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[H.A.S.C. No. 108–25]



FOR FISCAL YEAR 2005—H.R. 4200






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MARCH 3, 2004




JOHN M. McHUGH, New York, Chairman
TOM COLE, Oklahoma
JIM SAXTON, New Jersey
JIM RYUN, Kansas
ROBIN HAYES, North Carolina
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VIC SNYDER, Arkansas
MARTY MEEHAN, Massachusetts
JIM COOPER, Tennessee

Mike Higgins, Professional Staff Member
Lynn W. Henselman, Professional Staff Member
Jennifer Ruddock, Staff Assistant
Elizabeth McAlpine, Staff Assistant



    Wednesday, March 3, 2004, Fiscal Year 2005 National Defense Authorization Act—Budget Request on Military Resale and Morale, Recreation and Welfare Programs

    Wednesday, March 3, 2004

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    McHugh, Hon. John M., a Representative from New York, Chairman, Total Force Subcommittee

    Snyder, Hon. Vic, a Representative from Arkansas, Ranking Member, Total Force Subcommittee


    Abell, Charles S., Principal Deputy Under Secretary of Defense, Personnel and Readiness

    Downs, Michael P., Director, Personal and Family Readiness Division Headquarters, U.S. Marine Corps

    Frost, Maj. Gen. Kathryn G., USA, Commander, Army and Air Forcer Exchange Service Command

    Johnson, C. Lloyd, Chairman of the Board, Armed Forces Marketing Council

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    Lokovic, Chief Master Sgt. James E., Director, Military and Government Relations, Air Force Sergeants Association

    Maguire, Rear Adm. William J., Supply Corps, U.S. Navy, Commander, Navy Ecxchange Service Command

    Olding, Joseph B., President, Commissary Division of WEBCO

    Raezer, Joyce, Director, Government Relations, National Military Family Association

    Stanley, William E., Jr., Chaqirman of the Board, American Logistics Association

    Wiedemer, Maj. Gen. Michael P., USAF, Director, Defense Commissary Agency


[The Prepared Statements can be viewed in the hard copy.]

Abell, Charles S.

Downs, Michael P.

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Frost, Maj. Gen. Kathryn G.

Johnson, C. Lloyd

Lokovic, Chief Master Sgt. James E.

Maguire, Rear Adm. William J.

McHugh, Hon. John

Olding, Joseph B.

Raezer, Joyce

Snyder, Hon. Vic

Stanley, William E., Jr.

Wiedemer, Maj. Gen. Michael P.

[There were no Documents submitted.]

[The Questions and Answers can be viewed in the hard copy.]
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House of Representatives,
Committee on Armed Services,
Total Force Subcommittee,
Washington, DC, Wednesday, March 3, 2004.

    The subcommittee met, pursuant to call, at 2:40 p.m., in room 2118, Rayburn House Office Building, Hon. John M. McHugh (chairman of the subcommittee) presiding.


    Mr. MCHUGH. The hearing will come to order. Let me first of all apologize, not that I had any control over it, but nevertheless I regret the delay of in excess of 40 minutes of the start of this hearing; but as I hope everyone understands, as powerful as all of us may be on this subcommittee, we don't have the power—or as powerful as we would like to think we are, we don't have the power to schedule floor votes. And we had four beginning just before 2 o'clock. So we appreciate your patience.

    And let me note that as a subcommittee, we are honored to turn our attention today to a series of issues that certainly are of great importance to the members of the service and their families, and that is the military resale programs as well as the morale, welfare and recreation, or MWR activities.
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    Like many members of the House, and certainly many members of both the full committee and the Total Force Subcommittee, I have had the opportunity to travel now twice to Iraq. I returned from Afghanistan just last week, and I can confirm that these programs play a critical role in relieving the stress and providing that touch of home that is so important to the troops who are on the front lines of the war on terrorism.

    Perhaps even more important to the individual warrior than his or her personal welfare is the need for a level of comfort that the family members they leave behind are secure, and a quality environment at home, and this is the real measure of the value of the benefit and type of war. And I would submit that few factors contribute more to readiness in combat capability than that which can relieve the stress that service members feel and the concerns they have about the welfare of their families.

    It is part of the military ethos to create a community that service members turn to for support; and commissaries, exchanges, and MWR activities are critical elements of that military culture.

    That same culture has produced the wonderful armed forces that continue to fight with courage and skill in places like Iraq, Afghanistan, and in other trouble spots around the world, and the connection between these pillars of the military community and our stunning battlefield victories is very clear, in my mind certainly.

    Effective family-oriented MWR programs equal military readiness. However, I am increasingly concerned that some people, particularly in the Department of Defense, do not view the commissaries, exchanges, and MWR programs in the way that I do. There is some evidence that these programs are now seen as a drain on the budget and perhaps not worth their overall cost.
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    And let me for my own perspective be clear. I believe that these programs are worth every penny that we invest in them. These are powerful readiness tools. They are a powerful readiness means by which we ensure that our troops are able and willing and comfortable in going abroad to do our bidding, and they are, as well, generators and retention tools that reach into every military home. And I intend, again for my personal perspective, to resist any effort to seek so-called budget savings in these programs where the result is the reduction of service or benefits.

    That having been said, it is unquestionably the responsibility of all managers of these organizations and these activities to be more efficient and more effective, and we support those initiatives as well; but such improvements must not be at the expense of service members and their families.

    And I am looking forward to the exchange of dialogue and the testimony of our two panels here today, and I welcome them and thank them for being here.

    Before I introduce our witnesses, let me offer first an opportunity for my partner—our partner on this subcommittee in this effort, a leader in these activities, the ranking member of the full committee, the gentleman from Arkansas Dr. Snyder. Vic.

    [The prepared statement of Mr. McHugh can be viewed in the hard copy.]

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    Dr. SNYDER. Thank you, Mr. Chairman, and I will be brief. I have a written statement that I would like to have inserted into the record at this time.

    Mr. MCHUGH. Without objection, so ordered.

    Dr. SNYDER. With your indulgence. But I appreciate you all being here. I concur with Mr. McHugh's comments, and I think these programs are so important, both here and overseas, and that we need to be sure they are as strong as they can be. And I know you all are headed to doing that and we look forward to working with you on them this year.

    Thank you, Mr. Chairman.

    [The prepared statement of Dr. Snyder can be viewed in the hard copy.]

    Mr. MCHUGH. I thank the gentleman.

    As I noted, we have two panels today. Our first is comprised of very distinguished individuals, most of whom, in fact all of whom, are no stranger to this subcommittee. And let me introduce them. First is the Honorable Charles S. Abell, Principal Deputy Under Secretary of Defense for Personnel and Readiness. Mr. Secretary, thank you for being here.

    Next, Major General Kathryn G. Frost, Commander, Army and Air Force Exchange Service. General.

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    Rear Admiral William J. Maguire, Commander of Navy Exchange Service Command. Admiral, thank you for being here.

    Major General Mike Wiedemer, Director of the Defense Commissary Agency.

    And Michael P. Downs, Director of Personnel and Family Readiness Division.

    I should also mention that this will be the last opportunity for a gentleman who has been with us on previous occasions, Admiral Maguire, to testify before the subcommittee. In spite of his young appearance—and not just appearance, I trust his very young age—the admiral will be retiring shortly. And I certainly want to extend the gratitude of this subcommittee, the full committee and all the American people and, most of all, the men and women of your service for what you have done for them. And we wish you every best for the future, for you and your family. And thank you for your service, sir.

    And with that, let me yield to the first gentleman whom I introduced, no stranger of this subcommittee in his current capacity, but to Capitol Hill in general from his past service, Secretary Abell. Charlie, thanks for being here, and your attention is yours, sir.


    Mr. ABELL. Thank you, Mr. Chairman. I appreciate the opportunity to testify today on the Commissary, Exchange and Morale, Welfare, and Recreation programs. I also want to thank the Readiness Subcommittee for your advocacy and support for these important benefits and programs.
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    To begin with, Mr. Chairman, I, like you, want to commend the brave men and women in uniform who are defending our Nation at home and abroad and the Department of Defense civilians and contractors who support them.

    While you were in Afghanistan last week, I was in Iraq, Kuwait, and Bahrain where I found great soldiers, sailors, airmen, Marines and Coast Guardsmen performing their duties with professionalism and enthusiasm.

    I was heartened to see the selfless activity throughout the theater as units are preparing to turn over to replacement units. Everywhere we went, units were working hard to leave the bases and facilities better than they were when they arrived. They knew well that they would not benefit from this hard work, but they are determined to make the quality of life for those that follow them better than that that they experienced.

    Selfless service, Mr. Chairman, working for the welfare of others. That is why I love the members of our armed services. They make me proud every day. I saw them on watch, on patrol, and I also saw them enjoying the bustling exchange outlets and the many MWR facilities over there.

    Over the past year I visited many installations from which our troops are deployed. Guard and reserve members mobilize, and families anxiously await. In every location I found commissary, exchange, and MWR activities, along with other community support programs, are responding to the special needs that accompany the global war on terrorism. There have been and will continue to be challenges met to support the front lines on the homefront. At the same time, the programs are positioning the change with transformation, the global posture review, and, of course, Base Realignment and Closure (BRAC) 2005.
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    I am confident that the resale and MWR leadership are up to the task.

    Mr. Chairman, the Department is committed to the commissary and exchange benefits as core elements of nonpay compensation. The Department is equally committed to the MWR programs, including child care and fitness programs, that form the military community support structure and contribute to mission readiness.

    The resale benefits and MWR programs are crucial to the quality of life of our military members and military families. Further, we recognize that many retirees rely on the resale programs as they work within their limited incomes. We want to thank you for your support to provide emergency supplemental funds for family assistance and morale programs during this time of war.

    Dr. Chu and I are working with the military department senior military and civilian leadership to monitor the resale and MWR operations as we consider ways to guarantee the continued viability of these programs into the future. We are trying to answer tough questions which must be discussed openly and deliberated carefully. We are concerned about defining realistic resale benefits and MWR programs. We are concerned about maintaining a suitable balance between taxpayer and customer contributions to the commissary, exchange, and MWR programs.

    We are also concerned about our capability to sustain strong capital investment programs, sales growth, exchange profits and MWR dividends. We are concerned that the continued viability of MWR programs depends on a predictable stream of nonappropriated fund revenues, appropriated fund support, and exchange dividends.
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    There are some who would rather we had not asked these questions, but we feel compelled to do so. These are complex issues. They touch on compensation, social, organizational and business disciplines. We don't pretend to have all the answers, but we are seeking the best advice available from academia, industry and other government entities. We seek your support of the review process. We will keep you advised of our progress, and we understand that many of these matters will require your approval before implementation.

    Mr. Chairman, I appreciate your support and that of this committee and I am prepared to answer any questions that you may have.

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

    [The prepared statement of Mr. Abell can be viewed in the hard copy.]

    Mr. MCHUGH. Next, as I have said about all of these witnesses, no stranger to this subcommittee, someone who has worked with us very closely to maximize the benefits to our men and women in uniform, Major General Kathryn Frost, who is, as I noted, Commander of the Army and Air Force Exchange Service (AAFES). General, good to see you again. We look forward to your testimony.


    General FROST. Thanks, Mr. Chairman, and I am really proud to have the chance to testify before you once again to tell what I believe is a wonderful AAFES story.
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    I have submitted written testimony, and if you would accept that for the record, I would like to summarize.

    When I testified last year, American troops were fighting their way to Baghdad. Seven days later, even before Baghdad fell, AAFES had a Post Exchange (PX) in Iraq. AAFES civilians, long committed to serving soldiers and airmen around the world, had followed the advance to take a little bit of home to war-weary troops. Within 3 months AAFES operated 12 stores in Iraq and had even opened a Burger King at Baghdad International Airport.

    Today AAFES operates stores at 32 different locations in Iraq, and we support some unit-run stores in small, remote locations. And I am proud to say that all of those stores sell U.S. merchandise at state-side prices.

    We also operate now 3 Burger Kings, 2 Pizza Huts, 21 telephone call centers and a variety of other services like barbershops for our troops, and there are many more of those on the way.

    It has taken a miracle of logistics to make all of this happen. Stores in Iraq are supported by an unbelievable network, hauling millions of dollars of merchandise by road, rail, and air—supply lines that have all been subject to hostile fire and ambush.

    Overshadowing the logistical accomplishment are the magnificent AAFES associates who have volunteered to endure spartan living conditions, extreme heat, a relentless pace, and a daily enemy threat to fulfill our pledge to the troops. We go where you go.
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    Today there are some 270 AAFES associates in Iraq, another 200 assigned throughout Operation Enduring and Iraqi Freedom theaters, from the Horn of Africa to republics of the former Soviet Union. These associates are more than mere merchants. They are managers like the one who asked the Texas Rangers to send baseball gear to his store in Tikrit so the Fourth Infantry Division (ID) could play baseball on the Fourth of July, or the manager who opened his store long after closing for a platoon traveling through Tajik, needing refreshment for the last leg of a 300-plus-mile convoy in Iraq; or the associate whose bottom teeth were jarred loose by a mortar attack, who is demanding to return to Iraq as soon as she has healed; or the manager who, when asked why she deployed, replied, ''Because when I am here, I am the best that I can be.''

    These are courageous Americans by any measure, willing to put themselves at risk to provide a familiar connection to home for America's sons and daughters in uniform. This is the most important work they will ever do.

    Each of these associates also represents a position back home that has gone unfilled during the deployment. Those who have remained behind have also had a challenging year. Not deterred, though, by a weak economy, thousands of customers away from home, or the challenge of providing a business on many fronts, the AAFES team, rallied by our chief operations officer Marilyn Iverson, who is seated behind me, have proved beyond any doubt that when the going gets tough, the tough get going.

    We are in the process today of closing our books on our 2003 business year. The information I received this morning is different from what I provided in my written testimony. But right now our revenue will be, for 2003, around $7.8 billion. That is an 8 percent increase over 2002. And even with the extraordinary cost of operating in a war zone, our earnings will come in at close to $354 million, $25 million over last year. And our dividend to the services for MWR is going to be $238 million. That is a per-capita dividend that is $27 higher in constant dollars per person than the dividend 10 years ago.
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    In 2003 AAFES provided quality of life on the battlefield, and our benefit through MWR will continue to sustain quality of life at home station as well. We are celebrating that success, but we recognize the challenges ahead. We continue to work closely with the Unified Exchange Task Force and our sister exchanges on the exchange consolidation directed by the Deputy Secretary of Defense.

    We are also working to transform ourselves to face a potential overseas force restationing and base closure actions here at home. We want to work closely with you as well on a way ahead to ensure that soldiers and airmen don't bear the cost of these actions with a reduced MWR dividend.

    This subcommittee in one form or another has been with AAFES through good times and bad, and I hope you will share my pride in the retail history that I believe AAFES has made this year: unprecedented support on the battlefield, energetic engagement of families back home, and an incredible bottom line.

    Now in our second century of service, I am convinced the exchange benefit has never been more important, and AAFES has never been more relevant. And on behalf of the 48,000 AAFES associates around the world, I am proud to report that our team is more committed than ever to serving the best customers in the world.

    Thank you, Mr. Chairman.

    Mr. MCHUGH. Thank you very much, General.
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    [The prepared statement of General Frost can be viewed in the hard copy.]

