE

VIC SNYDER, Arkansas, Chairman

MARTY MEEHAN, Massachusetts

LORETTA SANCHEZ, California

SUSAN A. DAVIS, California

NANCY BOYDA, Kansas

PATRICK J. MURPHY, Pennsylvania

CAROL SHEA-PORTER, New Hampshire

JOHN M. MCHUGH, New York

JOHN KLINE, Minnesota

THELMA DRAKE, Virginia

WALTER B. JONES, North Carolina

JOE WILSON, South Carolina

MICHAEL HIGGINS, Professional Staff Member

JOHN CHAPLA, Professional Staff Member

JOSEPH HICKEN, Staff Assistant
(III)

C O N T E N T S

CHRONOLOGICAL LIST OF HEARINGS

2007

Page

HEARING:

Tuesday, March 13, 2007, Overview of Military Resale Programs ..................... 1

APPENDIX:

Tuesday, March 13, 2007 ........................................................................................ 31

TUESDAY, MARCH 13, 2007

OVERVIEW OF MILITARY RESALE PROGRAMS

STATEMENTS PRESENTED BY MEMBERS OF CONGRESS

McHugh, Hon. John M., a Representative from New York, Ranking Member,

Military Personnel Subcommittee ...................................................................... 1

Snyder, Hon. Vic, a Representative from Arkansas, Chairman, Military Personnel Subcommittee ........................................................................................... 1

WITNESSES

Cowley, Rear Adm. Robert E., III, Commander, Navy Exchange Service Command, U.S. Navy .................................................................................................. 5

Dominguez, Hon. Michael L., Principal Deputy Under Secretary of Defense

(Personnel & Readiness) ...................................................................................... 2

Downs, Michael P., Director, Personal and Family Readiness Division, Manpower and Reserve Affairs Department Headquarters, U.S. Marine Corps ... 9

Essex, Maj. Gen. Paul W., Commander, Army and Air Force Exchange Service, U.S. Air Force ................................................................................................ 3

Nixon, Patrick B., Director, Defense Commissary Agency ................................... 6

APPENDIX

PREPARED STATEMENTS:

Cowley, Rear Adm. Robert E., III ................................................................... 64

Dominguez, Hon. Michael L. ........................................................................... 40

Downs, Michael P. ............................................................................................ 96

Essex, Maj. Gen. Paul W. ................................................................................ 54

McHugh, Hon. John M. .................................................................................... 37

Nixon, Patrick B. .............................................................................................. 80

Snyder, Hon. Vic ............................................................................................... 35

DOCUMENTS SUBMITTED FOR THE RECORD:

[There were no Documents submitted.]

QUESTIONS AND ANSWERS SUBMITTED FOR THE RECORD:

Mr. McHugh ...................................................................................................... 124

Dr. Snyder ......................................................................................................... 121

(1)

OVERVIEW OF MILITARY RESALE PROGRAMS

HOUSE OF REPRESENTATIVES, COMMITTEE ON ARMED SERVICES, MILITARY PERSONNEL SUBCOMMITTEE, Washington, DC, Tuesday, March 13, 2007.

The subcommittee met, pursuant to call, at 10:03 a.m. in room 2212, Rayburn House Office Building, Hon. Vic Snyder (chairman

of the subcommittee) presiding.

OPENING STATEMENT OF HON. VIC SNYDER, A REPRESENTATIVE FROM ARKANSAS, CHAIRMAN, MILITARY PERSONNEL

SUBCOMMITTEE

Dr. SNYDER. The hearing will come to order. Today, the subcommittee turns attention to a topic that is of great value to the members of this committee, the military retail

stores. These stores have been so important to our men and women

in uniform and their families, and each year, we look forward to

getting an update on the status of how we see these military retail

facilities.

Without objection, all of your opening statements will be made

part of the record, and I hope in this hearing today that you all

take this opportunity to let us know of any problems or issues that

you think we need to deal with in this year’s Defense Bill or in any

kind of a funding issue.

Before introducing the panel, I will yield to Mr. McHugh, who

has also been a champion of this cause, for any comments he may

want to make.

[The prepared statement of Dr. Snyder can be found in the Appendix on page 35.]

STATEMENT OF HON. JOHN M. MCHUGH, A REPRESENTATIVE

FROM NEW YORK, RANKING MEMBER, MILITARY PERSONNEL SUBCOMMITTEE

Mr. MCHUGH. Thank you very much, Mr. Chairman.

I would ask unanimous consent——

Dr. SNYDER. Without objection.

Mr. MCHUGH [continuing]. That my opening statement be submitted in its entirety.

[The prepared statement of Mr. McHugh can be found in the Appendix on page 37.]

Mr. MCHUGH. Thank you, sir. Just a few comments.

First of all, welcome to our witnesses—friendly faces, familiar

faces—all to this subcommittee, and gentlemen, let me say, we continue to appreciate your efforts on behalf of the important interest

that you represent.
2

I think, Mr. Chairman, if you will look at the testimony that has

been submitted here today, we are reminded once more of how

amazingly successful these good folks have been in satisfying customer expectations and providing substantial savings to their patrons, accommodating organizational and financial challenges. They

have found efficiencies to do more with less. As Pat Nixon notes in

his testimony, when you measure in constant dollars what the

Commissary benefit and its Administration costs today, it really remains below what it cost in the year 2000, and all of that has happened not at the expense of the customers, but because of those efficiencies and the expertise and the hard work of the folks who are

scattered throughout the agency.

I would just say, Mr. Chairman, I would hope our witnesses

today will help us understand the significant challenges that they

are facing right now. They are beginning to form, those who are

looking out on the horizon toward—there are many. There is base

realignment and closure (BRAC). There is global rebasing, pressure

on appropriative funds, support, the skyrocketing costs of construction, the commercial competition that is ever present, declining Morale, Welfare, and Recreation (MWR) dividends. It sounds depressing, but there are those and others, and we want to make sure that

they are not left unaddressed, and we welcome their comments as

to how they plan to go forward and, of course, most importantly,

Mr. Chairman, how we can be supportive in that effort.

So, with that, Mr. Chairman, I thank you for convening this

hearing, and I look forward to our discussions.

Dr. SNYDER. Thank you, Mr. McHugh.

Our panel today is the Honorable Michael Dominguez, the Principal Deputy Under Secretary of Defense for Personnel and Readiness; Major General Paul Essex, Commander, Army and Air Force

Exchange Service; Rear Admiral Robert Cowley, III, Commander of

the Navy Exchange Service Command; Mr. Patrick Nixon, the Director and Chief Executive Officer (CEO) of the Defense Commissary Agency; Mr. Michael Downs, Director of Personal and

Family Readiness Division Headquarters, United States Marine

Corps.

Gentlemen, we appreciate your being with us. As I said before,

your written statements are going to be made a part of the record.

You all are well-known to us, and we appreciate your patriotism

and support of our men and women in uniform.

Mr. Secretary, we will begin with you and then go right down the

line.

STATEMENT OF HON. MICHAEL L. DOMINGUEZ, PRINCIPAL

DEPUTY UNDER SECRETARY OF DEFENSE (PERSONNEL AND

READINESS)

Secretary DOMINGUEZ. Thank you, Mr. Chairman, Representative

McHugh and distinguished members of the subcommittee. I am

honored to appear before you today to discuss the Military Commissary and Exchange Program.

The President’s budget submission for fiscal year 2008 continues

the Department’s strong support for service members and their

families. Commissaries and exchanges are an essential component

of our quality-of-life programs, and I would like to thank the sub-
3

committee for its support in helping the Department sustain the

commissary and exchange benefits for our soldiers, sailors, airmen,

and Marines.

The road ahead is a challenging one for our military families and

the resale institutions that serve them. Our commissaries and exchanges are supporting military personnel and their families as the

force mobilizes, deploys and rotates in large numbers. Access to the

benefit is a pressing concern as we bring thousands of military

families home from overseas and close and realign bases. Finally,

our resale activities must respond to rising customer expectations

and the reality of competition in the global and networked marketplace.

Our success in meeting these challenges requires that we set and

achieve ambitious goals in cost reduction, improved customer value

and improved access to these benefits. We must continue to enable

and encourage creativity, experimentation and imagination in

adapting to the challenges we face. We do not believe, however, the

challenges we face warrant consolidation or merger of our various

resale activities.

With respect to the exchanges, we reported last year that, instead of proceeding with the recommendations of the Unified Exchange Task Force, the individual exchange boards assumed responsibility for deciding the way ahead. I am pleased to report that

the exchange boards completed their review of the future of the retail industry and their exchange strategic plans. The exchange

boards have set a course of action for the exchange commanders to

develop cooperative efforts to maximize efficiencies in systems, logistics and supply. To maintain momentum, I will ensure we create

strong performance goals and effective oversight mechanisms. With

the individual and collaborative efforts underway, I have every confidence that our exchange programs will successfully transform to

the new defense environment, and I want to echo Congressman

McHugh’s accolades to these gentlemen for leading that way and

to Pat Nixon for the extraordinary stewardship of the Commissary

Agency.

In conclusion, the Department of Defense (DOD) is committed to

seeing our commissaries and exchanges meet the challenges of

changing expectations, a changing marketplace and a global repositioning of U.S. Forces. We thank you for continued congressional

support, and I look forward to answering your questions.

[The prepared statement of Secretary Dominguez can be found in

the Appendix on page 40.]

Dr. SNYDER. Thank you, Mr. Secretary.

Let us go to General Essex.

STATEMENT OF MAJ. GEN. PAUL W. ESSEX, COMMANDER,

ARMY AND AIR FORCE EXCHANGE SERVICE, U.S. AIR FORCE

General ESSEX. Thank you, sir.

Mr. Chairman and members of the subcommittee, as Commander

of the Army and Air Force Exchange Service (AAFES), it is my

privilege to once again appear before this subcommittee. On behalf

of the military community we serve, I thank this subcommittee for

its continued support of the exchange benefits and quality-of-life

programs.
4

AAFES has a long and proud history of service and support to

America’s armed forces, and 2006 was no exception. We continue

to fulfill our mission to provide quality merchandise and services

at competitively low prices and to generate earnings for the Army

and Air Force morale, welfare and recreation programs. This foundation of service and support is at the center of all we do at

AAFES.

No matter where military members serve, AAFES provides a

comprehensive and customer-focused benefit either online, by catalog, or in the more than 3,100 facilities around the globe. Many, if

not all, members of this subcommittee have visited our deployed

troops and witnessed the AAFES team in action. AAFES operates

more than 50 field exchanges, well over 100 name-brand fast-food

operations, 69 phone centers and hundreds of concession activities

throughout Iraq, Afghanistan, Kuwait and the Horn of Africa. This

is one of the most important jobs AAFES will ever do.

All of this would be impossible without the dedicated and enthusiastic AAFES workforce. About 450 devoted AAFES volunteers are

deployed in support of Operations Enduring Freedom and Iraqi

Freedom, and I would add that we have more volunteers than we

have requirements to send them, so it has been a particularly

heartwarming experience for me to lead these folks.

In 2006, AAFES embarked upon one of its most challenging

years in recent history. Remarkably, we project AAFES revenues

for 2006 will reach $8.9 billion and an increase of $257 million over

2005, and we expect to provide contributions to MWR in excess of

$221 million. AAFES receives minimal indirect appropriated funds

to support exchange operations. The largest component, $136 million, was applied to Second Destination Transportation (SDT) expenses, which enables AAFES to provide balanced pricing for soldiers and airmen stationed overseas. This funding also fulfills congressional intent to provide the staples of an American lifestyle and

improve the quality of life for military families serving abroad.

