WRITTEN STATEMENT
BY

GAIL H. MCGINN
ACTING ASSISTANT SECRETARY OF DEFENSE
(FORCE MANAGEMENT POLICY)
BEFORE THE
SPECIAL OVERSIGHT PANEL
ON MORALE, RECREATION, AND WELFARE
OF
COMMITTEE ON ARMED SERVICES
U.S. HOUSE OF REPRESENTATIVES
ON

MARCH 29, 2001

Mr. Chairman, I am honored to appear before you and the Panel today to discuss the Department of Defense resale system.  I would like to begin by congratulating you and the Ranking Member on your appointment to these positions.  I look forward to working with you and the members of this Panel to strengthen our military resale system and enhance these benefits for our military members.  I would like to re-affirm the importance of our resale system, provide an overview of its performance, and discuss the challenges we see for the future.

THE IMPORTANCE OF THE RESALE SYSTEM

The Department of Defense operates commissary and exchange stores serving over 11 million authorized patrons at nearly 300 military installations in over 30 countries worldwide.  There are 99,000 employees in the military resale system, about 30 percent of whom are military spouses or family members.

I would like to express the Department's appreciation for this Panel's continuous support of these important quality of life programs.  You recognize, as we do, that the commissary and exchange benefits are provided to active duty personnel and their families as an integral element of the military pay and benefits system.

Pay and quality of life are two major factors affecting our ability to recruit and retain a quality force.  Exchange and commissary benefits are both non-pay compensation and dynamic contributors to quality of life.  Commissaries and exchanges, by offering groceries and merchandise at significant savings, contribute substantially to the military families' standard of living.  The exchange profits distributed as dividends to MWR programs help form a community network that supports our Service members and their families who are managing high personnel tempo and separation from family.  Commissary and exchange benefits also provide a sense of belonging and send the message that DoD is not just another employer and military service is not just another job.

The Armed Services Exchanges also perform a vital support role for 185 ships stores afloat and 45 forward deployed or mobile units supporting uniformed members performing combat, peacekeeping, or humanitarian missions. 

The exchanges step in wherever there is a call to serve.  When the USS Cole sailors returned to the hospital in Germany, the Army and Air Force Exchange Service AAFES made sure that every sailor was clothed for the trip home and upon their return to Norfolk, the Navy Exchange Service Command NEXCOM  provided articles of uniform.  In the Balkans and South West Asia, the exchanges provide a wide variety of services including:  snack items, civilian and military clothing, soft drinks, health and beauty aids, pre-paid phone cards, recorded music and several name brand fast food outlets.  In addition, e-mail and telephone services help keep families connected during long absences.  All of these activities, in partnership with the MWR program, help ease the burden of our Service members and their families. 

DEFENSE COMMISSARY AGENCY (DECA)

The commissary is the cornerstone of the resale system.  Our military families consistently rank the commissaries as one of their top benefits. The Department operates commissaries as an integral element of the military pay and benefits system and as an institutional element to foster the sense of community among military personnel and their families.  They are a proven, efficient method of compensating military personnel.  The savings offered by well-managed commissaries provide significant noncash benefit to military personnel at lower cost than cash pay equivalents.  Additionally, commissary benefits foster a community identity and instill essential confidence among military personnel that the military institution is caring for the well-being of their families when military duties require their absence.  

The Defense Commissary Agency (DeCA), which operates the commissary system, is fully engaged in actions designed to achieve economies and to improve the value of the benefit, especially for young members.  Major General Bob Courter is the force behind these initiatives.  Under his excellent leadership, and with your support, DeCA is on the fast track to revitalize the commissary benefit.

In Fiscal Year 2000, the commissary sales increased $83 million or 1.7% to over $5 billion.  Customers are responding to operating changes, including improvement of produce and longer store hours. In 1995, the Defense Commissary Agency offered customers a savings of 23% on their grocery purchases.  Since last year, the Defense Commissary Agency has increased customer savings from 27% to 29% -- through a combination of the Best Value Item, Power Buy and other promotional programs.  This means a local market basket costing $100 would be $71 in the commissary.  These are great savings - a contributor to the financial well-being of the family.

After DeCA's creation, the Commissary Trust Fund, which is funded primarily from the 5% surcharge levied on purchases by commissary patrons, absorbed a greater proportion of DeCA's operating budget - reaching 20 percent in Fiscal Year 2001.  As a result, the Trust Fund has had increasing difficulty meeting DeCA's capitalization requirements and construction backlog.  We thank you for the new legislative authority provided by the Congress.  Starting in Fiscal Year 2002, appropriations will fund the commissary operating costs so that surcharge funds will be available for capital requirements.  This is an important change, which will significantly improve the commissary benefit.