    Mr. MCHUGH. Let me note two things. First, for all of the witnesses, we have your statements in their entirety. I should have opened by saying we will, without objection, enter them into the record in their entirety. We appreciate your effort to try to summarize those as best you can.

    Second thing I would like to say to General Frost, we do share your pride. All of the members of this subcommittee are like the members of today's armed services in the United States, volunteers; and they are here, I know from past experience, because they care very deeply about these programs, share your pride and share your commitment. So thank you for that effort.

    Next we have the honor of, as I noted earlier, hearing from a gentleman whose appearance here today will likely be his last—if he has any kind of luck, it will be his last—but to whom we owe a great deal as a Nation and appreciation for his service, Rear Admiral William Maguire, Commander, Navy Exchange Service Command.

    Mr. MCHUGH. Admiral, as I said earlier, thank you so much for your service. We wish you all the best in your pending retirement, but for right now we are more interested, frankly, in your active career experiences. And we look forward to your comments, sir.

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    Admiral MAGUIRE. Thank you, sir. Mr. Chairman, Secretary Abell, and distinguished members of the total force subcommittee, it is my honor to appear before you today on behalf of the Navy Exchange Service Command (NEXCOM) and its 15,000 dedicated associates. We are laser-focused on our commitment to provide a better quality of life for our sailors, reservists, retirees and their families. It is our mission, it is our passion, and it is our privilege to serve these great Americans.

    I am pleased to report with the completion of the 2003 retail year, NESCOM has experienced five years of continuous improvement. Since 1998 we have increased our retail sales by 32 percent and our total sales by 24 percent, surpassing many of our commercial counterparts.

    Our exchange operating profit, which measures the performance of our stores, has shown a significant increase of 51 percent. Over the same time period, our customer satisfaction index continued its positive trend with an 11 point increase since we began the survey in 1999.

    For our year just completed, sales were up 7.5 percent, store profit up by 16 percent, and we will meet our commitment to MWR.

    These improvements directly related to three main drivers: our store renovation program, information technology modernization and, most importantly, a performance-driven, highly motivated team of associates.

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    More importantly, when we look out over the next five years, we see ourselves only getting better in the areas of sales, net profit and MWR dividend projections.

    While our stores, merchandise assortments, and services are continually improving, one thing has remained unchanged: the ability of the Navy Exchange to meet their mission. Last year we provided sailors and their families with average savings of 15.8 percent before sales tax, while still contributing $49 million to their Morale, Welfare and Recreation program.

    We focus on providing the best value to our customers at the best prices. Over 80 percent of our sales in apparel are for opening to moderate-price point merchandise in both dollars and units.

    As part of providing the benefit, we operate many small exchanges at remote, isolated and overseas locations. These stores represent one-third of our total locations and only account for two percent of our total sales and three percent of our net profit, but they are every bit as important as our flagship store in Pearl Harbor, because they take care of our Navy families.

    Our capitalization program remains strong with over $56 million invested last year, and remains a key element to the future growth and viability of the Navy Exchange System. Delivering our mission is not easy. We are constantly balancing our requirements: dividends to MWR, capitalization, providing the benefit at remote and overseas locations, and, most importantly, providing value and savings to our customers. It is a challenge, but one we gladly embrace and aggressively strive to improve.
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    In working to improve the benefit for our customers, we need your support in lifting the remaining Armed Services Exchange regulations. The time has come for our military customers to receive parity with their civilian counterparts. We continue to survey the commercial retailers annually, and have received very few negative reactions from local businesses. The restrictions we have lifted in the past have been very well received by our service members and their families. They serve our country with the utmost diligence and devotion to duty, and deserve to be treated the same as other Americans.

    Finally the Navy Exchange is working diligently and openly with the Unified Exchange Task Force (UETF) to help shape the Military Exchange Integration Plan to be presented to this Congress next year. We are committed to the 19 operating precepts developed in conjunction with the other exchange commanders.

    First and foremost, we feel the business case for integration must be clear and auditable. Data we have seen on the success of large retail mergers—and this is a three-way merger—causes us real concern. We have received assurances from the UETF that risk mitigation will be addressed in our effort. We are concerned that although the process framework appears good, the aggressive time lines established for data collection, data normalization, and decisionmaking are far too compressed for the required level of due diligence. We cannot afford to break this system apart until we are absolutely convinced that it is the right thing to do.

    Thank you for the opportunity to address you today. It has been my privilege to serve as NEXCOM's commander. Our Navy Exchange System is financially strong and is meeting the needs of our sailors and their families around the world every day, today and into the future. Our success is a direct result of the strong support of our customers, our dedicated associates, our industry partners and the support of each of you on this subcommittee. Together we can protect the benefit, maintain the commitment we made to the men and women who have served and continue to serve our country so well.
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    I have submitted my full statement for the record and will be pleased to respond to any questions you may have.

    Mr. MCHUGH. Thank you very much, Admiral, and, again, best wishes to you in the future. Thank you for your past service.

    [The prepared statement of Admiral Maguire can be viewed in the hard copy.]

    Mr. MCHUGH. Next we have Major General Mike Wiedemer, who is Director of Defense Commissary Agency. General, thank you for being here, and we look forward to your comments, sir.


    General WIEDEMER. Mr. Chairman and members of the subcommittee, it is my pleasure to appear before you to provide an update on the Defense Commissary Agency (DeCA). Serving as DeCA's director for the past 19 months has not only been most challenging but also the most enjoyable job of my career. I can't think of a more rewarding experience than providing the number one quality-of-life benefit for our armed services community around the world.

    DeCA had a great fiscal year 2003. Despite obstacles such as typhoons, a blackout, hurricane, dock strikes, and a bankruptcy of a major distributor, we achieved sales in excess of $5 billion, up 1.5 percent over fiscal year 2002. Operating costs came in almost $5 million below budget, and we achieved the highest customer satisfaction scores to date, a 4.42 out of a possible 5.
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    In addition, the external survey conducted for the Department through the American Customer Satisfaction Index validated the satisfaction of our patrons, awarding us a score of 75, which exceeded the industry average and led the great results achieved by the military resale community.

    And even though we don't offer a full range of products found in civilian supermarkets, we were able to achieve increased patron savings of 32.1 percent. Obviously the great men and women who operate the Defense Commissary Agency are doing something right.

    2004 looks even better for DeCA. In the first 5 months of the fiscal year, sales are up by $88 million or about 4 percent over the same period last year. This result is truly remarkable considering DeCA's declining patron base and limited product selection compared to commercial supermarkets. If our sales trend continues, as we expect it will, our unit costs will be below the fiscal year 2003 level.

    We are also on track to once again increase patron savings.

    Additionally, our customer satisfaction scores are at an all-time high. Our internal customer service satisfaction reached 4.47, which is the theoretical limit attainable. And our American Customer Satisfaction Index score rose to 76. This score is even more impressive when you consider that the American supermarket industry declined from 75 to 74 this year.

    Our 2004 construction program will invest $150 million in our infrastructure, with $100 million in new stores and major upgrades to existing stores. The great men and women who operate the Defense Commissary Agency are committed to doing it even better in 2004.
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    The commissary benefit is the strongest it has ever been, not only in a retail sense as demonstrated by the enormous successes I just mentioned, but also in our governance of this integral element of the total compensation package.

    While it may seem trivial for an entity like DeCA, at costs about one quarter of one percent of the Department of Defense budget, to crow about their cost-savings initiatives and stellar performance, never before has the taxpayer and customer gotten so much bang for their buck from the commissary system, with the average family of four saving $2,700 per year.

    In fact, for the last several years, DeCA's annual appropriation has only been increased to cover pay raises and inflation. If stated in fiscal year 1993 dollars, DeCA's 2004 budget would only be $834 million, vice 1.1 billion.

    The outstanding men and women of DeCA, our trading partners, the Commissary Operating Board, our leaders in the Department, the Members of Congress, should collectively take credit for these achievements.

    I thank each and every one of them for their steadfast support, and I look forward to answering any of your questions.

    Mr. MCHUGH. Thank you very much, general. I appreciate your comments, your presence here today.

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    [The prepared statement of General Wiedemer can be viewed in the hard copy.

    Mr. MCHUGH. Next we have Mr. Michael B. Downs who is Director of Personal and Family Readiness Division. Mr. Downs, welcome. Our attention is yours, sir.


    General DOWNS. Thank you very much, Mr. Chairman. First I would like to express the Marine Corps' thanks to congress and the American citizens. Congress' supplemental appropriations were most valuable, and I want to assure you that our installation commanders used their allocation wisely to support deployed Marines and the families that remain behind.

    The outpouring of support and concern Marines and families of Marines received from the communities surrounding our bases, and, for that matter, citizens throughout the country, was beneficial and heartwarming.

    Needless to say, 2003 was a challenging year. However, despite the challenges associated with 67 percent of our operating forces being deployed, a major hurricane and the southern California wildfires, our Marine Corps Exchanges posted another year of strong performance. Dividends generated were directly supportive and critical to the delivery of our high-quality MWR programs.
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    Even most of our MWR revenue generators posted increased sales. I am happy to report that the Marine Corps appropriated fund support to MWR that has been on a steep incline since 2002 continues to increase this year.

    For the second year we have exceeded our funding goals in the most important mission sustainment category A programs, and we are very near the Category B goals.

    Installation commanders and their loyal and dedicated exchange and MWR professionals are key to our success. They do the hard job of balancing competing priorities to ensure the exchange, MWR and other quality-of-life programs are working as they should.

    The Marine Corps continues to pursue a multiyear effort of standards of excellence designed to move Marine Corps Exchanges into the next century of service, including implementation of a modern merchandise system, centralized buying, an image campaign, and a functionality assessment, all designed to enhance customer service.

    From the recently reported American Customer Satisfaction Index, an impressive increase in customer satisfaction seems to validate our efforts. As to exchange integration, it is a demanding process, requiring careful attention, apportionment of key staff members' time and energy.

    At times, important regular duties are being overtaken. If not supported by appropriated fund costs—if the costs associated with our exchange integration effort is not supported by appropriated funds, the costs will be borne by nonappropriated funds intended for Marines and their families. That concerns us.
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    I will be happy to respond to any questions.

    Mr. MCHUGH. Thank you very much, sir. Appreciate your comments.

    [The prepared statement of General Downs can be viewed in the hard copy.]

    Mr. MCHUGH. Are you and General Frost in Haiti yet, or are you still working that out?

    General DOWNS. The Marines are in Haiti. We are working on it.

    Mr. MCHUGH. Just thought I would check.

    General Frost has a copy of the VHS tape—because I appreciate it since I have not bought a DVD player yet—and I wonder if you will tell the members exactly what they have in front of them so it won't go to waste.

    General FROST. Thank you, Mr. Chairman. Actually in January, AAFES received the American Spirit Award from the National Retail Federation in New York at their annual convention, and in the presentation they asked AAFES to provide a video that told a little bit of the AAFES story and the support that we provided on contingency operations for which we were being recognized.

    We produced this video, and I do think it goes a long way to explaining with those unfamiliar with AAFES a little bit about what we have done for 108 years for our troops around the world, and we wanted to share it with each of you, to have you have something to do late at night when you are sitting around here waiting for votes, so that you could once again recognize what the AAFES team does but also realize that the support of this subcommittee, and previous to the MWR panel, has gone a very long way in enabling us and inspiring us to give that support to our troops around the world.
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    Mr. MCHUGH. Thank you very much. And a couple of comments in preface. As I mentioned, I just returned from Afghanistan. I was in Kandahar and Bagram. I have now been to Iraq twice, and Mosul and Baghdad and Kirkuk and other places. And every place I went, there were exchange operations on the ground running and doing very, very important work, and a little slice of America in those very remote and very difficult assignments.

    And I heard some complaints from the soldiers, sailors, airmen, Marine Corps and Coast Guard folks that I came across, but none of them related to the job that you folks do. And it is incredibly important.

    I know that you hold that belief as firmly as anyone who walks this planet, but I just want you to know that from my firsthand experience, you are doing a great job in those very difficult theaters. And it is important work, and thank you, thank you for what you are doing for those good men and women in uniform.

    And I also want to be very clear that, speaking for myself, I know each and every one of you, from Secretary Abell in the middle, to his right and left, are committed to doing the best job possible, and that is certainly the objective that we on this subcommittee and the full committee and the United States Congress in general hold as well. We may have at times differences as to how to do that in the overall context of the challenges we face, but where we want to go in the end is a common objective.

    Having said that, Mr. Secretary, we have talked a great deal last year about the potential proposed consolidation of the exchanges. You are going forward with a study to assess that, and of course you are prepared, I assume still, to submit a proposal and the findings to Congress in 2005. If that has changed, we would certainly appreciate being advised of that.
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    But I just want to first of all reiterate my thoughts that I hope I conveyed very clearly, or somewhat clearly last year, as to how that process should proceed. And number one, it has to be an open process, one in which all of the stakeholders should be consulted. I would hope their views would be understood and their concerns would be in every way possible addressed.

    And second, and perhaps even more importantly, whatever recommendations you have, should it be that of consolidation, that it be predicated upon not intuition but predicated upon very hard and fast findings that there are savings that would be yielded of course and, most importantly, would result in a successful organization, hopefully more successful, if that is possible, than that which we have today. There are a lot of examples in the American business history and the American business lexicon where bigger is not necessarily better.

    So I would appreciate it if you could update us as to the status of that study as to what you know thus far, and if you have any objections to those, I think, very reasonable standards that I just set out, perhaps you could share those with us now.

    Mr. ABELL. Mr. Chairman, I think your description of your criteria, your standards, are entirely consistent with those that we have put forward. You have heard from the three exchange commanders here about the various parts of that.

    Admiral Maguire talked about the principles, the tenets of the task force, and it is fair, it is open. It is going to include, as I said, academia, industry, other experts. We will bring you a solid business case and a good plan, and if we can't develop one, then we will bring you a recommendation that we not proceed any further.
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    My goal remains to provide it to you about this time next year. I hear the admiral's concerns. If that turns out to be too aggressive a plan, then I won't bring it to you until it is ready. I am not prepared to relax that deadline at this point. I am not convinced that we can't get there. Yes, it is hard work. Yes, it is detailed work. But we ask our soldiers, sailors, airmen and Marines to do hard, detailed work all the time. The least we could do is meet that. So we will do that, sir, and it will come to you as a proposal. We will then be ready to respond to your questions and your review, and we look forward to your approval.

    Mr. MCHUGH. Thank you, sir.

    I would turn to the exchange chiefs. Any concerns, comments, observations, that you would like to share with us on that particular direction right now?

    Rear Admiral, you are retiring. What the heck?

    Admiral MAGUIRE. I would certainly agree. The process as set up is very open, and there is the ability for all of us to see the issues on a daily basis. So our concern is certainly not the openness of the process.

    Mr. MCHUGH. But your concern is what?

    Admiral MAGUIRE. My concern, as stated, is the detailed mapping required to actually define the best-of-breed business processes across all the exchanges. It does require a lot of detail. There is a lot of mapping that would be done, depending upon what the specific business processes are. It depends on the level of indenture you would want to go to, which could be down to the fourth level of indenture in that process. And the only concern that I have is that we allow the time to do it right, and that once we allow it the time, then I feel we would have done probably the level of due diligence to be able to make the right call; because—my meeting with my people—there could be a significant number of mapping events that would have to take place before you could then compare it across the exchanges and then be able to make the determination of which is the best way to proceed, sir.
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    So my only comment is that we be open to the fact that we give—the most important thing to me is to have the right amount of time to do the right job.