I want to personally thank this subcommittee for its leadership

and for the support of the AAFES SDT funding. We take our role

as stewards of these appropriated funds very seriously. AAFES implemented a number of initiatives that avoided $18.6 million in

SDT costs last year. We must not forget that there are significant

challenges, which inhibit our ability to remain responsive to the

needs of those we serve. AAFES will continue to advocate for the

repeal of merchandise restrictions that deny the Army and Air

Force families the ability to buy a more extensive range of products

and services. If they cannot purchase what they want, when they

want it from their exchange, they will look elsewhere.

Another challenge for AAFES is the impact of the Base Realignment Closure, BRAC, and global posture and realignment. In gaining locations, military construction appropriated funds are authorized. Unfortunately, AAFES will be required to expend the service

members’ dollars in lieu of appropriated funds (APF) because the

services have not programmed funds for these projects. We recognize the intense budget pressures of a wartime environment. However, it is a fact that every nonappropriated dollar spent on authorized APF functions negatively impacts quality-of-life programs.
5

For many years, the military exchange services—may I finish?—

have participated in cooperative efforts, collaborating on projects of

common value. In 2006, the Exchange Cooperative Efforts Board

chartered four cross-functional teams to focus on efficiencies in logistics, procurement, gift cards and information technology. We

have made great progress in strengthening these relationships and

in defining our common objectives.

Discussions on mutually beneficial cooperation are not limited to

the exchanges. AAFES recently began exploring initiatives with

Defense Commissary Agency (DeCA) that focus on win-win opportunities for both organizations. These combined efforts should result in benefits for AAFES, DeCA and, most importantly, for the

military community.

In summary, while AAFES continues to meet the unique and diverse needs of service members and their families, the road ahead

is a difficult and challenging one. The actions we take together

today will ensure the long-term fiscal viability of AAFES tomorrow

with the focused and dedicated effort on our mission of serving the

best customers in the world.

Thank you, and I look forward to your questions.

[The prepared statement of General Essex can be found in the

Appendix on page 54.]

Dr. SNYDER. Mr. McHugh and I would like to be able to claim

credit that we run the clocks around here, but we do not. That was

actually the 15-minutes notice that the House will be going into

session at 10:30, and we are not anticipating, I do not think, any

interruptions in this hearing today from votes. Although, having

said that, I will probably be surprised. In another 15 minutes, we

will hear the votes go off, announcing we are going into session.

Admiral Cowley.

STATEMENT OF REAR ADM. ROBERT E. COWLEY, III, COMMANDER, NAVY EXCHANGE SERVICE COMMAND, U.S. NAVY

Admiral COWLEY. Good morning, Mr. Chairman, Representative

McHugh and distinguished members of the subcommittee. It is my

privilege to represent Navy Exchange and our dedicated associates

worldwide. Navy Exchange and the Navy family thank you for your

steadfast support of the Navy Exchange benefit. I provided my

written statement for the record, and I will take this opportunity

to briefly report on Navy Exchange.

Research shows quality-of-life programs positively and directly

affect recruitment, retention and the performance of service members. The Navy’s Spouse Survey, recently published in February

2007, revalidated this. When asked to identify the top 10 most important support programs, both enlisted and officer spouses ranked

the Navy Exchange within the top five. Our Navy families clearly

recognize the importance of the exchange benefit.

Navy Exchange is integral to the Navy’s quality-of-life mission.

We directly support the Chief of Naval Operations Navy Professional Reading Program. We support and participate in the Navy’s

wellness and healthy lifestyle programs. We support Task Force Financial Health in helping junior enlisted members better manage

credit. We provide spousal employment with 24 percent of our associates’ military spouses. Further, we provide for continuity of em-
6

ployment for spouses as members transfer, and we assist in the

Navy’s Disaster Relief mission, and these are just a few of the

areas where we participate. All of these initiatives leverage our

mission of service to our members.

Navy Exchange operates under a balanced scorecard using commercial performance metrics. We use a commercial firm to validate

customer savings that average 26 percent, including sales tax. Our

Customer Satisfaction Index, also reported by a commercial firm,

continues an 8-year improving trend with a score of 79 for 2006.

This score places us in the top quartile of commercial retailers that

participate. This year’s survey shows savings as the single most

important factor to our customers. The commercial retailers measure our financial performance through sales and profit execution to

plan. Our total sales have been on a continuing upward trend since

fiscal year 2001, meeting or exceeding our board of directors’ approved targets. Likewise, our profit execution has consistently met

the board’s identified requirements for MWR dividends and recapitalization, and we are continuing to improve the viability of future

exchange benefits.

I am pleased to report that our integrated commercial Enterprise

Information System, Oracle Retail, is deployed and operational. Together with the other exchanges, Navy MWR and the Defense

Commissary Agency, we are seeking and discovering efficiencies

across combined operations to further improve the quality of life for

military members. Our passion is caring for sailors and their families, and we do this through over 1,300 stores and outlets. We do

this afloat for our Ships Store Program on 192 Navy and military

sea-land command ships. We keep sailors in touch with family

through our telecommunications programs. Our Navy Lodge Program supports sailors and families with clean, affordable accommodations. The Navy Lodge Program continues to support wounded

service members returning from Operations Iraqi Freedom and Enduring Freedom. Navy Lodge has provided over 13,000 room nights

in 2006 to families of injured service members as well as to the

service members themselves.

Bottom line, we are a touch of home when our sailors are overseas or afloat. We are a safety net for their families when they are

deployed.

In closing, I would like to say how proud I am of our Navy Exchange teams who take care of our sailors and their families who

serve worldwide every day with great dedication. Together with

help from our many industry and government partners as well as

the strong support from this subcommittee, we are able to do more

for our deserving military families.

On our sailors’ behalf, I thank you, and I stand ready to take

your questions.

[The prepared statement of Admiral Cowley can be found in the

Appendix on page 64.]

Dr. SNYDER. Thank you, Admiral.

Mr. Nixon.

STATEMENT OF PATRICK B. NIXON, DIRECTOR, DEFENSE

COMMISSARY AGENCY

Mr. NIXON. Thank you, Congressman Snyder.
7

Congressman McHugh, Congresswoman Drake, thank you.

It is my pleasure today to provide an update on the performance

of the Defense Commissary Agency this past year.

In 2006, we have seen the commissary benefit grow in importance in the eyes of our customers as we serve the families of service members deployed around the world, many in harm’s way. The

commissary is truly the rallying point for military families and provides those deployed with a sense of security that their loved ones

are being taken care of while they are away from home. The 18,000

employees who operate the commissary system continue to be a

source of personal pride as they rise again and again to deliver astonishing business results in the face of significant resource challenges. Once again, DeCA reached new highs in sales performance

and customer service. Our customers continue to express their satisfaction with our service, giving us the highest scores ever on the

Commissary Customer Satisfaction Survey. In addition, the external independent evaluation provided by the American Customer

Satisfaction Index ranked DeCA second in customer satisfaction

among the largest private-sector supermarket chains in the United

States. At the same time, we have maintained the level of savings

our customers enjoy at 32 percent, providing the average family of

four almost $3,000 a year in additional disposable income.

Finally, the cost of providing the commissary benefit when measured in constant fiscal year 2000 dollars continues to decrease, vividly demonstrating that we have increased the value of the benefit

without increasing the cost.

On the governance front, DeCA continues to demonstrate the attributes of a model governmental entity. DeCA received its fifth

clean audit opinion on its financial records from its commercial

audit firm. Further, not only was DeCA’s Fiscal Year 2006 Annual

Statement of Assurance Scorecard rated the highest in DOD, but

the Department’s comptroller consistently holds DeCA up as a

model for other DOD activities to emulate in implementing their

internal control programs. We continue to focus on reengineering

our organization and operations to remain recognized, responsive

and relevant to the military of today and of the future. Our key initiatives remain on track as well.

The DeCA/TRICARE partnership for the ‘‘It’s Your Choice, Make

it Healthy’’ program, highlighting healthy foods available in military commissaries, has been extremely successful in informing military families about eating healthier and promoting concepts such

as weight management and fitness. With the addition of a dietitian

to the DeCA staff, we have increased our ability to educate customers on how to make healthier meal choices at the commissary.

Our change in produce procurement also remains on track. While

we are working through some award challenges and minor startup problems, we continue to push forward with this initiative.

Adopting the best supermarket industry practices resulted in shoppers buying more produce. With higher quality and lower prices,

we have seen patrons return to the commissary more often to do

their fill-in shopping as a direct result of this program, raising

their level of financial fitness as well.

At the same time, DeCA is expanding its organic food offerings

as another healthy eating alternative. Of course, food safety is also
8

on everyone’s mind. Thus, to provide an additional level of food security, which I believe commissary patrons deserve, I recently directed that the food products we buy for resale come from suppliers

that observe the good safety guidelines established under the DODApproved Source Program.

DeCA’s biggest challenge today is the strain placed on the surcharge account. The surcharge account was established during a

time with predictable force structure, construction costs and investment models. BRAC and restationing actions are projected to impact 16 installations where DeCA operates commissaries and further compounds the strain on the surcharge account. There will be

significant personnel increases at those locations, and our existing

facilities will not be able to accommodate the increased patron demand. The requirements to build new or to renovate existing stores

to serve those locations not only further taxes the surcharge account, but also will require deferring those projects that would

have been next in line for replacement or for renovation under our

planned construction program. In essence, it has negated the existing methodology of ranking and setting priorities for the investment of surcharge dollars. At this point, it appears the only solution is that we begin placing more emphasis on the repair and the

renovation of existing stores in the future rather than building

new.

We at DeCA are proud of the contribution we make in operating

the 263 commissaries worldwide that provide tremendous savings

on groceries for military personnel, retirees and their families. We

recognize that commissaries deliver a highly valued component of

military compensation, and they bring a morale-building taste of

home by providing familiar American food products in overseas locations. Simply stated, commissaries contribute to family readiness, but we do not do it alone. It is a team effort.

Mr. Chairman, thank you for your support, and my thanks to all

of you on this subcommittee for the continued emphasis that you

place on the value of the commissary benefit. We also recognize our

industry partners in their support of the commissary system, both

through their excellent prices that they offer on commissary products and the direct contribution they make in supporting a number

of activities designed to improve quality of life.

Once again, it has been my pleasure to have the opportunity to

tell you about the great things at DeCA and the great accomplishments we have achieved over the last year. When all is said and

done, it comes down to people taking care of people, and no one

does that better than those at DeCA.

I look forward to answering your questions, sir.

[The prepared statement of Mr. Nixon can be found in the Appendix on page 80.]

Dr. SNYDER. Thank you, Mr. Nixon.

Mr. Downs.
9

STATEMENT OF MICHAEL P. DOWNS, DIRECTOR, PERSONAL

AND FAMILY READINESS DIVISION, MANPOWER AND RESERVE AFFAIRS DEPARTMENT HEADQUARTERS, U.S. MARINE CORPS

Mr. DOWNS. Thank you, Mr. Chairman, Representative McHugh, Congresswoman Drake, for this opportunity to report on Marine

Corps Exchanges. Over the past year, your Marines deployed to all corners of the globe in support of our nation’s combat requirements or humanitarian missions. The commandant of the Marine Corps has made

it clear that those who sacrifice so much for our nation’s defense

should not be asked to sacrifice their quality of life. Exchanges and

the MWR programs they support are a very important part of the

nonpaid compensation benefit, and we appreciate your continued

efforts to protect this benefit.