          We want to continue to increase the value of the commissary benefit to our customers and create a modern physical plant to encourage shopping and increase efficiency.  The Department and DeCA have thus set a course to reduce costs and improve customer satisfaction - guaranteeing no change to the surcharge rate.  DeCA's aggressive plan includes measures to continue to increase customer savings, increase sales, reduce costs, and eliminate the facilities backlog.  

THE MILITARY EXCHANGES

The three exchange systems, the Army and Air Force Exchange System (AAFES), the Navy Exchange Service Command (NEXCOM), and the Marine Corps Exchange, operate independently to serve the members of each Armed Service.  Each Exchange Service provides two important non-pay compensation benefits for authorized patrons:  selling quality goods and services at low prices and distributing earnings as dividends to support their Service(s) MWR program.

  In 2000, the exchanges sold $9.5 billion of merchandise and services to authorized patrons, a 5% increase over 1999.  Profits also increased 5%4%  to $484 million.  The Exchanges provided $333 million of dividends to MWR, an increase of $9 million over the previous year, representing about 68 69 percent of annual profits.  The exchanges are in sound financial condition - in fact, AAFES and NEXCOM have earned A1+ ratings by Standard and Poors.

Last year, the Department completed an extensive review of the merits of creating an integrated exchange system.  The Under Secretary of Defense for Personnel and Readiness determined that the best way to capitalize on recommendations to achieve best commercial practices was to initiate a series of cooperative efforts among the exchanges.  The goal is to maximize efficiencies that will offset operational costs and improve patron services while at the same time, ensuring modernization of facilities, and continued contributions to MWR programs. 

The Price Waterhouse Coopers review identified best practices and analyzed the "gap" between each exchange service and the industry best practice.  Where cooperative efforts are not practicable, each exchange service is independently implementing the best business practice.  

We have just received the exchange implementation plans, approved by the Service Vice Chiefs, that detail ongoing cooperative efforts; independent actions underway and planned; and a process for the Exchange Commanders to jointly oversee the development of new cooperative efforts. The Assistant Secretary of Defense (Force Management Policy) will oversee the progress of the individual and cooperative efforts.

Ongoing cooperative efforts, initiated nearly a decade ago, have been successful in over 30 areas such as the Military Star Card joint credit program, on-line access to the exchange catalog, in-house fast food franchises, private label merchandise, and shared design and construction support.  In addition, we see several opportunities for cooperation across the entire resale community, most notably in the area of cross promotions and joint sales, and master planning for facilities.

CAPITALIZATION AND CONSTRUCTION

The resale system annually invests in excess of $600 million in recapitalization of the system, including major and minor construction, maintenance and repair projects, equipment, and information technology.  Interdependent finances and companion operations connect the commissary system, exchange systems, and MWR activities.  Because of the interrelationships, a change to one program is likely to impact the others.  In this regard, we must consider the system-wide impact of initiatives or circumstances that affect funds available for capitalization.

Exchange and commissary facilities are constructed with nonappropriated and commissary surcharge funds, respectively.  Annually, DeCA and the Military Departments submit a report on nonappropriated fund, commissary surcharge, and privately financed construction programs. The Department closely reviews the annual construction programs to assure an overall review of DoD-wide construction priorities. The FY 2001 major construction program included $113 million for exchanges and $24 million for commissaries. 

Carefully targeted investment will be needed to guarantee the future effectiveness of these programs. Experience shows that such investment results in greater sales. The continuation of this capability depends on a steady stream of exchange profits and dividends and stable appropriated fund support of authorized operating costs for resale and MWR programs. 

Marketing the Resale Benefit

To afford all authorized members the savings and benefits derived from commissary and exchange programs, marketing efforts are designed both to retain existing customers and to gain customers who are authorized, but do not currently use the programs.   The resale community is making a concerted effort to show the value of the commissary and exchange benefit to all authorized customers - using surveys, Web sites, promotions, and in-store radio.  

The target population will continue to be active duty, especially members entering their second term -- meeting the needs of young members, both those with families and single members.  DeCA has clearly identified a young member strategy.  The exchanges are targeting sales promotions and entry price point merchandise to the needs of young families with children.  "Grab and Go" sections in the commissary stores and exchange convenience stores offer "quick stop" shopping alternatives, at a savings, for working parents and single members.