    Mr. MCHUGH. How about the culture differences? If I were to go to, as I have, an exchange at a Navy business base in Naples, by and large the product offering is substantially different than were I to visit an Air Force or, even more, an Army exchange somewhere else.

    Do you think that is resolvable? I know the Department has said that they would respect those cultural differences, but do you bring some skepticism to that ability, or no?

    Admiral MAGUIRE. Sir, I think the face of the exchange is really defined by the buying processes that you have that back up that exchange. I know in soft lines alone, we probably have 35 to 50 different configurations, depending upon the demographics, of that specific base. So I think the challenges associated with defining each process is very critical, and, quite honestly, there are approaches that could be taken, depending upon the model. And the task force is looking at that to try to, respect the fact that we do things differently in the way we load out our exchanges. And there are private sector models that do similar approaches. So it certainly is doable, but it would have to be looked at in detail to make sure that we are not losing that culture or that customer face that we provide.

    Mr. MCHUGH. Any other of the chiefs would like to make comments?

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    General DOWNS. If I could just reinforce what the admiral has said, and maybe expand a bit.

    It is my belief that the complexity of military exchange consolidation is not fully understood by the idle observer. The culture, operating precepts, and stock assortments, as you have indicated, are quite different. Additionally, you can't isolate exchange operations for study. You must include the relationship and the impact on MWR. I, too, believe the UETF process could work with appropriate time lines. It needs to be event-driven, not time-driven.

    Unfortunately, the Phase one baseline deliverable time frame has already lapsed, and work teams are being forced to move ahead without reconciliation of functional team input. We need time to analyze and normalize data. We are forced to meet a deadline, and if we are forced to meet deadlines, we are going to forfeit quality. It sort of flames the notion amongst some of our staff that the process is a check-a-block activity, that the exchange leaders and those that are working on the process are being used as cover and that the 2(b) OAL plan already exists.

    Manpower requirements are my most important concern. We are overloading key members of the staff who are already in our organization, multiheaded. It exacerbates the unrealistic time line, and it risks insufficient oversight to other Marine Corps Community Service (MCCS) programs for the sake of exchange integration planning at a time when we are very busy taking care of Marines and families of Marines.

    Mr. MCHUGH. Either of our two generals, General Frost, General Wiedemer?
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    General FROST. Well, I think the undertaking of the entire Unified Exchange Task Force and the direction that the Office of the Secretary of Defense (OSD) has asked us to go is to make the benefits stronger. And to the extent that we can work together with our sister service exchanges to identify best practices and to share those best practices, and to map our processes, and question those processes that are not the best practice, then I think in the long run, whether we end up a consolidated exchange or whether we end up three separate exchanges, we will all be stronger as a result.

    If the goal is not to be stronger, we do not need to be wasting our time. But at least we are going into it with an eye toward what we will get through this process. Whether that means we get bigger as a consolidated exchange is another matter, and that is something that OSD, working with Congress, is going to have to decide. But we are working very closely to identify the things that we will have to do to make that happen.

    Now, to answer your question with regard to the stock assortment being different in different stores, even at AAFES, in our 200-plus PXs, you will not ever necessarily find the same stock assortment, because as a company, at our corporate headquarters, we tailor the assortments based on the demographics of the population that that particular exchange is primarily serving. So you will find some stores that have more prestige and some stores that have a focus on more entry-price point, depending on the customers that we are serving.

    And so there are ways in which you can support individual stores with a varied stock assortment, and that is what we will obviously work with the Unified Exchange Task Force to suggest.
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    Mr. MCHUGH. Thank you. I know, General Wiedemer, you don't have a direct dog in this fight, as we say. Let me give you a question in which you do have a direct dog potentially.

    We have heard a lot of discussion over the past several months about expanding the available stock for sale in the exchanges: phone cards, one-time use cameras, film, greeting cards, maps, those kinds of things that currently are unavailable. Certainly those who support that make an understandable argument that that is the kind of thing that most American consumers can find in your grocery stores, your supermarkets back home.

    I was wondering if you would like to make a pitch for that expansion of your stock opportunities, or comments as you may see fit.

    General WIEDEMER. I think this is a great question. The restrictions on what categories that can be sold in the commissaries today has denied our troops the opportunities to get the lowest prices on the products they need or want.

    Now, while DeCA has——

    Mr. MCHUGH. General, I apologize. Could you drag that mike a little bit closer?

    General WIEDEMER. We will start that again. Is that better?

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    Mr. MCHUGH. I could hear you before, but John couldn't. Can you hear now, John? Yes, he can.

    General WIEDEMER. The restrictions on what categories can be sold in commissaries has denied our troops the opportunity to get the lowest price on the products they deserve or want. While DeCA has made tremendous strides in improving our stock assortment over the past several years, we have been unable to keep pace with commercial supermarkets because of these restrictions.

    Supermarkets often jump on developing trends in the marketplace to leverage their competitive advantage. The restrictions we must operate under often prevent us from even examining the business case as to whether we could provide items our patrons want at a greater savings than what they could obtain from our competitors.

    Because of those restrictions, DeCA more closely resembles the format of an Independent Growers Alliance (IGA), or family-operated grocery store of the 1950's rather than the modern supermarket of today.

    In short, these restrictions keep us from offering the types of products our customers are used to seeing on shelves in their local supermarket. It causes them to believe that the commissary is something less than a full-service store, and it denies them the opportunity to stretch their paychecks even further.

    Just like the concerns that have been raised about the Armed Services Exchange Regulation (ASER) that drives business outside the gate, the category restrictions imposed on the commissary act in the same manner. Therefore, if the ASER is going to be reviewed for the exchange merchandise, the commissary category should be reviewed as well. After all, as our friends at AAFES say, military resale serves the best customers in the world.
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    We believe also that those best customers in the world deserve and expect the best service at the best available price.

    Mr. MCHUGH. Thank you, General. You mentioned ASER, and let me just follow up. And then I very much need to yield to my colleagues who have been very patient, and I appreciate their patience.

    ASER is a problem, and the general principle, I suppose, is the same, where the product is available elsewhere. But ASER is an issue for this subcommittee and I think this Congress, because it places the exchanges in competition, direct competition, with businesses off post, particularly small businesses.

    The commissary store offerings really place you more in competition with the exchanges, less so off base. So I think in fairness, I appreciate the comments of any or all of the exchange chiefs with respect to the commissary store expansion.

    What kind of an effect would that, in your estimation, have on your operations, and is it worth it in terms of the overall benefit versus the cost?

    General FROST. Mr. Chairman, I really believe the synergy between the commissary and exchanges is very important for our customers, and nobody can do the sale of groceries better than the commissary. But and you pointed out that most American consumers believe they can walk into a grocery store now and buy a lot of different products, but I would suggest to you that most American customers don't depend on a military exchange for their MWR dividend, and in expanding categories in a commissary, you are detracting them from our ability to generate the earnings that we need to fuel these important MWR programs.
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    Basically we believe that we are selling the merchandise at wonderful prices for our customers. In fact, we just did a market-basket survey throughout the country, and the average saving of buying merchandise such as cameras and so forth in our stores is around 21 percent. And I would hate to lose that ability to sell that merchandise in a facility that is in many cases co-located in a mall with a commissary, and in that way have our MWR dividend suffer.

    Mr. MCHUGH. Thank you.

    Mr. Secretary, do you want to comment? You are the arbiter between the commissaries and the exchanges, sir.

    Mr. ABELL. Yes, sir. One of the things I enjoy about dealing with these folks is that they are all strong advocates for their particular entity. My view is the same. I think if we were to go talk to the children of our servicemen in the age range of maybe three to seven or eight, they would probably tell you that exchange and commissary is a hyphenated term. I think the culture of our military services is that they go to the exchange and commissary. So the culture is they are very used to shopping for groceries in one place and other goods in another place, and I do heartily agree with General Frost on the necessity to preserve the MWR dividend that flows from our three exchanges to support those programs that are so necessary out there.

    The commissary has its place, but the commissary, frankly, does not contribute to the MWR benefit.

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    Mr. MCHUGH. Thank you, Mr. Secretary.

    Admiral, Mr. Downs, any of you wish to weigh in?

    Admiral MAGUIRE. Sir, I support the comments by General Frost. I mean, my concern would be lost sales and the impact on MWR dividends, and without any additional information, it would be hard for me to project.

    Mr. MCHUGH. Thank you. Mr. Downs.

    General DOWNS. Ditto, sir.

    Mr. MCHUGH. Thank you all very much. I will be happy to yield to the distinguished Ranking Member, Dr. Snyder. Thank you for your patience.

    Dr. SNYDER. Thank you, Mr. Chairman.

    General Wiedemer, just following up on that, last year I was out of here for a month or two because of some health things going on, and so I feel like I am about two years out of date because I missed this hearing last year. So I want to try to have you amplify on some of this, in terms of just issue identification. One is the restrictions you brought up, General Wiedemer. Your concerns about the restrictions has not reflected on the favorability or your customer satisfaction surveys of—I mean, in your written statement, they continue to go up, they are better. I mean you are not seeing business drop off because they say we are going to go to a Wal-Mart instead of downtown. They are still coming to see you and the numbers are up and everybody is happy. Is that not what you related to us?
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    General WIEDEMER. The most common complaint, however, that I received is, You do not carry these types of items that I see in other stores, Wakemans, Safeway and so forth. So from that perspective they may be satisfied with the services—very satisfied with the services we are providing, but I think there is an opportunity to better serve those, and perhaps in a coordinated initiative with the exchanges so that we would not undermine the sales or the dividends that are provided.

    Dr. SNYDER. Do you have that document? I mean, can you tell? What are the complaints that people go and volunteer, what are the five things, the five items or the three items at the top of the list that people would most like you to carry?

    General WIEDEMER. Yes, sir, we can identify those. The following category of household necessities such as school supplies, greeting cards, products that you find in household sections of your neighborhood supermarket, in addition to film, and phone cards.

    Dr. SNYDER. So school supplies, phone cards, greeting cards. What was the fourth one?

    General WIEDEMER. Things that you find in the household section.

    Dr. SNYDER. Detergent, brushes, sponges.

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    General WIEDEMER. Sponges. Those kinds of things. And we don't carry a very wide selection of those right now.

    Dr. SNYDER. You have some of those items?

    General WIEDEMER. Yes, sir.

    Dr. SNYDER. As a general rule: If you can't eat it, you don't have it?

    General WIEDEMER. As a general rule, groceries and necessary household items.

    Dr. SNYDER. So you have some household items but not others?

    General WIEDEMER. Tupperware. That kind of thing would come to mind.

    Dr. SNYDER. You have?

    General WIEDEMER. We don't have that. We would like to have.

    Dr. SNYDER. You have sponges?

    General WIEDEMER. We have sponges, sir.
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    Dr. SNYDER. I am just trying to learn here, Mr. Chairman.

    Mr. Secretary, Secretary Abell, when you all are making a determination about opening or closing a commissary, is one of the factors the number of reservists in the surrounding geographic area?

    Mr. ABELL. Under today's rules, that is not the primary driver, sir. The primary driver is the size of the active duty population that is supported.

    Dr. SNYDER. Is it—your word ''driver,'' is it a factor at all?

    Mr. ABELL. Yes, sir. It always comes under consideration, but it is not a primary factor.

    Dr. SNYDER. And, Mr. Secretary, the consolidation issue, which you all discussed in response to Chairman McHugh's question, that is clearly one of the controversies that we have going on.

    This issue of restriction is another. I don't think I have heard much discussion today yet about this issue of pricing and variable pricing. What is the status of studies that have been done or are ongoing in your decision-making process with regard to variable pricing?

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    Mr. ABELL. Yes, sir. General Wiedemer's organization, the Defense Commissary Association has commissioned that study. It is due to report out at the end of this month. I don't know what the findings of the study will be, but my view is that it was important to get the study done so that we have answers to the questions. We have spent a lot of years listening to people tell us what they think the outcome would be of variable pricing. The purpose of this study is to resolve that question.

    Dr. SNYDER. All right. Would you articulate specifically that question for me?

    Mr. ABELL. It is the feasibility and desirability of requesting your authority to implement variable pricing within the commissary system. It will also look at the best value program that the commissary currently runs and make recommendations as to whether that is being optimized or not.

    Dr. SNYDER. Are you saying that there have not been other studies done on variable pricing?

    Mr. ABELL. In my view, sir, we don't have a definitive study, and I hope this is that. I think it has been looked at. I haven't found other studies that I view to be a credible and definitive study.

    Dr. SNYDER. It is my own personal experience, as human beings, sometimes my definition of a definitive study is one that agrees with me, and everything else is just an opinion.
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    Mr. ABELL. I have no predetermination.

    Dr. SNYDER. Okay. Would you define variable pricing for me, please?

    Mr. ABELL. Yes, sir. It would allow—today, the commissary charges for its goods cost, and then at the register a five percent surcharge is added. Variable pricing would allow a variant of that, and let me give you an example. If at Fort Riley, Kansas, they found that commissary hamburgers were, say, 50 percent less than the prevailing outside cost of hamburgers. Then, under variable pricing, they could charge above cost, and then go over to some other commodity that was not as competitive with the outside area and charge below cost, leveling it out. We could do that at the store level, we could do that across the commissary system if we wanted to.

    Take my Fort Riley example where the market basket might be below the outside; we could raise the prices there, and then perhaps in another area of the country, a more high-cost area, we would be able to sell the goods at a lesser amount.

    This is a way to maintain that 30 percent savings across the board. It may be a good idea; it may not be a good idea, sir.

    Dr. SNYDER. So we have got the consolidation issue, the restrictions General Wiedemer referred to the variable pricing.

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    What are the other potential controversies facing you this year, Mr. Secretary?

    Mr. ABELL. There is always budget pressure, sir. As you know, through the whole budget process, everything gets additional scrutiny. And all of us I think are looking forward to the changes that are going to occur as a result of both the BRAC process and the global positioning decisions that the Secretary will make within the next year.

    Dr. SNYDER. General Frost, how are the lines doing at the Burger King in Baghdad? They were really long when I was there.

    General FROST. Well, I think the lines start about 8:30 in the morning and they stop when the Burger King closes its doors.

    But I read where a soldier had been asked at one name-brand fast food restaurant, ''Why are you standing in line?'' He says, ''Well, if I go to the dining facility, I have to stand in line. I would rather stand in line for something I want to eat.''

    Dr. SNYDER. It was good to see all the facilities there. Thank you for all you do and thank you for your indulgence.

    Mr. MCHUGH. I thank the gentleman.

    The gentleman from Virginia, Mr. Schrock.

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    Mr. SCHROCK. Thank you, Mr. Chairman.

    And thank you all for being here today. And while I have a chance, for Bill, good luck to you in your retirement. Thank you for what you have done all these years. And I wish you happiness, health, and success the rest of your life. And take it from one who knows, there is life after the uniform.

    Admiral MAGUIRE. Thank you, sir.

    Mr. SCHROCK. And it can be pretty nice. So I wish you nothing but happiness, you and your family.