Our Marine Corps Exchange has evolved and continues to trans- form to new levels of operational excellence. In 2006, we achieved

unprecedented sales and profits, resulting in a generous MWR dividend and support for a strong recapitalization program. While

much of our efforts to date have been on back-of-the-house efficiencies, Marines and their families will soon see visible improvements as the renovation and the replacement of Marine Corps exchanges takes center stage in our Marine Corps Community Services non-appropriated funds (NAF) Construction Program. Finally, I am pleased to comment on the productivity of the Ex- change Cooperative Efforts Board. Through a spirit of increased

trust and openness among our sister exchanges, our service departments and OSD, we will continue to work together to further initiatives designed to increase efficiencies and effectiveness.

Thank you for this opportunity to be here today and to represent

the Marines and their families.

[The prepared statement of Mr. Downs can be found in the Appendix on page 96.]

Dr. SNYDER. Thank you, gentlemen, for your testimony.

I guess our pattern here over the last few months has been to

put us on the clock, but when you see these lights go off, those are

for the benefit of the members here. We want all of you to have

an opportunity to answer these questions as you deem appropriate.

Mr. Dominguez, I guess the clock is running, but the light is not

on, but I can see the time. Mr. Dominguez, let me just give you a

softball question if I might.

You are a zealous advocate on behalf of our men and women in

uniform. Is there anything in these topics that are being talked

about this morning that keeps you awake a little bit at night or

things that you think that Congress needs to be focused on as we

head into this year’s Defense Bill?

Secretary DOMINGUEZ. Sir, I think our progress on BRAC and restationing, you know, is a big deal. It is certainly the greatest turbulence in front of us in these areas. Associated with BRAC and

rebasing, obviously, there are some tough things, I mean in particular around the closures. You know, those are really tough on

communities, but they are necessary actions to take, and we will

need to close bases. When the bases close, we need to close commissaries and exchanges.
10

For both you and I, for the committee and myself, I think it is

continuing to advocate in that context for the appropriated funding

to make sure that—for the new construction associated with BRAC

or rebasing so that the Nation, you know, is able to prioritize these

things and decide, you know, when the money runs out, that everything above the line is really, really important, and unfortunately,

we did not—we were not successful in terms of the 2008 budget in

doing that, but the advocacy and making the issue and making

sure people understood the choices I think was important and continues to be, and that certainly is a dialogue that Congress now

should take up.

Dr. SNYDER. You are referring to the $3.1 billion in the BRAC

account? Is that specifically what you are referring to?

Secretary DOMINGUEZ. Yes. The $3.1 billion in the BRAC account, which—or another appropriated fund account in Military

Construction in which we are authorized to build these new facilities through that, but we were unsuccessful. There just was not

enough room in the budget, and there are higher priority things

from the Administration’s viewpoint.

Dr. SNYDER. And anybody can respond here.

Again, taking off on the issue of construction, what is the status

of the rebuilding of facilities that were damaged or wiped out by

the hurricanes in the south? I know we had an issue of Keesler.

Can somebody give me an update there and on any other facilities?

General ESSEX. Yes, sir. I can speak to Keesler.

That goes off every time I talk; doesn’t it?

Dr. SNYDER. I am taking back what I said. You know, I think it

is related to you.

General ESSEX. I think it is. It is something about the tone or

tenor of my voice.

At Keesler, we very much appreciate the support that we got

from the subcommittee and from Congress in the funding to rebuild

the soldiers and airmen’s exchange at Keesler Air Force Base. We

do have sufficient funding now, and we have got the interim, the

temporary, exchange up and operating. And the replacement exchange is on the books and underway.

Dr. SNYDER. But ‘‘on the books’’ is different than ‘‘underway,’’

isn’t it?

General ESSEX. No.

Dr. SNYDER. Is it under construction?

General ESSEX. You know, I do not know if it is actually under

construction yet. Yes, they are going to be breaking ground in

April.

Dr. SNYDER. An April groundbreaking for the one at Keesler. I

have about a half a minute left.

Any other facilities?

Mr. NIXON. Yes, sir.

Just as an update on commissaries, the Keesler commissary was

destroyed. Gulfport was significantly damaged. New Orleans was

not so much damaged, but you could not get to it. We have three

facilities back open and running. New Orleans is back open and

running, and it is running at about 79 percent of its previous capacity. Gulfport, a real success story, is running at pre-Katrina 159

percent. Keesler is running at about 37 percent. We have got a
11

great temporary facility there, some real ingenious folks who went

into an old club and put a commissary in. They just added phase

three of a deli operation there. Along with General Essex, the new

store will break ground in April, probably, for the new facilities,

and very thankfully, you provided the money for the replacement

of the Keesler facility.

Dr. SNYDER. Mr. McHugh, I guess our clock is not working. I

mean, the clock is working; the light is not working, a broken wire.

General Essex probably did it.

General ESSEX. Yes, sir, I think I did.

Mr. MCHUGH. Thank you, Mr. Chairman.

Mr. Secretary, in your written statement, you made the comment

that your departmental goal is to sustain the commissary and exchange benefits without increasing appropriated fund support. I

think you heard me in my opening comments allude to the fact

that the cost today, as Mr. Nixon noted, of operating DeCA, at

least, is in 2007 dollars virtually the same as it was in 2000. I

think we can all agree the exchange and commissary systems have

done a terrific job in finding efficiencies in savings.

I have to begin to wonder now. While I understand that is an objective, what, if anything, would make you revisit that decision? I

mentioned costs escalating, exploding costs of construction. I just

would like to know if that is an open page. Is that a stated objective, or are we absolutely under no circumstances, regardless of

what the tide may bring us, going to see a proposed increase in appropriated fund support?

Secretary DOMINGUEZ. Sir, that is our objective. It is not an impermeable barrier. If reality changes, we will have to change with

it. You know, clearly, some things can happen like the, you know,

exploding construction costs, those kinds of things, pension, health

care costs. So those things are putting stresses. To date, these gentlemen and the boards that back them have been forward-leaning,

creative, aggressive, I think, achieving the kind of performance improvement that we have seen in the private sector, who are both

benchmarks and, to some degree, competitors.

Mr. MCHUGH. No good deed goes unpunished, right?

Secretary DOMINGUEZ. Yes, sir, but this is life in retail, and you

know, as we evaluate those, as the boards look at the challenges

in front of them, we will have to consider that, but as a goal going

in, as I said, there is plenty of demand for the appropriated funds.

There are plenty of high priorities that demand those resources,

and if these gentlemen can keep hitting that goal, then that is

great. If they cannot, the benefit is important. The quality of service is important. What people—our members and families—you

know, the value they place in this is clear to us, as you heard here

in the opening statements about the survey responses. So retention

and recruiting are big deals. This is an important piece of this.

This is a piece of the compensation package that we offer our service members, and we need to be true and honor that promise.

Mr. MCHUGH. I appreciate that. I would go so far—of course, I

do not have to live by a particular manual, but I would go so far

as quality-of-life issues, and this environment is a readiness issue.

I strongly believe that.
12

Let me pose a conundrum to you. I know that you have got a review underway with respect to the adequacy of nonappropriated

funds for DeCA, but if construction costs force you to the point,

what would be the decision, to make a proposal to increase the fivepercent cap on commissary prices or would DOD consider using appropriated funds? Where would you go first?

Secretary DOMINGUEZ. Um——

Mr. MCHUGH. I will get to the hard questions in a minute.

Secretary DOMINGUEZ. Yes, sir.

I am not sure where we would go first. I mean, I think we would

have to consult the Commissary Operating Board and then, you

know, go through the process inside of the Department. I am not

an enthusiast for increasing the surcharge, you know, simply because that has been so much a part of our understanding of the

commissary benefit for so long.

Mr. MCHUGH. Well, I am glad to hear you say that. I just have

a few seconds, and I assume we will have other rounds. Just for

the record, I am a damned opponent of raising the five-percent, but

I want to underscore the fact that, in the commissary era, this is

a retail challenge, and I think Pat would certainly agree. They

have got to compete against the private sector, and the private sector is continuously modernizing stores, opening new stores and

such, and if we cannot compete on that level, it is going to have

a terribly, in my judgment, erosive effect on the customer base

which, of course, starts downhill real fast. So I just want to suggest

that, when it comes to appropriated funds, there are not a lot of

other happy choices.

So I thank you for your comments.

Mr. Chairman, I yield back.

Dr. SNYDER. Thank you.

Mrs. Drake.

Mrs. DRAKE. Thank you, Mr. Chairman.

First, I would like to thank you all for being here and for what

you do for our military families, and my only regret is I cannot

shop in them, because they are truly beautiful, the ones I have visited.

Mr. Downs, I cannot sit here, looking at you, without telling you

about the bumper sticker I saw Friday on my way home. It said,

‘‘Northern Virginia,’’ and it said, ‘‘Sit down. Shut up. And let my

Marine do his job.’’ so I just have not been able to get that out of

my mind, looking at you, but a couple of questions.

First of all, two weeks ago, Douglas McAlister with American Lo- gistics Association (ALA) was here, and he talked about limited

base access for non-DOD employees, and certainly, we understand

the security issues, and we understand the costs for resale, but

isn’t there some way to move more quickly to get some sort—Mr.

Secretary, I guess this would be to you—of a standardized clearance card to get access to the base and without making people duplicate their efforts to get that kind of a card?

Secretary DOMINGUEZ. Yes, ma’am.

You know, I have talked to the ALA leadership about this. I went

down to a convention they were having and spoke to them, and got

feedback from them. I understand this is an important issue for

our partners, and so it is an important issue for me. We believe we
13

have the solutions that are compliant with Homeland Security

Presidential Directive 12, and in fact, we are deploying that, you

know, technology solution where you register people’s credentials

into a database that is then shared and accessible, and the deployment of that database, though, is complete in Europe. It is complete in Korea. We are now focused on deploying it in Southwest

Asia, which obviously needs to be our first priority. Subsequent to

that, we will be deploying in the United States as well, and that

will help a great deal, and I believe that work is going on in partnership with ALA and organizations like that where their industry

is also establishing its own credentials to standards identified by

the U.S. Government and verifiable and transparent to us so that

we can incorporate their credentialing into our systems and then

make that data available to base commanders who ultimately determine who gets access to their bases. But there is a plan. There

is a technological solution—I believe we are all agreed on that

path—and it is just a question of getting it deployed.

Mrs. DRAKE. Do we have a time frame?

Secretary DOMINGUEZ. I do not right now.

Mrs. DRAKE. Okay. The next question would also be to you, and

that one deals with, this committee often deals with: How do we

encourage people to join the military? How do we retain people?

One of the things I have been hearing a little bit about is—because

we also want to recruit people who do not make it a career even

though we want to recruit people who do want a 30-year military

career, and one of the things I have heard out there is—and I know

we do this with some health care for military members who have

served in a combat zone.

Would there be a value to looking at commissary or exchange periods after discharge from the military for someone who is not retired? Is that one of the things we should throw out there as we

look at, how do we attract the people who we need to fight the global war on terror?

Secretary DOMINGUEZ. Ma’am, if we are thinking about it as a

recruiting tool for people who just want to do, you know, a tour for

a six-year enlistment and then out, there are much more effective

ways to deal with that than through a commissary benefit, you

know, after you end your enlistment, so I would not see that as a

big driver, a big attractor, to recruiting. There are much more effective ways.

Mrs. DRAKE. Does anyone else want to comment on that before

I run out of time?

Mr. DOWNS. I would tend to agree with Mr. Dominguez.

Our folks who leave the services go to the wide expansive America, and commissaries and exchanges are in very limited places, so

many of these departing service members are not going to find

themselves in and around bases.

Mrs. DRAKE. Thank you.

Mr. Chairman, I yield back.

Dr. SNYDER. Sure.