Using Technology to Deliver Benefits

Technology initiatives play a major role in DoD's efforts to market the commissary and exchange benefits to authorized patrons.  We recognize that computers and the Internet open a new world of customer service.  Web sites allow authorized patrons to obtain information about their benefits.  This is an incredible opportunity for the commissaries and exchanges to explore the potential for creating commissary and exchange "virtual stores" to service authorized customers who choose to shop on-line.  The on-line Exchange Mail Order Catalog for Uniforms is a pioneer in that effort.  The Internet offers the authorized patron, especially reservists and retirees who may not live near a commissary or exchange, access to their benefits. 

Combined Stores

The Department is committed to operating independent commissaries and exchanges where necessary to support authorized patrons at locations with significant active duty populations, and to thoughtful consideration of combined stores where independent operations are not supportable and where operation of a combined store does not negatively impact on the exchange dividend to MWR.  We recently submitted a report to Congress on the process and criteria for establishing combined stores.  The Assistant Secretary of Defense (Force Management Policy) approves the establishment of commissaries, combined stores, and the closure of commissaries after proper notification to Congress.

The Department has approved four combined store operations:  NAS Fort Worth (Carswell Field), Texas; Homestead AFB, Florida; Fort McClellan, Alabama; and Orlando, Florida.  These "Exchange Marts," which sell edibles at cost plus 5%, are well received by authorized patrons in the surrounding areas who otherwise would have limited access to their resale benefits.

OVERSIGHT AND MANAGEMENT

The last decade has shown an unprecedented focus on quality of life and especially in the improved management, supervision and direction of commissary, exchange, and MWR programs.  Our past progress and our ability to meet the challenges of the future would not be possible without the involved leadership of the Congress and the Department of Defense.  Mr. Chairman, the progress made by our resale system would not be possible without the strong support offered by this Ppanel.  I would like to thank the Panel for its recent actions to provide the new merchandise authority for the exchanges and commissaries and last year's legislative change which will enable the commissary system to recapitalize.

The Secretary of Defense has assigned responsibility for the overall supervision of the Defense Commissary Agency and the Armed Services Exchanges to the Under Secretary of Defense for Personnel and Readiness.  The commissaries and exchanges operate under policy issued by the Assistant Secretary of Defense for Force Management Policy.

          In 1997, the Commissary Operating Board (COB) was established to assist the Under Secretary of Defense for Personnel and Readiness in providing the overall supervision of Defense commissaries.  Its membership includes leadership from the Military Departments and Services with responsibility for logistics, budgets, and personnel, as well as the senior enlisted representative of each Service. The COB, under the leadership of Lt.Gen. Mike Zettler, exercises supervisory authority over DeCA, its management, and the day-to-day commissary operations.  The COB has done a superb job in steering DeCA through a myriad of challenges and setting a new course for the future.

The Military Departments oversee the Armed Services Exchanges through direct line management, administration, and control authority and are responsible for periodic review of program performance and financial management to assure that the exchange mission is being met in accordance with sound business practices.  The Military Departments have fiduciary responsibility for management of resources, to include nonappropriated fund capital investments (including construction programs), investments, and pension plans. 

Each Armed Service Exchange has its own board of directors composed of senior Service military and civilian leaders to ensure that the exchange is responsive to the needs of the personnel.  Each Military Department determines the specific composition, function and purpose of the board of directors.  Because AAFES is a joint activity, it is operated under the policies of the Army and a joint Army and Air Force Board of Directors.  This structure has well served the Department and its ultimate beneficiaries:  the military members, their families, and other authorized patrons.

CONCLUSION

Mr. Chairman, commissaries and exchanges are an important component of our quality of life programs.  Our men and women in uniform and family members view these services as their most valuable non-pay benefit.  

          The military resale system has 99,000 talented employees who are dedicated to delivering and improving this important benefit.  Our industry partners understand the value of these programs and are fully committed to supporting the military community.  The Department appreciates their efforts to ensure that our customers are well cared for.

          With the help of Congress, DoD will continue to build and sustain a strong and viable resale system.  Our plans are aggressive and we will need your support.  I would like to thank the Panel for its support in bringing about much needed change in the resale system.  Your advocacy has delivered the authorities needed for the Department to become more effective in providing commissary and exchange benefits to improve the quality of life for our people.

Mr. Chairman, this concludes my testimony.  I would be pleased to answer any questions that you and the members of the Panel may have.