Points of Interest: Exchange System Merger Stings

By Tom Philpott

Citing that report, Assistant Secretary Pang said integration must occur if exchanges are to survive stiff competition for customers from discounters such as Wal-Mart and Kmart. A merger would slash operating costs and "enhance the exchange benefit" for customers. He directed each service branch to designate a member of their exchange service board of directors to serve on a new "joint exchange integration board." That board, he said, would have until 30 June to develop a master plan to merge the exchange management, logistics, technology, and overhead support functions.

But Assistant Secretary Pang's 8 January memo seemed to catch the services by surprise and clearly angered at least one key lawmaker. Representative John McHugh (R-NY), chairman of a House panel that oversees military stores, accused Assistant Secretary Pang of intentionally ignoring language in last year's defense authorization report not to consolidate exchanges without consulting Congress. Representative McHugh chided both the "tone and content" of Assistant Secretary Pang's memo, which portrayed the decision as final. Congress will decide whether "integration is in the best interest of the exchange system," Representative McHugh said.

Sara E. Lister, Assistant Secretary of the Army for Manpower and Reserve Affairs, criticized Assistant Secretary Pang's "headlong rush into a program of high-cost spending to facilitate" integration "without a studied, rational look at all possibilities." That, she said, "is not in the best interest of the soldier." Not only do exchange shoppers enjoy discounts and avoid local sales tax. but also exchange profits fund base Morale, Welfare, and Recreation Services. In 1995, AAFES had $6.4 billion in sales, NEXCOM $1.9 billion, and MCX $559 million.

Assistant Secretary Lister said the services need to validate the SRA findings. "The SRA International analysis expressed grave concerns about not being able to talk with any store managers, tour a distribution center. or even see a local exchange outlet," she said. Assistant Secretary Lister called creation of a joint exchange integration board "premature" and said Assistant Secretary Pang's "arbitrary deadlines will only lead to a poorly considered and hastily drafted" implementation plan, "should one be warranted."

Consolidation always has been opposed vigorously by Navy and Marine Corps exchange officials, who see merger with AAFES as tantamount to a hostile takeover. "Our position is the same as it has been since . . . the early 1990s," a Navy official said. Integration must be based on "a thorough. business-case analysis" showing "clear benefits. . . after weighing all the risks and other factors." That case, he added, "has yet to be made in our eyes."

Assistant Secretary Pang and his staff cited other reasons for exchange integration:

  • Improvements in technology will allow the streamlining of operations while remaining responsive to local customer preferences. Assistant Secretary Pang suggested that today's "more mobile and discerning" customers are more interested in "choice, convenience, and good prices" than in what service runs which store.
  • With the Defense Commissary Agency now a Performance Based Organization, in step with Vice President Al Gore's effort to reform government, exchanges must join that "momentum" toward greater efficiency.
  • Competition from off-base retailers is growing. "Wal-Mart is kicking our butts," said one Assistant Secretary Pang staffer.

Assistant Secretary Pang is not wrong either, said an AAFES official. "The merits of integration speak for themselves," he said. What critics don't like is the way it was done. This official also agreed that integration has been studied to death and must happen soon for the exchanges to survive. "In the long run, the entire military resale system is at risk," he said. "The Wal-Marts and Kmarts get stronger by the day." 


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