Mr. Nixon, I cannot let the hearing go by, of course, without asking about produce.

Can you give us an update on the situation?

Mr. NIXON. Yes, sir.
14

Dr. SNYDER. I am going to hold off on any tattoo questions for

this panel and just ask about—what is the update on the situation

with regard to produce, and one specific question is, would you describe for us, please—what is the status—I think it was either in

your written statement about the status of legal challenges to the

new way of doing produce. I did not understand that.

Mr. NIXON. Yes, sir, and thank you for the personal interest that

you have taken in produce and in our new procurement method.

We set out a goal of soliciting a new produce business model for

184 stores by October first. We accomplished that. And because

these are procurements and some of the largest produce procurements that have been awarded in the retail industry, public or private sector, there was a great deal of interest.

To date, we have one active challenge, Government Accountabil- ity Office (GAO) challenge, outstanding for 31 stores in the northeastern part of the United States. In total, we have two agencylevel challenges, seven GAO challenges, and I think three—because

these were set aside, three Small Business Administration (SBA)

challenges whether companies are small businesses or not. We

have worked through all of the protests with the exception of the

31 stores in the northeast and a lawsuit in the southeast portion

of the United States. None of these, except for the one in the

Northeast, have impacted us proceeding with performance to

awarding the contracts.

What we found is that, you know, the primary test area was in

the Tidewater Area. We established that this business model was

extremely effective. For two years in a row, they have had doubledigit increases in sales, and we have benchmarked them against a

very well-run chain there, Farm Fresh, and we have quadrupled

our produce sales increases versus what they do.

But as with any venture where we have new contractors moving

into new areas, there are some start-up issues with getting the

right people in place, getting the right distribution points in place,

getting the right sources in place. One of the issues that we have

been watching closely is the Birmingham market. In fact, the Military Produce Group (MPG), who is the successful test company in

the Tidewater Area, was awarded the southeastern portion of the

United States, and they have had a few start-up issues. We have

had some start-up issues. This is a new partnership, a new business relationship that we have undertaken.

I absolutely believe that applying commercial supermarket best

practices is the way to go. I was even down in your area and happened to visit the Little Rock store. A fine, young, new produce

manager down there came up from Key West. It is a significant increase in responsibility for her. So we provide additional training.

Mr. Jerry McDonnell, the president of the Military Produce Group,

I asked him to fly down and meet me there, and I said, let us look

at the quality of the produce you have here as compared to the

quality you have up in Oceana. And he did that, and there are a

few things we have to work on, but I am absolutely committed that

this is the right way to go, Mr. Chairman, and it will be successful.

Where we have issues or where we think the contractors are providing nonconforming products not up to standards, we do the normal things you do in a contract. We issue discrepancy reports. We
15

have our contracting officer first approach the contractor and give

them, if necessary, a get-well notice, a cure notice, so we follow all

the rules. I am very pleased with the direction produce is going,

and it will be a signature department in the Defense Commissary

Agency, and I welcome your visits often to the Little Rock commissary.

Dr. SNYDER. You may remember, Mr. McHugh, a couple of years

ago, I did a little walk-through in the produce at the Little Rock

Air Force Base, and it was really pretty abysmal—an abundance of

molds and everything else—but we are dramatically—and I went

back there just a couple of weeks ago, three weeks ago.

The issue of produce—and I assume that—I mean, I am not a retailer, but I assume that produce is kind of like eye candy for consumers. I mean, you walk in the store, and that is what you see,

and that is what you want folks to see, and if you see in the first

rack that it is not where it ought to be and it does not compare

favorably with the folks downtown, it sends a bad signal for the

whole store.

Mr. NIXON. Absolutely.

Dr. SNYDER. What is your monitoring system on this? I think the

system is very responsive to my walk-throughs and questions and

all, but are there stores sitting out there somewhere that do not

have a member of Congress or a staff person close by? Or how do

you all from your level——

Mr. NIXON. That is not the criteria.

Dr. SNYDER. How do you handle that in—no, I do not mean that.

Mr. NIXON. I understand.

Dr. SNYDER. I assume you will respond to complaints wherever

they come from. I happened to be the one who walked through that

one, but there may be people out there who, when they complain,

the way they deal with it is they take their business elsewhere and

do not let you know. I found you all very forthcoming on this.

So what is your system for monitoring in some kind of meaningful way so you can do checks on all of the stores?

Mr. NIXON. Sir, because of the importance of our perishable departments, we obviously have area managers who are focused just

on the perishable departments. There is also a zone manager who

does the overall operation, but in our Customer Satisfaction Survey, it measures 14 operational areas, all observable to the patron,

I mean produce quality being one of those that allows us to benchmark stores against stores. So we will look at a store in an area

that has a high score versus one that has a low score and use best

practices and send that management team over to the store that

needs some help improving. We monitor through a variety of

sources, one including veterinary food inspectors, the quality of

produce arriving at the back door. We reject it if it does not meet

standards. It is rejected at the back door, and it should never make

it into the produce department.

It is a leadership issue with me because, in fact, now the trend

in the supermarket industry—it used to be the meat department.

Meat was the draw. That is what you based your menu around was

the meat department. It is not anymore. The produce department

is what you build your menu around, and you are absolutely correct. The message that the patron gets when they walk in and look
16

at the produce is an evaluation of that store. Is everything in that

store fresh? Is the store clean? Is there attention to detail? So, from

a management perspective, I do inspections. I go out, and I want

everybody to know that—you know, they always say that everybody

pays attention to what the boss pays attention to. Produce is on the

top of my list for the message we need to send, and I want—and

I want patrons to realize that there is no place that they can go

where they are going to get a fresher, better deal than at the Defense Commissary Agency. So I hope you sense my passion about

this, and we introduced this procurement methodology to drive that

kind of mentality, that kind of business approach for produce, not

only the quality of produce but how the department looks when you

come in, that it is a farmers’ market. It is an open environment.

There is excitement there. You do not know what is going to be on

sale. That is what drives the excitement about——

Dr. SNYDER. Thank you, Mr. Nixon.

Mr. McHugh, you may recall that, I think a couple years ago,

there was a hearing on the Little Rock Air Force Base. It was a

hearing that you chaired in which we had a group of enlisted people here. I think it was the Marine Corps. I think it was a gunnery

sergeant who—you know, we asked, what is going on? He just

made mention that, you know, my wife keeps complaining about

the produce at some base. Mrs. Drake was part of this whole thing,

too, and that is what led to a lot of these discussions from me.

Mr. McHugh.

Mr. MCHUGH. The Chairman has a thing about produce, which

I commend him for. I have got a thing about Diet Coke. More importantly, I have got a thing about something they call Coke Lite

that they foist on those poor Europeans and other people as a substitute for Diet Coke, and it stresses me greatly when I think about

the lack of Diet Coke and the presence of Coke Lite in commissaries and exchanges overseas, which brings us to Second Destination Transportation. See, there is a method.

I have been assured repeatedly by our folks, as they look at the

budget numbers, that the Second Destination Transportation is

going to be fully funded. Mr. Secretary, I always like to have somebody on record assuring me of that.

Can you assure me that SDT is fully funded by the Department—by the Army, I should say?

Secretary DOMINGUEZ. The Fiscal Year 2008 President’s Budget

submission, we got that fully funded, so that was not the case in

the prior budget, and we corrected that for this year.

Mr. MCHUGH. Well, I am glad, and I am glad to have it on record

particularly, and I appreciate that.

Mr. Secretary, you may have heard—well, I will just pose it in

a different way. You know, we have heard about the dividend, and

we heard about, I guess, 136—no—$221 million dividend by

AAFES over the 2006, I believe it was, fiscal year. That dividend

is critical to the entire effort.

How does that play out over time as we draw down particularly

overseas? Has anybody had a chance to try to quantify that and to

try to accommodate for that? I mean, clearly, the overseas customers have always been the system’s best customers. I believe, at

one time, they provided well over 50 percent of all of the revenues,
17

and it follows that that is a huge part of the dividend. That is so

important in providing MWR programs.

So what does that look like—see, you were not talking this time,

General Essex.

Secretary DOMINGUEZ. He was anxious to talk.

Mr. MCHUGH. He anticipated your answer.

What kind of read do you have on that issue?

Secretary DOMINGUEZ. Sir, right now—I mean, for the last several years, the dividends in aggregate across the exchanges have

been declining, so they are under some significant pressure. It was

in response to that that this Unified Exchange Task Force got

started, and we really dove in with the Exchange Boards of Directors in exploring the concept of what kind of cooperative efforts we

can do to drive down costs and, you know, to ensure the exchange

profitability. So those things continue because the dividends will be

under pressure for a while. The same things that are impacting the

commissaries are impacting the exchanges with pension costs, construction costs climbing, the challenge of BRAC and restationing.

Mr. MCHUGH. Is there a budget estimate? I do not know if you

can get to that level of projection, but as you look into 2009, 2010,

et cetera, do you have a budget plan that says, well, we expect, by

that time, the dividend will be $190 million or $200 million, or

have you just not been able to forecast out that far?

Secretary DOMINGUEZ. Yes, sir, we do. I mean, each of the exchanges does with their boards of directors, you know, look at

where things are going. I do not have that with me right now. I

think each of them could talk to you about it, but we are and remain concerned about, you know, the downward trend and reversing that downward trend, and that is where a lot of our focus has

gone.

So let me go ahead and turn it over to Paul.

General ESSEX. Thank you, sir.

Yes. I mean, you have identified one of the key reasons why dividend is changing. The move from Europe is anywhere from two to

four times as much is spent by our customers when they are overseas in their exchange as when they come home, and then when

they come home, they typically live off the post or off the base, so

they pass two Wal-Marts, a Target and a strip mall before they

even get to the gate, so it is going to affect our earnings. The other

factors that are involved here are that it is not just the people moving and spending less, but when we have identified a place for closure, we have to start accelerating the depreciation schedule and

finish that up by the time we close. So that adds to the issue. It

is a temporary issue, but it is real, and gas sales and the whole

gas business has been a change, too. Just 2 or 3 years ago, profit

margins for us were 12, 13 percent, which is not great, but it is

a benefit to the troops, and it was a fairly reasonable number.

Now, even though sales on gasoline are way up, earnings are

around five or six percent, so that has affected the earnings picture. Also, investment in the capital program at gaining bases

where we have to build new stores has caused, you know, us to use

a lot of that money in the 2006, 2007, 2008 time frame, and then,

of course, as soon as you open a new store, you start the depreciation schedule again. So 2006–2007 has been sort of the perfect
18

storm year where a lot of these things have come together. We expect 2008, when we start really getting some benefit from our

Retek Oracle Retail implementation to kick in, 2008 dividends

should start coming back up nicely and proceed on up.

Mr. MCHUGH. Thank you.

Admiral COWLEY. Yes, sir.

Our profit demographics or revenue demographics are a little bit

different than AAFES. We did not have quite the same decline in

overseas revenue and we experienced stronger performance overseas. In fact, we have seen some increase in overseas revenue with

the exchange that we opened in the Kingdom of Bahrain that was

previously a ships store. Since we have opened that, we have seen

some increase in revenue due to that. Oddly, we have all of the

same pressures that my colleagues have articulated here, and we

are looking both internally and externally at initiatives that we can

pursue in order to mitigate that. If we look on our operating profit

from 2003 on, it has been fairly steady. It has been health care,

medical care. It has been some of the recapitalization. If you look

at the pressure just in construction alone, it is fairly illustrative.

