ECN CoverE&C Commissary News

Editorial Comment — January 2017

Good News, Bad News …

First, the Bad News …

One question that arises in 2017 is that if DeCA is fully funded for the fiscal year, what will happen to any revenues or additional monies derived from private label sales? Assuming that patrons do not by-pass these items once they’re on the shelf, where will the profits — the difference between DeCA’s cost and the marked-up pricing that patrons will be asked to pay — go?

Along those lines, how is this new stream of revenue going to be monitored, and who is going to keep an eye on it? One would hope the Congress, OMB, the Department of Defense and the Departments of the Army, Navy and Air Force will all be looking at it carefully — not just the consultant that derives a reward for performance. After all, the idea of generating revenues is to offset costs that ultimately accrue to the service branches.

Monitors must be ready to meter the new revenue stream, whether it will be like drinking from a fire hose — or barely sipping from a straw — when DeCA’s customers get the private label they’ve been asking for all along … so we’ve been told.

That is the claim — that patrons have apparently been clamoring for private label products for quite some time. But the only granular data published so far regarding the matter doesn’t address what patrons really want on the shelves, merely their “willingness to consider” private label products in commissaries. And roughly 40 percent of military shoppers surveyed did not even place themselves in that group.

Next. Where in all of this transformation is any real concern about what the patrons want? Why is DeCA looking to remove top-selling items that patrons have obviously wanted (and still do), replacing them with second-tier items? Is it because the top-sellers will not meet DeCA “requests” to lower their prices, while their replacements are more pliable? Is it just to clear shelf space for the influx of an eventual 4,000 SKUs of the untried and unfamiliar?

Whatever the reason, an impartial umpire would be hard-pressed to call removing top-tier products “category improvement.”

Or is the apparent lack of concern because DoD would be just as happy to push even more shoppers to shop elsewhere? It makes one wonder.

Finally, what about the surcharge? The new law leaves it up to the Pentagon, once the variable pricing model is in effect, whether to tack on a surcharge or not, so long as it doesn’t exceed 5 percent. If the surcharge percentage is reduced, will it generate enough revenue to handle required upgrades and to modernize and replace old stores where needed?

With the continuing sharp decline in sales, which means less surcharge income, the same question applies.

But if the system is converted to a for-profit model, with capital improvements included in the markup as they are in the civilian world, why should the surcharge remain at all?

Whatever the case, the Pentagon will need to keep all eyes peeled. In the Boston Consulting Group report that got the whole ball of wax rolling, the estimates of APF reduction from “improving” merchandise and reducing COGS, introducing private label and “rationalizing” the surcharge ranged from $240 million to $385 million. If even half of either of those numbers were to emerge from the balance sheets, they would be beans worth counting.

And now, the Good News …

… Good News for Wal-Mart, that is.

Regarding all the companies that refuse to be held hostage by category “improvement” and private label negotiations, guess what! Their promotional dollars are in jeopardy of heading down the street to one or more big-box stores. And for sure, some of those promotional dollars will go not only toward civilian promotions but also toward bringing in military patrons — so they can buy the name brand items they really want … prefer … love!

Remember, promotional dollars do not generally flow to private label — they typically flow to manufacturers’ branded items instead, so the responsibility for stocking and promoting private label is going to fall on DeCA’s shoulders. Whether these costs are somehow worked into the COGS, or they are tacked on in the mark-up, one way or another, they will be passed on to the customer.

According to BCG’s foundational briefing, “Patrons reported that with a 5-percent price increase, they would shift 25 percent of their spend at DeCA elsewhere.” Another way to say that is the customers will go where the promotional dollars go.

None of that is good news for exchanges, either, which will suffer collateral damage as more patrons stop to shop at the numerous other stores they pass on the way between home and the commissary.

At last, the Truly Good News …

The exchanges have come up with some ideas to help expand and improve the resale benefit and have ironed out details with DoD as to how to make them work.

For one thing, the Military Star Card will now be accepted in commissaries.

For another, the Exchange expects to be ready to launch online Exchange shopping for Veterans (VOSB) by Veterans Day of 2017.

Few things in the world of DoD regulations are as straightforward or easy to change as they may seem, and it has taken quite a feat of mountain-moving for AAFES and the advocates of VOSB to break through the inertia to bring its authorization to fruition.

Kudos to Tom Shull for putting his heart into it, kudos to David Tillotson III for helping get it through all the red tape, kudos for the VCS, Navy, Marine Corps and Coast Guard for locking arms and supporting all the honorably discharged Veterans who may benefit from this initiative. Now, Veterans of every service branch can truly find an Internet home at the exchanges’ online sites.

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