    I have followed the actions of this administration with respect to military exchanges, commissaries, and the MWR program since I arrived here on my first day of Congress; and I have listened to both sides of these issues at great length. With each passing development, my concern continues to grow.

    I believe DOD's actions, to date, in many ways reflect the single-minded pursuit of a goal of reducing the use of appropriated funds. I heard the secretary say it involves budget pressure, and I understand that and I believe in that; but I think when it comes to our men and women in uniform, that is where it has to stop.

    But that single-minded pursuit of reducing appropriated funds with little regard for the efforts of that goal or the need to enhance and maintain, frankly, is what I think is a very, very critical benefit.
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    The proposal to create a unified exchange system is of the greatest concern to me at this point; and as many of you know, this is certainly not a new idea. When asked in November of 1990 by the then-Secretary of Defense to comment on the proposal to consolidate military exchange systems, then chairman of the Joint Chiefs of Staff, General Colin Powell, wrote in bold black letters at the bottom of his memo, ''The exchanges are financially sound, serving their patrons and making valuable contributions to the MWR program.''

    It goes on to say with respect to the consolidation proposal, and I quote, ''Leave it alone. It is not broken or even cracked. At the same time, challenge the systems to achieve savings by collaboration rather than consolidation.''

    I believe Colin Powell's advice and consent is still valued and respected on many matters under jurisdiction of this committee. I also believe that there are many instances of the different exchange systems answering the challenge to achieve savings through collaboration and implementing industry's best practices.

    My question is for the witnesses with the exception of General Wiedemer. You get off the hook this time, too. What has changed since 1990 that leads DOD to believe the consolidation of military exchanges is now a good idea?

    We could start with the Secretary and then go up or down the line.

    Mr. ABELL. Sir, I believe exploring consolidation is essential. I believe that we will bring to you a study and a plan that will demonstrate the business case for consolidation.
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    The differences between 1990 and now are the differences in the services. We are looking forward to joint bases. We are smaller than we were in 1990 by about a third. The competition on the outside is more acute now than it was in 1990. All of those things combine to say we have a responsibility, in my view, to undertake this effort.

    When we bring you the plan, it will have to be the best plan that we can devise. I am not naive. You are going to give me one shot at this, and so I have to bring you the best product I can bring. I don't envision that you are going to say, ''Geez, why don't you go back and look at this again and come back in two more years?'' That is not how I see it working.

    So when I bring it to you, it will be a product that I believe you will be able to examine in minute detail and come to same conclusions that we did, or else we won't bring it to you.

    I do agree with what I heard earlier. Either way, I think our exchange systems will be stronger at the end of this process.

    Mr. SCHROCK. General? Admiral? General?

    General FROST. I agree with Mr. Abell in regard to the strengthening of all of our business process as we go through this. I mean, we had cooperative efforts for many, many years.

    Three things are significant that came out of that, and that is the creation of the Exchange Select private label brand that we share and for which we just received an award, recognizing the Exchange Select brand of health and beauty care as well as household products.
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    Also, we cooperate on our catalog and internet sales, and that has been a cooperative effort among the exchanges.

    As well, our private label credit card, the Star card, which started as the Army and Air Force's DPP, deferred payment plan, is now the fourth largest proprietary credit card in the country. And that is a credit card shared by all of the exchanges.

    There are other cooperative efforts around the fringes, but we had really gotten to the place where it took a whole lot more soul searching to find other ways that we could cooperate. And I would suggest that if anything good has come out of the Unified Exchange Task Force, it has been the requirement for us to sit down and do more in-depth soul searching about other ways that we can become more like, if not share, other processes and so forth.

    So I think the process of getting the report to you is driving us all to be better.

    Mr. SCHROCK. Yes.

    General DOWNS. Congressman Schrock, a problem is that this is not a study. We are developing the UETF as part and parcel of the UETF process, an implementation plan. Any mention that it was a study has been rejected.

    The Marine Corps has always maintained that there had not been a credible business case. The UETF's starting point is that the culmination of all the studies that have been done over 30 years somehow or another is that credible business case. So, you know, that flavor is of concern, and my principal concern with integration is the MWR piece.
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    There are a lot of things that we need to know about. What are the revenue generation plans of a consolidated exchange? How do they intend to determine what level of price savings would that be directed? How do they intend to have the individual services participate in a recapitalization plan? Because all those things impact the dividend.

    I don't know what kind of a dividend distribution plan will be created, but any one that I have heard suggested the Marine Corps dividend will be decreased somewhere between 10 and 30 percent. That is devastating.

    And then the question I would ask is, would the demanding time effort that is required by key people that have full-time important duties, is this the most valuable use of their time?

    Mr. SCHROCK. Thank you.


    Admiral MAGUIRE. We went into this process at the Navy Exchange with fundamentally three tenets. Number one, we were going to actively participate and engage in the process. Number two, we were going to basically watch very closely the impact of such an effort on our sales' top line or potential impact on MWR dividends, and that we would want to go into it ensuring all of our employees or associates have equal and fair access to any positions that could surface from this.

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    So those are the tenets and approach we have taken, and some of those have certainly been embodied in the overall 19 operating precepts that I talked about.

    The jury is still out with me. I think we need to really have a business case that we can all sign up to that says that the end state of this means better merchandise availability, lower prices, better MWR dividends. And we are still in the initial planning phases of that.

    The second thing is, I know where we are today and I know where we will be with the assumptions we are making in the future. And we are going to get better in sales, and we are going to get better in MWR dividend contributions, I am convinced. And we are implementing a retax system that will enhance our ability to really move retailing into the 21st century.

    So at this stage of the game, I still have to be convinced. I have to see a very sound business case that would support this and would stand up to any audit. And right now I am leaning more toward Secretary Powell. We are certainly not broke and we don't need to be fixed.

    But if the end state of this and the business case proves that we are going to be better than we are individually when this is implemented, then it would be hard to argue with not doing it. But right now we are in the starting phases of this, and we need to see a very solid case made before we change anything.

    Mr. SCHROCK. I know we have to vote, but let me follow up on the task force situation. I am going to put it simply.
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    Many critics believe that a credible business case for consolidation has not been made. And, of course, the PriceWaterhouse Coopers due diligence study they did in 1999 held up by many as a business case that justifies the action. And I believe the study highlights the extreme risks involved in this process and gives credence to the premise that costs and risks outweigh the supposed benefit.

    My question is for the three exchange heads. In your opinion and from your observation of the process so far, do you believe a credible business case has been made for consolidation? And has the task force adequately considered risk mitigating strategies, or are the risks being sidelined in an effort to meet the deadlines? And is the task force just charging forward and ignoring the risks?

    That is what I fear, because they have to meet a deadline.

    General? Admiral? General.

    General DOWNS. Well, as I indicated, I do not believe a business case has been made. I am seriously concerned about the risk, the huge risks associated with consolidation. And the UETF process has within it, later, a time when risk mitigation and risk issues are to be dealt with. We are very early in the process. We don't have a well-refined baseline, as it states, for any of the exchanges yet.

    Mr. SCHROCK. Yes.

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    Admiral MAGUIRE. I think to rely upon the PriceWaterhouse study, which is a study that is now aged, we have to be careful, and we have to go through and refresh that because we have had cooperative efforts; and as I alluded to earlier in the capitalization plan, we are implementing an ERP system that is going to generate some savings as well.

    The risk mitigation issue is a concern of mine. It has been voiced at our meetings, and I have been assured that there will be a risk mitigation strategy, because in the literature that I have read on mergers, there is a period where performance during the transition declines; and top line sales preservation is an absolute imperative for the retail business.

    So I haven't seen the risk mitigation strategy yet. It has been put on the table, and we have been assured that there will be one that all the exchange commanders can review and either agree or disagree with.

    But that is where we are right now on this, sir.

    Mr. SCHROCK. General Frost.

    General FROST. With regard to the business, when Mr. Wolfowitz directed that we do this, that, to me, was a call that we have to sit down at the table and we have to do this. I have not heard from my people yet that they feel any arbitrary drive toward a target date rather than a serious effort to sit down, look at the business practices, and see what we can work out.

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    There are risks. And those are things that have to come out of each and every single one of the work groups; they have to be brought to our level, and they have to be elevated to OSD as we find them.

    From our standpoint, there is a tremendous risk of scale. When you take the size of AAFES and then you try to superimpose on that common business practices for smaller operations, there is a huge risk to us with regard to the scale and cost to AAFES in terms of having to change a gigantic ship to meet the necessary practices of the others.

    So, yes, there are risks. And we are identifying those as we find them, and we will be vocalizing all of those to OSD as we work through this process.

    Mr. SCHROCK. Mr. Chairman, I have got several other areas, but I know the voting clock is ticking.

    Mr. MCHUGH. Well, we are not in a vote, but we do have other members.

    Mr. SCHROCK. Oh, okay. Well, thank you.

    Mr. MCHUGH. If we were in a vote, we would have been out of here a long time ago.

    Mr. SCHROCK. I am sorry.

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    Mr. MCHUGH. We will try to provide a second round.

    I should note—and I was just discussing this with Michael Higgins. I am not sure why it is; and if it is his personal wish and I am now going against it, I apologize, but Mr. Downs is actually General Downs, Brigadier General of the United States Marine Corps, retired. That does not show on his card that he hands out, his business card or on his nameplate there. But he has a distinguished record of service, and speaks not just from his very able position as he is now, but certainly from his very responsible experience as a former general officer of the United States Marine Corps.

    Mr. SCHROCK. Once a Marine, always a Marine.

    Mr. MCHUGH. I understand that. But it doesn't say that. I wanted people to be aware of it.

    Next I would be pleased to yield to the gentlelady from California, Ms. Sanchez.

    Ms. SANCHEZ. Thank you, Mr. Chairman. And it is okay, because we saw his posture and we knew immediately he had been—he was a Marine. Was, is, was.

    I am not going to talk very long because I don't have much of a voice today, so you all get lucky.

    But General Frost, I had the opportunity to go to Kuwait and Iraq with Representative Frost. And, of course, that means we got to go to everything. And I have to tell you, it was wonderful. I mean, you are really doing a great job out there, and we really enjoyed—it was really nice to see that there was a little bit of home in a little corner somewhere for these young men and women to go and get whatever it is that they wanted.
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    But there was one thing over and over and over that they asked me for. Maybe it is because my last name is Sanchez. A Mexican food joint. So I just wanted to find out, where are we? You know, and quite frankly I don't want to be mean to Taco Bell, because they are actually headquartered in my district. I don't really consider that Mexican food because the only Mexican food I eat is my mom's.

    But when will we see that happen for them? Because, literally, that was the question on their minds.

    General FROST. And, of course, I know you all took that very seriously, because I received a call that evening from Kuwait from Congressman Frost telling me that the soldiers want name-brand Mexican food in Iraq. We immediately set the wheels in motion.

    As I mentioned in my testimony, right now we have five name-brand fast food restaurants in Iraq; that is, three Burger Kings, two Pizza Huts. We were allowed to do that, but in October we had to cease putting in name-brand fast food for a while.

    Last week, we received word on the—well, actually on the 22nd of February—that the command in Iraq has told us now we can go forward with eight additional name-brand fast food restaurants in Iraq. One of those is going to be—and I won't use the name—name-brand Mexican food in Iraq.

    Simultaneously, we are working, and it will be a little bit quicker perhaps to get name-brand Mexican food into Kuwait. But we have identified one site for Mexican food on the ground in Iraq sometime before the end of April.
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    Unfortunately, there are no name-brand fast food Mexican restaurants in the Middle East, so we are having to make separate arrangements to get the restaurant set up in Iraq. But we are going to deliver that to those soldiers.

    I was in Kuwait a couple of weeks ago, and I was in the food court of the Camp Doha main store, and that is an extensive food court. The 101st Airborne Division had just sent a party into Kuwait from Iraq that day. I talked to one of the soldiers there, and he said when he walked into that food court and saw it, he cried. And to the extent that we can deliver that little taste of home to those kids in Iraq, we are going to work very, very hard.

    Ms. SANCHEZ. Thank you so much.

    Secretary Abell, thank you again for being before us. I am a little concerned about the Army and the Navy reducing the appropriated fund levels for MWR programs. And in fact, reading the budget, I think there is an $89 million cut in that appropriated fund for the programs.

    What are you going to be cutting if you are cutting $89 million out of that fund?

    Mr. ABELL. First of all, I would like to recognize and praise the leadership of the Marine Corps and the Air Force for increasing their appropriated funds support to their MWR programs in the fiscal year 2005 budget. And I join you in being concerned about the cuts to the Navy and the Army appropriated funds support for MWR.
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    In the internal budget discussions within the Pentagon, our office worked hard to try and get those budget decisions reduced, but in the end they were the decisions of the service Secretary and service Chief. So our tactic now is to work with the services to mitigate the impact of those cuts.

    Ms. SANCHEZ. So what does that mean? I mean, what can we perceive? I mean, $89 million, that is a lot of money.

    Mr. ABELL. Yes, ma'am. But I am the wrong guy to tell you that. I would offer that you should ask the leadership of the Army and the Navy about that.

    Again, our focus has been on mitigating the negative impacts of that, and we have been working with both services to try and do that, and actually have received some assurances that they may, through their internal processes, put some money back to try and restore some of the cuts that were in the original budget. That is yet to be seen. And, again, we are looking at ways that we can help them so that there aren't severe impacts on the sailors and the soldiers.

    Ms. SANCHEZ. Well, that really didn't answer my question, but I guess——

    Mr. ABELL. I didn't make that decision, I can't tell you why they did it.

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    Ms. SANCHEZ. Okay. We have a lot of reservists and National Guardsmen serving. In fact, when we finished the rotation into Iraq, it is going to be almost 40 percent reservists and National Guardsmen. And, you know, these family members—because we have a lot of reservists in California, in particular; we see it all day long. These families are going through a lot, because it is not just a 6-month deployment, it is a 12-month deployment; once your boot hits the ground in Iraq, sometimes it is more, as we have seen.

    What are you doing to provide outreach to the families? Are they being made aware of any of the benefits that they might get, whether it is commissary benefits or child care benefits or support services? You know, what are we doing differently with these families whose men and women are now active for anywhere between 12 and 18 months at a time?

    Mr. ABELL. Well, I think we are doing more than we ever have done before, thanks, as I said in my opening statement, in part to the money that you all were able to help us with by putting it into the supplemental appropriation.

    There are some 400 family support operations for the reserve components' lien across the services and across the United States. That matches up with some 300 family support operations at the active bases, which again reach out to these same people.

    But the one thing that we have found that is enjoying the most acclaim from our family members is the 1–800 number, the one source number where they can call in and get help with anything from a mental health crisis to needing a plumber to a pet sitter. This has been a wonderfully successful program, and it is available to all who are serving.

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    We also have outreach through the commands. They all have rear parties who reach out to these folks. They have, by various names in different commands, the chain of concern, if you will, or things like that, folks who are aware of who is serving and then where their families are and what they are doing, and making sure that they understand what benefits accrue and how to obtain those benefits.

    I think it is, all over America there are people working every day outreaching to these families. And do we miss one or two? Perhaps. But for the most part, I think not.

    Ms. SANCHEZ. Thank you, Mr. Chairman.

    Thank you.

    Mr. MCHUGH. Thank the gentlelady.