We are seeing some increases, double-digit, 25, 30 percent that is

not generating commensurate benefit on the other end. So we are

looking both within and across organizations to continue to drive

those efficiencies and economies through standardization in order

to put us back on that upward slope. We have now deployed and

are operational with our Oracle Retail, and indeed, we are seeing

some benefit accrue from that. But as you know, that benefit accrues on a curve, and that comes a lot more slowly than does depreciation, so some of these other pressures affect us, and I believe

we are on an upward trend.

Mr. MCHUGH. Thank you.

Mr. DOWNS. This is one of those cases where size and location

matters. The Marine Corps is not dramatically impacted by other

BRAC or restationing, and we only have one overseas store. You

will note that our dividends were up 34 percent from last year to

this year. We anticipate being able to sustain that. This is a particular case of, we started later in efficiency initiatives than the

other exchanges, and that is just now coming into fruition. We will

have some minor impact from the fact that there are some stores

that lose sales during the periods of renovation, and we are on a

very active renovation initiative, but we do not anticipate a significant lowering of our dividend, and we will, in fact, remain steady

out to the foreseeable future.

Mr. MCHUGH. Thank you, gentlemen.

Thank you, Mr. Chairman.

Dr. SNYDER. Mrs. Drake.

Mrs. DRAKE. What about Mr. Kline?

Dr. SNYDER. Well——

Mrs. DRAKE. Okay. Do you want me to go first? Okay. Well,

thank you.

First of all, Mr. Chairman, I want to tell you our pilot program

on produce is working as well as Mr. Nixon has said. Customers

are happy. Suppliers are happy. And it is really beautiful. It is well

displayed. It is a good selection and just really working very well,

and so I know we would like to see that everywhere, Mr. Nixon,
19

but two of the other things that we have talked a lot about in here

and certainly the one Mr. McHugh asked about, about secondary

destination, is my term. In my time in Congress, we have talked

about produce, secondary destination, but there are two other

things, and one is the DOD is looking at eliminating restrictions

on the sale of certain other products, whether it be jewelry, furniture, what the status of that is. Then the second question would

deal with implementing shared services, kind of backroom for the

separate exchanges—human services, logistics—an update on all of

that.

Secretary DOMINGUEZ. Let me start with the latter on the shared

services.

What we did as part of our discussion of the Unified Exchange

Task Force is we recognized that the boards of directors for each

of these exchanges has a fiduciary responsibility to their stakeholders to ensure that this dividend that we just talked about is sustained, and the Unified Exchange Task Force pointed out areas

through, you know, shared purchasing, the potential for some

shared human resources (HR) services, for some shared information technology (IT) services, those kinds of things, where costs

could be reduced through economies of scale, and what we agreed

was that we need to look at each of these individually as a business

proposition and that the exchanges should develop mutually agreeable business proposals that would be vetted with their directors

so that they then commit themselves to it because of a compelling

business need. So we have really put this back to the boards to let

them guide the way forward here, again, keeping our eye on that

dividend ball. I am sorry. The——

Mrs. DRAKE. Specialty items. Furniture.

Secretary DOMINGUEZ. As a general proposition, we would like

for the exchanges not to be restricted around the sale of some

items. Again, that helps their ability to meet customer needs, generate revenues, profits and then MWR dividend. Saying that, we

recognize that there are particularly issues with small businesses,

in particular outside of our gates, and we have to be good stewards

and citizens of the communities, you know, in which we live, but

we are reviewing that continuously with an eye to try and lift restrictions wherever that is possible and that it makes sense and

will not disrupt the community where we belong.

Mrs. DRAKE. Thank you very much.

Thank you, Mr. Chairman. I will yield back.

Dr. SNYDER. Mr. Kline.

Mr. KLINE. Thank you, Mr. Chairman. I was not going to speak

because I, unfortunately, came in late, and I am always hesitant

to ask a question that has been covered probably three times by

every member and every witness.

Dr. SNYDER. It does not stop the rest of us.

Mr. KLINE. I know. I remembered that, Mr. Chairman, and

thought, what was I thinking?

I just wanted to say a couple of things and get to one question

that is always nagging out there for me. First of all, let me say

that the reports that I have heard about the commissary and exchange system continue to be good. I have my built-in spy system.

My son is serving on active duty; his wife goes to the commissary
20

and the exchange at Fort Campbell, Kentucky, and I continue to

get good reports. And so I always check that barometer on how

things are working; I am glad to hear that.

One of the things that continually comes up is of some concern

to me and, I hope, to you. When we have troops deployed in relatively small numbers, typically to remote corners—Admiral, you

mentioned Bahrain, but we have troops in Djibouti and Iraq and

Afghanistan and all sorts of places—where they are set up for

sometimes several weeks or several months, we need some sort of

exchange system, and that has worked pretty well.

In the past, there have been problems getting sort of essential

items, small, round, circular cans of smokeless tobacco and things

like that. I am just saying that I hope that we have foreseen our

way through that and are able to get that kind of essential item

to these troops in these remote corners. And I ask any of you if you

are getting any feedback that there is difficulty there. I wouldn’t

expect from this group that you would.

General ESSEX. Sir, we watch that stuff closely; that is, job one

at the Army and Air Force exchange service is the support to our

deployed troops, Operation Allied Force (OAF) and elsewhere, as

you mentioned, in various locations. And we pay particular attention to that. I have a senior vice president in my area staff that

focuses on that.

For the small locations out in the more remote parts of Iraq, for

example, we typically use what are called impressed fund operations; that is, where someone in that small unit will actually go

pick up tobacco, toothpaste, whatever they are going to take back

and we give them a credit account and they sell it and then once

a month or once every couple of weeks, depending on how often the

need, they come back and replenish.

That said, as hard as we try, sometimes we do run out of some

particular item at certain locations. The logistics are a tough, tough

problem in some of these places. And we watch it as closely as we

can and do make it a major focus.

Mr. KLINE. Exactly. It is the logistics that are almost always the

issue.

We have enormous demands on intratheater lift in Iraq. I know

that you are very much aware of that. But intertheater lift, we

have had instances in my ancient history where we couldn’t find

the transportation or you all couldn’t find the transportation to get

the items there; and that is what I was going to.

Are you running into that? Are you hearing sorts of things that

you can’t get, some of these high-demand items, to the more remote

corners?

And I am thinking certainly there are some forward operating bases (FOB) and things in Iraq, but I am also thinking of places

like Djibouti and Bahrain and places that don’t have the focus and

may not have the continuing flow of the lift.

General ESSEX. I can’t say that we are perfect. We try and we

do watch it closely. Occasionally things pop up where we run out

of something, but we push hard to get everything replenished as

quickly as we can.

And we hear—with the e-mail age here, the troops are pretty

well connected and they let us know.
21

Mr. KLINE. Thank you very much.

Thanks, Mr. Chairman.

Dr. SNYDER. Thank you, Mr. Kline.

I wanted to ask Mr. Nixon one more. I can’t let go of produce.

One of the issues from my last visit out there, for want of a better

term, it is ‘‘specialty items,’’ where you have, let’s suppose, some

kind of item that is good for perhaps ethnic cooking or it has got

a little niche consumer base.

I was discussing with, I think, the produce manager there about

the issue that if something—if you buy in certain volume, if you

buy 20 of something, but you only sell three packets, it does not

take you long to figure out that is a loser and so the response may

be to cancel the item.

How do we deal with that—that situation? Is the problem, too

many were being shipped from your wholesaler? Or is that an issue

that has come up? I assume that is an issue that has come up at

other places.

Mr. NIXON. In particular, with the produce manager there; and

having come from a smaller location—she came up from Key

West—one of the things that we stress in our operations, especially

the ones that are perishable, is accountability and they have to recoup the amount of money for the markup for processing, whether

it is meat or whether it is produce.

One thing I challenged her, and also challenged Mr. McDonald,

is that, you know, when a produce market will carry—a full-range

produce market will carry 350, 400 items and they were carrying

probably 250 there. And in talking with store management, I said,

let’s be aggressive, and if the packs are too big, let’s work with the

produce company.

The MPG group has all military commissaries on the East Coast

except the ones protested in the Northeast. They certainly have

enough volume to stretch a little bit. And I said, let’s stretch and

let the customer decide. If there is a pack issue, worry about that.

Bridget Bennett, our produce specialist for the East Coast, added

50 items while she was there. And some of the items she added

only were shipped the first time, and the supplier wasn’t ready for

the orders.

But there are folks who are willing to experiment with produce,

and let them decide. And price wise, too; we always want to be

price conscious.

The things that I noticed when I went down there, we are bringing the oranges and grapefruit in from Texas, and from an appearance standpoint, they worked with the best. But they were the ones

that were competitive with what was being sold out in town.

I say, bring the top of the line, and if it is a dollar an orange,

let the customer decide. If they want to pay a dollar an orange, we

will sell them an orange. And that dollar will be 50 cents cheaper

than out in town, if they carried it.

From the aspect of getting new, what you call ‘‘exotic-type’’ items,

it is up to our managers to stretch and our suppliers to bring them

in. And we can work with the packs, and work with the growers,

and say, look, I can’t take a 24-pack on that. I want you to start

going to a 12-pack. We can start moving some of these items in

multiple items. That is what we did and what we are going to do.
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Dr. SNYDER. And those are some of the issues that are continuing

to evolve under this new way of supplying produce; is that correct?

Mr. NIXON. Yes, sir.

Dr. SNYDER. Mr. Dominguez, I wanted to ask you, have you

reached any conclusions or have opinions on whether there should

be insurance on exchanges or commissaries? I think there was an

ongoing study about how you see the status of that.

And the second, is with regard to beer and wine sales at, potentially, commissaries as a way of dealing with this potential shortfall on the five percent surcharge.

Secretary DOMINGUEZ. Sir, first, with respect to insurance, the

exchange commanders are still looking at that. It is actually quite

a complicated challenge to look at the risk profile everywhere they

are, and then the availability of insurance products and the affordability of those products.

So they are still working their way through that. I am going to

refrain from issuing an opinion until after I have seen their studies

and get the advice from their boards.

On the beer and wine sales in the commissaries, I think if I was

to put these two problems, the MWR dividend and Mr. Nixon’s

challenge, on the scale and weigh them with the beer and wine, my

opinion is, beer and wine comes down on the exchange side, on the

MWR dividend side.

I am not nearly as sanguine as these gentlemen are about our

ability to turn that dividend growth—or that decline back into

growth. And I certainly wouldn’t want to erode their ability to generate that MWR dividend through this very highly profitable line

of business that they have there.

I think I accept the challenge Mr. Nixon has with that five percent surcharge having been created in a different era. But if we

tackle that problem, I would like to do that without putting in jeopardy the MWR dividend.

So those are my thoughts on the beer and wine.

Dr. SNYDER. Mr. McHugh.

Mr. MCHUGH. Thank you, Mr. Chairman.

Mr. Secretary, I would like to go back to Mrs. Drake’s question

about Armed Services Exchange Regulation (ASER). I heard what

you said and I appreciate that. Outside-the-gate sensitivity is certainly something that those of us on this subcommittee and, in fact,

the entire committee in Congress share. As you know, the House,

however, has approved some relaxing of restrictions in the past—

last year included, I believe—that the other body, as we say, did

not totally agree to.

Do you know of any—well, are you attempting to talk to the Senate to see what receptivity might be for future relaxation? Or what

is the status of that? Is there anything you can share with us

there?

Secretary DOMINGUEZ. It is an issue. I have not yet engaged with

members of the Senate or their staff on this. But my staff has, and

I know the staff of these gentlemen have, because there are clearly

important business opportunities that are important to generating

and sustaining that MWR dividend that they are being precluded

from pursuing. And some liberalization of those restrictions, I
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think, would be important; and we will engage and continue to

push.

