DeCA Officials Are Responsible for Product Selection Decisions

DeCA officials select the products that commissaries sell—the agency does not use its large suppliers to select products for commissaries. Commissaries Sale of Products from Small Businesses and Foreign Companies

Based on a statistical sample, we estimate that 53 percent of businesses producing products that DeCA sold are small businesses and that these businesses produced about 24 percent of the products (about 10,900 products, plus or minus 1,500) sold by commissaries from August 2000 through May 2001. In considering products for sale in commissaries, DeCA is bound by a provision of federal law that requires a name brand product to have been sold on a regional or national basis through grocery stores or other retail operations consisting of multiple outlets before DeCA may purchase these products on a non-competitive basis for resale. These increased distribution costs may affect the decision of a small business to sell products through commissaries. Private Label Products Might Reduce Commissary Prices and Provide Small Business Opportunity

Private label products are successful in the supermarket industry, providing quality products at low cost, but DeCA does not now offer private label products. DeCA’s Director’s said that a study may clarify whether a private label program would be in the best interests of commissary customers. Private label products, such as those sold by the major grocery retailers Kroger Co.; Albertson’s, Inc.; Safeway Stores; Wal-Mart; and Ahold USA have captured 20.7 percent of supermarket unit sales, and 16.2 percent of dollar sales according to industry data. Examples of private label brands include the Kroger Company’s “Big K” brand, Wal-Mart’s “Sam’s American Choice” brand, or Safeway Stores’ “Safeway” and “Lucerne” brands. More specifically, DeCA officials noted that the private label concept could be difficult for DeCA to initiate, and the DeCA’s major suppliers may respond by raising prices on products now sold through commissaries and withdraw the labor support that they now provide to commissaries. Due to these concerns, DeCA officials have not performed a thorough study of the potential for selling private label products. In discussing the potential offered by private label products, as well as the issues that would be involved, DeCA’s Director concluded that although there may be difficulties associated with the application of the private label concept to commissaries, it would be reasonable to perform a study to determine whether the sale of private label products could enhance the commissary benefit overall. Conclusions

The legal requirement that name brand products must first be introduced through multiple retail operations on at least a regional basis may preclude DeCA from purchasing some small business brand name products that it may desire to purchase. Nevertheless, a change in the requirement could at least open the opportunity for small businesses to make the case that their products deserve a place on commissary shelves. Recommendations for Executive Action

Because of the potential limitation on small businesses opportunity, GAO recommends that the Secretary of Defense consult with the Administrator, U.S. Small Business Administration, on the provision of law restricting DeCA’s consideration of products that have not yet achieved regional distribution, and together inform the Congress if small business opportunity could be improved by removing or modifying the provision. Only company brands to be placed on company display equipment. 3.
Why GAO Did This Study

Some grocery supermarket companies have been charging food product manufacturers "slotting fees" to place products in stores and have involved large product manufacturers in making decisions about what products to sell. These practices have raised concerns about anticompetitive behavior and may be adversely affecting small businesses. GAO was asked (1) if the Defense Commissary Agency is using these practices in managing military commissaries; (2) what proportion of products sold by commissaries are produced by small businesses; and (3) if small businesses face barriers in selling products through commissaries and how opportunities for small business could be improved.

What GAO Found

The Defense Commissary Agency does not charge slotting fees, and agency staff, not product manufacturers, decide which products to sell and where they will be placed on commissary shelves. GAO estimates that slightly more than half of the companies producing products that the agency sold are small businesses. According to GAO estimates, these businesses produced about 24 percent, or about 10,900 of 45,200 products sold by commissaries from August 2000 through May 2001, generating about 7 percent of commissary sales during the period. Federal law requires that a name brand product must have been sold on a regional basis through grocery stores or other retail operations before the agency may purchase it for resale without competition. This requirement apparently poses a legal hurdle to small businesses whose name brand product distribution may be limited because the agency cannot accept their products for resale. GAO identified two ways in which opportunities for small businesses might be increased. First, the legal hurdle to purchasing name brand products that have limited distribution could be removed. Agency officials are capable of deciding which products to sell without this requirement. Second, the agency could sell private label products, such as the Kroger Company's "Big K" brand or Safeway Stores' "Safeway Select" brand and obtain these products from both large and small businesses. In 2001, private label products constituted over 20 percent of industry unit sales and 16 percent of dollar sales. Private label products are sold at lower prices than brand name products and could potentially increase savings for commissary customers. Agency officials recognize there could be some potential benefits if the agency were to offer private label products. However, the officials said it would be difficult to initiate and operate a private label program. Further, they are concerned that if the agency attempted to sell private label products, its current suppliers would increase their prices and withdraw some of the support they now provide commissaries, perhaps reducing the overall benefits of commissary shopping. GAO noted that the agency has not done a thorough study of the potential for private label products to serve commissary customers. The agency's Director agreed with GAO that a study of the benefits and costs of developing private label products would be reasonable to undertake to determine if such a program could enhance the commissary benefit. The Department of Defense concurred with GAO's recommendations and plans to implement them.