    She raises an excellent point about the appropriation level, and I think we are all concerned about that. And just so all the members are aware, on the 24th of March—we will have personnel chiefs in next week, but it will be on other issues, force restructure. But on the 24th, that would be a very appropriate issue to pursue and a very important one as well.

    With that, I would be happy to yield to the gentleman from Massachusetts, the former ranking member when this was an independent panel, and a good friend, Mr. Meehan.

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

    And thank you to all of the panelists. And I want to associate my remarks with Ms. Sanchez relative to allowing reservists total access.

    During last year's hearings on MWR issues, I expressed my concerns about the need to allow reservists unrestricted access to commissaries. And I was pleased that the defense authorization bill extended access to the reserve component personnel. And I think all of us think that with nearly 40 percent of our deployed troops drawing from the reserve component, these men and women are clearly an integral part of our active duty military and deserve the same access as their active duty counterparts.

    General Frost and Admiral Maguire, with so many of our troops deployed abroad in Afghanistan and Iraq, I am interested and I have heard some of the services that you provide to personnel abroad to ease the strain of separation and ensure care for family members at home.

    Prior to military conflicts, a big morale booster for our troops was mail call. Now, it is the ability to call home and send e-mail messages. Can you both expand on the type, availability, quality and cost of communication services offered to our military personnel who are now serving in Iraq and Afghanistan and Kuwait?

    And finally, Secretary Abell, can you elaborate on the types of services offered to families at home to help them cope with the deployment of family members?

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    General FROST. As I was mentioning, in Iraq we right now have 21 AT&T call centers, and are in the process of installing 11 more by the end of March.

    For a soldier to call home from one of these call centers using the 550 unit global calling card that is sold at the exchanges, it costs our soldiers 32 cents a minute to call home from Iraq. It is 19 cents a minute if they are calling from Kuwait. It is also 32 cents a minute if they call from Afghanistan.

    We were talking with AT&T last week; they came in to visit our headquarters, and we have asked them once more to go back and sharpen their pencils. Now that we are expanding the call centers more, we will have more phones on the ground for our troops—to sharpen their pencils and see if they can come back to us with a better rate for our soldiers and our airmen to call home at these call centers throughout Iraq.

    Now, right now, we in no way can provide—there is not adequate phone—unofficial call centers there for our troops to use. We have also asked AT&T to speed up the process a little bit more. In the meantime, if they can't get into a call center, we do have satellite phones in the theater. But the cost of using one of those phones is significantly higher. I think that is 76 cents a minute if you use a satellite phone. So we would prefer to rapidly roll out more call centers and continue to try to drive the rate down from 32 cents to something that is better for the troops.

    Mr. MEEHAN. General Frost, I have seen TV commercials running in the Washington area suggesting that Halliburton is now setting up and operating phone centers in Iraq. And it was always my understanding that the Army and the Air Force Exchange Service had the responsibility for this mission.
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    And as you have indicated, you already have centers set up in Iraq and Kuwait. How did Halliburton get into the phone business? And aren't you already expanding the number of centers?

    General FROST. We are expanding the number of centers, and it caught us by surprise as well. I have not seen them, I have only heard that they have established call centers at two locations. Commanders are trying to take care of soldiers, and that is what commanders should do. But, unfortunately, they were misinformed about how to do that. Because, of course, when you go to Kellogg Brown & Root, Halliburton, and ask them to do a service, then appropriated money has to pay for that service as opposed to us being able to come in to provide that service with our call centers.

    So we have worked with command to try to get the word out and will continue to do that; but it is absolutely incumbent on us to keep working with AT&T to speed up the process, because when there is a vacuum, an enterprising soldier is going to fill that vacuum. So we need to move faster to get the call centers out there, but we also need to reinforce our primacy, because you know that the money made on the telephone calls also goes back to MWR. So that is taking away from the dividend as well.

    Mr. MEEHAN. So Halliburton is into the phone business?

    General FROST. I have been told by my people on the ground that they have established two call centers at two different locations with the appropriated funds.

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    Mr. MEEHAN. Okay. It wasn't a negative ad, but it was a ad nonetheless. But it just hit me by surprise.

    Secretary Abell, I asked about the types of services offered to families at home to help them cope with deployment.

    Mr. ABELL. Yes, sir. Sir, family support centers are there to help. They are there to try and resolve any and every problem. They provide friendly understanding, empathetic ears and faces. They organize activities. They are conduits for information from the unit to the individual and from the individual family member back to the unit. They become the unofficial, if you will, communication link to the units. They explain what benefits are available for the service members and how to obtain those benefits and, in some cases, actually assist in the delivery of those.

    They are generally problem solvers. But I think the most important function that they perform is that they are there, they are friendly, understanding, and empathetic, usually manned by folks in the same situation, so that they share it. You see many cases of where they organize activities so that they can go off and do something together again because they are kindred spirits.

    Mr. MEEHAN. I can't resist. Every year I bring up the issue of restrictions placed on what can and can't be sold in exchanges, and over the past few years, Congress has lifted the size of format televisions. But I understand there is still a restriction on the cost of a projection TV. I was reading through the testimony of William Stanley, the Chairman of the American Logistics Association who will be testifying in the second panel, and I was amazed to hear that because of the advantages in digital technology, service members can now purchase digital projection TVs, which are not sold in exchanges, for less than the digital tube TVs currently sold in exchanges.
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    It just seems that these restrictions are outdated and costly to service members. And every year I bring this up. And I have football analogies. The Patriots did go to the Super Bowl, and I was there, so I didn't watch it on my large-screen TV, but I just can't understand the justification for retaining these restrictions.

    Mr. ABELL. Sir, my personal view is that the product line available in the exchanges should be market driven, not limited by artificial constraint.

    The Congress has been generous in, over time, lifting the various limitations, and they have charged us to go survey folks outside the gate to determine the impact. That data is being assembled, and we will have a report to you sometime this year.

    Mr. MEEHAN. And I understand that exchanges once again seek relief from the Armed Services exchange regulations which would permit them to sell whatever they wanted without restriction.

    I don't know, General Wiedemer, whether you can comment. Is the Defense Commissary Agency subject to the same restrictions? And how do the commissaries compare in terms of the numbers and types of items sold in today's modern supermarket? And, actually, Dr. Snyder asked about Tupperware and all those items; I am wondering whether you are selling the Patriots DVD? They had a great season.

    General WIEDEMER. Perhaps that could be found in the exchange, sir. I do not know.
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    With respect to your question, we do have similar restrictions in terms of product lines. And I do share the sensitivity of my panel member commanders that the MWR dividend should be very, very carefully protected. But I think there is an opportunity to expand the product lines in both the exchange and the commissary to the benefit of our patrons and the benefit of our surcharge and our dividend.

    Mr. MEEHAN. Thank you, Mr. Chairman.

    Mr. MCHUGH. I thank the gentleman. And I would note, and I know the gentleman is aware of this, the last time ASER was in any way expanded was when this subcommittee did it 2 years ago, and the only time in the last 12 years prior to that I am aware of is when the gentleman and I were chairman and ranking member on the independent panel, and we lifted it. So——

    Mr. MEEHAN. I am looking forward to doing it again.

    Mr. MCHUGH. And I appreciate that. We may hear a counterbalancing view from some of the independent businesses, but it is an important issue, and the gentleman has been a leader on that and I appreciate it.

    Next, I am happy to yield to the gentlelady delegate from Guam, Ms. Bordallo.

    Ms. BORDALLO. Thank you very much, Mr. Chairman and our ranking member.
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    Distinguished members of the panel, I represent the Territory of Guam. My first question is for Rear Admiral Maguire.

    I understand that the DOD instruction on Armed Forces exchange regulations provides unlimited exchange privileges to U.S. civilian DOD employees, in quotes, ''when stationed outside of the United States.''

    Now, for the purpose of this regulation, Guam is considered outside of the United States, which means civilian DOD employees should have access to the exchange. My question is, are locally hired civilian DOD employees in Guam considered stationed in Guam? And, if not, why not?

    I ask this because I want to be absolutely sure that locally hired DOD civilian employees are not discriminated against compared to those that come in from off island in receiving exchange privileges. It does seem peculiar to me that under the regulation 13–2021, locally employed DOD contractors employed by the DOD can have access to the exchange but civilian employees cannot.

    We need to fix this so we don't have one worker from the mainland having access to the exchange and the guy at the next desk being told, ''no,'' because he was brought on in Guam.

    Admiral MAGUIRE. Ma'am, I can address the issue of locally hired civilian employees who work for the Navy exchange. They do have exchange privileges. As far as DOD employees on the island that are locally hired, I would have to take that as a question for the record, ma'am. I don't have an answer on that one.
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    Ms. BORDALLO. Could I have some information on that?

    Admiral MAGUIRE. Yes, ma'am.

    [The information referred to can be viewed in the hard copy.]

    Ms. BORDALLO. Because it is a concern, and I am getting a lot of questions about it.

    The other one is to Major General Wiedemer. I would like to read you a letter from a constituent regarding access to the commissary at Anderson Air Force Base, and I would like to have your thoughts on the subject.

    ''Dear Representative, I am asking your support for the 28 contractor employees who are in jeopardy of losing base exchange and commissary privileges here in Guam due to a decision by Pacific Air Force (PACAF) command and the base commander at Anderson Air Force base to terminate a long-standing benefit. Even though we have long held these privileges, granted under the OSSS contract, and were induced to hire on here at lower wages than other comparable jobs, our coworkers in Hawaii make several dollars per hour more. PACAF is not supporting Space Command, our employer, and this contractor continued granting us base exchange and commissary privileges.

    Space Command is only a tenant unit at Anderson, and their desire to grant us these privileges is being overruled by PACAF commanders.
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    The substitution of monetary compensation for the lost privileges would only cost the government a lot of money when there are ample facilities available to support the benefits. Without these privileges, we will be entitled to negotiate for monetary compensation, but fear that because of the cost and the tendency to use percentages, we will not be adequately compensated for the lost value of the privileges.

    The Anderson Air Force Commissary did a survey and found their representative shopping list cost $178.77 in the commissary. The local price was $351.69. This compensation would require an increase in the budget for Space Command under the OSSS contract. It seems ridiculous to increase the budget and pay out a lot of money to replace benefits that are of virtually no cost to PACAF and directly benefit PACAF in several ways.

    Profits from exchange sales go to base morale, welfare, and recreation activity for military personnel. Our use of the facilities adds to the number of users who justify the continued operation of these facilities. Anderson has a replacement commissary and upgraded exchange scheduled to be built soon. Without sufficient utilization of these facilities, how are they going to be sustained?''

    It seems to me, gentlemen, that this constituent has the right idea to save the government some money here and make sure that the commissary is fully utilized. And I would like to get your thoughts on that, if I could, General.

    General WIEDEMER. Certainly.

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    This is the first time that I have heard about that particular case of the 28 employees. And we will be glad to research the specifics associated with why they were entitled and are currently not entitled; and also sponsor the staffing of returning those rights if that is sponsored by the appropriate service.

    So we will get back to you on the record and informally.

    [The information referred to can be viewed in the hard copy.]

    Ms. BORDALLO. Thank you very much. I really appreciate it. Because the letters are coming in frequently now to my office. Thank you.

    Thank you, Mr. Chairman.

    Mr. MCHUGH. Thank you. The ranking member just asked me what time we planned on bringing dinner. I think his point is well taken. We have expended well over two hours with another panel yet to go. But at the risk of appearing self-important, I would like to make a couple of comments and ask one final question—I hope one question.

    First of all, I know Mr. Meehan brought up the question of telephones. As I mentioned I just got back from Afghanistan, and in my two previous visits to Iraq, the one thing I heard about phone service was ''more,'' meaning more phones. And I promised a lot of hard-working soldiers who are getting ready to go up into the mountains to search for al Qaeda that I would pass that message along.

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    And I see General Frost is nodding her head. I suspect this is not a new message to you.

    But they very much need that contact and very much appreciate that contact in a theater, or two theaters of pretty tough duty. So to the extent that we can bring to bear some additional resources, whatever it takes to have that happen, that would be very well received by the folks who you are attempting to serve and who, in fact, you do serve so well.

    The other thing goes back to variable pricing that the ranking member was focused on. As I understand it, in the private sector, Mr. Secretary, variable pricing is really a profit-generating mechanism.

    I don't think any of us have a problem when you talk about decreasing a price that is not competitively structured vis-a-vis the outside. I get a little concerned when, in your example, the hamburger needs to be increased.

    At the end of the day, in the private sector, variable pricing produces more, not less profits. And when you are speaking about that in terms of the commissaries, you are speaking about increasing prices for the service men and women. And more than that, usually, particularly when you are in the value brands area, you are probably increasing prices to those who can least afford to pay.

    The other thing that concerns me is that—and it is conjecture on my part, but nevertheless I think it is with some merit—every time the Department has spoken about the need for variable pricing, there has been a similar and very quickly referenced comment about 30 percent. You used that today, Mr. Secretary, as though that were a cap, not an objective.
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    Right now, the commissary benefit is somewhere in excess of 32 percent. I think more is better. Thirty percent means we are going to do less compared to right now. And the other thing I hear about is following a talk on variable pricing the need to at least limit, if not outright cut, appropriated funds support.

    So I wonder if you could help disabuse me of my notions, if that is appropriate, and enlighten me with respect to what the overall objective of DOD would be in a variable pricing scheme if not to cap at 30 percent and/or to reduce appropriated funding support where, at the end of the day, the net result is soldiers, sailors, Marines, airmen, airwomen, Coast Guardsmen and -women are paying more.

    Mr. ABELL. Certainly, Mr. Chairman. The 30 percent savings against the market basket is an objective that we have assigned to General Wiedemer and his organization to shoot for. They have exceeded that, as you note.

    We could have a debate about, is it 30 or 40 or 32 or whatever. We do reach a point of where you can spend a lot of money to get a part of a percent more savings, and this is savings to the customer, not necessarily with regard to the investment that goes to get that savings.

    So, is 30 percent right? It is where we are today. It is kind of the result of the efficiencies that DeCA has managed to implement over a series of years, and it seemed about right to me, frankly. So that is where we are. Variable pricing would allow us to try and maintain somewhere around 30 percent.
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    What I will tell you is that we will have, by the end of the month, a study that tells us whether this is desirable and feasible; and then we will have better answers on that. I know that the detractors all see it as way to increase profits, but of course, the DeCA doesn't make a profit. And so detractors would point out that we would then use that to depress the appetite for appropriated funds, and that is, frankly, fair. That assumes that 30 percent is where we need to be in the market basket savings.

    Again, once we know the outcome on the feasibility and desirability of variable pricing. We can have another debate or a debate, if you will, or a discussion to determine whether 30 percent is the right target or it ought to be 35 or it ought to be 29.

    Mr. MCHUGH. Well, again, I appreciate your comments. Targets are one thing, caps are another.

    Mr. ABELL. Yes, sir.

    Mr. MCHUGH. And I prefer not to think of myself as a detractor but rather a skeptic.

    Mr. ABELL. I understand.

    Mr. MCHUGH. I am skeptical. Because you are absolutely right, you don't generate profits; but what you do do is find a reason to reduce appropriated funds support.
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    And the other thing I would encourage you—and Mr. Secretary, you are a busy man; I don't expect you to have to sit here for however long the next panel may or may not take. But I expect in the second panel we are going to hear how variable pricing substantially alters the very unique relationship between the commissaries and the Department with respect to best pricing.