Mr. MCHUGH. So it is a live issue, I guess?

Secretary DOMINGUEZ. It is a live issue.

Mr. MCHUGH. Rather than just a broad-based study?

Secretary DOMINGUEZ. No, sir. There are some specific product

lines they will talk to you about that we would like for them to be

able to get into. We see no reason why they should not be in there.

And it will be important, in my judgment, in ensuring and guaranteeing their profitability both by drawing in customers and by selling products that are in demand, that will generate a profit margin.

Mr. MCHUGH. Okay.

At least 10 years ago—and I don’t have my biography in front

of me; it may have been 12—I had the honor of serving as MWR

Chairman. That was an independent panel prior to the reconstruction of this Personnel Subcommittee that brought MWR back under

our jurisdiction. MWR was all we did.

At that time we were talking about back office cooperation,

shared efficiencies, where can the exchanges work together? That

was 10 years ago. We are still talking about it.

Can you tell me what exactly has been done with respect to cooperation, other than talking about it? Talking is great, but when

are we going to do something?

Secretary DOMINGUEZ. I believe that there has been actual

progress——

Mr. MCHUGH. Good.

Secretary DOMINGUEZ [continuing]. Through the forums that we

have set up. And what I would like to do is refer to the gentlemen

here. Why don’t we start with the Admiral.

Admiral COWLEY. As the current chairman of the Cooperative Efforts Board, we have done a number of logistics initiatives; and

today we are taking a very programmatic approach and looking at

discrete milestones and business case analyses so that we can go

back and report to our board of directors vis-a-vis our fiduciary responsibility.

We have a number of initiatives that we are pursuing with

AAFES that are very well along. The nonretail procurement, we

are very well along on that. We have established commodity councils. We are using community analogs.

We are not making this up as we go along. We are looking at

what works in the commercial sector and we are pursuing that.

The long pole in this is the IT backbone, and we currently have

an initiative in place right now where we are looking at mapping

that IT backbone. And it is not just information technology; it

comes down to the business process level. In order to make a lot

of this stuff actionable, you have to be able to translate it down to

the business process level.

It is a detailed process, but we have undertaken that effort and

we are not going to wait until we get nirvana out here. We are actually looking at how to capitalize on different opportunities, as we

discover these in the process as we move along. So I think we are

making pretty good progress there in a number of these areas.
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And, in addition, I know within Navy we are looking at consolidating some of our backroom functions with MWR. We are now

looking at some of the quality control and the audit functions there,

as well as some of the retail functions where we can reach across

and operate more effectively and efficiently.

Secretary DOMINGUEZ. Sir, maybe General Essex can talk to you

about the gift card, which is a new product that the exchanges

have brought on line.

General ESSEX. That is one of the four cooperative efforts that we

have tackled this past year. And it is the one that is going to pay

off first.

It seems like a small thing, but it is actually quite a big thing

from a customer perspective; and it was a request of the Marine

Corps and Navy Exchange that we tackle this. And it is simply

that if a family or troop wants to buy a gift card at a Marine Corps

exchange, that they would be able to cash it in at an Army and Air

Force exchange or vice versa.

And as Admiral Cowley pointed out, business processes and IT

had made that a problem. We have had three different size companies over the years, as you know, with different business practices

because of that, and different IT. So it is very encouraging what

we are doing.

I think it is exactly the right thing. The gift cards is a good step

in the right direction, and certainly the logistics and the indirect

procurement and the information technology are going to pay good

dividends for a long time.

Mr. DOWNS. Congressman McHugh, I testified in front of that

MWR panel when Congressman Martin was the ranking member.

But it bothers me that we allow the thought out there that exchanges haven’t been making real progress and efforts within the

cooperative efforts for many, many years.

The Marine Corps exchange has lived off of cooperative efforts

with the AAFES and Navy Exchange Command (NEXCOM), as far

as I can remember; and perhaps we haven’t spoken to that enough,

but there have been 70 or 80 cooperative efforts that have been on

the books between the various exchanges for multiple years. And

we just don’t seem to get credit because they are not big banner

items. They are not big bang items, but they are, in fact, things

that allowed us to incrementally do things more efficiently and effectively.

Mr. MCHUGH. Well, I appreciate that. Let me tell you why it is

important, and maybe you should start tooting your horns a little

bit louder.

The fact of the matter is, Admiral, the reason that is the long

pole, that is the hardest, I think—I understand that—but that is

also where the biggest savings potentially lie. And, remember, don’t

forget, why this is a point of interest and concern: Because the Department at one point was talking about outright exchange consolidation, and the Congress did not want to do that. But Congress felt

the responsibility to ensure that you worked very proactively to derive some meaningful savings; not that savings in other things

aren’t good, but we are talking about backroom operations and

such.
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What worries me, and I am not trying to put the bean on Secretary Dominguez, but we will all pass away from this place and

do other things with our lives; and in another time someone in his

place is going to come in and say, we are going to consolidate,

again because they people did not do what you challenged them to

do.

That is why I worry and that is why I think the question is important. And I certainly want to encourage you to continue to work

as hard as you possibly can to get the long pole up and do as much

as you can, so we don’t have to be dealing with consolidation.

And the other things that I think are problematic in recognizing

that you all have your legitimate cultures, there are differences

amongst your various customer bases that I think legitimately

need to be reflected in what you do. And that would be greatly

jeopardized, in my judgment, with consolidation, outright consolidation. That is the purpose of my question.

With that, Mr. Chairman, I guess the red light is on. You got it

fixed for me. I yield back.

Dr. SNYDER. Mr. Murphy.

Mr. MURPHY. Thanks, Mr. Chairman. As a former soldier myself,

I know how important the MWR is to accomplishing the mission.

In fact, in the 82nd Airborne Division, we used to say the heart of

the soldier is more important than the body of the soldier. One of

the most critical things for a soldier is that peace of mind while

serving his country overseas to know that his family is being taken

care of.

I am very concerned about the decreasing exchange dividends, a

problem which appears to be prevalent across the services, though

most notably in the Army and Air Force exchange systems. The

dividends from the exchange services fund about 16 percent of the

MWR programs. These MWR programs fund critical things for

military families such as child care centers, e-mail, phone access so

families can communicate with their soldiers overseas, and a wide

range of other programs.

So I looked at numbers, the profit, the dividend ratio, with 55 to

60 percent of the profits going to fund MWR dividends. If we continue to see declining profits in the exchanges, would it be possible

to increase the percentage of profits that go to MWR dividends?

And if we did this, what other programs or areas might lose out?

Secretary DOMINGUEZ. Sir, let me take that to start with.

We all share your concern, and I think before you got here, you

heard, or the committee heard, each of the exchange commanders

testify to their optimism that the decline in MWR dividends will

be, in the years ahead—near years, not distant years—near years

ahead will turn around and they will start growth again.

I have extraordinary confidence in their management and leadership abilities. It is something that we do need to watch.

The right attack on the problem, I think, is through cost containment, which is, again—some of these issues that Congressman

McHugh was asking about where you consolidate back office operations and try and reduce overhead costs are contributors to that.

It is also through the expansion of new products and new product

lines and new methods of delivery.
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So these gentlemen are all into using the Web now, and we just

talked with the committee about easing some of the restrictions

that now they have that keep them out of some business lines.

And the other challenge is going to be closing facilities where the

bases are closed, where there isn’t the business anymore that generates revenue and, in fact, where we are actually hemorrhaging.

That is a big challenge for us.

The big challenge in trying to work cooperatively with the commissary so that the two entities can draw customers in and increase foot traffic.

And so all of those things are now going on. And it is through

those mechanisms that I think we will be able to turn this direction around.

Mr. MURPHY. And I understand what you are saying, and I understand that you are optimistic about how you can could do that.

But my question, if you can’t turn around and if you see the profits

continuing to decrease, would you change the dividend ratio? Because right now it is 16 percent MWR funds from you, and I want

to make sure that these soldiers getting taken care of and these

Marines and airmen.

Secretary DOMINGUEZ. The only way we can do that in the exchanges is to put further pressure on their recapitalization. So that

is not a good long-term strategy.

Mr. MURPHY. But what window are we talking about here? My

concern is, I want to make sure that these MWR programs that are

directly affecting soldiers that are serving overseas in deployments

are being taken care of. Is there a look at changing this ratio if you

can’t hit it in the short term, and what is the short term? Quarterly? Are we talking annually?

I want to make sure that these MWR programs are not getting

shortchanged.

Secretary DOMINGUEZ. Right. I share your concern with that.

We do have the ability to fund, and we do fund directly in the

MWR programs with appropriated funding. So if the dividends diminish to such a degree that some of these essential programs—

as Congressman McHugh said, those are readiness; they affect

readiness, they affect retention. So these are critical programs. And

we would first look at increasing the amount of appropriated funding we are giving to the different MWR categories.

Another challenge, and we talked to Congressman Snyder about

this, is that our construction recapitalization programs right now

are authorized to be funded through appropriated funds, through

the BRAC and the global repositioning. We were unsuccessful in

making that case inside the Department so that—there was not

enough money to go around, and we drew the line, so these are

now being funded out of the profits the exchanges generate.

That again is a continuing debate we need to have. We need to

keep that issue on the table and in front of decision makers, particularly if we start to see the support to the MWR accounts erode.

Then that balance may tip and these projects may get above the

line in terms of the BRAC construction accounts.

So you are exactly right, exactly right to focus in terms of watching that dividend. And there are a lot of things going on to try to

protect that.
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General ESSEX. Sir, if I could add one point to that that you

could do.

Mr. MURPHY. It is up to the chairman.

Dr. SNYDER. We would like to hear your comment. You will have

another opportunity, Mr. Murphy, if you need it.

General ESSEX. Just to add one more point to that, when AAFES

operates overseas in contingency areas, we have extraordinarily

high operating costs, sometimes, which we are reimbursed for. Last

year, the Congress did reimburse almost the entire amount; it was

$80 million that we were authorized. And it has not always been

that way in the past, but last year it worked out.

In the future and this coming year, we will have extraordinary

expenses that are authorized for appropriated funds. If those are

provided, then it goes to the bottom line and that goes to the dividend.

Secretary DOMINGUEZ. And that is through the supplemental

process.

What he is talking about is direct support to soldiers, sailors, airmen, Marines engaged in combat.

Mr. MURPHY. Last year it was 80 million. This year it is what?

General ESSEX. We won’t know yet.

Dr. SNYDER. Mrs. Davis.

Ms. DAVIS OF CALIFORNIA. Thank you, Mr. Chairman. And, as

usual, I am doing double duty with other committees.

I appreciate that you are all here, and I am sorry that I missed

your earlier testimony.

I wanted to mention, because I think it is so important to the

San Diego area—and I appreciate, Mr. Nixon, your work on this—

that we do have—we will be opening, actually, a 118,000-foot commissary next month. And that will have some unique features, so

that families can come—if they want to convenience shop, they can

do that; and if they want to fill their pantries, it is a different kind

of shopping in a different area that they will be engaged in.

We think this store within a store is going to be very important.

And I appreciate some of the decision-making that went into that.

I don’t know if you want to comment on that, Mr. Nixon, in

terms of how you got to that point, and whether or not that is a

model that really should be tried elsewhere in the country and if

we are going to be look at that.

Mr. NIXON. Yes, ma’am. Actually, we went out and did significant market research and brought a consultant in to find out what

were the shopper-of-the-future’s requirements going to be. And they

surveyed all the leading retailers and said, you are going to have

to meet two particular shopping demographics, a convenience shopper and a pantry-building shopper. And how to do that? You build

a store within a store.

