ECN CoverE&C Commissary News

Editorial Comment — October 2016

Pay to Stay …

Will commissary prices really drop if contests, prizes, giveaways, promotions, special events, advertising and scholarships are done away with and their value applied against the invoice to drive down the cost of goods?

So goes the script, we are told, DeCA negotiators are reading to suppliers. Got scholarships? Give us that money in lower pricing! Got contests? Give us the money instead! Got special programs? Give us the money! Sales commissions? Spiff competitions? Advertising? Couponing? Give us that money, too!

More to the point, where will those dollars really go? Provided that they don’t end up augmenting another consulting contract, will they appear as margin, to compensate for future programmed cuts to commissary appropriations? One thing you can be sure of; they will not be used to reduce shelf prices. Is this what Congress had in mind when it devised language for DeCA to pilot variable pricing and private label?

But wait — there’s more. There’s also “Pay to Stay.”

In a 2015 decision, a federal court judge in Australia ruled that a large supermarket chain there would have to refund its suppliers $12 million — in addition to a $10 million penalty — and allow them to exit a “pay to play” scheme it had rigged in conjunction with its consultant, the Boston Consulting Group, to bully millions of dollars from its vendor partners, according to the Australian Competition and Consumer Commission (ACCC).

The ACCC’s claim, which the court upheld, alleged that the company had threatened suppliers with commercial consequences if they did not pay rebates to use a new supply-chain program the supermarket had introduced, which the company purported benefited suppliers and warranted the rebates. [For details, click here.]

Among the trading partners the supermarket chain targeted were some of the world’s largest food, beverage and packaged goods manufacturers, including many top Defense Commissary Agency vendors. According to newspaper reports, court documents show that the supermarket developed four different scripts for its representatives to use in negotiations with its suppliers.

Beginning to sound familiar?

The ploy backfired miserably on the chain. In the penalty judgment, the federal justice said the supermarket’s “misconduct was serious, deliberate and repeated,” and added that the chain “misused its bargaining power … treated its suppliers in a manner not consistent with acceptable business and social standards which apply to commercial dealings … demanded payments from suppliers to which it was not entitled by threatening harm to the suppliers that did not comply with the demand … withheld money from suppliers it had no right to withhold,” and said its “practices, demands and threats were deliberate, orchestrated and relentless,” and that its “conduct was of a kind which merits severe penalty.” Overall, the court labeled the chain’s conduct unconscionable.

But this is America, and Australian commissions and courts have no relevance here, right?

Maybe not, but the same consultant has put DeCA on a similar path that according to some observers does not align with best business practices and may not even conform to federal contracting standards.

Reports are that DeCA has recently been demanding reimbursement from suppliers for the difference between prices paid by DeCA for merchandise and prices paid by Walmart, over the past few years. Many in the market question the legality of the practice; and at least some of the suppliers facing such demands feel blindsided, having received no hint or warning that such an audit was in the works.

In what alternate universe does a company that does $5 billion in worldwide sales enjoy the same business terms as one doing nearly $500 billion? The cost base for a manufacturer doing business with one is entirely different from what it is with the other. The industry must recover its costs as well; and when an agency turns its back on its suppliers, it does not bode well for the continued relationship between government and industry. Threats that commissaries will not stock a manufacturer’s merchandise or listen to new product presentations can quickly turn into empty shelves system-wide if all commissary suppliers decide to stand up to such strong-arm tactics … as they should.

Both sides stand to lose, of course. DeCA could lose millions in sales and countless customers if it suddenly tried to switch suppliers on multiple brands overnight, not to mention the havoc wrought on its own Sales Directorate, distributors and new supply chain system. That’s assuming that alternative suppliers even agree to go along with the scheme. For many customers, there is no such thing as an alternate supplier of their favorite products and brands; and if they don’t find them in the commissary, they will find them somewhere else.

And that impacts the exchanges: if patrons are shopping at the civilian supermarket, it’s not an easy stop to look in on the exchange to see what’s being promoted there.

One could be forgiven for wondering whether DeCA has now completely lost its sense of direction if it thinks “Pay to Stay” is a wise supplier strategy, laying aside the question of whether it is even appropriate or permissible. DeCA and its patrons have enjoyed countless special promotions, discounts, contests, giveaways, and scholarships in the past and have developed great goodwill with military-dedicated suppliers; but as the agency pushes them away in an attempt to trim costs to the bone, it is likely to find that millions of patrons are left wondering what happened to their commissaries … and thousands of employees, not only in abandoned partner firms but in sparsely shopped stores as well, are left out in the cold.

To receive your own advance copy of the EandC News editorial each month,