    From that point forward, I think we will hear from the people who are in large measure responsible for the prices that DeCA pays. You get into considerations about your price quote is dependent upon volume and all kinds of other things that, as I said, at best, disrupts a very unique relationship that I think has been in the best interests of men and women in uniform and the American taxpayers.

    So without getting into a debate about that, I would just encourage you to take those comments into careful consideration. And I know you will.

    Mr. ABELL. Yes, sir.

    Mr. MCHUGH. Thank you all very much.

    With that, and it is not quite dinnertime, let me thank you all for your patience, for your service and contributions. Thank you so much for being here.

    Admiral, again, best wishes to you in the future. And we are looking forward to talking to the rest of you again in the near future on this very important challenge that you meet so very well for such terrific and grand patriots in uniform to the service of this country. Thank you.
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    And with that, if we could have the next panel find their way to the table, and maybe we can get the nameplates changed so that those good folks would know their appropriate seating position.

    Mr MCHUGH. Well, let me welcome our second panel and just state the obvious. Thank you for your patience, but as I know, or at least I hope you would agree, our give and take with the first panel is important, and there are a number of very important issues out there that we wish to at least have some clarification on the record. And I hope we achieved that. I think we did.

    And let me introduce our panel, starting with Mr. Bill Stanley, chairman of the board of the American Logistics Association, ALA. Bill, welcome, C. Lloyd Johnson, chairman of the board, Armed Forces Marketing Council. Lloyd, good to see you, Joe Olding, president, commissary division of WEBCO; Joyce Raezer, director, government relations, National Military Family Association. Joyce, good to see you; and Chief Master Sergeant James E. Lokovic, director, Military and Government Relations, Air Force Sergeants Association. Welcome, sir.

    Mr. MCHUGH. We are extremely grateful that all of you in your busy schedules could make time to be with us today, and with that, let me just start with going down the order I introduced you. Mr. Stanley, welcome and we look forward to your comments.


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    Mr. STANLEY. Thank you, Mr. Chairman, and members of the subcommittee. The American Logistics Association is most grateful to you and your continued strong leadership in preserving and improving the commissary exchange and MWR benefits for service members and military retirees and their families.

    I understand my written statement has been accepted into the record in its entirety.

    It is an honor for me to be here as the chairman of the board of American Logistics Association (ALA) representing over 400 of America's leading manufacturers, over 100 brokers and distributors and more than 2,000 individual members who are actively engaged in providing goods and services to the military resale and MWR activities.

    I want to affirm ALA's strong commitment to maintaining the commissary and exchange benefit as an integral part of the total nonpay compensation package for service members and their families.

    Today I would like to address four issues: Armed Services Exchange Regulation (ASER) restrictions, exchange consolidation, variable pricing and BRAC. Also I would like to make it clear where ALA stands on these issues. I will give you that stand before I give you a brief statement on each of those.

    We support lifting all ASER restrictions in exchanges. We do not support the consolidation of exchanges. We do not support variable pricing in commissaries. We support preserving quality of life benefits at BRAC installations and ASER restrictions.
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    Exchanges are a key component of the quality of life of uniformed service members. We believe that shoppers should have a choice without restrictions of merchandise sold in exchanges. Many of these military patrons are young families, utilizing credit for the first time, and therefore high interest rates can easily get them into financial difficulty by going off base to buy the products they want.

    Mr. Chairman, ALA strongly supports lifting all ASER restrictions on exchange stock assortments. Exchange consolidation is an issue of significant concern to our members. ALA does not support this initiative unless a substantive business-based analysis is completed that clearly demonstrates the change would not degrade the current change to the patron or the MWR dividend. Any merger may have damaging impact on small businesses as the number of contractual opportunities will diminish effectively limiting competition and subsequently reducing the benefit.

    Variable pricing: ALA believes that the introduction of private label and variable pricing in commissaries would lead to a significant cost to the patron and degradation of the benefit. Therefore ALA strongly opposes private label products and variable pricing in commissaries. In effect, DOD seeks to transfer the cost of providing the commissary benefit to the patron. DOD's goal of initiating variable pricing while maintaining a 30 percent overall savings for the military patron would generate little, if any, revenue with which to offset the current appropriation.

    Taking promotional offerings into account, a variable pricing strategy removes all incentives for manufacturers to offer DeCA their lowest available prices. Under variable pricing, manufacturers would lose the ability to effectively manage price points as well as guarantee that all of their promotional dollars will be passed directly to the patron.
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    ALA believes price increases to the patron would have the greatest impact on shoppers who are the most price-sensitive. The most price-sensitive shoppers tend to be the lower ranking enlisted and retiree families. Members of this subcommittee in an era where DOD has been raising the basic pay of military members to increase their rate of compensation, why should the burden of operating commissaries to the patron in effect reduce their disposable income? Today a family of four can save over $200 per month by shopping the commissary. That same family ranks their commissary as the most important nonpay compensation benefit.

    Let's not erode the benefit. Simply stated, variable pricing will not work.

    On BRAC, ALA urges Members of Congress to protect the interest of all beneficiaries impacted by base closures and realignments including guard and reserve retirees and their families. Mr. Chairman, we support preserving quality of life benefits such as commissaries, exchanges and MWR services that remain at a BRAC installation. ALA believes the interest of all beneficiaries should be included in a demographic criteria for preserving commissaries and other quality of life programs in BRAC installations. Eliminating commissaries, exchanges and other family services at BRAC installations is, in our view, unwise and sends the wrong message to our member service members, guard and reserve, retirees and their families. We urge Congress to not let this happen.

    Without the Congress of the United States, we believe that the benefits will be eroded and the military community will suffer. Thank you, Mr. Chairman, and members of the subcommittee for providing industry the opportunity to present its views on these critical topics.
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    [The prepared statement of Mr. Stanley can be viewed in the hard copy.]

    Mr. MCHUGH. Thank you, sir. And you stated very accurately, but let me state for the record, we do have all of your written testimony in hand, and it will be without objection submitted in its entirety into the record.

    And with that, next, we are pleased to welcome Lloyd Johnson. Lloyd, welcome. Good to see you.


    Mr. JOHNSON. Good afternoon, Mr. Chairman, and good afternoon to all the members of the subcommittee on total force.

    Thank you for inviting the Armed Forces Marketing Council (AFMC) to testify today. I will summarize our positions in my remarks, but we have submitted a much more in-depth written statement for the record.

    The AFMC, as many of you know, is a nonprofit business league composed of seven small privately owned firms, totaling some 2,800 full time and part time employees. We represent over 400 large and small manufacturers of consumer products to the various segments of the military resale systems and in some cases to MWR as well.

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    For more than 40 years, our member companies have taken an active role in supporting the military's right to fair compensation in the form of wages and benefits. Today we will focus on commissaries and exchanges. These activities play a critical role in recruitment, retention and readiness. This is especially true when you consider that the U.S. relies on people who volunteer to serve in the Armed Forces. They are only modestly compensated, and they operate in some extremely dangerous locations around the world.

    Add to that the intentionally stressful conditions under which they have operated these past 2–1/2 years, and the case for continuing important benefit programs is more than compelling. And not surprisingly, surveys indicate, as others have said, that the commissaries are the number one nonpaid benefit in the eyes of the military community, even surpassing health care. It is for all of those reasons that we wish to comment on several issues of concern. The first is DOD's continued interest in contracting out more functions than are already outsourced by the defense commissary agency.

    In the past, complete privatization has been considered, but that idea has largely been discredited, and there is even a law in the book that prohibits it. But it is important to note that DeCA already contracts or outsources private businesses for those functions that make sense from a cost and management control standpoint and where contractors are available. Examples include delis, shelf stocking, most display building, custodial tasks, most store re-sets and distribution throughout the U.S.

    There is no successful supermarket chain in America that contracts out as many functions as DeCA does, but surprisingly, DOD is still looking to expand this practice.

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    To force DeCA to contract out store management, meat or produce departments or any other function beyond what they already do seriously complicates their ability to deliver goods and services and manage effectively with a flexible workforce. I do not believe Congress would consider outsourcing important functions like staff assistance, constituent services or any other core activities for the same reasons it does not make sense for DeCA.

    Finally, the timing is wrong to even consider this strategy when DeCA is in the beginning stages of an extensive reengineering process and DOD is facing issues like BRAC, rapid deployment without families and other force restructure strategies.

    In AFMC's opinion, DeCA needs permanent relief from DOD privatization and outsourcing pressures, but at the very least, they should be relieved of this major distraction for the next five years or so in hopes that the defense environment will stabilize by 2009.

    Variable pricing for commissaries is another strategy that raises serious concerns. It is a tactic used by virtually all profit-making retailers in the U.S., but as has already been said, DeCA is not a profit-making enterprise. DeCA is part of an important nonpaid benefit structure that happens to sell groceries at cost plus one percent for inventory shrinkage, plus a five percent surcharge to reinvest in modern facilities. Any strategy to raise prices on all or part of DeCA's stock assortment will simply result in taking money out of the pockets of military families. If prices were raised only two percent, the military community would have to spend $100 million more for groceries each year. Just imagine the headlines that would appear in the Army, Navy and Air Force Times.

    We cannot get distracted by claims that variable pricing will equalize the savings from one part of the country to another or that only best value items would be affected or that the average of 32 percent savings is somehow unnecessarily high, as some mistakenly believe. The fact is DOD is trying to raise enough money from servicemen to reduce or eventually eliminate the $1 billion appropriated fund subsidy for DeCA, and that, sir, we believe is the wrong thing to do.
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    First of all, that $1 billion subsidy is one of the most efficient spends in the entire Federal budget, because it would cost over $2 billion to raise wages enough to give the military community the same buying power outside the gate as they now get by using their commissaries.

    Second, how can DOD even consider reducing the number one benefit to our volunteer military families when they are more stressed out and in harm's way today than at any time since the Vietnam conflict?

    Store closures are another issue. It is tempting for budget reasons, even before BRAC here, for DOD to want to close some of the smaller commissaries that are inherently somewhat less efficient to operate than large ones and that therefore fall below meeting average unit cost goals, but when 100 or more families are unlucky enough to be stationed at a small base that is too far from a larger base to permit shopping convenience, they should not be penalized by taking away their local commissary.

    It is another case of quality of life versus budget considerations. The AFMCA believes that quality of life should be the overriding consideration in decisions to close commissaries.

    Total exchange integration is another issue that warrants the close scrutiny of Congress. The current law that prohibits such action was passed for good reasons, and we believe many of those conditions still exist today.

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    Let me say that based on what we know now, consolidation still does not guarantee that prices will be lower, selection will be better, MWR dividends will be higher or operating costs will be lower. Nor is there yet any assurance that the difficult process of consolidation itself would not interrupt the delivery of the benefit for far too long a period of time.

    Exchange consolidation is enormously more complex than the integration process that created DeCA 13 years ago. Instead of merging together 400 ''big box stores,'' all with relatively similar stock assortments, a daunting task by itself, the unified exchange task force must somehow come up with a plan to integrate 40,000 plus stock-keeping units in main stores plus consolidate hundreds of barbershops, restaurants, movie theaters, hotels, concessions, troop stores, military clothing stores, combination convenience and liquor outlets, and even gas stations.

    There are numerous experts who believe that bigger is not better in a large percentage of corporate merger cases. So much of those experts are referred to in our written statement.

    We want to address one last issue that we believe is finally generating strong support among all the people who can effect the value of the resale benefit. I am referring to proposals for exchanges to be able to sell advanced technology TVs and to build sufficient facilities to display and sell furniture properly. These are very positive moves that we hope Congress will support. These proposals will allow military people to buy high-demand items from on-base facilities where they get advantageous prices, very low interest rates and assorted other financial safeguards from the Star card. And the exchange systems will earn profits that can help badly needed MWR projects.
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    Interference with outside the gate small business is no longer a viability issue since the vast bulk of this kind of merchandise is today sold through large corporate retailers.

    The only thing better than lifting these specific restrictions is to lift all of the restrictions on the stock assortments for exchanges.

    Mr. Chairman, in closing, we want to reaffirm our long-standing belief that the resale system is absolutely a core function within DOD. It is a vital part of the overall compensation system, and it contributes to the all-important quality of life of our volunteer force. In these dangerous times in which we live, the resale system makes a measurable difference not only in recruitment, retention and readiness but in the sense of community that is a vital part of the fabric of military life. We urge this subcommittee to continue to support and protect the most important element of our Armed Forces, which is our people. Thank you for listening. I can take questions whenever you are ready.

    Mr. MCHUGH. Thank you, sir.

    [The prepared statement of Mr. Johnson can be viewed in the hard copy.]

    Mr. MCHUGH. Next, Mr. Joe Olding, President, commissary division of WEBCO. Welcome, sir.

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    Mr. OLDING. Thank you, Mr. Chairman and members of the Subcommittee on Total Force. I have been involved with the grocery business for over 35 years, and involved with the military resale system for over 25 years. I have worked for a large grocery retailer. I have worked for two of the top 100 consumer package goods manufacturers. I am a partner in one of the larger military resale brokers. I have chaired the American Logistics Association Commissary Council for five years since DeCA's inception and I have served on the board of directors for three separate occasions, most recently completing my term as vice chairman of the ALA last year.

    I was also contacted by the Dove Group for my thoughts on variable pricing and private label.

    From these experiences, I believe that I have developed an excellent understanding of the differences and similarities between the grocery retailer and DeCA and how they interact with manufacturers. I am here today to give you my insights into the recent recommendation by the Department of Defense for DeCA to study variable pricing business models and would like to summarize some of the key elements in my prepared the.

    Variable pricing has always been a part of grocery retailing. After all, the only way a retailer can cover their expenses and make a profit is to charge customers more than they pay for the products.

    It seems to me that DOD's interest in DeCA implementing a variable pricing program is simply a way to shift some of the costs of the commissary system to the users of the benefit, the commissary patrons.
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    Patrons will pay more for the products they buy and DOD will reduce the size of DeCA's appropriated funds budget. When you consider the fact that DeCA is restricted in the categories of products they sell, selling products at cost is really their main point of difference versus the traditional grocery outlets.

    Obviously the central question is whether Congress should entertain any change which would adversely effect the benefit. In my opinion, the answer should be no to variable pricing, because it will reduce patron savings and less diminish the benefit to our military families.

    I would like to spend a couple of moments discussing what might be considered side effects of DeCA's variable pricing business model, and I would like to call them maybe unintended consequences.

    The first side effect of variable pricing I would like to touch on is the additional cost of effectively administering a variable pricing business model. Today the manufacturing community is responsible for managing DeCA's pricing model, because they really determine what prices DeCA charges for their products. Manufacturers determine this pricing after evaluating competitive issues, both within the commissary system as well as outside the gate. Where regional pricing is appropriate, plans are created to enact regional pricing.

    When you think about it, with DeCA implementing the variable pricing business model, they will have to assume the responsibility for determining all these prices. If the average commissary carries 10, 12, 13,000 items, when you start talking about controlling prices at a specific commissary to enact variable pricing, all the commissaries around the country think about the number of pricing decisions that one would have to make. It is just phenomenal.
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    They would have to have the capability of understanding competitive and retail prices across the country and at the same time, I assume, make a profit. In my opinion, DeCA will have to substantially increase expenditures, both in systems and personnel, to implement any type of competent variable pricing business model.