When you go into the store of the future, you go into a convenience-type store environment to get that day’s meal—get in, selfcheck out—get in and out. And we will have short-term parking,

and we put it on the side where the barracks are going to be.

If you are going to do the pantry-loading shopping, you go in the

other entry. The line of demarcation is the frozen foods. That is

convenience and pantry-loading. We have set a goal to be the nutritional leader in the supermarket industry, so we are putting in an
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extensive organic and health and wellness section associated with

a huge produce section, the largest meat department in the world.

Incredible, incredible opportunities and some additional technological futures like a new front end system. The self-checkout

counters, being able to order through kiosks, place an order and go

pick it up in the deli or bakery later on.

We did extensive research. This is the model we will use, but it

has to be tailored to the demographics of the particular base. Our

goal in the naval station store is to have the largest commissary

in the world, but an individual shopping experience. And that really is leading edge in the supermarket industry.

So if we can accomplish that——

Ms. DAVIS OF CALIFORNIA. Thank you. I appreciate that. I guess

the one thing we are going to want to evaluate as we look at that

is whether it makes for more affordability for families, as well,

whether they feel that they are going to go in. What we don’t want

probably—and we all experienced this in Costco—is a lot of impulse

shopping, so that families find that their budgets don’t go as far

as they would like them to, and so that they can really focus on

what is most nutritious and affordable and help them out through

that impulse.

Mr. NIXON. We allow them to go on www.commissaries.com and

do their shopping list while they are at home so they are not

tempted by the impulse items. They may see one item they can’t

pass by, but for the most part we allow them to do the shopping

experience in their home and bring that list with them.

Ms. DAVIS OF CALIFORNIA. Is there also an opportunity in that

for families within a certain distance, that they can have deliveries

if they shop on line?

Mr. NIXON. We have looked at that option and we are evolving

the virtual commissary. Right now, it has gift packs—very successful. Our sales per visit to the virtual commissary mirror what happens in the private sector. It is primarily gift packs now. We are

hoping by summertime, we will have around 200 items on sale, like

Amazon.com has groceries for sale, for a shipping fee.

We haven’t talked about the delivery mechanism, but we will

once we make sure that we have the mechanism in place to order

on-line.

Ms. DAVIS OF CALIFORNIA. Thank you.

And getting back to my colleague’s question, what we want is to

be able to serve our families, our military families, and to be able

to return to them their investment in their shopping experience as

well. And as we have some extraordinary services that I hope you

will be providing there, how do we monitor that so that we are able

to capture those best practices, whatever you want to call it, and

see whether or not it is making a difference in terms of MWR and

whether or not they are really getting that return?

Are you all going to be looking at that? How are you going to be

doing that?

Secretary DOMINGUEZ. We survey customers to ensure that the

quality of their experience meets or exceeds industry standards.

And so we do the surveys. And someone up here mentioned that

these are contracted out to a group that does this in industry. So

that is important.
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Through the efforts of the boards and through the exchange cooperation, we are continually looking at benchmarks against our

competitors in terms of practices and profitability and those kinds

of issues. It is a continuing obsession with these leaders here and

their boards of directors.

I hope that answers your question.

Ms. DAVIS OF CALIFORNIA. Just quickly, Mr. Nixon, do you expect

the revenues to jump by any measurable degree at the stores?

Mr. NIXON. Since we are not directly involved in generating

MWR dividends, we expect sales to increase significantly. In fact,

our largest volume commissary is Fort Belvoir, doing around $92

million a year. We think the naval station could be the first $100

million commissary. The significant funds generated will be to surcharge the patron’s dollar, to go back and recapitalize other investment opportunities.

Absolutely. This was built—we do charrettes; we ask the patrons

what they would like to see in it, and that is what we put in it.

We monitor, as the Secretary said, their shopping experience to

make sure it is world class, because they deserve it.

Ms. DAVIS OF CALIFORNIA. Thank you. We are excited.

Dr. SNYDER. Mr. McHugh and I will both have questions for the

record which we hope you all will respond to in a timely fashion,

but I wanted to give Mr. Murphy and Mrs. Davis any opportunity

for questions they have today.

Mr. MURPHY. I just want to make sure, from my understanding

of the timing issue when we talk about the dividend ratio. Do you

make that decision on an annual basis?

Right now, 16 percent; it has been about 16 percent that you

fund MWR. If we continue to see a decrease in profits, when do you

look at that? And I understand you are optimistic.

Secretary DOMINGUEZ. Well, first, these decisions are made by

the individual military services in consultation with their boards as

they are looking at their exchanges annually. That is annually.

Mr. MURPHY. How about this fiscal year? When are we looking

at this?

Secretary DOMINGUEZ. This fiscal year, the aggregate—again,

that is, in aggregate—the situation is different by individual exchange, but in aggregate the MWR dividend is smaller this year

than last.

I think we are looking at 2010 or so to really to have that begin

to turn around again; that is, in aggregate, the individual exchanges have different pictures each.

Mr. MURPHY. Would each you like to comment?

Admiral COWLEY. I guess it is true each of our boards do establish targets for us that we meet. Ours is established annually and

we report performance to plan on a quarterly basis.

One thing I would like to say is, as we look at this, it is established based on requirement. Looking at it, year on year, in terms

of consumption does not necessarily tell the whole story. As we are

looking at reductions in active duty population and whatnot and

what the actual requirement is out there, that is what the board

looks at; and our boards look across both MWR and the exchange

and balance across the two of them.
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There may be one year where there is emphasis in one of them

and one year where there is emphasis in another. Without looking

at that granular level, just looking at a top level does not tell the

whole story. We really look at the discrete requirements in the

MWR categories as well as the savings that we are providing to our

customers when they come in the stores, our recapitalization. That

is the dialogue that goes on in our board meetings, and they meet

quarterly.

General ESSEX. I can speak for the Army and Air Force Exchange Service. The number we use—and I believe our numbers

are correct—is, 65 percent of our earnings goes to the dividend. It

is split between the Army and Air Force, but also Marines and

Navy because we operate exchanges on Okinawa, Marine bases,

but we operate the exchanges and provide the dividend to them.

And then, of course, there is the split for the earnings that come

from Internet sales and cataloguing we do cooperatively. So twothirds are dividend, one-third capital program.

The best advice we have from industry and academia says that

basically taking money from that capital program will have a very

negative, long-term impact and the strong advice is against doing

that.

One of the things that we wrestle with every year in our board

meeting, where we discuss our annual financial plan, is this very

issue. And one of the problems we have is that we are, like any

private company, required to follow generally accepted accounting

principles, or GAAP, and that requires that we do deal with depreciation just like a private entity does.

And when I was talking earlier—I don’t remember if you were

in yet—but I was trying to explain in 2006 and 2007 is kind of a

perfect storm year for us where we have a lot of capital programs,

due to BRAC, and a lot of depreciation that comes with that. And

then the closing bases with BRAC and global restationing cause us

to do accelerated depreciation.

That also impacts our dividend; and hence, my point that I keep,

you know, probably exaggerating, but make as strongly as I can,

that any time there is an appropriated fund authorized, then it

does make a direct impact on the MWR dividend if it can be actually appropriated, instead of making us use the soldiers and airmen nonappropriated money that is generated from sales.

Mr. MURPHY. Thank you.

Dr. SNYDER. Anything further, Mr. Murphy?

Mr. MURPHY. No, sir.

Dr. SNYDER. Gentlemen, we appreciate your being here today,

and we appreciate your comments as we head into this year’s Defense Bill. The hearing is adjourned.

[Whereupon, at 11:45 a.m., the subcommittee was adjourned.]
A P P E N D I X

MARCH 13, 2007

PREPARED STATEMENTS SUBMITTED FOR THE RECORD

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QUESTIONS AND ANSWERS SUBMITTED FOR THE

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QUESTIONS SUBMITTED BY DR. SNYDER

Dr. SNYDER. Cost of New Construction: The ongoing global repositioning of forces would seem to demand that some appropriated funding be provided to support construction of expanded commissaries and exchanges. Why is this realignment-based

construction being financed out of accounts dedicated to routine replacement and rehabilitation of facilities? Will appropriated funds be available to reduce the pressure

on the troops’ non-appropriated accounts?

Secretary DOMINGUEZ. Under Department policy, appropriations may fund re- quirements for those installations receiving over a 25 percent increase in personnel

within a two-year period. The Defense Commissary Agency (DeCA) and the Exchanges are committed to providing adequate facilities to support quality of life for

the Service members and their families relocating to these installations. Although

requirements were considered, sufficient resources were not available for the Department to propose funding in the Fiscal Year (FY) 2008 Budget. Therefore, DeCA

and the Exchanges are reprioritizing their capital investment programs to meet the

highest priority needs using commissary surcharge or non-appropriated funds in the

absence of appropriated funds. Those requirements related to facility construction

costs will be identified in the FY 2008 Commissary Surcharge and Non-appropriated

Fund Construction Program. We continue to advocate for appropriated funding for

these requirements in future appropriated budget submissions.

Dr. SNYDER. A new round of base closures was announced in 2005. In the past,

there has been considerable interest in maintaining some level of commissary and

exchange support at base closure sites to support the retired and reserve population.

We understand that the ongoing negotiations to establish a new model for combined

exchange and commissary stores has been complicated by an inability to decide

which products will be sold by exchanges and which products will be sold by commissaries. Why are such decisions so difficult? Why are such decisions allowed to

impede the development of a store model that is urgently needed by military patrons, particularly at base closure sites?

Secretary DOMINGUEZ. To maintain some level of support for the military community after a base closes or when separate operations are not feasible, the Congress

authorized the exchanges to run combined commissary and exchange stores with reduced appropriated funding. Under the combined store concept, food items are sold

at cost plus 5% and all other merchandise is sold at the exchange mark-up. Without

exception, the concept has not been financially successful at base closure locations.

Under the direction of the Executive Resale Board, the Defense Commissary

Agency (DeCA) and the Exchanges are evaluating other store models that may

share facilities or other operating features. Because DeCA and the Exchanges are

both authorized to sell certain merchandise, an important consideration is how to

allocate the inventory and pricing and the residual effect on exchange profit, dividends to morale, welfare, and recreation, and commissary surcharge trust funds. As

a companion effort, the Deputy Under Secretary of Defense for Military Community

and Family Policy is developing a process to adjudicate such conflicts.

Dr. SNYDER. Cost of New Construction: The ongoing global repositioning of forces

would seem to demand that some appropriated funding be provided to support construction of expanded commissaries and exchanges. Is the funding for new construction to support the exchange and commissary projects associated with global repositioning adequate and are those funds being provided separately or is each of you

funding your own projects?

Mr. NIXON. Except for $300,000 received to offset the Base Realignment and Closure (BRAC) impact at one Air Force installation, the Defense Commissary Agency

is not slated to receive any appropriated funding. Commissary requirements were

considered when the Services prioritized their total requirements, but the required

commissary projects fell below the cut line on the prioritized lists.

Dr. SNYDER. A new round of base closures was announced in 2005. In the past,

there has been considerable interest in maintaining some level of commissary and

exchange support at base closure sites to support the retired and reserve population.

We understand that the ongoing negotiations to establish a new model for combined

exchange and commissary stores has been complicated by an inability to decide
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which products will be sold by exchanges and which products will be sold by commissaries. Has the military resale community done more work on developing new

approaches for providing military resale benefits at base closure sites? What is the

status of current efforts to develop a new combined store model?