    The second unintended effect could be the reduction in manufacturer promotional support with DeCA. I think Bill Stanley touched on this. Most manufacturers view their promotional dollars as investment dollars. They provide these dollars to the retailers in order to grow their businesses. A variable pricing model implemented similar to an average retailer would include extracting part or promotional monies and dropping them to the bottom line. If this were to occur with DeCA, manufacturers would reduce their traditional promotional spending levels, making products less competitive versus outside the gate.

    This would ultimately decrease patron savings and influence patrons into purchasing some of their needs obviously in the private sector.

    My third concern to a change in Title X authorizing variable pricing would be the beginning of the proverbial slippery slope. In my opinion, once the law is changed to allow DeCA to make a profit, the annual budget cycle will force reduced patron savings as DeCA is required to make more and more money each year to offset decreasing appropriated dollars.

    DeCA has, since its inception, remained focused on servicing the military patron's needs, specifically refining stock assortments, improving savings, working with its trading partner to secure savings in excess of 30 percent for their customers.
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    In addition, DeCA has done an excellent job of improving the cost of output, obviously controlling their expenses, as was mentioned in earlier testimony. The DeCA card business model is working very well, as the benefit is either the number one or number two benefit for the military people and their families in spite of the burden of the restricted categories which we talked about earlier in some testimony.

    Today the commissary benefit is defined as selling all authorized commissary categories at cost plus five percent surcharge. I strongly recommend for the benefit of the military patron that this definition does not change, which if it would, it would if variable pricing were approved. Thank you very much.

    [The prepared statement of Mr. Olding can be viewed in the hard copy.]

    Mr. MCHUGH. Thank you very much, sir, and next Ms. Raezer, director of Government Relations, National Military Family Association. Welcome.


    Ms. RAEZER. Thank you, Mr. Chairman, and Mr. Snyder. The National Military Family Association, NMFA, thanks you for the opportunity to present testimony on commissaries, exchanges and MWR programs. We also thank you for your leadership in providing oversight for these benefits and keeping them strong. These programs are key components of the military compensation and benefit package and are essential to the quality of life of the entire military community, active and reserve components service members, retirees, their families and survivors.
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    NMFA's written statement includes our detailed discussion of issues facing commissaries and exchanges as well as our assessment of the current state of family and community support programs including MWR. It also provides information on the goals agreed to by the 35 members of the military coalition in relationship to these issues.

    Military families and their communities are under stress today and thus require a higher level of community support. MWR programs are part of that support package. Core programs such as child care, recreation activities, single-service member programs and the wide range of support offered by installation centers and services such the new military one source must be adequately funded to meet the needs of service members and families, active duty, national guard and reserve wherever they live and whenever they need them.

    I would really hope that Ms. Sanchez would ask that question about MWR funding in the Army and the Navy at that hearing on the 24th, because it is also a concern to us.

    Military commissaries also meet a vital need for members of the military community. NMFA thanks the DeCA leadership and employees for their support of service members and families during this very difficult year. We also thank the commissary vendors who have helped DeCA provide that support. NMFA thanks Congress for ending the restrictions on guard and reserve access to their commissary benefit and to DeCA for ensuring this benefit change was implemented immediately after becoming law.

    You opened the commissary door to the guard and reserve, and DeCA rolled out the welcome mat. The challenges facing DeCA and its beneficiaries this year have demonstrated to NMFA again just how valuable the commissary benefit is.
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    DeCA's response to wartime needs and to maintaining service during fire, wind and flood demonstrated its commitment to our community. Beneficiaries' reactions to news from DOD about potential commissary closures and other changes highlighted just how much they value the commissary benefit.

    Families contacted NMFA to explain just how far away their installation was from other commissaries and civilian grocery stores. Overseas families talked about their commissaries as a touch of home, as a place where they know me. Most of all, families expressed their confusion about why remote locations with the greatest need of commissary benefit seemed to be on the chopping block. Guard and reserve members noted the irony of receiving their unrestricted access just at the time when their nearest commissary was slated to be closed.

    NMFA thanks you, Mr. Chairman, and Mr. Snyder, for your understanding of the importance of the commissary to quality of life as evidenced in your opening statements today.

    NMFA has encouraged DeCA to reach out to all categories of beneficiaries, and it has done so, attracting those guard and reserve service members and their families, attracting more single service members and young families. We have encouraged DeCA to improve store operations, efficiency and quality and have been pleased to note improving customer survey results and beneficiary savings. These savings, as you have heard, currently average 32.1 percent compared to commercial grocery stores, translating into annual savings of $2,700 for a family of four. Commissaries are consistently ranked by beneficiaries as one of their top compensation and quality of life benefits. Because of the savings and because of beneficiaries' consistent assertion of the commissary's great value, NMFA believes the $1.1 billion commissary appropriation is a bargain for the government. We and the families who contact us do not understand why DeCA—why DOD seems to be targeting this particular appropriation for cuts when it provides so much bang for the buck.
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    Talk of closing their commissaries, of changing pricing formulas that would alter the familiar cost plus five percent, of moving oversight away from their uniform military leaders adds to the stress level of the military community. Beneficiaries want their stores to focus on meeting the needs of their community, not on wondering whether they will be operating next year. Now is not the time to mess with such a critical benefit.

    Beneficiaries are beginning to hear of the DOD initiative to consolidate the military exchanges. NMFA appreciates the action of all the exchanges in providing support and touches for home for our deployed service member and looking out for their families at home. We also appreciate the outreach of the United Exchange Task Force for seeking the input of associations and their members about the value of exchange benefit. NMFA cannot take a position on exchange consolidation, however, until we have more information on the costs involved in moving to a consolidated system, whether or not the consolidated exchanges will be able to provide increased revenues to support MWR and the effects on the flexibility of a local exchange to respond to the needs of a community it serves.

    NMFA asks this subcommittee to provide the necessary oversight to ensure that exchanges, whether or not they consolidate, continue to provide appropriate product choices, competitive prices and increased funding for MWR.

    As DOD prepares for BRAC or base realignments overseas, we also ask that you help ensure that services remain in place at closing installations until families depart and that the needs of the remaining population, retirees and guard and reserve members, are considered before any facilities are closed.
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    We also ask that you ensure the facilities a community will need are in place before they receive an influx of new personnel as missions change under BRAC.

    True communities are not made up just of houses and places of work. They also include support facilities to provide community interaction and wholesome safe activities. Commissaries, exchanges and MWR provide a financial benefit but also serve as focal points for the community. Because of the high stress of the military community generated by the war on terrorism, deployments that are both lengthening and growing in frequency and the unpredictability of military life today, these services are valued more than ever. NMFA asks you to support those who serve our Nation, either as uniformed service members or their families. To support those who have served. And by ensuring the high quality, responsive support services they need, that these services are available when they need them most. Thank you very much.

    [The prepared statement of Joyce Raezer can be viewed in the hard copy.]

    Mr. MCHUGH. Thank you. Appreciate your presence here today. Next we have Chief Master Sergeant James Lokovic, director of Military and Government Relations for the Air Force Sergeants Association. Chief, welcome.


    Sergeant LOKOVIC. Thank you, Mr. Chairman, Mr. Snyder, and Mr. Schrock. Thank you for having the marshall discipline to stick with us through this relatively long hearing and for this opportunity to talk briefly about MWR programs, commissaries and exchanges, programs so important to military members that those who are charged with administering them should be before this committee enthusiastically encouraging increased spending and expanding these benefits. Because that hasn't happened in recent years, we are so grateful that this committee has taken up the torch to serve as the champion of this Nation's defenders and their families.
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    To AFSA and its partners in the military coalition, it comes down to a fundamental question. Does this Nation honor those who defend it and step up to fully fund a real benefits program for them? Of course implicit in that question is an important statement, and that is that some government programs should be off limits and should be treated as matters of national priority.

    The programs we are discussing this afternoon are such benefit programs.

    While my written statement touched on a range of topics, in this brief statement, I want to explore one DOD proposal about which we too are skeptical, and that is the variable pricing to be applied in our commissaries. As Mr. Abell partially explained, this is a pricing scheme used by civilian marketers to generate profits, which may or may not work. It is a common practice there to lower the prices on some products to draw customers into the facility while raising prices on others to increase overall profits.

    Despite the sentiments of this committee, DOD has spent half a million dollars to study variable pricing, money that might well have been better spent. In our mind, when you consider fundamentally changing one of the greatest nonpaid benefits just to lower an appropriation, you are walking on dangerous ground. And as a side note, moves like this always create trepidation in the force.

    Several questions need to be answered in regard to variable pricing, and frankly we have to be prepared to live with the answers that we come up with.

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    First, what has changed that is driving a look toward variable pricing, especially at a time when we are at war? For years, DeCA and DOD have told us that one of the primary reasons for commissary savings has been that they do not use civilian pricing schemes. Basing the benefit on the wholesale cost without the manipulation is the real reason for the savings. What has changed? Why now?

    Second, since one undisputed goal of variable pricing in commissaries would be to eliminate the $1.2 billion annual commissary appropriation, one would have to ask why. This committee has told DOD that this is well worth the investment and that there is no desire to lower this particular appropriation.

    Keep in mind that this appropriation has not grown, in real terms, since DeCA was formed in 1991. In fact, once you factor in inflation or look at its proportion to the defense bill, the DeCA bill has actually decreased. Why then is there a drive to disregard that fact and do it anyway?

    Third, why not allow General Wiedemer and DeCA to continue to run up the savings as high as they can by using good business practices? Why not get the most benefit from the investment that this committee and this Nation makes?

    DeCA says current average savings in commissaries is 32 percent of civilian markets. DOD says the average is based on some savings being more and some savings less, as we heard this afternoon. DOD suggests we ought to make sure all get the same by using variable pricing, but you can't do that mathematically without lowering the average overall savings. It doesn't work. This isn't about benefit balancing. It is to shave off savings to lower the appropriations.
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    And what factor is going to be used to decide what the specified cap or level ought to be of those savings? Remember, the higher the nonpaid benefits are, the greater would be the government argument to hold compensation down in other areas. Something simply doesn't make sense.

    Finally, because we interface with some of those sitting at this table who supply commissaries, we know that some producers routinely provide commissaries with good deals that are passed on as further savings to military customers. Some do this only because there is no price manipulation. Some do it for patriotic reasons. Some do it to test the acceptable prices of products, but we are pretty certain that if you insert profit-driven manipulation, you will drive away these good deals and the benefit will be even further reduced.

    In short, we would suggest that variable pricing wouldn't work in commissaries. It can't eliminate or significantly reduce the appropriation without degrading or possibly destroying the benefit. At the least, the end result would be more money out of the pockets of the average military consumer.

    Additionally, shifting the burden of operating commissaries from the American taxpayer to the few who are willing to defend and die for their nation is just plain wrong thinking.

    Again, Mr. Chairman, Mr. Snyder and Mr. Schrock, thank you so much for listening to the military members who find these benefits so important to the quality of their lives, and we would like to thank each of you for being supporters and for your firm commitment to America's heroes. Thank you very much.
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    [The prepared statement of James Lokovic can be viewed in the hard copy.]

    Mr. MCHUGH. Well stated. I couldn't agree more. And thank you, all of you, for your service, because it is very real, and the contributions you make to the well being of our men and women in uniform, their families, is critically important particularly at this very, very challenging time.

    And let me just say to Ms. Raezer, I, too, hope Ms. Sanchez pursues her questions. She brought it up. I suspect she will, but if she doesn't, I guarantee you someone will with respect to that drop in commitment on the appropriated funds——

    Ms. RAEZER. Thank you very much.

    Mr. MCHUGH [continuing]. In two of our very respected branches of the United States military.

    Let me just touch on variable pricing again. Let me ask, I guess, three questions. My understanding of the process—and they say a little knowledge is a dangerous thing, so I run around this hill some days the most dangerous person in America, and it is probably true the intricacies of pricing or product on a grocery store shelf. It seems simple, but once you get into it, it is like heart surgery. Much more complicated than the surface would suggest. But is there another reason—the only reason I am aware of to do a variable pricing scheme is to either affect profits or to raise prices. I mean, commissaries don't make profits, as the secretary correctly pointed out, so if you are going to charge more, presumably, presumptively the appropriated support would necessarily have to be less. But if there is another reason to do that kind of variable pricing scheme, in your opinion, I would like to hear about it.
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    And the other two parts of that would be—I hope I didn't overstate the unique relationship between those who sell to the commissaries and the commissaries themselves. I think for most of you, you walk in and you give best price plus. You are very, very different—the commissaries are very, very different than I expected the transactions between you and profit making businesses.

    If that relationship were put asunder, would it, in effect, upon how you would approach and how prices would be determined with respect to the commissaries and your sales to them?

    And last, if all of a sudden you have variable pricing—and I should have asked the Secretary this. If you have variable pricing, the soldier, sailor, marine, airmen, airwoman, Coast Guardsman or woman now knows or is questioning are they receiving the best price? Right now when you walk in that door you know what you are going to get, and it is the best price, 32-plus percent. But now aren't they going to start comparison shopping and, you know, I will buy this here and I will go around for something else and they are running back and forth and that denigrates the convenience of it, but it also denigrates the confidence, does it not? And doesn't it jeopardize sales theoretically? And whoever wants to jump all over that in whatever order, I will be happy to hear from you.

    Mr. OLDING. Let me comment on the relationship with the manufacturing community and DeCA and the impact that it has on the pricing model itself.

    As most things, over time people get used to doing business a certain way, and manufacturers have been doing business with the commissary system for a long, long time, and they know that if they give DeCA a price, that price will be reflected to the customer.
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    What is significant about that is that manufacturers today want to optimize their return on investment with their promotional dollars. So they know in the military that they can actually take a promotion or a price, call it a lower price and they may sell somewhere else, and that is going to drive share. Where in a traditional retailer they may have a number two position in a marketplace, but the prices that they may give that retailer would not be reflected. They can actually drive share in the military by their pricing model because they can control the prices.

    You change that dynamic. You change that dynamic. It makes the manufacturers start to ask a lot of questions about, well, what is the benefit now of investing in this particular entity.

    The other thing I will mention to you is there is what they call, matrix management now with the manufacturers, and they quad out whether a business is a growing business, a declining business, a status quo business and a cost of doing business. And of course, the commissary system today is really not a growing business, so it is not going to reach high in the quadrant in terms of interest for manufacturers from that perspective, but what they do like about it and what we go back to them and say the reason to continue to invest in it is because there is that 100 percent pass-through of those promotional monies. Change that dynamic, and it changes a lot with the relationship of the manufacturer. And, quite frankly, I think that is going to impact and decrease patron savings.

    In the context of variable pricing, even if there is a way to do zero sum gain in terms of how you priced on regular, that promotional impact would I think be devastating.
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    Mr. MCHUGH. So even if you use variable pricing for a net no gain or loss, in other words——

    Mr. OLDING. Can you do it?

    Mr. MCHUGH [continuing]. It is a baseline, if you could do that—I am not sure you could, because not everybody buys the same thing in the same quantities, but if you could do that patron to patron, the relationship would have a denigrating effect on prices, in your opinion.

    Mr. OLDING. Absolutely. I would also suggest it is probably possible to have a zero sum gain on variable pricing, but the resources you have put against it. I mean, think about the personnel you would have to put in place to manage price points all across the country, and then balance those price points, those you raise with those you decline, to get the zero sum gain. It would take a phenomenal amount of investment in personnel and systems that quite frankly wouldn't be worth it.

    Mr. MCHUGH. Management-intensive means higher cost. Okay.

    Anybody else? Lloyd.

    Mr. JOHNSON. I agree with everything that Joe said, and I would add that this notion of evening out the savings in different parts of the country for the servicemen, that was brought up in the first panel. That is not the right approach. The right approach is to have consistent pricing across the country for servicemen, whether they ever, in Arizona or New Jersey, not try and figure out a very complicated scheme to have consistent savings, because you are always going to be off, but you can always assure the patrons that you can have pretty darn consistent prices across the country with the current system. And I think that is what fairness is all about, and that is what satisfies the patron. You start messing around with the shelf prices just for somebody's notion of what is fair in one area and not fair in another, that is going to produce an endless debate in people's minds.
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    Mr. MCHUGH. Thank you.

    Ms. Raezer.

    Ms. RAEZER. Mr. McHugh, we are still waiting for some kind of firm statement of the benefit of available pricing to the beneficiary, and we haven't gotten that yet.

    I agree with your third point. I think when I started working at NMFA and following this issue, back several years ago now, and we were hearing from a lot of our junior service members and their families, well, I can get this item cheaper at Wal-Mart or I can get this, and thanks to the outreach and education campaign that DeCA has done, our junior families may still say that, but they know enough now to say, but if I look at everything I buy altogether, I am getting the best deal at the commissary for what I need for my family. That message about cost plus five percent is becoming ingrained in their knowledge because of the outreach. The message about the savings, as the savings have gone up, the families have been more aware of that.

    And while you still hear every once in a while, ''I can get a certain item someplace else cheaper,'' they now say ''but I know I get the best deal or all for everything at the commissary, and so that is where I am going to shop.'' And so I agree that putting in the variable pricing strategy, that will bring us back to square one. We would undo all the good education that DeCA has done, that the Department of Defense has done, that beneficiary associations have done to bring those young families in where they can get the most for their money. That $2,700 average savings for a family of four is compensation to them, and we want to preserve that. I don't see anybody asking for a $2,700 raise for people. They get that. And not only the active force, the retirees and survivors get it as well. This is good, and we want to keep this, and upsetting that basic strategy hurts that.
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    I think you are right that there is a unique relationship between the vendors and the commissaries. I see that as a beneficiary. I go into the commissary and see promotions targeted at me as a military family member that recognize the service my service member performs and my role as a family member. I see the money the vendors put in. They are businessmen, but they are cricketing to the community as well. They are getting a good price, but they are giving a good price for them, but they are contributing. They provide money for scholarships for military children. They are helping our community. And if changing the price structure jeopardizes that assistance they are providing to the military community, I as a military beneficiary am concerned.

    Mr. MCHUGH. Yeah. And I would like to emphasize that. 12 years ago I went and told my predecessor, who was seated in the back, but I don't see him right now, Dave Barton taught me how to spell MWR, let alone what it meant. I have been absolutely flabbergasted at the relationship between the private sector, the industry and the commissary as well as the exchanges. Look, everybody is in this for a profit. This is a capitalist Nation. We all support that. But the vendors and the manufacturers up and down the line on the private sector side really feel, with great justification, they are making a contribution to the national defense of this Nation, and they are.

    And I would hate to lose that, and I don't know if you can put a price tag on it, and I am not saying that change is impossible in every way because you will somehow upset that delicate balance, but I think certainly when we are talking about variable pricing, I think it is more than just tinkering at the margins. I am very concerned about its impact.

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    Mr. Stanley, you wanted to say something, sir?

    Mr. STANLEY. Yes. I am also a manufacturer and variable pricing, the other reason for the variable pricing scheme as utilized by outside the gate grocery channels is to compete against each other. They will reduce the price of one item to draw people in their stores, but they make that money back up on other items within the store. So it is called loss leaders.

    That would be the other reason. DeCA does not advertise, so they do not have the benefit of utilizing that scheme.

    In addition, there are other items that are stocked in a grocery store that they can make money back on if they have lower prices on their core items that are not sold in the commissary, such as umbrellas, alarm clocks, some of these other items that you will see on the front end in a grocery store, impulse-type items.

    Pricing would change. As a manufacturer, if I bring a dollar into DeCA to pass on to the patron, it gets passed on to the patron. If I bring a dollar into DeCA under variable pricing scheme and it gets passed on to my competitor or another product group, I will not bring that dollar to the commissary. It doesn't make sense for my company to invest that kind of capital on other people's products. And I think you are absolutely right. People will competitive shop. They know that sometimes they can get things cheaper in the commissary, get them cheaper outside. Or if the commissary raises their prices on items at times, people will start viewing the commissary as just another grocery store.

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    Also you should know this. It costs us more money generally to do business in Alaska and Hawaii because of the freight to get the product there, but you will also notice that when we run specials, we run a one-world price. So people in Alaska and Hawaii generally, on my line of products, will get the product at the same price as people in Washington, D.C.

    Mr. MCHUGH. So as Lloyd Johnson said, that dollar you bring in you know is going directly to the potential of increasing market? Which is important.

    Mr. STANLEY. Absolutely. And by the way, the patron generally is a younger family, highly impressionable. We are trying to get them sold on our brands, and that is a good investment for my company to spend money with them. So we do things a little different. It drives a little different behavior as we relax some of our policies to promote with DeCA and the commissaries.

    Mr. MCHUGH. So a large share of the incentive to bring in those bonus reductions, however you choose to term them, is lost.

    Mr. STANLEY. Certainly, sir.

    Mr. MCHUGH. Thank you all very much. The ranking member, Dr. Snyder.

    Dr. SNYDER. Mr. Chairman, I don't think I really have any questions. I was just going to make the comment, Master Sergeant, in your written statement, you use as an opportunity to talk about child care centers, which I think is really important, and I appreciate you mentioning that. I know, Ms. Raezer, we have had that discussion a year or two ago before we had to reorganize the committees. And I just think they are really important. And we spent, I think, a lot of time talking about the privatization of housing and all that, which I think is really important, but this child care center is a huge one, particularly when we have got families now with both husband and wife are gone, and so it is a huge issue. But thank y'all very much for being here.
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    Mr. MCHUGH. I thank the gentleman.

    The gentleman from Virginia, Mr. Schrock.

    Mr. SCHROCK. Thank you, Mr. Chairman. Thank you all for being here. I am glad General Downs stayed, and I am glad Admiral Maguire stayed. That speaks volumes about them and how they care about this issue. I only wish the two Secretaries from the Pentagon had stayed, because I think they would have heard things here that might make them change their mind. And I guess my cynical mind makes me think they didn't want to hear that, and that is unfortunate, and quite frankly, I think they made up their minds and we have to do everything we can to change that and watch them very, very carefully, or this thing is going to happen. I really worry about that.

    I had questions I could have asked, but I know the answers to them, and I hope you know I know some of the answers to them. But the two issues that really bother me are the variable pricing and consolidation. To me that is just another word for privatizing, because I think the bottom line is that is exactly what they want to do. And it seems to me there are so many problems in this world right now that need attention from the Defense Department. Why in the name of common sense they are picking on these kind of issues is a total mystery to me.

    I just don't get it. I have great respect from the top down, but I just don't—it is like I heard somebody say that—somebody who was in charge of one of the agencies one time used to spend his time going in and squeezing the lettuce. He had no business doing that sort of stuff. They need to be taking care of the big stuff and leave the things like quality of life issues to us. I mean, if you don't—if we erode those quality of life issues, Mom and the kids aren't going to want to hang around very long, or if the wife is the member, the husband or the kids don't want to hang around very long.
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    We have got to do everything we can to not only keep them but enhance them, and I think we are doing that with a lot of the new housing. I can assure you the new commissaries and exchanges in the district I represent are unbelievable. They are absolutely wonderful. And I use them. I am retired. I use them. I got this wonderful haircut at the exchange, and I can't imagine—isn't it wonderful? I just can't imagine not having that benefit, frankly, and I really appreciate you all coming here and appearing before us, and of course I know Lloyd Johnson very well and have met with him many, many times on this issue. And Boyd Raines, who has been very involved in the ALA, happens to live across the street from me, oddly enough, and so I have to go by his house to get to my driveway, so I hear this issue all the time, as you can imagine. And I think it is one everybody needs to hear.

    I really respect and admire the Chairman for focusing on this, because if you had a chairman in that seat who didn't feel like this, it could be a real problem for us, so we have to hope he sticks around for a long time or whoever follows him has the same feeling toward this.

    So, again, I thank you for being here and what you do for our folks, and believe me, we will continue to support you in any way we can. Thank you. Thank you, Mr. Chairman.

    Mr. MCHUGH. I thank the gentleman. And it is a nifty haircut.

    Mr. SCHROCK. You are just saying that because it is true.

    Mr. MCHUGH. Well, worth every dime you paid for it. Just kidding.
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    Let me ask you a quick question, because we are going to have a vote here pretty shortly. I don't know as you did, but perhaps you heard my comments to Secretary Abell about the process of evaluating the consolidation of the exchange systems, about open and consultative, ET cetera, ET cetera. Any comments? I believe I heard the Secretary state that he agreed with those standards and the objectives within the process. How is it going? Is it open? Have they been consulting any or all of you that have an oar in this water so to speak, or do you have any observations, criticisms, critiques or whatever?

    Sergeant LOKOVIC. We visit a lot of bases and talk to a lot of troops, and I can tell you that a lot of the questions that are being considered are being considered up at this level and not down at the level of the people that are directly affected. Either through surveys or by directly approaching people—and Joyce might know that a little bit better, because she gets informed in that.

    But from our experience, I don't know that the consultation is including all the players or stakeholders as you called them that are involved—should be involved in the process.

    Mr. MCHUGH. Have they supported you, your organization?

    Sergeant LOKOVIC. No.

    Ms. RAEZER. Well, they have with the committee from the military coalition. So it is several—quite a few associations have participated in discussions with the task force. It has been presented—the whole process has been presented to us as we are looking at how to implement exchange consolidation, not study whether or not to do this, but how do we do this.
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    And the exchange task force has recently stood up a Web site. They have started sending communication out to members of the military coalition saying get information out to your beneficiaries. We want to hear from you. What is important about your exchange benefit? We have had some of our volunteers who went to the Web site and submitted comments. They have gotten very respectful responsive answers back from the task force saying we are going to consider all of this.

    Our folks seem to be most concerned about things they have always been concerned about with the exchanges. Are they the right product mix for my community? Am I going to be able to walk in the exchange and find the hot choice for Christmas that my children want, the Match Box toys at a lower price than down at the toy store downtown? Am I going to be able to find trash cans and containers when I move and need more things in my kitchen? Am going to find clothes for my teenager? Am I going to find things at the price level that I can afford, that I don't need designer jeans for my 3-year-old. I need clothes that are sturdy and I don't have to pay a lot for because he is going to outgrow them in a little while.

    So those are the kinds of issues that I think a lot of our folks are concerned about rather than this big picture exchange consolidation. But the task force is trying to keep associations informed, any association that hasn't heard from them yet, all they would have to do is say we would like to have a briefing and I think they would do it.

    So in terms of the associations and the beneficiaries, I think they are trying to get the word out. The problem is we don't have a good feeling about what this means to the beneficiary yet.
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    Mr. MCHUGH. I understand you to say you are concerned that the process is not considering should we do it but how we do it. Did I——

    Ms. RAEZER. That is my sense, yes.

    Mr. MCHUGH. Well, that is all we have in this moment, our senses.


    Mr. JOHNSON. I would agree with that, although I must—I mean, there is a sense that it is—on the part of the Defense Department, that it is going to happen, not that it is being studied.

    On the other hand, I have to say General Wax has been open to meet with the folks in the industry that I work, and we have met with them three times. Essentially we have been asking a lot of hard questions and trying to, you know, assess the risk that is involved. We have been assured by General Wax that there are processes in place to find the answers, but I suppose in some degree of fairness those answers aren't all available yet because all the studies aren't done.

    But we remain skeptical that the case can be made, but there is a sense, though, that the train is pretty far down the track already.

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    Mr. MCHUGH. Mr. Stanley.

    Mr. STANLEY. Yeah. We believe that there hasn't been a business case made yet for the consolidation. We have had dialogue with the people that are studying it.

    Mr. STANLEY. One day, though, I hope that when people are thinking of these things to do, that industry would get in on the ground floor. We have a lot of expertise that resides in our Association amongst our members that can help understand the pitfalls and risks before it becomes a full-blown study. So in the hypothesis stage, at some point I hope we are consulted.

    Mr. MCHUGH. Well, and I appreciate that, and it is certainly important.

    You heard the first panel. I mean, there are concerns amongst the military about the different cultural aspects, Navy versus Army, et cetera. Is the primary only secondary? The business case, is that what you are concerned about? Do you have others?

    Mr. STANLEY. Well, I have another concern. We have a lot of small businesses that are a part of the Association with the combined service, who would limit the number of contracts. A lot of the smaller businesses will be damaged by that. They will not be able to get some of these contracts.

    Mr. MCHUGH. Because you——

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    Mr. STANLEY. They are little in size, and the larger companies will get more of the contracts.

    Ms. RAEZER. We are concerned about the cost of the consolidation itself. You heard some of that in the first panel, where we have, you know, personnel who are supposed to be delivering a benefit now, who are being tasked to perform duties related to the consolidation study or whatever. And we are concerned about that, because we need folks focused on the benefit.

    And so we would hope that those—and so there are costs to this process. We would hope that those costs aren't being met out of MWR funds. Our communities need the MWR revenue. And so we are very concerned that those costs might have an effect on the MWR revenue.

    Mr. MCHUGH. There is your call from the Governor; you have been reprieved.

    Lloyd, did you want to say something?

    Mr. JOHNSON. I was just going to say, it really comes down to if a case can't be made that prices will be lower, selection will be better, MWR dividends will be higher, or operating costs will be lower, it needs to be scrapped.

    Mr. STANLEY. Agree.

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    Mr. JOHNSON. It is that simple.

    Mr. MCHUGH. I have got one more question. We will be back in about an hour.

    Mr. STANLEY. I will be here.

    Mr. MCHUGH. Unless someone would like to weigh in? Thank you all very, very much, both for being here today and for really a very direct—and I was very sincere about that—a very important contribution to the United States military, to the men and women in uniform. And you serve in a very unique and a critically important way. And I deeply appreciate it and vastly admire it.

    And I can't tell you exactly how everything is going to come out in the end. But I hope you believe when I say all of us on this panel, and certainly all of us on the full committee, and I believe, at the end of the day, everyone in the House, want to be your partners in that vitally important role and want to have the best for our men and women in uniform, particularly at this point in our Nation's history. And we look forward to working with you.

    We may, if it becomes appropriate—and I would extend this request to the first panel—as well submit some questions for the record in writing. If that should be the case, if you could respond at your earliest convenience, we would greatly appreciate that so we can have a complete hearing record on these issues.

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    So, absent any other further comments, we thank you. And the subcommittee stands adjourned.

    [Whereupon, at 5:42 p.m., the subcommittee was adjourned.]