Mr. NIXON. Under the direction of the Executive Resale Board, the Exchanges and the Defense Commissary Agency (DeCA) are exploring the potential as to whether

a new model of combined operation might be more advantageous in providing the

commissary and exchange benefits in some locations. We call this the shared facility

concept, and it is still in the development stage. It envisions that a commissary and

an exchange could operate in a single facility, sharing certain support costs, complying with existing statutory guidance that requires the operation of separate commissary and exchange systems. This concept has many moving parts and we have

yet to resolve a number of them. The Shared Facility concept is based upon three premises: (1) that it should en- hance both exchange and commissary shopping experiences; (2) it should generate

additional morale, welfare and recreation dividends; and (3) it should generate additional surcharges for DeCA, without increasing the top line appropriated costs. The

Executive Resale Board is considering a process to adjudicate the merchandise authorities.

Dr. SNYDER. Cost of New Construction: The ongoing global repositioning of forces would seem to demand that some appropriated funding be provided to support construction of expanded commissaries and exchanges. Is the funding for new construction to support the exchange and commissary projects associated with global repositioning adequate and are those funds being provided separately or is each of you

funding your own projects? General ESSEX. To date, the Army and Air Force Exchange Service (AAFES) has not received any authorized appropriated funds (APFs) in support of Global Repositioning of Forces to the United States, nor has there been any indication that APFs

will be forthcoming. In-turn, AAFES is required to fund capital improvements with

retained earnings and accumulated depreciation for projects eligible for APF support.

The DOD authorized the use of APF’s for community facility construction related to the establishment, activation, or expansion of a military installation. In the case

of an installation expansion, a major increase in authorized and assigned personnel

strength over a short period of time is necessary before APF construction can be

programmed. A 25-percent increase in personnel over a two-year time span satisfies

this requirement.

Additionally, closing installations are authorized APF support for expense items such as: civilian severance pay; permanent change of duty station; transportation

costs of relocating assets; and residual value of facilities constructed with AAFES

funds.

During 2006–2012, AAFES will make worldwide, non-appropriated fund (NAF) investments of more than $476M ($358M in construction costs) in new and expanded

facilities. This does not include an additional $25M investment in expense items relating to installation closures.

AAFES identified CONUS facility needs totaling $359M ($263M authorized APF

support) to meet quality of life requirements. Projects are being developed, or are

underway at Ft. Belvoir, Ft. Benning, Ft. Bliss, Ft. Carson, Ft. Drum, Ft. Lee, Ft.

Lewis, Ft. Riley, Ft. Sam Houston and Ft. Sill.

New exchange OCONUS facilities totaling $117M ($96M authorized APF support)

are underway, or being developed for Andersen AFB, GU, Dal Molin, IT,

Grafenwoehr GE, and Weisbaden GE.

Dr. SNYDER. A new round of base closures was announced in 2005. In the past,

there has been considerable interest in maintaining some level of commissary and

exchange support at base closure sites to support the retired and reserve population.

We understand that the ongoing negotiations to establish a new model for combined

exchange and commissary stores has been complicated by an inability to decide

which products will be sold by exchanges and which products will be sold by commissaries. Has the military resale community done more work on developing new

approaches for providing military resale benefits at base closure sites? What is the

status of current efforts to develop a new combined store model?

General ESSEX. The Army and Air Force Exchange Service (AAFES) evaluates exchange operations at BRAC closure sites by location and adjusts the scope of operations based on a sound business case. Any operations that remain open will be

monitored to ensure economic viability after closure.

AAFES and the Defense Commissary Agency (DeCA) are currently exploring the

feasibility of using a shared facility concept as a potential operating model at small

or downsized military installations. We are proceeding cautiously in our discussions
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with DeCA to ensure we are within the bounds of Section 2481(a) of Title 10 which

mandates separate exchange and commissary systems. This cooperative effort focuses on increasing the value of the military resale system for its patrons. In the

shared facility concept, the commissary and the exchange remain separate entities

within the meaning of the law, but reside in a single facility to maximize shared

services. Commissary and exchange merchandise sales would be credited to the appropriate separate account and each organization would be responsible for its pro

rata share of infrastructure costs and common operating expenses. AAFES and DeCA will continue to address a number of major issues: defining the commissary/exchange merchandise category mix; adapting IT systems to ensure separate organizational accountability; sharing credit card fees and other common expenses; and resolving any workforce issues resulting from different human resource

systems (appropriated fund v. non-appropriated fund).

Dr. SNYDER. Cost of New Construction: The ongoing global repositioning of forces would seem to demand that some appropriated funding be provided to support construction of expanded commissaries and exchanges. Is the funding for new construction to support the exchange and commissary projects associated with global repositioning adequate and are those funds being provided separately or is each of you

funding your own projects? Admiral COWLEY. In general, Navy Exchange construction required to support global repositioning at Navy installations has been minimal since the plan is still

being developed. NEXCOM is working with military planners to evaluate the need

to construct additional Navy exchange facilities to support a major influx of Marines

to Guam from Okinawa Japan. Specific details on the scope and cost of Navy Exchange construction have not been developed pending completion of a comprehensive

master plan for this initiative.

Dr. SNYDER. A new round of base closures was announced in 2005. In the past,

there has been considerable interest in maintaining some level of commissary and

exchange support at base closure sites to support the retired and reserve population.

We understand that the ongoing negotiations to establish a new model for combined

exchange and commissary stores has been complicated by an inability to decide

which products will be sold by exchanges and which products will be sold by commissaries. Has the military resale community done more work on developing new

approaches for providing military resale benefits at base closure sites? What is the

status of current efforts to develop a new combined store model?

Admiral COWLEY. Department of Defense (DOD) policy ties the continued oper- ation of exchanges and commissaries at closed installations to specific criteria including whether the installation has an active duty mission, the number of active

duty or reserve component population remaining, and the proximity of other facilities. A combined commissary and exchange store may be considered at a closed installation upon reviewing the criteria. As the geographic area around a closed installation may have authorized patrons which would benefit from the commissary

and exchange benefit, although most likely a much smaller population, determining

the optimal combined store model becomes critical.

The DOD Executive Resale Board, whose members include the heads of the Defense Commissary Agency and the Military Exchange commands, is currently discussing merchandise assortments and various operating models for future combined

exchange and commissary stores. The Executive Resale Board had discussions during the February 2007 meeting, and is scheduled to continue these discussions in

the July 2007 meeting. No definitive future model for combined stores has been determined, however, the focus of the review is on determining the best enterprise approach to provide the commissary and exchange benefit to our military members.

Navy Exchange successfully operates a NEXMART model of combined commissary

and exchange stores at nine overseas locations. This non-appropriated exchange

store model delivers commissary benefits in a fully integrated facility with shared

costs for common functions. The exchange labor costs associated with delivering

commissary merchandise are funded by DeCA, and when normalized for operating

hours this offers the most cost-wise solution compared with similar sized standalone commissaries. NEXMARTs provide added customer satisfaction with extended

store hours and convenience of one-stop shopping. The commissary merchandise is

procured from DeCA and sold at cost plus five percent. This combined store model

works best in lower volume locations where the economies of scale with combined

stores are easier to garner. These could include base closure sites.

The policy discussion about which products will be sold by exchanges and which

products will be sold by commissaries becomes more pointed in a combined store.

Since no gross margin dollars are produced by commissary-type merchandise sales,

expenses resulting from wider assortments must be subsidized by more appropriated funding. If a combined store’s goal is to reduce overall appropriations, then
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it is counter-productive to subsidize these sales with more appropriated funding, especially since the same sales can be made with exchange merchandise that generates gross margin dollars to offset expenses. Thus, the practice of selling exchange-type merchandise at cost represents a significant expense for the DOD.

QUESTIONS SUBMITTED BY MR. MCHUGH

Mr. MCHUGH. The Department of Defense Instruction (DODI) 1330.21, ‘‘Armed

Services Exchange Regulations,’’ issued July 14, 2005, authorizes exchanges to operate revenue generating activities such as personal telecommunications services but

does not specifically address the Internet as a revenue generating vehicle. As a result, a number of organizations at the base level are providing revenue generating

Internet cafes, on-line games and other Internet based activities to service members

and there appears to be considerable duplication at the base level in providing such

Internet based activities. It would appear that the failure of the DOD instruction

to specifically address the Internet as a revenue generating activity has left a policy

vacuum. When does the Department plan to update the DOD instruction in order

to address the duplication problem?

Secretary DOMINGUEZ. The Exchanges have primacy in the operation of ‘‘fee-forservice’’ personal telecommunications, including personal Internet access (email accounts, high-speed Internet service provider accounts, etc.). Authorized morale, welfare, and recreation activities may be Internet-enabled, including on-line games and

‘‘no-fee’’ Internet access in recreation, community, and library activities. The Department is in the process of publishing updates to the Exchange and Morale, Welfare,

and Recreation policies to clarify the Internet access policies.

Mr. MCHUGH. The John Warner National Defense Authorization Act for Fiscal

Year 2007 (Public Law 109–364) directed the Secretary of Defense to report by July

31, 2007, an evaluation of the cost effectiveness of purchasing commercial insurance

to protect the financial interest in facilities operated by the Defense Commissary

Agency, the Army and Air Force Exchange Service, the Navy Exchange Service

Command, the Marine Corps exchanges and morale, welfare and recreation non-appropriated fund activities of DOD. Given what we heard in testimony about exploding construction costs, limitations on the availability of commissary surcharge funds

and appropriated funds, it seems to me that commercial insurance may almost be

a foregone conclusion. To better understand the evaluation that is being conducted,

please tell me to what extent will the Department’s evaluation take into account

and weight in the evaluation: (1) The current trend in the explosive growth of construction costs but also future projections in construction costs for both new construction and modification to facilities; (2) The expected limited availability of appropriated or other funds (for example, the commissary surcharge fund) to respond

to catastrophic loss; and, (3) A possible decreasing reliance on emergency supplemental appropriations to address unforecast losses? Beyond that, as a hedge against

future catastrophic facility losses in the commissary, exchange and MWR activities,

and to preserve the benefit in a predictably stressful fiscal operating environment,

will DOD be considering appropriated funding for commercial insurance for such facilities?

Secretary DOMINGUEZ. In addition to the evaluation of commercial insurance, the

subcommittee also requested a report on future funding to maintain and construct

facilities. Because both reviews will consider escalating materials costs, the availability of appropriations, and other facility funding sources (including non-appropriated, commissary surcharge, and private financing), and operational funding, the

Department plans to submit the reports together, with the FY 2008 construction

program, in August 2007. The review will consider the cost effectiveness of purchasing commercial insurance with either or a combination of non-appropriated and appropriated funding.

Mr. MCHUGH. The Department of Defense Instruction (DODI) 1330.21, ‘‘Armed

Services Exchange Regulations,’’ issued July 14, 2005, authorizes exchanges to operate revenue generating activities such as personal telecommunications services but

does not specifically address the Internet as a revenue generating vehicle. As a result, a number of organizations at the base level are providing revenue generating

Internet cafes, on-line games and other Internet based activities to service members

and there appears to be considerable duplication at the base level in providing such

Internet based activities. It would appear that the failure of the DOD instruction

to specifically address the Internet as a revenue generating activity has left a policy

vacuum. When does the Department plan to update the DOD instruction in order

to address the duplication problem?
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General ESSEX. The Exchanges have primacy in the operation of ‘‘fee-for-service’’

personal telecommunications, including personal Internet access (email accounts,

high-speed Internet service provider accounts, etc.). Authorized morale, welfare, and

recreation activities may be Internet-enabled, including on-line games and ‘‘no-fee’’

Internet access in recreation, community, and library activities. The Department is

in the process of publishing updates to the Exchange and Morale, Welfare, and

Recreation policies to clarify the Internet access policies.

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